A Simple Mutualization Argument Based on Al-Qarafi's analysis

I have posted a short note supporting my previous arguments for mutualization in Islamic financial intermediation. The central inspiration for this note is Al-Qarafi's difference #201 in Al-Furuq, in which he explains why interest-free loans are permitted despite containing both riba and gharar.

The abstract of the note follows (follow this link to the paper):

Islamic finance is a prohibition-driven industry, aiming to avoid the prohibitions of riba and gharar. It is well accepted in Islamic jurisprudence that riba and gharar do not affect the legal validity of non-commutative financial contracts (e.g. gifts). Jurists have long viewed this as a potential solution to the problem of gharar in commercial insurance, proposing mutual insurance as a non-commutative alternative. Likewise, Al-Qarafi had shown that loans are exempted from the rules of riba and gharar because of their non-commutative (in this case charitable) nature. It is thus argued that a substantial portion of Islamic financial intermediation can and should be conducted through mutual financial institutions.

Muslim-Western Discourse: What to Think and What to Say

I received a number of private emails regarding the previous post on the NYT article. In particular, many fellow Muslims objected to my rhetorical question about whether one can be a Muslim and not hold a separatist-triumphalist viewpoint.

So, let me explain further: The answer to the rhetorical question is that -- of course -- the mainstream Muslim view is triumphalist, while Muslims vary in their views of optimal levels of separatism. In this regard, Mr. Shakir was merely representing the orthodox view, even though I am not sure that he is entitled to speak on behalf of all Muslims (i.e. we are not allowed to declare one who disagrees with this view as a non-Muslim if he or she professes to be one).

The real problem is the following: Western observers were scared of the likes of Mr. Shakir when they glorified violence and employed anti-American rhetoric. Now, he has professed that he denounces violence, but still wants to convert America into a Muslim country. For non-Muslims (and many Muslims, I might add) who are scared -- based on experiences that they had in countries that declare themselves "Islamic" -- of what his vision of a "Muslim country" might entail.

Let me explain: If the image in the minds of most non-Muslims and many Muslims is that of the Taliban's Afghanistan, the fact that Mr. Shakir now aims to reach his goal through legal means of persuasion appears even more threatening. Put yourself in the shoes of someone who fears that a "Muslim America" will replicate the historical worst case scenario perpetrated in the name of Islam. Fix the likelihoods of success of the Islamization program under a violent and a peaceful scenario. Now, if the advocates of an Islamic state try to reach it by illegal violent means, that becomes a security issue, which allows you to reduce the probability of success dramatically. If, on the other hand, they play by the rules of the game, then there may be very little that you can do legally (although, or course, discrimination would help reduce those chances of success -- and thus increased discrimination against Muslims is the most likely result that we are likely to observe in coming years).

One must respect Mr. Shakir's honesty in articulating what he and many or most Muslims believe (although the vision of what a Muslim country would look like varies tremendously within that group). However, you can see that for practical purposes, those who considered him intolerant before will be even more worried now. This is the fear that the west has had regarding Islamic movements in the middle east (FIS, MB, etc.). As Bernard Lewis coined the term, they fear that it will be "one man, one vote, once". Now, they fear, Western Muslims want to bring this threat right to their own homeland (witness the increased interest in U.S. media and politics in European Muslims, especially in France, where their proportions are relatively high).

So, if you believed that Mr. Shakir's approach was intolerant before, you would think that it is now better packaged, but even more dangerously intolerant.

This is a very difficult issue to face as Muslims. Too many Muslims repeat the rhetoric of Mr. Shakir in their homes, mosques, etc., but deny it when dealing with people of other faiths. Some even go as far as to claim that they respect other people's faiths and wish for them to respect ours (as evidenced by the now infamous Danish cartoons episode). Honestly, however, if you think that the other person's is wrong, and that he will only be saved if he converts to yours, you do not have as much respect for their faith as you profess, or as you hope that they will have for yours.

Of course, this is a problem with the doctrine of tolerance more generally: Can we tolerate those traditions that are intolerant. Likewise, a doctrine of mutal respect finds trouble in the face of separatist and triumphalist traditions, as ours admittedly is.

Yet, we ask others to be tolerant towards us, and to respect us, in ways that we may not be able to reciprocate.

It is up to our public leaders to formulate a coherent vision for dealing with this quandry. To the extent that I implicitly criticized Messrs. Yousuf, Shakir and Khaled, it was because they either avoid those thorny issues altogether, by focusing on positive aspects of relations with "the other", or they profess a view that is contradictory to the type of non-adversarial relationship that they wish to have with that other.

