Interest Free Banking

pakfin...I am by no means a scholar of Islam or have any training in Islamic banking but I think what Islam wanted to prohibit was a kind of loan sharking which seemed to have plagued societies in those days. I am not a big buyer of banks taking equity stakes in either large well established corporations or new ventures due to inherant moral hazards associated with the practice.

#99 by yusafkhan on December 14, 2002 4:20pm PT
Interest is rent:
Yusaf you are right. It is a similar concept. The first thing to realise here is that capital has value and that no one would be willing to give up that value without some sort of return. The propagonists of Islamic Banking have not been able to come up with too many real modes of Islamic Financing (other than Musharika and Modaraba). What most of these institutions are doing is to call interest profit or commission.

Interest is rent:
Money is an asset similar to a car or a house. When I rent out my house I recieve the rent while the renters get the opportunity to use the house, my asset. Similarly, it should be equally fine for me to lend out my cash savings, another asset, and receive rent which is the interest. Why should renting my home be allowed and renting my cash not? they are afterall the two faces of the same coin. I would go a step further to say that the market for lending my cash, or borrowing cash, is alot more liquid, well regulated and transparent than renting a house, which in financial terms is kind of an OTC (over the counter) contract.

Asfand,

While your intensions may be noble, your concepts are misplaced.

The reason why I say this is because, rent is not exogenous, but in fact it is based on things like cost of property and financing and the perception of future price movement.

A person who rents a place is not looking for a long term committment on the property and which is why he may pay an amount that is different from what it should be on the basis of cost of carry.

I remember paying 10% of the property price in Canada because people were thinking that the prices may fall further and did not want to make a financial committment.

But in a mortgage where I am willing to make a financial commitment why should I pay for the, leave the property after lease expiry option.

I think a major problem for the Islamic Financers is that they have been unable to reconcile to the risk reward matrix. They have been unable to understand what drives the pricing of financial instruments and what motivates individuals to transact. If they were to understand that then they would be able to comprehend that the formal financial sector is most Islamic, i.e. it is fair to both the borrowers and lenders without the transaction being disguised to fool people as is being done by large Global Banks.

I would like to add a few concepts to this discussion.

1) If we have hyper inflation like what we used to have in Turkey 120% per annum or 1% every 3 days, how does one go about pricing goods in Turkey versus in Japan where there is a deflation of 3% per annum. Conceptually should deferred purchase have the same amount of profit, else it become profiteering.

2) The currency is printed by the Central Bank and is lent to the government who runs a budget deficit so that the money in circulation increases. Assuming that we start a new country, the Central Bank would not simply hand us the money by itself or in exchange for goods for it does not have any mechanism to store goods (except maybe gold even that Central Banks are shedding). So the point being if money is issued only with the full faith and obligation of the Government only, this would normally give rise to inflation which is why to balance the loss in purchasing power the lender demands interest (otherwise he would invest it in real assets whose nominal price would increase with inflation).

3) Islamic Banking specialist start investment banking not at the stage of issuance of money but somehow think that investors and borrowers should engage in this activity. They cannot reconcile the alternatives available to them and the risks involved in the process. In an hyper inflationary environment if I have excess cash for 1 week can I take a risk on a company involved in an economic activity. No because that company is engaging in a long term activity and whose value would be driven by the level of customer satisfaction it has been able to develop that would lead to greater profits in the future. Profits are not merely the amount of money made in the past but what can be made in the future based on the activity today.

Short term investments should give us small return in short term horizon while long term investments should be evaluated on the basis of future cash flows.

I hope I have not confused the issue.

Re: #94 by tahmed32 [``...Junaid is my old classmate from Government College Lahore. Small world. ...``]

It is a small world, Ahmed sahib, and its getting smaller. Glad to know that you are also a fellow Lahori. They say you can get the boy out of Lahore, but you cannot get Lahore out of the boy. I cannot say about anyone else, but it certainly hold true for this humble servant of yours.

As for Rabbani sahib, I have only had the pleasure of meeting him once at a gathering in the mid-1990s. He wouldn`t possibly remember me. I hear about him simply because I have the honor of sharing his last name and since he is a prominent member of the community in the New York area the subject comes up during conversations.

...SR

Re: #93:

The email is, without any space or other characters, myfullname at yahoo dot com. Always glad to hear from the friends of Chowk. Please drop a note anytime.

...SR

pakfin #93 You may receive enlightenment directly from guru SR. In return, please send a small donation (interest free) to me.
SR #92 Junaid is my old classmate from Government College Lahore. Small world.

SR I would like to get your views on the economy in some detail. How can I get in touch with you? Is there an email address that I may use?

Re: #91 by pakfin [``... are you the same Rabbani who worked for Citibank in Treasury in New York?...``]

No sir, that is Junaid Rabbani. He is a successful finance executive, whereas I am not even an ordinary bank peon. Junaid has moved from Citi. For a while he went to Aetna but recently he`s gone private (asset management).

...SR

#88 by zeemax . Let us look at the fallacy in this argument.

