Islamic Banking – a Sham

Is interest really risk-free? I agree it carries lower risk than equities, but there is still the risk of default on the part of the borrower - check out the NPAs (non-performing assets) on most banks` balance sheets.

BTW, are the sayings in the Quran a reaction to the times in which they were written, rather than holding eternal value? For example, ban on interest seems to me like a reaction to the high interest rates of those times; allowing men to marry up to 4 women at the same time a reaction to the skewed gender ratio - fewer men due to deaths in wars; and so on. I would agree if people said that many of the sayings in the Quran are far ahead of ITS TIME (eg allowing women witnesses, even if not giving their evidence equal weightage to that of a man`s), and we should respect it for that, but does it hold good for all time. I am sure if Mohammed lived today, he would have come up with a different set of sayings than in the 7th Century.

#65 by sattar2

<<< If $1.50 or $6, .. how far can this idea be pushed? ....What is the limiting factor in this equation?>>>

The limiting factor is when the purchasing power of domestic currency = zero .... kaput .. due to hyperinflation. That`s how far you can push it .. no more!

How come it hasn`t happened in USA despite our sage Mr. SR`s protestations? That is my question ...

SR (#47, 48):

Thanks for sharing your thoughts on the issue.

Yes, interest/credit may not necessarily be the root cause of issues that may add drag to the US economic growth over long term. Your comments on monetary expansion versus economic growth too seem to hold validity. If I understood correctly, you are alluding to the abandonment of gold-backed currency … right?

But if US economic machinery has established trust amongst international monetary community, it does make a case for abandoning the gold-backed standards to some extent … in order to leverage their financial strength. However, it does raise the issue of too much currency being created out of “thin air” … which can potentially lead to phony money phenomenon.

I have a follow up question for you and Zeemax. If $1.50 (or $6, as seems to be the case now) credit expansion is needed to increase output by $1 … how far can this idea be pushed? In other words, if this increased output is being consumed by the US consumers, how much can credit be extended in order to boost output? What is the limiting factor in this equation?

Re: # 57
``what about the muslim caste system where ``qureshis`` are venerated? ``

sahib, people like butchers for their skills, BUT they don`t `venerate` them. Perhaps you are confusing them with the vedic priests with holy gao sacrificial offerings ;)

Re: # 61
Lol. In other words the concept of Islamic banking need that as well?

Re: 42

(In theory the little man who holds worthless bonds issue by defunct XYZ corporation has the same rights as does ABC bank over the littleman`s loan. In practice its a different story altogether. This is the fundamentally unfair financial ecosystem that is justly lamentable by any moral standard. )

Very true Sir. There is also a twist towards the size of the borrower in India. There is a saying in India “If you borrow Rs.10,000 you spend sleepless nights worrying about how to repay the loan, if you borrow Rs. 10 crores your banker spends sleepless nights worrying how to recover the loan

masadi: take two tablespoon of pepto-bismol. that might help relieve the gas.

tahmed, once again you respond with absurdities and non-sequiturs. Bureaucratic control is much more thorough than anything a coersive system can offer, thus the enslavement in systems like the US be it polite is much more thorough and robs people of their human freedom and dignity much more completely than any that exists in Pakistan. Compared to the hundreds of thousands that might be coerced by a tyrannous system, millions and billions are kept on the margins by the bureaucratic control of economic systems- that is the difference. I condemn the US elite and reject all their official solgans and mythologies. They are hypocrites and you are either a damn fool for being blind not to see that or evil by design. I hope you are the former for then there is hope for you.

Mr . Debsharma:

I am quite sure you are from the a-religious school of thought, people wanting sham publicity by writing nothing short of falderal. You have been audacious enough to pass a few fleeting arguments about islamic banking, to which I dont want to respond to one by one. Will pass a few comments in return though:

1. Islamic ( sharia law ) includes both the qur`an and the Sunnah, so when all your arguments are based on a very narrow interpretation of the Sharia, they ought to be wronged. The Qur`an in various instances has prohibited Interest ( and not usury -even one cent over and above the principal is disallowed, plain and simple ). These are a few Ayah`s of the Qura`an, read em before you comment!