Of course, as I discussed in a previous posting ("asking difficult questions, seeking easy answers") there is evidence from the episode told about Amr Khaled's visit to Germany that his audience and devotees would abandon him if he were to address those issues. In the meantime, more intellectually oriented leaders like Tariq Ramadan -- who criticized Amr Khaled and other televangelists for avoiding those difficult issues -- have not to-date been able to provide solutions that capture the imagination of the masses of Western and Eastern Muslims.

In the areas of economics and finance, I think that I have found ample evidence in traditional scholarship to solve the problems of separatism and triumphalism (which others may or may not accept, but at least I think I see a way forward).

In this more important area, we are looking for better leadership, but I have not yet found it (I like Tariq Ramadan's approach a lot, but it is still work-in-progress, and I am not confident that the Muslim masses would accept his finished product).

Tolerant, or still separatist and triumphalist?

I am sure that by now most people interested in modern Islam would have read the New York Times feature of Hamza Yusuf and Zaid Shakir. They were protrayed as the face of emerging Muslim moderation -- showing discomfort with their pre-9/11 anti-American rhetoric.

Underneath the veneer of tolerance and the merchandising acumen of Muslim Deepak Chopras, one wonders if there lurks the same separatist and triumphalist view of Islam that inspired their previous glorification of violence and anti-Americanism.

It is the same separatist triumphalism that I sensed in "Islamic finance" circles: Those in the know recognize that all they have produced is an inferior analog of convnetional financial products, and yet there is no denying the triumphalist boasting about the rate of growth of the "industry".

Likewise, in the NYT article, the closing quotes by Mr. Shakir show unquestionable separatist triumphalism:

He said he still hoped that one day the United States would be a Muslim country ruled by Islamic law, "not by violent means, but by persuasion."

"Every Muslim who is honest would say, I would like to see America become a Muslim country," he said. "I think it would help people, and if I didn't believe that, I wouldn't be a Muslim. Because Islam helped me as a person, and it's helped a lot of people in my community."

Like the Amr Khaleds of the Islamic world, the new discourse of the Hamza Yusufs does not seem to find adequate solutions to the difficult questions. First and foremost, can you even call yourself a Muslim if you do not hold a separatist and triumphalist view of Islamic hegemony over other religions? You can avoid the issue, and talk about tolerance "in the interim", but that is no more tolerance than the Christian Zionists' tolerance of Jews (they are only supported to bring about the second coming of Christ, when they all either die or convert).

Are they really a face of tolerant Islam, or just better packaging of their older selves?

Islam, ART and World Cup Broadcasting

Many will be familiar with the uproar in Arab countries over the monopoly of world cup games by the subscription-only satellite/cable channel ART. The network has struck deals with local authorities in Arab countries to ensure that their local populations can only watch world cup games on ART, which sells at prices well beyond the reach of the middle classes in those countries (over L.E. 1000 in Egypt, $600 in Palestine!). Some may be able to circumvent that monopoly by using dishes that can pick up European satellite channels, but that is generally a more expensive alternative.

Adding insult to injury, many of the semi-legal cable connections that some Egyptians had used for years to receive Arabic satellite channels were ordered severed, just as the world cup was starting, based on complaints by ART. So, to protect the monopoly, people who had actually been paying to receive ART and other channels now lost access (unless they agree to pay more for what they had already bought!). Ironically, in richer Saudi Arabia, the King forced ART to make some games available for free. However, in poorer Egypt, the monopoly stands strong.

Needless to say, monopoly is quite un-Islamic. If this were a new sports event that ART was showing, they can obviously charge anything they want for it. In this case, however, they chose a sport and an event that people have grown accustomed to watching on free broadcasting for many decades. Then, they struch a deal with governments so that others cannot make it available at lower prices. Thus, this was purely a case of monopolizing a market for which demand was originally built-up by low prices, and then raising the prices dramatically by virtue of that monopoly power.

Letter and Spirit of the Law

In a brilliant analysis of the Enron affair, Business Week magazine reduced the problem to one of obeying the letter of the law while subverting its spirit. Skilling was a master of adhering to the letter of the law, the article argues, on which the Enron style was centered:

The Enron trial was at heart about the difference between the letter of the law and its spirit. It was the most complicated of the half-dozen or more big corporate corruption cases that have come to trial, not just because of the scope of the meltdown, but because the fraud at Enron was accompanied by the most obsessive and careful concern for the letter of the law.

