Tuesday, November 28, 2006

The Pope, The Condescending, and Closet-Intolerance

Now that the Pope is trying to rebuild "bridges" with the Islamic world, I think that one can reflect on his now-infmaous speech without eliciting angry responses. I would like to draw analogies between the Pope's remarks on the one hand, and what appear to be very different but are in fact very similar remarks on the other: As reported recently by BBC UK Chancellor of the exchequer Gordon Brown expressed his desire to make his country the global "gateway" for Islamic finance. The latter is a combination of ratinoalist desire to enrich one's own country (fat fees for investment bankers and lawyers), and the typical condescending attitude that "politically correct" and "tolerant" non-Muslims exhibit toward Islam.

Parsing Chancellor Brown's message, one cannot but conclude that acceptance (on face value) of the ludicrous claim that Islamic finance can do finance without interest is simply to say that Islam does not have to make sense (or even use coherent language). That is no different from the Pope's ahistorical claim that Islam favors dogma over rationalism. The Pope's charge is historically inaccurate, and -- depending on the particular historical period -- may be applied to his Church or any other form of organized religion during its dark ages. It just so happens that the Pope's remarks may be very applicable to Muslim societies today: he merely stated what others (who are condescending and closet-intolerant) dare not say.

For my money, I appreciate the Pope's remarks more than the Chancellor's.


Blogger ainain said...


I have been following your blog and have read some of your entries. As someone keen to getting into Islamic Finance, I understand some of your specific reservations about the industry as a whole. My readings have mainly centered around Justice Taqi Usmani and M Umer Chapra (both distinguished scholars in their own right).

My comment is regarding the statement you made "... ludicrous claim that Islamic finance can do finance without interest is simply to say that Islam does not have to make sense (or even use coherent language). " Are you saying that taking out interest from the equation is not practical or are you saying it is not necessary or doesn't make sense. Please excuse my ignorance.

Inshallah i will purchase your book but I was hoping for a clarification.

M Abdullah

8:41 PM  
Blogger Mahmoud El-Gamal said...

Writers on Islamic economics and finance from its earliest days used the simplistic translation of "riba" as interest. This spawned an incoherent notion that all interest is forbidden, and since nothing essential should be forbidden, it must be possible to do finance without interest. Of course, the bulk of what is called Islamic finance is very much interest based: the mark-up they charge in credit sales and the pure rent component in lease financing are indeed designated as interest in all beginner textbooks.

More generally, most of Islamic finance done today is not focusing on how to do good with one's investments, and how to invest other people's money well. Instead, the juristic focus on contract forms and Arabic names has allowed a very lucrative legal-arbitage industry to emerge -- synthesizing what the jurists claim to be forbidden from what they claim to be permissible, in violation of the classical juristic rule that what matters in contracts is their economic content and not their names and structures.

9:31 PM  
Blogger aburajah said...

This post is a very bold post. And unfortunately a lot of truth is there.

7:33 AM  
Blogger aburajah said...

I would argue that trade based (Islamic) finance is possible.

Let me illustrate by an example. A company like Rylands homes could implement such a scheme easily.

They are a nationwide builder which uses its own cash to an extent to finance its operations(1). It can choose to portfolio some of the "loans" it provides to its customers through its in-house financing entity.

They can choose to provide these "loans" from the company's cash and therefore be from a Islamically permitted source.

The advantages of setting up a section in their financing entity in such a fashion would be as follows:

Since these "loans" are portfoliod they a are not beholden to the market interest rate. The financier can lower the profit rate when the market is soft and increase it when the market is hot.

Since the financier is inhouse the effect would be owner financing which is equivalent to a credit sale. Which is also permitted Islamically.

I believe this is also currently being practiced by car manufacturers such as Ford. That is why they are able to offer 0% financing and low interest financing independent of Market interest rates. When inventory levels are high and demand is low they provide these incentives.

The credit price of the product is determined by market forces and not by a third party money lender.

1)"The Company generally provides for the cash requirements of the homebuilding
and financial services businesses from outside borrowings and internally
generated funds. The Company believes that its current sources of cash are
sufficient to finance its current requirements."




8:19 AM  
Blogger ainain said...

Thank you for your response.

I am beginning to better understand your argument and I agree with your point that nowadays Islamic Banking is skating on thin ice in terms of some of its practices. Some of the essential business and economic principles elucidated in Islamic teachings are being overlooked in favor of a tweaking of the structured product to make it 'Islamic'. Your earlier post on Short-selling is a prime example where the basic principle of not making money at another's misfortune is overshadowed. Anyways I have only a nascent understanding of this industry and as I read more my interest increases.

I do not understand your argument that the majority of scholars (via ijma-concensus) incorrectly translated riba as interest. Are we not supposed to follow the majority opinion of scholars which holds that interest is forbidden in financial/business transaction? I do agree with your assertion that there is a serious dearth of qualified well-trained scholars who can succesfully work with classical Islamic sources and western financial systems/models, but there are a few that I have come across that are respected in both arenas (Justice Taqi Usmani and Yusuf DeLorenzo among others). My point is not that all Islamic Banking is smoke and mirrors or completely on the up and up, rather that there are some legitimate programs in place.

Sometimes scholars are stretched too thin or even worse Banks and financial institutions will hire those that can be easily convinced and not understand the finer points. The common consumer is left confused and sometimes completely turned off. An industry wide regulation board would go a long way but there would be tremendous push back from many parties.

The reason I may sound verbose is because I am fleshing out my thoughts as I am seriously considering a career in Islamic Banking and want to make sure I iron out my concerns beforehand.

M Abdullah

7:45 PM  
Blogger Muslim Unity said...

This my first visit to this blog, and the topic is very interesting.
I however wanted to know one thing, what type of economic model do you think is the best? Are restrictions on investment a good thing?

2:24 AM  
Blogger Mahmoud El-Gamal said...

Yes, of course, some restrictions on investment can be good (do not invest in breweries, do not invest in destructive industries, do not invest in excessively leveraged companies, etc.). However, Islam is not only about restrictions. How about positive and ethical investment provisions (invest more in pollution abatement, employment creating, development oriented, etc. industries). The latter is surprisingly absent from "Islamic mutual fund" practices. They merely tell the fund managers what they cannot invest in them, and let the latter decide on portfolios based on purely financial considerations. It would make a lot more sense to have a system of positive and negative weighting of companies, where good ones are given more weight and bad ones are given less weight in portfolios than purely financial considerations would dictate. Some efforts at Shari`a grading were underway a couple of years ago. I am not sure where they are today.

7:29 AM  
Blogger Ali Yasin said...

Quick question on corporate bonds:
A corporation limits liability and hence the risk of a person losing their most essential assets due to a financial downturn is somewhat mitigated. Also, one does not charge interest to a person, via tradable bonds, but to a limited liability corporation. So, does this still qiulaify as Riba. It seems that the rationale behind banning the ribawi system was to prevent exploitation. Hence, it seems to me that corporate bonds may not qualify as Riba. Any comments you may have are appreciated.

12:57 PM  
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12:06 AM  

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