Consider a morabaha transaction where an individual is getting a loan to buy a house.

The individual sells two airconditioners to the bank for Rs. 1,000,000 and then buys them back for Rs. 2,500,000 immediately. This amount of Rs. 2,500,000 is then repayable to the bank in equal monthly installments over a period of say 20 years. The repurchase price is fixed by the financial institution based on the internal rate of return that it wants on the loan. The individual either sells property that he/she does not own or property that he/she does own at an inflated price.

Is this Islamic banking?

SR are you the same Rabbani who worked for Citibank in Treasury in New York?

zeemax #88 They say that someone who knows WHAT is to be done is a good worker. However, the person who knows WHY something is being done is his boss. The trouble I see in Islamic Banking is that people have their own interpretations of WHAT is to be done, and I have yet to read one sentence in any discussion on WHY the Quran is against Riba. The reason the WHY does not come up is because the basic thrust of the Quran is counter to the ethos of ``Islam`` as it exists in practice among fervent muslims around the world.
We must change the way we view what Islam is all about before we can talk about Islamic Banking. And when we do, we will realize that Islamic Banking is first and foremost about being reliable and customer-oriented. In other words, doing what the best among commercial banks (and this does NOT include nationalized banks in Pakistan) have been doing all along all over the world.

Well, I think I made it abundantly clear in my post #84 that the Islamic mode of Finance does not contemplate on eliminating a reward or `rent` for capital, but it does abhor `interest` as a reward for capital. The reward in, say Morabaha deals, comes from re-invoicing the purchased goods. In this mode there is no concept of borrowing, or collateral. Only purchase and re-sale. In these deals the only collateral is over the cash flows emanating from the goods financed, and not over the goods themselves. The title of the goods passes from the financier to the borrower immediately once the deal is consummated and the goods become freehold. This is because pledging goods for `Rehan` or in other words hawking one`s property is forbidden.

The problem arises when one has to decide on the re-invoiced price. What should it be? tahmed32 is right in saying that it may be hypocrisy because so far it is calculated based upon the cost of funds for the tenor, plus administrative cost plus profit. However one important fact remains. The goods are the possession of the borrower and not mortgaged. It`s upto the lender to assess the future cash flows and place a lien over them. That`s permitted as it’s an investment in future cash flows rather than usurping someone`s property towards a fixed return by the benefit of possession of capital. In my opinion that`s the theory behind it all and must not be rejected outright. It`s also an important distinction and goes a long way towards the expertise and monitoring capabilities of the lenders as against collateral based fixed-return lending.

The main problem with Islamic Mode of Finance is not even the needs of risk-averse depositors. This could be corrected by a central provident fund, funded from zakat proceeds to insure any needy person getting burnt in the process. The National Savings Schemes are right now being funded from fiscal resources. No one knows where the colossal zakat deductions go. Those resources could be easily replaced with the zakat fund.

The main problem is State Funding and Monetary Policy. How does one conduct a monetary policy without T-Bills ? And how does one fund Budgetary Deficits without Bank/Non-bank borrowing ?

There are answers to the above as well through securitizations of State Assets and lease-back through Special Purpose Vehicles (SPVs) which are provided for in Islamic Mode through `Ijara`. A Capital lease is Ijara while a Finance Lease is not permitted. Securitization of say Tarbela Dam would be a Capital lease. Car finance is a Finance lease.

Therefore, there are modern solutions to the `7th Century` ideas as my good friend GhalibZaman stated. However, Islamic Mode of Finance is neither Hypocrisy nor nonsense. Its a very serious counter-approach to finance and banking as we know it..

Regards.

Zeemax: Here is a simple test of Islamic Banking - Would you be willing to open a Bank that pays zero interest to its depositors and asks zero interest from its borrowers?
If yes, then please advise when you are open for business and I will be your first borrower.
More seriously, whatever way I look at it Islamic Banking is either hypocrisy (where interest is called many different names, and equity participation is called a ``loan``) or else a non-starter (as you say, you dont contribute resources to economic activity without charging a ``rent`` of some kind). If the proponents of Islamic Banking were really trying to ``follow instructions`` as they understand it, they would give loans plain and simple without interest. The problem with most fervent muslims is that they are afraid to use their own minds, and follow what they have been told like sheep.

Zeemax:

Thank you for this very timely input. Would you please participate and write something about how the Islamic mode of Finance ( I like the ring of it) is working on a practical level and how are present-day ``educated`` ones in MBA & Banking Institutes coping with the shock of ``7th`` century modernity.

Under our english-based education ( read: Mind Colonisation) system one is trained specifically never to use one own mind. The ability to ape & parrot in food, dress, and alien-accent is considered the highest achievement. The result is for all to see. We have Pleaders intead of Leaders and those who seek salvation by offerring themselves to be enslaved by the remote-controllers.

Please stay in touch. You know how :)

The only forms of interest free financing are Musharika and Modarba. Leasing may also be considered an interest free form of financing. However, markups and morabahas are simply interest based forms of financing by another name.