.........
The Noble Qur`an - Al-Baqarah 275-281

275. Those who eat Ribâ (usury) will not stand (on the Day of Resurrection) except like the standing of a person beaten by Shaitân (Satan) leading him to insanity. That is because they say: ``Trading is only like Ribâ (usury),`` whereas Allâh has permitted trading and forbidden Ribâ (usury). So whosoever receives an admonition from his Lord and stops eating Ribâ (usury) shall not be punished for the past; his case is for Allâh (to judge); but whoever returns [to Ribâ (usury)], such are the dwellers of the Fire - they will abide therein.

276. Allâh will destroy Ribâ (usury) and will give increase for Sadaqât (deeds of charity, alms, etc.) And Allâh likes not the disbelievers, sinners.

277. Truly those who believe, and do deeds of righteousness, and perform As-Salât (Iqâmat-as-Salât), and give Zakât, they will have their reward with their Lord. On them shall be no fear, nor shall they grieve.

278. O you who believe! Be afraid of Allâh and give up what remains (due to you) from Ribâ (usury) (from now onward), if you are (really) believers.

279. And if you do not do it, then take a notice of war from Allâh and His Messenger but if you repent, you shall have your capital sums. Deal not unjustly (by asking more than your capital sums), and you shall not be dealt with unjustly (by receiving less than your capital sums).

280. And if the debtor is in a hard time (has no money), then grant him time till it is easy for him to repay, but if you remit it by way of charity, that is better for you if you did but know.

281. And be afraid of the Day when you shall be brought back to Allâh. Then every person shall be paid what he earned, and they shall not be dealt with unjustly.


The Noble Qur`an - Al-Imran 3:130

O you who believe! Eat not Ribâ (usury) doubled and multiplied, but fear Allâh that you may be successful.



..so riba ( plain interest ) is prohibited, simple...no two words, no heelay bahanay , no new fangled logic to justify its existence.

2. benchmarking ( for lack of any other alternate ) per se does not nullify a transaction. So if A sells coke for 2 cents above the price of alcohol, the selling of coke is not shariah non-complaint even though the benchmark to which the sales are related, could be...


perhaps...these things become clearer to those who have and who will inshaALLAH sworn allegiance to the fastest growing religion in the world..may Allah be our guide and helper..Ameen..and one caveat, the prophet is very dear to us, so no sacrilgeous words for him...comprende?

regards

Arsalaan Ahmad Siddiqi
Karachi

#56 by nabendu

fundamental concepts of Islamic Banking, i.e. elimination of uncertainty, sharing risk and reward etc, ...

Huh? Let me get this straight .. are you saying that potential for risk & reward can exist at the same time as nil uncertainty? How? Pray tell me from your 30 years of experience!

Islamic Banking actually eliminates `certainty, not `uncertainty`. Thus the prohibition on fixed income return. Your entire thesis about LIBOR being against fundamental teachings of Islam is entirely incorrect .... nay .. downright ignorant. Libor floats so it`s ok. 10 year note is fixed so it`s not ok ... got it Mr. Conventional Banker?

Eliminating certainty altogether turns the entire investment universe into punters; and risk averse groups are left to fend for themselves if they don`t trust the `modaribs` not to run off with their lifesavings ...

But that is another story ...

masadi: i didnt expect you to change your mind. i just enjoyed writing that post.

as for the american class system being as as rigid as the hindu caste system - easy to point fingers at others. what about the pakistani VVIP culture that stinks like a rotten egg??
what about the muslim caste system where ``qureshis`` are venerated?

america is light years ahead of the muslim world in terms of fairness and equality. read indian history carefully, and you will find that even in india, the caste system has historically not been as rigid as you seem to think - there have been sudra kings in india (as in case of the Nanda dynasty that preceded the Maurya dynasty, founded by a sudra, and Changdragupta maurya was no brahmin either).

