Studying Islamic Finance

السلام والازدهار العدالة المجتمعي
You are visiting a blog associated with an online noncredit course studying the topic of Islamic Finance, moderated by John Wiley Spiers. Feel free to participate in our discussion, and if you are interested in taking the course visit

Sunday, June 22, 2014

Usury Frustrates the Creative and Unitive Aspect of Commerce

To produce a book, I prefer to teach the topic, and work through the questions with students, in that way testing the ideas and growing the book.  This blog was associated with a class, but I could never get enough students through the schools to make the class a go.  I will proceed with the book, but sadly, uninformed by rigorous debate.

What Islamic scholars I have tried to engage are generally reticent for whatever reason, contrary to my experience of Moslem hospitality in general.  Perhaps the topic is too hot.

But I can engage Moslem scholarship, and I find a most excellent article here.
The rationale behind the prohibition of interest-based transaction is not beyond the common wisdom. If the funds are borrowed for consumption purposes, then charging of interest is clearly a sign of moral bankruptcy and inhuman behavior. In case the funds are provided for investment purposes, even then the prohibition is rational. It is obvious that such transactions involve a one-sided traffic. The entire burden of risk and uncertainty, being the norm of trade and business, has to be born by the debtor/investor. On the other hand, the creditor/saver is guarantied for a sure return.
I recommend this article for being succinct and comprehensive.

Although the rationale is not beyond common wisdom, there are also reasons beyond common wisdom to abjure usury, as I will note below.

Borrowing money to consume is to stay on a path of diminishing returns.  If you need to borrow money to live, then your life is not ordered to your best options.  Truly there are circumstances which are short term, or long term due to injustice, but to take a loan for consumption is to ignore the signal that something is wrong.  There is the term "deserving poor" in which a lender gives a hand to someone who has been in error and is reforming.  Charging interest distorts this person's recovery by making the lender's demands absolute while the borrower's recovery is relative.

Funds at usury are always available, for there will always be someone who can get more out of your life than you are willing to give, if only they can trap you.  Usury is a trap.  To refuse funds at usury certainly narrows the options for solving a problem, but it is within those very narrow options where one's unique talents are discovered, and the efforts at recovery are made on a most solid basis: you find where you are not only most productive, but where you are the best at what you do.  Usurious loans give a false sense of achievement (I got the loan approved!) versus the grueling trial and error of finding what talent you have which the world will reward.

Anyone making a loan ought to do so limited in scope to an act of charity.  As an act of charity, not only is there the loan, there is the opportunity of offering compassion in the form of advice from one who is doing well to another who is doing poorly.  If the loan cannot be paid back, there is even more opportunity for a charitable act, and that is to forgive the loan.  And non-forgiveness of a loan is a most mild rebuke to a borrower.  The only sanction is to not lend more.  The errant borrower is then obliged to go find another benefactor, from whom he will benefit from another round of instruction and bromide.  He who lent without being any help is improved by the experience that his lending in this instance did no good.

If it is easier to borrow than produce, few people will change their habits in order to be more productive.  Productivity is always measured to the degree you serve others.   "Welfare" is taking borrowed credit, credit someone else will have to pay at some time.  The state steps in and acts as usurer trapping the poor on one hand and obliging future generations with no say on the other hand to make good the loan.  For society to offer welfare is to lure incalculable potential into a dead-end, and leave the tab with lenders who have no say.  As Dorothy Day said, it is amazing hoe much you can get in the way of luxury if you just do without the necessities.  Simply compare the results of welfare when it was the job of mediating institutions with welfare as a state function, and the argument is done.

As to usury on a business loan, first we must follow Noonan in recalling all loans are an act of charity, and a business loan is a chimera.  The article on riba quoted above is correct, but to add to it, anytime "credit" is cheaper and easier up front than other means of finance, the moral hazard of taking easy or cheap or both in the form of credit will trip up the entrepreneur more often than not, and in any event, eventually.

Loans at interest are simply unnecessary to an economy.  The usury-free range of options are sufficient to the task of a prosperous economy.  And here again, the borrower's absolute needs become relative to the lender's desires.  Serving the customer becomes secondary to paying the usurer, this misallocating resources in the enterprise.