Since conversation is lively regarding this issue, let me offer my two cents worth.

1) I read someone`s opinion on this board that `interest` is different from `rent`. In fact, the two are identical. As per Adam Smith, the father of modern capitalistic economy, we all know each of the four factors of production has it`s reward, or `Rent` as its called in economics terminology. Entrepreaunership has profit, Land has Rent, Labour has Wages, and Capital has interest. Thus, a capitalistic system cannot function without a reward for capital, or in other words `rent` for capital or any other of the factors of production. It`s like removing one leg from a chair and trying to sit on it. In the communist system the reward for `Entrepreneurship` was removed and it collapsed. So is the case with removing the reward for capital. That`s why all the controversy about an interest-free system.

2) The Islamic system is a capitalistic system as well and the reward for capital cannot be removed. It is not intended to be either. The difference is that Islam insists on `Intrinsic Value` in transactions and not notional or derived value.

That is why Islam prohibits any form of derivatives, although limited futures contracts are permitted in the form of Istis`na. When we make a profit from a derivative, it comes out of some one else`s pocket with no intrinsic backing to the transaction. So it`s gambling unless its purely for hedging reasons towards a physical trade.

To that extent I agree fully with my friend SR that a Gold backed economy is worth looking at, but then there are concerns about who exactly will benefit from such an economy? Its certainly not going to be the Muslims. So why not have an Oil backed currency based on proven reserves? The answer is blowing in the wind.

3) Some people have expressed concerns, like our dear friend Ras, that can the Islamic Banking work on a large scale? I had the same reservations and now am of the opinion that it can work better on a large scale rather than on a retail level. I had written about the problems at the retail and macro level elsewhere on some board. Firstly, Islamic banking is a misnomer. It`s not banking at all. It`s the Islamic Mode of Finance. Interestingly, the acronym works out to IMF. It has no parallel with banking as we know banking.

4) In Pakistan, the largest deals that have been executed are the PIA fleet replacement plan worth $ 1 billion, out of which $ 150 million has already been disbursed. This is Morabaha finance with Citibank as lead manager of a consortium of National Bank, Hong Kong & Shanghai Banking Corporation, United Bank, and Exim Bank. So this mode of finance is well established in large corporate deals.

5) The major problem comes at either the retail level or the public finance level with the government, as Islam does not allow fixed income. So where will the National Saving Scheme go with Rs 750 billion outstanding in fixed income bonds? Or where does the individual widow or retiree get risk-averse returns? Again these questions need to be resolved.

In conclusion, the principles of Islamic banking are sound. We need to translate these into modern economy.

Regards.

Re: #77 by dullabhatti [``... tell me ... What kind of insurance will protect my assessts and what kind of motgage will be best... you are not suggesting me to move ...``]

It is not my place to suggest anything about how you, or anyone else, should or should not, handle their personal investments. Your specific situation may be so different than mine that anything I say may make absolutely no sense in your case.

All I can do is to offer a hypothetical course of action that I would likely take were I in similar circumstances.

If I was living in California and had a regular job and a home mortgage I would try to secure my financial future from the potential financial storm on the horizon by first eliminating as much debt as I could.

If I was single I`d sell my house which, at this time, would sell at a great price (especially if I`d had it for some time), pay off the loan and buy a combination of interests in oil, silver and gold (bullion - ideally from Dubai) with the capital gain in equity, and rent a modest apartment for the next few years waiting for the real estate market to come down. Next I`d cut all unnecessary expenses and be in the maximum positive cash flow position possible. I`d also cash out all other paper assets, if I had any, and put them in the same place as the proceeds from the house.

If I had children and a whole family, then of course, selling the house would not be a viable option, but I`d get a low fixed rate mortgage (not a `floating` or `adjustable` one -- because mortgage rates should eventually skyrocket).

If I was retired, or lost my job, I`d sell everything and immediately move to Panama and set up household in the Canal Zone. Any surplus cash reserves or liquid savings, I would keep in Canadian dollar (50%), Euro (35%) and South African Rand (15%). I`d avoid the US dollar (and dollar denominated assets -unless based on tangible intrinsic value, such as Newmount Mining shares) as one does bubonic plague.

These are just my opinions about what I would do, so am not looking for a debate here. I respect everyone else`s views as valid also.

...SR

SR #75 I dont think anyone can unite the ``ummah`` against anyone - people who talk the most about the ``ummah`` understand the least what a ``community`` (i.e. ``ummah``) is all about, and are too busy grabbing each other`s throats (shia vs sunni, ahmedi vs. shia/sunni, this school of thought vs that school of thought, this mullah`s followers vs. that mullah`s followers - I am told in pakistan followers of different mullahs (even if they belong to the same sect) refuse to say prayers behind a competing mullah.
On gold - will look forward to your articles. We shall have much to argue about, I am sure. :-)

#27 by FJ . The issue here is not necessarily that of the viability of Islamic banking, but is that of a demand or markets for Islamic banking.

If somebody would prefer that a bank terms interest as profit or rent then so be it.