Living in the US - the land of opportunity, of inspiration to people around the world - while cursing it, you are a living example of ``water, water everywhere, and not a drop to drink``.

Re: # 55

Dear Odysseyoflife

Thank you for posting your interact.

As I have said, the fundamental concepts of Islamic Banking, i.e. elimination of uncertainty, sharing risk and reward etc, are very laudable. If implemented, these principles can truly create a more just society, and greater economic benefits, than we have today.

Unfortunately, Islamic banking has been implemented wrongly (incidentally Islamic banking first started in 1970, not a couple of years back). By using an interest rate, such as LIBOR, to benchmark ``profit``, Islamic bankers are violating the above very valuable concepts.

The real underlying reason is that banks have not tried to get depositors to accept a risk/reward based profit, nor have they been able to get borrowers to share profits. This is the fundamental issue.

The future of Islamic banking lies in the ability of Islamic bankers to get both depositors and borrowers to accept the fundamental principles. I see no efforts by anyone to make this happen.

Until this can be done, Islamic banks will continue to use exactly the same riba-based system as conventional banks do, by linking profits to a conventional interest rate, and thereby provide conventional banking with a different label : ``Islamic banking``.

This is a great pity.

I have been a conventional banker for 30 years, and I must confess I was sceptical about Islamic Banking. However, when the principles that are laid down under Shariah were explained to me, I understood and appreciated the value of these principles. Unfortunately, my appreciation was shattered by the realisation that Islamic banks are acutally interest-based.

Maybe, over time, Islamic banks will practise true islamic banking. I doubt that I will live to see that day.

Regards

Dear Nabendu Debsharma,

I must thank you for honest and realistic opinion about the current status of Islamic Financing / Banking. Before we go into details, one thing we must be clear about is the fundamental need of Prophethood of Prophet Muhammd SAW.

The intellect of 21st century educated individual fails to accept the existance of Universe and most especially the existane of life in human form as the result of a huge organised coincidence or just an accident (``God, Chances and Necessity`` by Keath Ward is an excellent read on the topic). It is the basis of all three monotheist organised religion, among which Islam is the latest and claims that it is the completion of the process which started with Prohet Adam AS.

Once the Creator - the Omniscient and Omnipotent, which muslim call ALLAH (Shubhan`hu wa Ta`aala) has defined the`Game`, He would have also defined the rules of the Game. The Code of which was given in the form of miracle called Quran. Quran, being the scripture of Arabic, was subject to many mis-interpretations (those who know arabic are well aware of the mechanics of language and the variations of meanings caused by little change in phonetics), needed some sort of standardization to ensure the right de-coding of the Divine Code. The life of Prophet Muhammad SAW is the practical demonstration of the right interpretation of the Holy book in various circumstances. That is the very reason why muslims tried to document the life Prophet Muhammad SAW from the very begining so that it remain preserved for future generations (it is called Hadith and Sunnah), given that Prophet Muhammd SAW was the last of the Divine Prophets. Scholars used that wealth of data for research and to decode the Divine Book in the light of Hadith and Sunnah, thus deducing wisdom, guidance and principles for various walks of human interaction. The intention was obvious - to follow the footsteps of Prophet Muhammd SAW as closely as possible. Why? obviously, the life of Prophet Muhammad SAW is the life curve of human perfection. Any curve above it or below it would be anything else but not prefect.

Now, at the moment, if Muslims fail to deduce right wisdom from the preserved data, does not mean that they would not be able to do so in future. As long as the process is active, there is a hope, as Islamic Finance is on it`s evolutionary curve. It has hardly attained a stable platue after it`s birth a couple of years ago. InshaAllah, soon it would be able to address all the presents issues with more confidence. Conventional western finance started with mere gold coin deposits hundreds of years ago. Now it talks in the language of risk sharing and derrivatives. Just be patient, and you will see bright sun shine behind the clouds. Remember, Addison tried 1000 different things before he found the right element for the light bulb.

