A Point of Interest

Written by Muhammad Tahir

"So I assume in Islamic countries it works this way and poverty is almost non-existent? Are there any role-models that implement what you are suggesting here?

"Sorry, another question:

"Interest, no matter how abundant, ultimately leads to poverty."

"So what do Islamic banks take instead an interest? I assume a fee? How high is this fee or who determines the amount of this fee?"

"Are Islamic organisations not seeking profit?"

Several important questions were raised in response to my previous article about the Grameen Bank which we at UmmahPulse felt were worth exploring in a bit more detail. I would like to thank "Anonymous" for his/her questions, because the answers help clarify some important points with regards to the Islamic financial system in particular as well as the goals and objectives of Islamic law in general.

Before answering Anonymous' specific questions, it is important to note that the current global financial system represents an incredibly corrupt, secretive and unaccountable network which creates money out of nothing, for the enrichment of a few at the expense of the many. Now, that might sound somewhat hyperbolous, but it is accurate. Can you think of any other industry that could directly receive over $700 billion in tax payer monies (not to mention the $12.8 TRILLION which were required to stabilize the economy after it almost collapsed due to unregulated financial dealings by the same banks), and then, after a slap on the wrist, just go right back to business (and bonuses) as usual? I don't know about you, but an interest based financial system that ends up $13 trillion in the hole would pretty much confirm the statement of the Prophet (peace and blessings upon him), that "Interest, no matter how abundant, ultimately leads to poverty."

It is also worth noting that before filing for bankruptcy, General Motors was making more money from its financial services arm than it was from making cars. In fact, up to 90% of GM's profits were derived from various types of loans and financial derivatives - including the type that led to the most recent financial crisis.

Why is this important? It is important because financial services do not create wealth or value - they just leaching off the wealth created by real economic activity. Taking steel and rubber and glass and electrical wiring and turning it into a car which can be sold for two or three times the value of the raw materials is creating wealth. Tilling land, planting seeds and then selling the resultant produce is also an example of creating wealth. Giving someone $100 to start a business and demanding $110 back at the end of the year regardless of the success or failure of the business is just a drag on the real economy. Lending money in return for interest is just a way to solidify the dominance of the owners of capital over the owners of other resources, like land or natural resources or labour. Islam argues that capital is just another input with no position of preference. If one partner puts in a pound of sweat, and the other puts in a pound of gold, then they're partners in success and failure, in the proportions they agree upon (in Islam, this type of contract is known as mudaarabah).

The objective of the Islamic Shari'ah (code of law) is not to create a utopia on earth (which even many Muslims do not comprehend) wherein poverty will never exist. Rather, the economic principles in Islam constitute a divinely inspired system which seeks to minimize the risk of conflict in people's dealings by delineating clear rights and obligations for contracts and relationships while prohibiting certain types of transactions outright. When it comes to the Islamic financial system, Islam recognizes the profit motive, but sets limits within which fair and just dealing should occur. To appreciate the dysfunction of the current financial system, it is enough to say that the current value of financial instruments being traded on the world's stock exchanges outstrip the value of the true economy by many multiples. If the purpose of the financial system is to facilitate trade and investment, does it make sense that the instruments that are supposed to be doing the facilitating are worth more than any possible real trade and investment? Much has been written about the rising cost of food; the real reason the price of food is going up is not a shortage of supply. Indeed in 2008, the world's total arable land amounted to 13,805,153 km², whereas 48,836,976 km² was classified as "agricultural land". That means that less than 1/3 of the world's agricultural potential was actually being tapped. And people are still worried about the earth's population growing from 6 to 9 billion people?

The real economy is not the problem. It is speculation on the global financial markets which is driving up prices such that real people can't afford to buy real food. Meanwhile, commodity traders buy and sell tons of food that they will never physically see or take possession of - a type of transaction which is explicitly forbidden in shari'ah. Since the traders have no interest in actually consuming the commodities they are trading, it is the end consumers - you and me - who suffer when we actually need to eat.

Islam states that real economic activity should generate wealth, and financial instruments should be strictly regulated to facilitate real economic activity only. A farmer needs some money to plant his harvest? He should be hooked up with an investor: the legitimate function of financial markets is to help pair investors with businesses. They can negotiate that the farmer and the investor will each get a certain share of the output of the crop. If the crop fails, the farmer loses his blood and sweat and the investor loses his cash. If there's a bumper harvest, both reap the benefit according to their agreed shares.

What Islamic banks may or may not do in the current context is a separate and vast subject. "Islamic finance" is quite a craze these days and not all of it is necessarily in accordance with the shari'ah. The fact that the likes of Citibank and Goldman Sachs now have Islamic Finance divisions should certainly give one pause for thought. Until there is an Islamic financial system which is completely independent of the conventional system, we will all be covered in the dust of riba, as foretold by the Prophet (may peace and blessing be upon him).