#30 by SR on November 19. SR a very good paralell if I may say so.

#33 by Urstruly . This is the concept behind Credit Unions and Cooperatives. It has nothing to do with Interest or with Islamic banking. Non-profit financial institutions may be set up by various governments to promote investment, but that is another topic.

SR #75 Incidentally (to add to my post below) I think it is funny to hear about a white south african teaching morality to the US, considering that it was US economic sanctions that, more than anything else, forced the white south african to step down from power and put an end to the apartheid regime. Just as I find it funny when I see how the Germans and Japanese are nowadays the most anti-war of all people, with Schroeder lecturing the US on Iraq - obviously getting their butts kicked by the US in WWII (when these same nations were bent upon ruling the ``inferior people`` of the world taught them some lasting lessons. As for Pakistan, the fact that it even exists today is due to US pressure in 1971 (backed by movements of the seventh fleet). So, it is not just a question of the other people having committed atrocities like the US. It is a question of the US being at the forefront in the war against the evils of Nazism and Communism, just as it is in the forefront in the war against the evil of Islamism today. (I say Islamism, not Islam, because Islamism is the opposite of true Islam).
As for the Indians and Blacks - these are obsolete issues. You and I (both living in the US) now live on land that the Indians used to roam once, and I dont know about you but I have no qualms about that. Since that is history, and every nation has skeletons in its closet, and if all one can do is rattle those skeletons then one needs to update one`s opinions. Similarly, the US is a better place for the black man than any place in Africa (even after forty years after the became free from colonialism) or anywhere else - if you dont believe me, look at the number of illegal immigrant Africans, Haitians etc. in the US. You dont find American Blacks flying back to the now-free African nations.

SR: yaar tell me how I can insure myself against the possible nuking of California? What kind of insurance will protect my assessts and what kind of motgage will be best for me in that case? we are talking in teh home mortgae conext here..not in general...you are not suggesting me to move to some safer place?:). You are right in a way..I have already improved my chances many folds than my border dweller relative..now it is a matter of how much more safe I need to be.

Let me also clarify that I am not saying to leave everything on fate...my original comment was on Asfand`s case study where the home owner is hedged by indexing the payment with market rent..remember in that case study the owner will have lower payment if the values go down but he still is responsible for the lower value of the home. Bank does not share the lost equity, it only makes the owner feel better during the down days by lowering the rent portion of the payment by meagre amount.

#21 by asfand . The way I see it is that most financial institutions that offer Islamic banking are not really doing so. I can bet you that in the example offered by you where a borrower pays part of the principal and a part of rent back to the financial institution, the rent is actually based on a fixed interest rate, which in turn is based on the cost of funds for the tenor of the loan.

Re: #69 by tahmed32 [“… your support for the gold dinar [is] not in terms of rational economics but in terms of what I consider to be an irrational hatred for the US. What atrocities has the US committed exactly? …”]

Aray yar, Ahmed sahib, you take it too seriously. I am not trying to unite the ummah against the “Great Satan.” That job, I’ll leave to others.

The US is not uniquely atrocious. The powerful always get their way and in so doing they twist arms and step over toes. Those whose arms are thus twisted, feel they have been subjected to atrocities. US being the principle power of the day, by definition will step over weaker toes. The foundation of this great world power was laid on graves of the Native America populations and it’s early economic success was built on the back of African slaves. In my book those are the real historical atrocities of this great power. But, the pyramids were built on the graves of the slaves and so was the Great Wall of China, the Taj Mahal and the Badshahi mosque etc., etc.

The reference to the Muslim world uniting in my message #67, if you noticed, was in question form. A rhetorical question, at that.

Those words (“come on brothers and sisters…etc”) were actually adapted from Jim Sinclair (Chairman and CEO of Tan Range corporation, a South African gold mining firm http://www.tanrange.com/s/Home.asp and a prominent spokesman of the gold industry), whose speeches and writings I have followed for some time. I recently met Sinclair, who turned out to be an unbelievably down to earth, open and friendly man. We had a detailed talk at a conference where I met him in New Orleans recently.

It was Sinclair’s view that the convergence of political and economic forces is coming into a sharper focus. The perceived (or real?) atrocities of the US could act as a motivator, a catalyst, and egg on some of the (Muslim) elements in the world that will combine with others who are motivated by fundamental economics, and it will coalesce into a force greater than the sum of its components.

The economic rationale of pro-gold sympathies is going to be an ongoing subject at Chowk FOMC, but for now, I’ve posted (in messages #63 and #64 under “Pir Sahib on Wall Street) two writings of, none other than, Allen Greenspan, himself. He, in his pre-Fed chairmanship days, was one strong supporter of the role of gold in a monetary system.

[“… And spare me this talk about the muslim world. … If you are worried about atrocities, try to convince the saudis to stop beheading poor pakistani workers every friday, …”]

The Saudi state security apparatus has the lucrative monopoly over illegal drug distribution. Therefore, ‘eliminating’ competition is a great price support method and keeps their profits margins high. The poor Pakistanis who are beheaded are simply used by competition as ‘mules’ –i.e., a person who carries, across border, a shipment of contraband.