have a nice day,

Odysseyoflife
Odysseyoflife@gmail.com

#50 tahmed, you are deliberately trying to cloud the facts by associating with the image of the US elite, a few sprinklings of unrelated events or individuals that do not describe decisions made by the US elite, decisions that have global consequences. The US elite are those that are in command of the dominant insitutions of this country, the political, economic and military institutions. They are the ones whose decisions (or lack thereof) determine how people in the million will live and how they will die. They are the ones that ruthlessly bomb civilian towns and cities, make decisions to lay off millions of people, destroy the environment, put countries under embargoes, command lucrative drug and arms trades, and ensure through their trade and finance policies that millions will live at near starvation levels. Those are the US elite and they need to be condemned and opposed on every front possible.

They are the ones who declare wars for economic and political reasons, justified by images of ``ideals`` that you are presenting in similar fashion, yet never fight the wars themselves but send most from the lower socioeconomic classes (as is the bulk of the US military) to do their fighting for them. They reap the benefits of such wars while killing other people`s children. The people at the receiving end of these wars are ruthlessly butchered in barbarism that equals that practiced by Hitler. Dropping two atomic bombs on civilian cities and claiming that they were military targets, what ``ideal`` was that. Ruthlessly bombing civilian cities in Japan. General McArthur’s military secretary and chief of psychological operations during the 2nd World War, Bonner Fellers, stated in an internal memorandum dated June 17th 1945, “The civilian bombings of Japanese cities was one of the most ruthless and barbaric killing of noncombatants in all history.”. He further stated that unlike the war against Germany, the war against Japan was a racial war. Here the US elite thought they were killing cockroaches not human beings.

The class structure, mind you, in the US is as rigid as the Hindu caste system. It is intergenerationally permanent and the people who live in the various strata are totally seperated not only by life chances but by access to life itself, how long they are going to live, their life expectancy. And God forbid if they happen to be of African origin, then they are physically seperated as revealed by segregation indices that are the highest in the world. I can go on and on. This is my area of expertise, so don`t try to teach me what American society is all about. It is all about hypocrisy and you have learned the trade well. Be honest, not a hypocrite.

SR #48 All money is ``phoney money`` by your definition - you cant eat a dollar bill, nor wear it.

To get this point straight, you need to think about what money represents to begin with - it represents trust Trust in the banking system, trust in the nation issuing the currency. That is why nations the world over buy US Treasuries (sorry, masadi!!) e.g. The fact that the total credit issued by banks exceeds by several times the amount of cash assets in the banking system is hardly a secret as you seem to think - any intermediate level economics textbook from urdu bazar lahore have been explaining this point to generations of students.

Once this basic point is understood, only then can you have any reasonable discussion on any monetary system.

#47/48 by SR

Your point re ratio of credit expansion:increase in output is quite valid since it relates to the ratio of high-powered money versus low-powered money created by central banks. However, if $6 of marginal expansion is creating only $1 of marginal value (output) then there`s bound to be spiralling inflation. If that hasn`t occured in USA, it only testifies to my long held assertion re the absolute uniqueness of the US economy. It cannot be compared to any other in the world due to the reserve currency status of the US$.

Re your other point of fractional reserve system, if you oppose that then ... surprise ... you are really a closeted proponent of the orthodox Islamic school in disguise. If I understand you correctly, you mean banks must not create money but only lend to the extent of what they`ve got in cash, not claims. That is exactly what the spirit of Islamic mode of Finance (if there`s any such thing) means. Islamic mode mandates purely transaction-based finance, backed by existing and tangible value rather than value to be created. Period.

Now, nothing wrong with that. This was indeed the case with the Gold Standard. This results in nil or low inflation but also nil or low growth. If the Gold Standard had not been abolished in USA followed by collapse of Bretton Woods, there would have been no post-war reconstruction in Europe nor emergence of the Asian `Tigers`.

So, IMO, it is all a matter of the trade off between `honest` and `fake`money as you put it. The more optimum the balance, the larger increase in wealth and overall betterment of the standard of living of ordinary people.

Rgds