The article goes on to eliminate the arguments for usury.  I'll only add the pro-usury arguments depend on terms that upon which few agree, thus winning by obfuscation. Money, credit, profit, rent, capital,  are all terms upon which among economists there is disagreement, even within a given school of thought. Even if within a school there is agreement on the definition of some terms, there will be disagreement on another, making conclusive argument impossible. Since no one has the others understanding of the terms in use, it is not possible to make an argument one way or another.  The practice of usury remains like a evil redoubt, unassailable for a lack of martialing reason to the assault..
Apart from the major differences in sale and usury contracts, and in the nature and functions of physical and financial capital, Islam prohibited the transactions involving interest on moral and social grounds. This is because it develops miserliness, greed and a selfish attitude in the individuals, and destroys the high virtues of kindness, sympathy, help and mutual regard in the society. It create a tendency among the people to earn wealth by hooks or by crooks.... It diverts the flow of investment to the projects offering a high rate of interest irrespective of whether or not these are socially desirable.
These are the rationales not immediately apparent.  Usury frustrates the creative and unitive aspect of commerce, as noted in this paragraph in the forms of misallocation and malinvestment.  This aspect is little appreciated must must be highlighted.

If one steps back and observes, usury is a relatively small part of the economy, that is to say the vast majority of commerce is usury free, with equities and vendor finance taking up the lions share of commerce.  This proves usury is unnecessary.  At the same time, the destructive elements in the economy can be traced to the relatively small portion of the economy that is usury based.  Like an otherwise healthy adult, the body economic can become quite ill over a tiny virus entering the system.

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Saturday, March 1, 2014

Islam the Religion of Peace: Jews of Rhodes

Jews thrived on the Island of Rhodes from about 200BC, including 400 years under Islamic rule.  That Islamic rule ended in 1912 when the Italians conquered Rhodes.  Within some 30 years, there was not a single Jew on Rhodes, most having been killed.

Moslems tried to save the Jews from the Nazis.    We never hear about Jews thriving under Islam.

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Saturday, February 8, 2014

Islam and Forgiveness

The last two days I attended a conference on Forgiveness in Islam at the University of Washington.  Prof. Arzoo Osanloo brought tremendous resources together and better yet introduced scholars who will esteem each others work for the coming decades, each improving the other.

For my part I got a brief chance to discuss my particular interest with Prof. Moumtaz, and that is loans, debt forgiveness and usury in Islam.  I had some general discussions with Profs Turner and Barfield that were enlightening.  The fireworks were saved for last with Profs. Lemons, et al and Nakissa going at it over "conceptualizing the habitus".  Frankly, I am used to professors who get into it like that, and I welcome it.

I did form a question somewhat outside of my amateur study, and it relates to Prof. Osanloo's studies of the Iran experience.  Prof Osanloo related a story of lad to be hanged under a regime more "radical (in the positive sense of "at the roots") in which the family offended decides whether the murderer is to be executed.  Given what I heard from the other professors, let's have a case that is the Shariah version of "open and shut."  Two adults playing chess (nothing disreputable as Prof. Barfield noted) in a cafe, lots of witnesses, Farhad beats Ehsan five games in a row, Ehsan is angry and begins to denigrate Farhad, Farhad is not having that and suggests Ehsan should learn to play chess if he wants to win, it becomes a shoving match, Ehsan loses the shoving match and screams "I'll kill you.." Screams it again on the way to the kitchen, screams it again coming out of the kitchen with the knife (three times) and then Ehsan kills Farhad.  Mid-sized city, relations not too close and not too far, (as prof. Ben Hounet noted), a clear straight murder case.

Judge rules, clear case, Ehsan's life is forfeit.  Ehsan makes an abject apology, blames himself for having pride in his chess-playing, when his skill was a gift from God and so not only did he murder Farhad, he is guilty of blasphemy and deserves to die, etc.

The family is sad at the murder of Farhad, sad at the whole case, moved by Ehsan's repentance, and decides to forgive for the love of God (let's ignore the problem of blood money for the sake of argument).  And under the radical Shariah, Ehsan walks free.  (And following Prof. El Fadl, this forgiveness is sad and beautiful.)

My observation: given all of the talk in the conference to the status of the forgiven in a regime of forgiveness, surely one can appreciate that even a forgiven Ehsan, free to walk, has had a profound sentence imposed upon him: he is a murderer.  The Ehsan before the murder and the Ehsan after the murder are two different people.  From inability to find a chess partner to compromised marriage prospects, a murder conviction is no small thing.