The most beautiful analysis of the trial, and the general issue of letter and spirit of the law, to which this blog is dedicated, came in the middle of the article:

A trial by definition is about the letter of the law, but in starting the way he did, Berkowitz pointed out that you can't reliably interpret the letter without talking about its spirit as well. That was the thing Skilling couldn't see.

One day, I hope that Muslims can recognize the same point: the law is meaningless without understanding the maqasid. In the area of Islamic jurisprudence of financial transactions, Abdul-Wahhab Khallaf said it best: the law is there to serve certain ends, and the ends are more important than the mechanics of the law.

Naked short selling on NYSE: Makes you wonder

In an article on possible illegal short selling of Vonage stock, contributing to its fall, Wall Street Journal reported the following:

Some of the NYSE regulatory questions in the letter appear aimed at determining whether dealers or their customers may have violated rules curbing the practice of "naked short selling," or selling shares without having them available or knowing how they can be provided to the buyer when the transaction settles after a few days.

The rules against naked shorting were tightened in mid-2004 by the Securities and Exchange Commission, and took effect in January 2005. They put new requirements on exchanges to police trading. As an SEC official noted at the time, naked shorting could drive down a stock price in an "abusive or manipulative way."

This makes one wonder about the extent of abuses in Arab exchanges, and how much they may have contributed to massive reallocation of wealth from those without access to brokers to those with such access.

The Economics of Islam -- Part II: A New Social Contract

This is a more serious posting. It relates to the dysfunctional relationships between Muslim populations and their governments. Muslim populations have grown restless after the welfare state-mentality -- following the socialist movements of the 1950s and 1960s and/or the oil revenue spike of the 1970s -- has given way to the stark reality of the terrible poverty and underdevelopment of those countries (including the oil rich countries, which are nonetheless incredibly poor).

The way out of this economic underdevelopment will not be easy. The medicine that is required to wean those countries off their rentier mentality, get rid of kleptocracy, and instill a culture of saving and genunire entrepreneurship, is very bitter. It requires a new social contract, for which the rise in Islamic fervor may be harnessed.

In his controversial book "The Great Test" (الفتنة الكبرى), Taha Hussein proposed an interesting political-economy interpretation of Islam: The resistance of Quraysh to Islam had very little to do with its monotheistic message, he argued -- most of the elites were agnostic at any rate, using religion only as a vehicle for political and economic power. It was the socioeconomic message of Islam that they found most disturbing: it affirmed private property and enterprise, and hence could not easily be dismissed (in today's language) as Utopian socialist or communist, but at the same time emphasized equity and the evils of excessive wealth accumulation. Worst of all, argued Hussein, Islam threatened the aristocracy created by marriage of money and power, declaring that the noblest are in fact the most pious.

According to Taha Hussein, the righteous leaders of the first fifty years of Islam (610 to 661 CE, spanning the beginning of the Prophet's mission until the Umayyads established their dynasty following the assassination of Ali, the fourth and last of the rightly guided Caliphs), with the possible exception of `Uthman (whom Hussein argued had good intentions but bad policies) -- the reason that his book was so controversial -- led by example: The Prophet (p) was a middle-class merchant, but when he became leader, he chose to die poor. The same is true of `Umar, Abu Bakr and Ali (r), who all insisted on keeping the Muslims from enjoying the great riches of conquered lands, and led by example -- living very simple lives. By living as the poorest do (`Umar eating only bread with oil when others suffered under famine being the most famous example), they could ensure a more equitable model of economic development (as opposed to the model where the rich get richer and the poor poorer).

The exceptions, of course, were `Uthman (r), who allowed the Prophet's companions to trade land, live more luxurious lives in the conquered lands, etc. Once this undisciplined materialism took hold of a big fraction of Muslims, argued Taha Hussein, the end of the socioeconomic regime started by the Prophet (p) in Madina had begun. `Ali tried to bring back the discipline of the earlier decades under `Umar (r), but to no avail -- too many Muslims by then could be lured away from his strict standards by the promise of riches under Mu`awiya.

The current state of affairs in Muslim societies combines the worst of both worlds: the elites of Muslim societies remind us of Yazid, son of Mu`awiya -- they do not even use economic incentives skillfully to further the public interest in any meaningful way; they are merely infatuated with fabulous and previously unimaginable riches. Consequently, they spend excessively on unproductive activities that their extremely poor countries (including GCC countries, who are very poor by international standards, despite the windfall of oil revenues that is likely to last them only a century or less) cannot afford, and buy the public's temporary happiness with transfers of their short-lived energy rents. Investments are also geared towards consumables and fast profits, as the business communities try to share in the fabulous wealth of the political rentiers. Public investments, including infrastructure building, is in most cases inappropriate for the very early stages of development of those countries, if they were to decide to develop economically.