[“…There is only one brotherhood - that of all mankind…”]

No arguments from me on this statement.

Re: #68 by ajeet [“… US is sitting on much bigger resourses … knack of finding alternatives … if at any time the supply of cheap crude is in doubt, they will find an alternate resource …”]

Yes, for starters, it can be said that the Persian Gulf oil reserves are virtually under US military ‘protection’ already. If the chips were down the oil fields will simply be ‘secured.’ There is serious ongoing talk in Washington and London about re-drawing the whole map of the Middle East. This includes splitting Saudi Arabia (a British creation to start with) into Najad (eastern) and Hijaz (western), and splitting up Iraq etc. Besides, when the Trade Wars come, the West (particularly North America) will have food-grain as an off-setting natural resource in a world approaching 7 billion population.

The point of my interest is not focused on whether the ummah defeats the “Great Satan” or vice versa. It is the fiat money based, out of control, monetary system (which will face increasing difficulties going forward) that I am discussing. The gold Dinar fits in as a wild card quite well in that equation.

Re: #72 by dullabhatti [“… we don`t plan for every uncertainty particularly the ones of the scale that effect everyone … ``it won`t happen but if does... we all be together in this``. Sure anything could happen tomorrow.....nukes could blow up....but we can`t plan our future for that. We can only plan according to what we have seen in the past...that is our reality. …”]

Bhatti sahib, you cannot be serious in adopting the logic of your relative who lives near the potential war-zone. He says that because he is there, on the spot. He either does not have a choice, or has embraced that fate and is willing to live or die with it. You on the other had, my friend, have voted with your feet and have taken a different course in life for the betterment of your family and future. I am making a major assumption here that you live in the West and have done so because unlike your border dwelling relative, you were not content to resign yourself to whatever fate would have in store for you had you not left that part of the world. Now, if my assumption is correct, then you are precisely the kind of a person who should be planning for those problems that can be tackled within our means, if we are aware of them.

Your argument sounds like someone who is aboard the Titanic. When it is mentioned that an iceberg may have hit the ship, you rebuff it by taking comfort in the assurances of the ship’s invincibility and, further, by saying that we are all in it together. Yes, you are on the Titanic, but you are one of the first class passengers above deck. You have a chance to secure a seat on one of the life boats. Those, less fortunate, who are below deck will have no choice. Its understandable for them, like your border dwelling relative, to say that “we are all in it together”. But you (and most readers here) are not in that situation. Its behooves those of us who can, to understand the situation and take pre-emptive action. That is the whole purpose of all my ranting and raving.

…SR

Re: #69 by tahmed32 [“… your support for the gold dinar [is] not in terms of rational economics but in terms of what I consider to be an irrational hatred for the US. What atrocities has the US committed exactly? …”]

Aray yar, Ahmed sahib, you take it too seriously. I am not trying to unite the ummah against the “Great Satan.” That job, I’ll leave to others.

The US is not uniquely atrocious. The powerful always get their way and in so doing they twist arms and step over toes. Those whose arms are thus twisted, feel they have been subjected to atrocities. US being the principle power of the day, by definition will step over weaker toes. The foundation of this great world power was laid on graves of the Native America populations and it’s early economic success was built on the back of African slaves. In my book those are the real historical atrocities of this great power. But, the pyramids were built on the graves of the slaves and so was the Great Wall of China, the Taj Mahal and the Badshahi mosque etc., etc.

The reference to the Muslim world uniting in my message #67, if you noticed, was in question form. A rhetorical question, at that.

Those words (“come on brothers and sisters…etc”) were actually adapted from Jim Sinclair (Chairman and CEO of Tan Range corporation, a South African gold mining firm http://www.tanrange.com/s/Home.asp and a prominent spokesman of the gold industry), whose speeches and writings I have followed for some time. I recently met Sinclair, who turned out to be an unbelievably down to earth, open and friendly man. We had a detailed talk at a conference where I met him in New Orleans recently.

It was Sinclair’s view that the convergence of political and economic forces is coming into a sharper focus. The perceived (or real?) atrocities of the US could act as a motivator, a catalyst, and egg on some of the (Muslim) elements in the world that will combine with others who are motivated by fundamental economics, and it will coalesce into a force greater than the sum of its components.

The economic rationale of pro-gold sympathies is going to be an ongoing subject at Chowk FOMC, but for now, I’ve posted (in messages #63 and #64 under “Pir Sahib on Wall Street) two writings of, none other than, Allen Greenspan, himself. He, in his pre-Fed chairmanship days, was one strong supporter of the role of gold in a monetary system.

[“… And spare me this talk about the muslim world. … If you are worried about atrocities, try to convince the saudis to stop beheading poor pakistani workers every friday, …”]

The Saudi state security apparatus has the lucrative monopoly over illegal drug distribution. Therefore, ‘eliminating’ competition is a great price support method and keeps their profits margins high. The poor Pakistanis who are beheaded are simply used by competition as ‘mules’ –i.e., a person who carries, across border, a shipment of contraband.

