Saturday, January 23, 2010

Justification and the four-step vicious circle of "Islamic finance"

I payed attention to "Islamic banking" when it first appeared in Egypt during my college years (1979-82), then again starting in the mid 1990s, and much more vigorously starting in 1998 when I took the "Chair in Islamic Economics, Finance and Management" at Rice University. In all those years, I have observed participants in this industry go (in circular fashion) through four main steps:
  1. Utopianism: Driven by ideological, religious, and social concerns, they seek economic and social answer in the vague financial commands of the Qur'an and Sunnah (the Qur'an does not explicitly say what the forbidden riba is, and doesn't mention gharar, the Sunnah gives some examples of forbidden riba and gharar, but not sufficiently to give unequivocal definitions thereof). We trust the "Scholars" (back in the late 70s and early 80s Egypt, that included household-name scholars such as Al-Sha`rawi, Al-Qaradawi, and most accomplished Azhari scholars).
  2. Engagement: As consumers, practitioners, or consultants, the Utopians start to engage the industry, either directly or through closer observation.
  3. Disenchantment: The engaged Utopians discover that the practice of Islamic banking and finance does not go beyond replicating what was already there, at ridiculously higher interest rates (for example, here in the U.S., "Islamic" auto-loan structures in the 1980s were offered at 22 to 25%, when the going market rates were below 10%.) They become disenchanted. Some disengage, but others remain engaged for one of two reasons: (i) residual Utopianism and dreams of eventually changing the industry through continued engagement (the "young industry" fallacy), or (ii) their livelihood as bankers, lawyers, consultants, etc., has become entangled with the industry, the have become used to higher incomes and living standards and recognize that they have been shut out of the conventional sector because of their "Islamic" identity.
  4. Justification: Those still engaged in the industry pick up the hobby of themselves criticizing the industry that they have participated in creating (it started with some bankers and lawyers, but now even "Shari`a scholars" who are the second-largest financial beneficiaries after lawyers, and who legitimized the industry by leveraging religious-legal authority, including Taqi Usmani and others, have joined the fray). A new narrative emerges, about the need for a different benchmark to replace LIBOR, new structures that are closer to the "Islamic ideal," etc. Those assertions help to shape a new Utopian vision of "true Islamic finance," which revives Utopianism (if cynical) within the engaged community (serving thus as justification for their continued engagement) and attracts a new wave of Utopians, leading back to step 1.
Those, like myself, who have decided to disengage and say that the entire enterprise is incoherent, are deemed "controversial." Recently, a very smart young man was seeking my advice on getting an advanced degree in Islamic finance and joining the industry. I told him that as it stands, all justifications in step 4. notwithstanding, engagement with the industry can only lead to one of two outcomes: (i) co-option and corruption if one remains engaged and perpetually engaged through incoherent justifications, or (ii) frustration, demoralization, and eventual disengagement.

Neither is a good outcome. So, for all fresh-minted Utopians out there: Keep your distance, and keep Utopian dreams where they belong.


Blogger Unknown said...

Jazak Allahu khair for the exceptional article, I think your 4 factor model is very intuitive and I found myself reading stages 1, 2 and 3 and relating my own personal evolution through these phases. I think every single Muslim who has considered the Islamic Finance industry has or will be going through some of your 4 steps. So the options a young Muslim student has left are: (i) conventional finance industry (ii) Islamic industry (either genuinely fighting an unwinnable war, what you call the unachievable ‘utopian dream’, or getting corrupted and realising how much money you can make by charging 300bps over fair value through their not so elaborate financial engineering) (iii) walk away.

Whilst I completely agree with you that (iii) is probably the most sensible option, for those of us who are already deeply involved in the industry it is simply too late to just walk away. Yes our ambition to one day do something relating to Islamic finance/economics may be an unattainable utopian dream, and we may in fact have realised that the industry is far too corrupt to ever change from within, but if all genuine Muslims whose intention is to add value to Muslim society and strive in the path of Allah were to walk away from the industry and accept that our dream should just stay a dream, what does that leave? Who does that leave? It leaves a group of corrupt Shariah scholars and western financial engineer Shariah arbitrators to drag the name of Islamic Economics/Finance through the mud to make a quick buck. Far be it for me to judge anybody, but if on the day of judgement when I am standing in front of my creator and I am asked why when I had all the qualifications and experience and understanding of the corruption taking place in the name of Islam, why I walked away and accepted defeat and let these people damage the name of Islam? I do not wish to over dramatize the situation, but we DO need young Muslims to come into the finance and economics industry with their ideological, religious and social concerns. We do not have an alternative model of Islamic Economics and Finance, how do we go about getting this alternative model? Its not by advising people to walk away, its by offering constructive advice which is exactly what you are doing with this blog. I urge you to continue what you are doing, because as I have said to you before you are one of the only non-corrupted Muslim academic in a recognised western institution who tells it how it really is. You may think that not enough people read this blog, or not enough people listen to your advice, or that you are repeating yourself over and over, but the wonder of the modern communication age is the fact that a person like me can discover your blog in a random Google search last summer (whilst going through stage 1 of your model) and catching up on 3 or 4 years of blogs in a few days of intensive reading. The truth comes out in the end, the Shariah arbitrageurs will get found out, and the utopian dream inshallah will one day be realised (10,20, 30 years, when we are all dead, whatever). We do need an alternative model; we do need the constant flow of ideas from real people who know what they are talking about, and I still think we need young Muslims to learn theoretical economics and finance. The utopian dream may seem unachievable, but who would have thought 1400 years ago that there would be 1.2 billion Muslims on the planet. In this day and age of mass information it is possible to achieve in a few years in terms of information dissemination what previously would have taken decades. Nothing is impossible, and even if its highly unlikely it is still worth fighting for.

