by Elias Karmi • 10/16/08 • It was just a few weeks ago that U.S. treasury secretary Henry Paulson declared raw capitalism’s death. And if I might add: Thank God someone realizes the futility of our current financial system. Two problems here: 1) it may be too late, and 2) even if we recover, the true solution may never be practiced.
Minnesota Muslims are finding themselves voiceless, discussed, defined, categorized, psychoanalyzed, talked at and talked about without a serious attempt at inclusion. Muslims, and friends of Muslims, would like to change this climate. Engage Minnesota is a blog that begins that effort.
It is challenging for someone who grew up surrounded by our current financial system to be able to feel what is fundamentally wrong with it. To illustrate, let me ask a question: Why is it that you can never own a house or open a business without borrowing money? And if you think that is the way things should be, it is not! Nor was it ever before in human history.
Borrowing money is not how humanity built its great historical monuments. The Pyramids and the Sistine Chapel were not paid for over years and years to come with interest. Yet in today’s world, if you avoid borrowing, you can barely add a wall to your house without going nearly bankrupt. Everyone, from individuals to large corporations and even governments are under some obligation to pay a debt that is often more than their net worth. How did we get here?
Now imagine this: Instead of your bank lending you money at interest to buy a house or open a business, your bank reviews your project, then makes a decision to become a partner with you in that project. If your project succeeds and thrives, both you and your bank make profits that represent strictly each of your capital contributions to the project. And if your project fails, both you and your bank bear losses according to each party’s capital contribution. Imagine how many more people would be willing to invest and open businesses with the fear of debt taken out of the equation.
But of course most banks are very unlikely to take such a risk. The prevalent view in today’s economics is that lending money is a favor banks extend for which they deserve compensation. This is the mentality behind interest on loans and it is the mentality that is putting entire countries in peril.
In Islam, however, money should never in and of itself be a way of making more money. Lending money is an act of charity for which the lender is given back exactly the amount borrowed in the designated time. Wealthy individuals or banks can make profits by investing their capital and taking the risk with the entrepreneurs, not lending money at interest.
Interest on loans came to exist precisely because rich people wanted to make more money without taking a risk. Perhaps that’s why the word usury sounds so much like “use,” or using the poor. Islam recognized the dangers of this practice very early in history and made it a particularly grave sin to take interest on loans, in order to avoid something like the situation on Wall Street today.
To demonstrate how interest and the economy are not exactly friends, consider how the Feds act whenever they want to drive the economy forward: They lower the interest rate. In Islam there is no such thing as “usurious loans” because all interest on loans is usurious.
The solution, which is unlikely to happen in the West, is an interest rate of zero on loans. This is not against capitalism in any way. It only calls for using earned capital instead of lent capital. It discourages lending and encourages true investing.
An explanation of the problem
I could not come up with a better explanation for the problem with interest than Tarek Al Diwany’s from Islamic-finance.com:
“If a money lender from the time of Christ had loaned an ounce of gold at 5% annual compound interest, it would today require an amount of bullion weighing several planet Earths in repayment.” Early bankers, El Diwany says, understood this fact: a system of loaning out at interest was unsustainable in the long term.
With paper money, banks and governments can just keep printing more. But eventually the consequences will be apparent.
Says El Diwany: “In the real world things experience compound *decrement*, which is to say they rot and become useless. Meanwhile, interest allows money to grow at compound *increment* towards infinity. Herein lies the fundamental conflict between interest-based finance and the environment. Money loaned at interest does not obey the same laws as the physical assets that money buys.”
That is: Money is allowed to increase toward infinity, while the stuff of this world obviously cannot.
Avoiding interest on loans is not the only thing Islam has to offer today’s markets. Gambling with options, securities and derivatives is also prohibited, which would have saved serious moolah for investors. Today the Islamic finance sector is the fastest growing globally, at a rate of 15 to 20 percent annually. Islamic assets under management are estimated by The Economist to be worth $US700 billion worldwide and expected to reach the $1 trillion mark by 2010.
And even though Western systems are not likely to adopt an interest-free scheme, whatever regulations the Feds place in response to this crisis will inevitably be ones that bring us closer to the Islamic model, not farther from it. You can learn more about the details and specifics of Islamic finance by visiting your local mosque or searching online.
* Credit crisis gives Islamic finance a chance to shine: http://www.iht.com/articles/2008/08/18/business/invest19.php
* Paris to rival London as centre for Islamic finance:http://islamicfinancenews.wordpress.com/category/islamic-finance/around-the-world/france/