Hence the need for a new social contract. The new Islamic adherence is becoming clear among all but the top-most cirlces of the rich and powerful. However, it seems mainly to stop at the feel-good level of paying some charity, excessive performance of `umra and Hajj, sponsorship of religious entertainment, etc. If those groups take their religion deeper, and convince the elite circles that they should be good Machiavellians and mimic the increased religiosity of their governed public, then a new social contract may be forged to enhance savings rates, make competition more productive, and redirect investment to more appropriate forms conducive to economic development. (Interestingly, Khatami and Ahmadinejad in Iran seem to follow that model, and that may be part of their mystique for their peoples. Is this the new breed of political leaders that we may see around the Islamic world in future years? Perhaps those who are more politically adept will learn from the domestic political successes of those currently seen as demagogues, and forge this new social contract).

More specific day dreams will follow in later postings, iA.

The Economics of Islam -- Part I: If I owned a hotel in Egypt

A dimension of Islam and Economics that I haven't touched upon is the economic dimension of increased religiosity among Muslims worldwide (at least in form for most, and in substance for many). Manifestations of the economic dimension of this increased religiosity cannot be missed. For instance, one may cite:

• Clothing stores specializing not only in modest clothes, but explicitly marketed or labeled as "clothes for muhajjabat" (ملابس المحجبات). Part of that movement is to create a parallel fashion industry, built around the notion of an Islamic "uniform" (الزي الإسلامي), as it is sometimes called. This makes it difficult for preexisting clothing stores to compete for this -- the fastest growing garment market segment, hence giving the "Islamic clothing store" a decided competitive advantage.
  
• Arabic satellite TV channels started with televangelist models (Amr Khaled being the most obvious example, but other models exist, catering variously to the fiqhi oriented, the spiritually oriented, the historically oriented, etc.). They have recently branched into the video clip channels as well (which remain the most watched channels, if coffee shops at shopping malls in Cairo are any indication). First, the songs of Sami Yusuf started showing up every 20 or so songs, then the Qur'anic reciter Mishari bin Rashed's "tala`a al-badru" started playing even more frequently. Now, it is probably only a matter of time before a 100% religious-oriented video clip channel is launched, to rival the soft-pornography variety (although it is far from obvious that deviating from the current mixed format of entertainment and religion would be profitable; the owners of those satellite channels may have done their research).
  

At any rate, what I plan to do here is to write about obvious extensions of this model of "economics of Islam" that may prove useful for Muslim countries and businesses. The first idea is to utilize the "religious entertainment" phenomenon -- started by the likes of `Umar `Abdul-Kafi in private gatherings of Egyptian upper-middle-class women -- to jump start a new type of religious tourism.

If I owned a hotel in Egypt, say at Hurghada or Alexandria, for instance, and I wanted to make a lot of money, here's what I would do: during holiday seasons, I would invite a televangelist like Amr Khaled or Tariq Suwaidan, along with a singer like Sami Yusuf or local variations thereof, maybe even some of the offshoots of Sufi Tariqas whose traditional songs are modernized by the likes of Sami Yusuf. I would invite them to stay at the hotel for a week, giving one performance after lunch and one in the evening. Then, I would publicize the event widely. I am sure that the hotel will be fully booked for those events. To maximize leverage of those events, one could spread the lectures/concerts over two weeks, say, by having them only over long weekends (Thu, Fri, Sat), and requiring bookings for the whole week if a family wants to stay at the hotel during those performances.

Then, I would have a contract with those religious entertainment figures to spend random periods of time at the hotel (minimum of four days a month, say, in addition to the widely publicized weeks). The understanding will be that if you happen to be staying at the hotel, then you would meet with people informally for a lecture, song session, etc. Lured by the chance to be part of a smaller gathering with those cult heroes, hotel occupancy rates will stay high most of the year.

There will be a substitution effect, no doubt. You wouldn't get many Italian or German tourists if you become known as "the Amr Khaled" hotel. However, your business would be booming just as a clothing store that switches to "muhajjaba clothes" would.