[“…There is only one brotherhood - that of all mankind…”]

No arguments from me on this statement.

Re: #68 by ajeet [“… US is sitting on much bigger resourses … knack of finding alternatives … if at any time the supply of cheap crude is in doubt, they will find an alternate resource …”]

Yes, for starters, it can be said that the Persian Gulf oil reserves are virtually under US military ‘protection’ already. If the chips were down the oil fields will simply be ‘secured.’ There is serious ongoing talk in Washington and London about re-drawing the whole map of the Middle East. This includes splitting Saudi Arabia (a British creation to start with) into Najad (eastern) and Hijaz (western), and splitting up Iraq etc. Besides, when the Trade Wars come, the West (particularly North America) will have food-grain as an off-setting natural resource in a world approaching 7 billion population.

The point of my interest is not focused on whether the ummah defeats the “Great Satan” or vice versa. It is the fiat money based, out of control, monetary system (which will face increasing difficulties going forward) that I am discussing. The gold Dinar fits in as a wild card quite well in that equation.

Re: #72 by dullabhatti [“… we don`t plan for every uncertainty particularly the ones of the scale that effect everyone … ``it won`t happen but if does... we all be together in this``. Sure anything could happen tomorrow.....nukes could blow up....but we can`t plan our future for that. We can only plan according to what we have seen in the past...that is our reality. …”]

Bhatti sahib, you cannot be serious in adopting the logic of your relative who lives near the potential war-zone. He says that because he is there, on the spot. He either does not have a choice, or has embraced that fate and is willing to live or die with it. You on the other had, my friend, have voted with your feet and have taken a different course in life for the betterment of your family and future. I am making a major assumption here that you live in the West and have done so because unlike your border dwelling relative, you were not content to resign yourself to whatever fate would have in store for you had you not left that part of the world. Now, if my assumption is correct, then you are precisely the kind of a person who should be planning for those problems that can be tackled within our means, if we are aware of them.

Your argument sounds like someone who is aboard the Titanic. When it is mentioned that an iceberg may have hit the ship, you rebuff it by taking comfort in the assurances of the ship’s invincibility and, further, by saying that we are all in it together. Yes, you are on the Titanic, but you are one of the first class passengers above deck. You have a chance to secure a seat on one of the life boats. Those, less fortunate, who are below deck will have no choice. Its understandable for them, like your border dwelling relative, to say that “we are all in it together”. But you (and most readers here) are not in that situation. Its behooves those of us who can, to understand the situation and take pre-emptive action. That is the whole purpose of all my ranting and raving.

…SR

For those truly interested in the subject. SR might find it fascinating.



By Dr. Sam Vaknin

This material is copyrighted.
Free, unrestricted use is allowed on a non commercial basis.
The author`s name and the address of this website must be incorporated in
any reproduction of the material for any use and by any means.

http://samvak.tripod.com/nm104.html

I. OVERVIEW

In the wake of the September 11 terrorist attacks on the USA, attention was drawn to the age-old, secretive, and globe-spanning banking system developed in Asia and known as ``Hawala`` (to change, in Arabic). It is based on a short term, discountable, negotiable, promissory note (or bill of exchange) called ``Hundi``. While not limited to Moslems, it has come to be identified with ``Islamic Banking``.

Islamic Law (Sharia`a) regulates commerce and finance in the Fiqh Al Mua`malat, (transactions amongst people). Modern Islamic banks are overseen by the Shari`a Supervisory Board of Islamic Banks and Institutions (``The Shari`a Committee``).

The Shi`a ``Islamic Laws according to the Fatawa of Ayatullah al Uzama Syed Ali al-Husaini Seestani`` has this to say about Hawala banking:

``2298. If a debtor directs his creditor to collect his debt from the third person, and the creditor accepts the arrangement, the third person will, on completion of all the conditions to be explained later, become the debtor. Thereafter, the creditor cannot demand his debt from the first debtor.``

The prophet Muhammad (a cross border trader of goods and commodities by profession) encouraged the free movement of goods and the development of markets. Numerous Moslem scholars railed against hoarding and harmful speculation (market cornering and manipulation known as ``Gharar``). Moslems were the first to use promissory notes and assignment, or transfer of debts via bills of exchange (``Hawala``). Among modern banking instruments, only floating and, therefore, uncertain, interest payments (``Riba`` and ``Jahala``), futures contracts, and forfeiting are frowned upon. But agile Moslem traders easily and often circumvent these religious restrictions by creating ``synthetic Murabaha (contracts)`` identical to Western forward and futures contracts. Actually, the only allowed transfer or trading of debts (as distinct from the underlying commodities or goods) is under the Hawala.

