CouldIslamicfinancingavoidcreditcrises?
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CouldIslamicfinancingavoidcredit
crises?
Friday,23 Nov2007I 4: 10
defaultingin
Suppose
for a momentall thosesub-primemortgages
the USweren't basedon cheapcredit and were insteadtied to real
assets.True, there probablywouldn't have been as manymortgages
takenout, but then again,bankswouldn'thaveas manyto write
downeither.
but perhapsit is a goodtime to
Of course,this is not what happened,
for ethicatfinance.Although,not totatty
lookat the ancientguidelines
a
uniqueto lslamicthought,it is herethat the ideahasexperienced
particutarresurgence
in recentyears.
Strictlstamicbankingandfinancemustadhereto the tenantsof Shariataw,or lslamicjurisprudence.
contractualuncertainty,and
Sharialaw prohibitsthe paymentor earningof interest,specutation,
transactions
whichareovertyadvantageous
to onepartyat the expense
of another.lt alsoforbids
tobacco
investment
in goodsdeemedharmfulto the goodof societysuchasgambling,pork,pornography,
andatcohol.
Amongthe mostsignificantandimportantdifferences
betweenmodernfinanceand lslamicfinanceis the
prohibitionof interest,or usury,because
it is earningmoneywithouthavingto do anyworkfor it.
Needless
to say,this is a starkcontrastto modernfinancein whichinterestis oneof the keymethodsby
andpersonalloans.Emphasised
whichbanksmakemoneythroughtheir productssuchasmortgages
insteadis profit andlosssharingbetweenparties.
interestassinfulat somepoint,thoughthe
Christianity
andJudaismhavebothhistoricalty
opposed
'unnaturat'
conviction
wasseldomadheredto. EvenAristottefett that makingmoneyfrom moneywas
it'doubtecharging'.
wealthcreation,and5t. ThomasAquinasconsidered
to Aristotle,Shariaconsiders
interestunethicatbecause
it is a form of weatthcreationwhichhas
Simitarty
'reat'economy.
stated,interest
no basis,creatinga'virtuat'economy
asopposed
to a
Simptisticatty
generates
moneyfrom moneyandtradingin indebtedness
asopposed
to realtangibteassets.
According
lslamicfinancingbranch,Amanah,in 1996the
to KamatMian,AsociateDirectorof HSBC's
gtobatfinancialderivatives
marketwasestimatedto be wortharound[64 trittion.However,at the same
time, the combinedGDPof atl countriesin the wortdamounted
to aboute30trittion.
Thismeansthat t34 trittionof the financialeconomy
waslinkedto Virtuat',intangibteassets,namely,
moneythat existsontybecause
someonehasdectaredthat it witt existin the future.
credit- essentiatty,
Thiscreatesan economicprobtemwhichleadsto bubbtes
the cost
andmarketfalts:asinterestincreases
of an asseton the basisof credit, demandfatts,if demandfatls,thensupptymustatsofatt, if supptyfatts
thenproductivitymustfatl aswell whichthen resuttsin unemptoyment
and[abourprobtems.
Sohowto tacklethe ethicalconcerns
in a financiateconomytargetydependent
on interest-bearing
products?
an item, a
In an lslamicmortgagetransaction,
insteadof loaningthe buyermoneyto purchase
bankwoutdbuythe item itsetffrom the setterat market,andre-setlit to the buyerat a profit, while
attowingthe buyerto paythe bankin instatments
for rent andsharesof ownership.In orderto protect
itsetfagainstdefautt,the bankasksfor strict coltateral,andthe goodsor landis registered
to the name
the buyermustensurethe sourceof the
of the buyerfrom the start of the transaction.Furthermore,
moneyusedby the bankto buythe propertyis alsofree of usury.
are backedby tangibteassetsas
lstamicbanks,then, avoidusuryby makingsurethat a[[ transactions
opposed
to intangibleones,suchasdebt. Now,imagineagainthat att the nowdefunctsub-prime
mortgages
were backedby tangibteassetsinsteadof by cheapcredit. Peoptewouldbe tesstemptedto
takeout a loanwhichthey coutdnot affordif that hadto backit up with reatcottaterat.Coutdthis avoid
the sortof turmoilwe find in the financia[marketsnow?
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CouldIslamicfinancingavoidcreditcrises?
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It'shardto say.Of course,we can'tpretendfor thisto be a panacea
andit seemsunreatistic
to etiminate
interest;but, surely,it is worththinkingaboutthe ethical(andeconomic)
imptications
of interestanew.
Onthe otherhand,the downside
to not havingaccess
to credit,however,is that it canmakegrowth
moredifficultandhasthe potentialexacerbate
incomeinequatity.Whatif onehastittte to offer the bank
for coltateralin the first ptace?
It is worthtakingnote,though,that lstamicfinanceis amongthe fastestgrowingfinancialindustries,
now
estimatedto be worthover8250bittion.Andit's not just in the MiddteEasteither- the UK,to takeone
exampte,is fast becoming
a keycentrefor its business
aswesternbanks,suchasHSBC,
Barclays,
UBS,
products.Themostpoputar,however,arethe
Deutsche
Bankandothers,beginto offer Sharia-comptiant
purelylstamicbankswhereasthe westernbanksareviewedwith morescepticism.
Withrecentchanges
to the UKtax systemlastspringto makelslamicfinancialproductsmorefairtytaxed,
this mutti-bittion
dottarmarketis growingbetween20-25percentannuatty,perhapsmorein otherareas.
TheUKgovernment
atsotook set to introducelslamicbonds.
Giventhe ongoingcreditcrisisandits subsequent
shortage,
a financialproductwhichdoesn'trequire
creditshoutdproveattractiveto Muslims
andnon-Mustims
atike.
Spencer
Thanhouser
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