Immature stock markets + poor Islamic governance = Arab stock market (now crashing) bubbles

Most people who are interested in the middle east know about the crashing stock markets in the region. I only have very little anecdotal evidence, but here's the likely scenario: Many rich investors, and few poor ones, are allowed to buy on margin (borrow to buy stocks and leverage their returns when stock prices are rising). This starts a speculative bubble, with price increases accelerating and more small investors trying to get in. Then, the rich investors stop buying (they buy gold and platinum instead, or buy other markets, real estate, etc.). Simultaneously, banks start to tighten credit for margin buyers, and the rich start to sell and short sell (i.e. borrow the stocks from prime brokers to sell them, paying interest and dividends to the owners, hoping to close their short positions at a later date when the price falls) the over valued markets. In certain instances, some of those large investors may have access to insider information about bank policies, since they may own or operate the banks and brokerages that allow margin trading and short selling. The result, of course, is what we see.

Islamic jurisprudence had built-in regulatory controls to prevent this game. The prohibition of borrowing to invest (margin trading) is obviously the prohibition of riba, which everyone knows very well: greed drives one to borrow in order to leverage his resources in investing, but riba leverages losses the same way it leverages gains -- and now you are gambling. The Hadith also explicitly forbids "selling that which you do not own/possess", which is an explicit prohibition of short selling. Needless to say, contemporary jurists and lawyers have found ways around those prohibitions (for "Islamic hedge funds" and other dealings that received jurists' blessings; of course, most traders engaged in such schemes couldn't care less about Islamic jurisprudence). It is the rich investors who are manipulating the markets as described and profiting from those relaxations of or non-adherence to Islamic prohibitions, and the small investors who are lured in with those relaxed rules, only to lose their life savings and fall into terrible debt. That is extremely un-Islamic.

Remembering Imam Muhammad `Abduh

1266 AH/1849 CE -- 1323 AH/1905 CE

Remembering Imam Muhammad `Abduh: A leader of the aborted Islamic reform movement of the past century. His approach to following the example of the early Muslims (al salaf) was turned upside-down by "Salafis" of the second half of the past century.

Political-establishment and reactionary-religious interests combined to assassinate him politically, forcing him to resign from Al-Azhar in 1905. He died shortly thereafter.

It has been over a century since his death, and we are still speaking of a long-awaited reform, disagreeing over what needs to be reformed and how.

رحم الله الشيخ الإمام

Activism and Academic Research

I had a nice lunch conversation with Timur Kuran a few days ago in Houston. One point that he made, which continued to bother me days later, was that I may be making a mistake by linking my academic research (in the economic analysis of Islamic law) too closely to an activist agenda (a reform mentality inspired by the century-old work of Imam Muhammad `Abduh and his students). My academic mindset forces me to acknowledge that -- ideally -- academic research should be done objectively, independent of one's political or other inclinations. However, my training as a social scientist also tells me that there is no such thing as objective social science, and one is most objective when one declares one's biases up front and writes in the most transparent manner possible.

Honesty and integrity dictate trying to approach objectivity, i.e. reporting analyses that contradict or detract from one's preferred conclusions. However, when writing on a topic with such subjective roots as religion, economics and social order, it is impossible to claim success in approaching objectivity. This makes it difficult to claim that one's analysis holds a higher intellectual ground relative to purely ideologically-driven treatise (e.g. by Islamic economists or others) that assume the conclusion and provide half-baked arguments to support it, relying on the sympathies of their readership who agree with the conclusions regardless of the analysis.

So, what is the solution? To avoid writing on those topics altogether and leave the domain to pure ideologues, to bury one's bias in obscure academic jargon and haughty intellectualism, or to continue doing one's best in a transparent but intellectually honest manner hoping that future readership can distinguish between the different genres of writing? The rhetorical question is framed to favor the third option, but it is far from obvious that this is indeed the best course of action.

Captive market analogy

More evidence has surface to show that minorities are being charged higher mortgage interest rates than their white counterparts with similar credit ratings and incomes. This is the proper analogy -- in my opinion -- to Islamic finance, where Muslim customers who are forced t deal with "Islamic financial providers" are obliged to pay higher interest rates. Part of the premium is caused by genuine (albeit spurious) transcation costs due to additional trades, SPVs, legal fees, "scholar" fees, etc. The rest of the premium (which may or may not exist in the short term, while providers are seeking to build reputation and market share) is the rent-seeking incentive that brings most providers into that industry. If "Islamic finance" providers can extend credit to those minority borrowers at lower rates than they are currently charged, there may be a mixed blessing in the whole charade.