5:38 PM  
Blogger Ibn Abee said...

الَّذِي خَلَقَ الْمَوْتَوَالْحَيَاةَ لِيَبْلُوَكُمْ أَيُّكُمْ أَحْسَنُ عَمَلًا وَهُوَ الْعَزِيزُالْغَفُورُ
Who has created death and life, that He may test you which of you is best in deed. And He is the All-Mighty, the Oft-Forgiving Surah Mulk: 2

Commenting on this verse, Al-Fudayl ibn Iyad stated that "best in deeds" means; the most pure and most correct. He stated, "If a deed is sincere and pure but not correct, it is not accepted. If it is correct but not pure, it is not accepted. [It will not be accepted] until it is both pure and correct. It is pure if it is solely for the sake of Allah and it is correct if it is according to the sunnah.

Quoted by Ibn Rajab, Jaami' al-uloom wal hikam

Based on the above, trying to justify the promotion of falsehood as a benevolent act to serve the interests of the Ummah is only an act of self-deceit being perpetuated by Shaytan or your own nafs.

12:20 PM  
Blogger Unknown said...

Salam Ibn Abee,
Jazak Allahu khair for your contribution. I am however a little confused, are you making a general point (which I completely agree with) or did you simply interpret my whole post as 'trying to justify the promotion of falsehood, an act of self-deceit being perpetuated by Shaytan or my own nafs'? May Allah reward us for good intentions.

5:07 PM  
Blogger Ali Altaf Mian said...

Thank you for these posts. I hope all is well in Houston.

5:23 PM  
Blogger nhusain said...

If the islamic financial institutions are the same as the regular ones then they should experience the same level of losses as the regular ones. We should say they are similar as some Islamic financial insitutions have been able to weather the storm better then their conventional counterparts.

7:07 PM  
Blogger ghazzali said...

Many non-Islamic/secular financial institutions have also weathered the financial crisis, and in fact have made record profits. That does not make the system ethically good. So, to suggest that some Islamic financial institutions who fared well were somehow similar (hence implictly a little more "shar'i' compliant) is a fallacy.

11:14 PM  
Blogger Muhammad Saeed Babar said...


When we use the word "utopianism", it means that the ideas of Utopians are "admirable but impracticable in real life", the reason for this according to Dr. Elgamal

"vague financial commands of the Qur'an and Sunnah (the Qur'an does not explicitly say what the forbidden riba is, and doesn't mention gharar, the Sunnah gives some examples of forbidden riba and gharar, but not sufficiently to give unequivocal definitions thereof."

There is a pre-condition to benefit from the guidance of Quran, which is mentioned in Aya 2 of Sura Al-Baqara. Unfortunately, we study and try to implement guidance of Allah without the necessary pre-requisites and the result is "disengagement". There is also a guidance from the companions of Prophet Muhammad (PBUH)to interpret the terms of Quran like "riba".

The confusion around the interpretation of the term "Riba" is intentional one to mislead people for the purposes of some ulterior motives. Some of them have taken refuge in the comments of Hazrat Umar (R.A) about the interpretation of the term "Riba". These people have taken Hazrat Umer’s (RAA) remarks to mean that Riba is a vague term whose meanings were not obvious even to the closest companions of the Prophet (PBUH). They further claimed that whatever has been written on Riba is the personal interpretation of religious scholars and jurists.

The tradition which reports the remark by Hazrat Umar (RAA) that he could not check full details of certain kinds of Riba with the Prophet (PBUH) also includes the words “so give up Riba and whatever may appear akin to Riba.” Hazrat Umar (RAA) himself followed his recommendation to the hilt “We have given up 90% of all legitimate transactions for the fear that an element of Riba might be present in them.” (Reported By Imam Shafi)

We should not "walk away and accept defeat and let these people damage the name of Islam." Also highlight "falsehood as a benevolent act to serve the interests of the Ummah."

1:30 AM  
Blogger said...

5:04 AM  
Blogger khalid622 said...

If it is a vicious circle, can you please show the way forward?

Pretending that something haram is halal (riba for example) does not seem a solution to me.
Moreover, pretending that something haram is ok because it is a state of necessity, when it is not doesn't seem a solution either.

Allah has given us an intellect and I am sure that the solution is simple, the only problem is that we can't see the truth with half an eye. We need to open our eyes, analyse the problem thoroughly and always keep on the safe side inshallah.

10:54 AM  
Blogger Unknown said...

"If it is a vicious circle, can you please show the way forward?

Pretending that something haram is halal (riba for example) does not seem a solution to me.
Moreover, pretending that something haram is ok because it is a state of necessity, when it is not doesn't seem a solution either.

Yeah, buy in cash or find a lender who won't charge you more than the principal lent. Stuff your cash in the mattress, or deposit it in an interest-free institution. Invest your money in screened equity investments.

I don't think the professors argument is that riba is halal, it's that what many Islamic banks peddle as riba free actually is riba in disguise.

11:17 AM  
Blogger Unknown said...

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5:51 AM  
Blogger Unknown said...

hi, its very informative, Financial Guidance , thanks

12:32 AM  
Blogger Unknown said...

This post is excellent, thank you.

8:27 PM  

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