``Hawala`` consists of transferring money (usually across borders and in order to avoid taxes or the need to bribe officials) without physical or electronic transfer of funds. Money changers (``Hawaladar``) receive cash in one country, no questions asked. Correspondent hawaladars in another country dispense an identical amount (minus minimal fees and commissions) to a recipient or, less often, to a bank account. E-mail, or letter (``Hundi``) carrying couriers are used to convey the necessary information (the amount of money, the date it has to be paid on) between Hawaladars. The sender provides the recipient with code words (or numbers, for instance the serial numbers of currency notes), a digital encrypted message, or agreed signals (like handshakes), to be used to retrieve the money. Big Hawaladars use a chain of middlemen in cities around the globe.

But most Hawaladars are small businesses. Their Hawala activity is a sideline or moonlighting operation. ``Chits`` (verbal agreements) substitute for certain written records. In bigger operations there are human ``memorizers`` who serve as arbiters in case of dispute. The Hawala system requires unbounded trust. Hawaladars are often members of the same family, village, clan, or ethnic group. It is a system older than the West. The ancient Chinese had their own ``Hawala`` - ``fei qian`` (or ``flying money``). Arab traders used it to avoid being robbed on the Silk Road. Cheating is punished by effective ex-communication and ``loss of honour`` - the equivalent of an economic death sentence. Physical violence is rarer but not unheard of. Violence sometimes also erupts between money recipients and robbers who are after the huge quantities of physical cash sloshing about the system. But these, too, are rare events, as rare as bank robberies. One result of this effective social regulation is that commodity traders in Asia shift hundreds of millions of US dollars per trade based solely on trust and the verbal commitment of their counterparts.

Hawala arrangements are used to avoid customs duties, consumption taxes, and other trade-related levies. Suppliers provide importers with lower prices on their invoices, and get paid the difference via Hawala. Legitimate transactions and tax evasion constitute the bulk of Hawala operations. Modern Hawala networks emerged in the 1960`s and 1970`s to circumvent official bans on gold imports in Southeast Asia and to facilitate the transfer of hard earned wages of expatriates to their families (``home remittances``) and their conversion at rates more favourable (often double) than the government`s. Hawala provides a cheap (it costs c. 1% of the amount transferred), efficient, and frictionless alternative to morbid and corrupt domestic financial institutions. It is Western Union without the hi-tech gear and the exorbitant transfer fees.

Unfortunately, these networks have been hijacked and compromised by drug traffickers (mainly in Afganistan and Pakistan), corrupt officials, secret services, money launderers, organized crime, and terrorists. Pakistani Hawala networks alone move up to 5 billion US dollars annually according to estimates by Pakistan`s Minister of Finance, Shaukut Aziz. In 1999, Institutional Investor Magazine identified 1100 money brokers in Pakistan and transactions that ran as high as 10 million US dollars apiece. As opposed to stereotypes, most Hawala networks are not controlled by Arabs, but by Indian and Pakistani expatriates and immigrants in the Gulf. The Hawala network in India has been brutally and ruthlessly demolished by Indira Ghandi (during the emergency regime imposed in 1975), but Indian nationals still play a big part in international Hawala networks. Similar networks in Sri Lanka, the Philippines, and Bangladesh have also been eradicated.

The OECD`s Financial Action Task Force (FATF) says that:

``Hawala remains a significant method for large numbers of businesses of all sizes and individuals to repatriate funds and purchase gold.... It is favoured because it usually costs less than moving funds through the banking system, it operates 24 hours per day and every day of the year, it is virtually completely reliable, and there is minimal paperwork required.``

(Organisation for Economic Co-Operation and Development (OECD), ``Report on Money Laundering Typologies 1999-2000,`` Financial Action Task Force, FATF-XI, February 3, 2000, at http://www.oecd.org/fatf/pdf/TY2000_en.pdf )

Hawala networks closely feed into Islamic banks throughout the world and to commodity trading in South Asia. There are more than 200 Islamic banks in the USA alone and many thousands in Europe, North and South Africa, Saudi Arabia, the Gulf states (especially in the free zone of Dubai and in Bahrain), Pakistan, Malaysia, Indonesia, and other South East Asian countries. By the end of 1998, the overt (read: tip of the iceberg) liabilities of these financial institutions amounted to 148 billion US dollars. They dabbled in equipment leasing, real estate leasing and development, corporate equity, and trade/structured trade and commodities financing (usually in consortia called ``Mudaraba``).

While previously confined to the Arab peninsula and to south and east Asia, this mode of traditional banking became truly international in the 1970`s, following the unprecedented flow of wealth to many Moslem nations due to the oil shocks and the emergence of the Asian tigers. Islamic banks joined forces with corporations, multinationals, and banks in the West to finance oil exploration and drilling, mining, and agribusiness. Many leading law firms in the West (such as Norton Rose, Freshfields, Clyde and Co. and Clifford Chance) have ``Islamic Finance`` teams which are familiar with Islam-compatible commercial contracts.