In the recent, western experiment someone who has "served his time" has been rehabilitated and the legal fiction is "justice served."  It seems to me, in our system, this is an extremely expensive process that guarantees we arrive at nonsense.

Now, take the Ehsan case today, as I understood the new laws in Iran in the same case today Ehsan walks free out of the Shariah court, and into the state court where he faces an "Article 12" prison term of 3 to 10 years, under the recent, western european innovation that a murderer has offended the legal fiction of the state (my editorializing).

So my question is, in the "article 12" regime example today, just what does the state bring to the polity by imposing a jail sentence?

My thesis:  mixing polities only makes things worse, but rent-seeking is an eternal human endeavor.  The experience of Ehsan the forgiven ought to carry weight in the considerations of polity change.  Prof. Kanafani-Zahar highlighted stability problems with these hybrid approaches.

Radical systems are proven by the test of time, but are subject to prejudice or woefully misunderstood.  Under the Timurids Afghanistan was the world's California and Herat its San Francisco (my biases, but you take my point).  It seems to me the problem is not a lack of innovation in mix-and-match NGO recommended systems, but a lack of restoring what works.  

Now I am not proposing the world go Timurid, but in a place like Hong Kong where the state is near non-existent, Moslems practice Shariah, the Chinese see the deal broker, the Christians use mediating institutions, the Hindus have their system, and the Jews theirs.  In spite of a reputation for probity, fairness, independence and accessibility, the courts are rather unattended.  At the same time Hong Kong is a beacon of peace and prosperity. 

What little reading I've done on the Prophet I recognize as a merchant his esteem of freedom.  Instead of Weber's 1919 definition of the state as a monopoly on violence, settled in the West, perhaps Islam can organize states as "protectors of freedom", evident in the rationale of the prohibition on usury, a process which enslaves people.  I am sure there are other examples of freedom esteemed.

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Monday, January 20, 2014

Plain Dealing

One aspect of Islamic finance is its emphasis on clarity and plain dealing.  On the other hand, let's look at a rule from a capitalist book:
This Statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of afinancial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
Definitions are so convoluted that books have to be written to explicate a "true sale" from one that is not true.  This makes it unlikely that partners to a deal can really appreciate their risk.

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Friday, January 17, 2014

Housing Bust in Canada

Mish Shedlock is notable for getting credit as a component of a lack of hyperinflation in that great debate.  He is mystified as to how his predictions of a real estate bust in Canada have not yet occurred.
No one knows for sure precisely when any bubble will burst. I got the US housing bubble correct but missed Canada by a mile.Read more at
This is easy: Canada requires a 20% down payment and there is no mortgage deduction on Canadian taxes.  So those seemingly insignificant points actual have profound effects.

For a decade most homes in USA were bought with nothing down, sometimes even negative LTV, but in Canada someone actually had to demonstrate enough discipline to save a down.  A much more responsible customer base.

Next, with mortgage interest deduction on taxes in USA, buying a house is a tax dodge, making the reason for having a house to that extent abstruse.

When it comes to usury (interest) even slight rules can have large effects.

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Thursday, January 16, 2014

Libyan Banks and Shariah

Comes 2012 news of protests in Libya:

A number of employees at a branch of Sahara Bank in Benghazi have held a demonstration outside the bank to protest against its use of interest. They demanded that the bank start using Sharia-compliant banking methods.
According to the Libya Herald, none of Libya’s major banks are Sharia-compliant, but the Governor of the Central Bank, Saddek Elkaber, has said that he believesdemand for Sharia-compliant banking is so high that it may become an important part of Libyan banking.

I wonder if the banks were Shariah-compliant under the late leader Muammar Khaddafi, who died in Oct 2011.  And now...
Preparations are underway for an international conference organized by the Central Bank of Libya in collaboration with the World Bank and the Islamic Development Bank on Islamic banking in Libya.
So the geography of islamic finance continues to evolve.

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Monday, December 30, 2013


From the New Testament, James 4, 13-17:

13 Go to now, ye that say, To day or to morrow we will go into such a city, and continue there a year, and buy and sell, and get gain:
14 Whereas ye know not what shall be on the morrow. For what is your life? It is even a vapour, that appeareth for a little time, and then vanisheth away.
15 For that ye ought to say, If the Lord will, we shall live, and do this, or that.
16 But now ye rejoice in your boastings: all such rejoicing is evil.
17 Therefore to him that knoweth to do good, and doeth it not, to him it is sin.

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