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Khamkhwa, don`t accuse SR of pulling legs...mera te ehnay kachha ee laah ditta ay khich ke.:-)
SR: I think you have well put the uncertainty we live in. Our life span is nothing compared to what this place has been through and might go through. But we don`t plan for every uncertainty particularly the ones of the scale that effect everyone or lot of people. I remember talking to a relative who lives right on the Indo-Pak border during the tension days early this year. I was worried about their well being if the war broke..he showed great consolation and security by saying ``it won`t happen but if does...saareyaN de naal ee ay...we all be together in this``. Sure anything could happen tomorrow.....nukes could blow up...a big 10 point earthquake turn the homes into worthless rubble, all men over 30 could turn bald over night due to some super natural phenomenon.....but we can`t plan our future for that. We can only plan according to what we have seen in the past..or at the most what our fathers had seen in the past...that is our reality.

Why do i get the feeling that SR is pulling some legs.

SR: #67 I think it is interesting that you present your support for the gold dinar not in terms of rational economics but in terms of what I consider to be an irrational hatred for the US. What atrocities has the US committed exactly? Developed the internet so you and I can chat? or is it the development of the automobile and thus of the oil industry, thereby making a bunch of illiterate arabs (the arabs having been in decay for several centuries by then) rich beyond their wildest dreams? Or is it the development of medicine that has increased life expectancies in South Asia from 41 years to closer to 70? I could go on.
And spare me this talk about the muslim world. I have been to a number of muslim countries, and rest assured that the poorest (and illegal) pakistani immigrant in the US gets more respect than the most hardworking illiterate worker in those countries. If you are worried about atrocities, try to convince the saudis to stop beheading poor pakistani workers every friday, in front of televesion cameras. There is only one brotherhood - that of all mankind. And the sooner we start to realize that, the better of everyone will be.

SR
The once mighty and now lowly but hardy dinar stll survives, like the present-day muslim, in the `d` which stands for the penny (dinarum) . The `L` for Lombardi`s bank-note was once the imperial, now in retreat, Pound.

`Paivasta reh shajar sey, umeed e bahar rakh`.

What do you think of Anthony Sampsons? Also another seminal and iconolastic work ``Towers of gold and feet of clay`` and ``The merchants of fear`` on the tyranny and terrorism of the banks & the insurance `kuffars` of the day. I forget the name/names of the author.

Banks & Insurance are the real fortifications from where the entire humanity is `feudalled` in this urban & industrialised serdom.

PS: Money and banking is a subject that fascinates me no end. The problem for me is to harness, in lay terms, this esoteric and wildly unwieldy subject.
Till then, I am content to cheer or jeer from a respectable distance.

SR # 67

My aunt who is seventy year old and in poor health is surely going to die in the next year or two and leave me her condiderable wealth. I have this great plan to start this business as soon as I come into this money. The problem is I have already been waiting for the past ten years for that to happen, but she just lives on inspite of her poor health. Mean time I am not getting any younger.

I think I have a much better chance of succeeding in my business than your islamic banking and gold dinar. This is if I don`t get run over by a truck while still waiting.

As far as resources are concerned, US is sitting on much bigger resourses than the entire islamic ummah. Also don`t forget they have this cursed knack of finding alternatives for their need. So if at any time the supply of cheap crude is in doubt, they will find an alternate resource before you can say Allah-o-Akber.

Re: Ghalib Z the coming of the Gold Dinar

Here we go. Thank you for contributing the newsclip. This is a development I`ve been watching with very keen interest for several months. The beginning of the end of this era of the Dollar`s hegemony (indeed the era of the power of all worthless paper `assets`) may be drawing to a close. The era of natural resource based value may be on the rise. Water, Hydrocarbons and Gold may have already begun.

Will we hear the Muslim world saying, “Let’s do it brothers and sisters. Let’s make them pay us with gold, not that lousy paper dollar?``

Today it may look like a puny joke, but this currency (the gold dinar) if it comes of age some day, would be the one way to strike back at the mighty US for all the atrocities committed over time. Militarily, there is no match whatsoever, but the dollar is the Achilles` heel.

It may have nothing really to do with gold, but the impact on the dollar-dominated world monetary system could be astounding. Gold prices should take off worldwide, because once that currency is established, the oil producers should logically refuse to accept (intrisically worthless) paper in exchange for their black gold. If that were to happen then the federal reserve will not be able to support the absurdly high price (against gold) of their green toilet paper.

Watch the banking houses and many of the big hedged gold companies collapse. That might just trigger off the other 128 trillion dollars (in notional value) of unregulated financial derivatives, a scary thought to say the least. This could be our early warning alarm. We have been warned.

That could really start a Great World Trade War, where North America`s strongest weapon would be food-grain not missiles. In two or three decades the landscape could be altered so radically that a Rip van Winkle from today would be utterly lost.

He may find a new natural resource-backed paper currency with the inscription IN GOLD WE TRUST printed on all its notes.

If he goes to his grandchildrens` school they may be singing a poem about Humpty Dumpty Greenback who sat on the Highest Wall of Debt and from there one day he ``had a great fall`` and all of ``Treasury`s printing presses`` and all of ``Federal Reserve`s Knights`` couldn`t restore its value again...

...SR