Wednesday, May 23, 2007

Incoherent Pietism and Shari`a Arbitrage

This Op-Ed piece appeared in today's Financial Times. Due to space constraints, the editors removed the paragraph wherein I claimed that microfinance institutions, and not today's multinational marketers of structured "Islamic finance", are the rightful heirs to the legacy of early initatives in Islamic banking in rural Egypt, India and Pakistan. They also removed my sentence on the use of the term sukuk, which I had only heard in my school years in Egypt in reference to sukuk al-ghufran, the Arabic name of the Easter Church's version of pre-reformation indulgences.


Blogger Parvez said...

Dear Dr. Gamal


Indeed, the Shariah arbitrageurs are currently assembled in Toronto in large numbers. Please see the link below:

The question is "how do we stop them from feasting on piety" or "should we leave them alone and hope that pious will sort it out themselves"

Your thoughts and comments please.



10:42 PM  
Blogger Mahmoud El-Gamal said...

wa `alaykumu s-Salamu WRB

I would like to know what you think can be done. I think that I have done my share: lost most of my credibility as an academic economist just by accepting the Chair that I now hold (most people don't read what I write, they just assume that you are an ideologue or a snake-oil salesman), and I have given up consulting opportunities that would have supplemented my academic income, because potential financial and macro consultees are also turned off by the title and I refused early on to do any consulting as a "Shari`a scholar". Security asked our departmental assistant during the anthrax scare after 9/11 if they need to screen our mail since they have an "Islamic" guy... which is how my most senior boss greeted me for the first time "you must be the Islamic guy"... In the meantime, you have the "scholars" who are lining up their pockets praised as providing a great service to Muslims, as they denounce me for being an agent of western economic thought who is disrespectful of Islamic scholarship.

I do not say all of this to elicit pity. Al-Hamdu li-Allah, I am doing just fine raising a family on my academic salary, and keeping a clear and peaceful conscience by writing and saying only what I believe in. Of course, it would help for more people to speak up. Most journalists after a few minutes of explanation that: (1) the Qur'an forbids riba, which is not always the same thing as interest, and (2) Islamic finance is most definitely not "interest free", simply tune off and ask aggressively "does anyone else share those views", "that is not what I hear from everyone else", and worst of all "that is very interesting".

However, for many who are driven by good intentions to look into Islamic finance, by the time they understand what's going on and become critical/cynical it is too late for them to seek a regular career. They have a choice between biting their tongues and justifying their actions to themselves as looking for positive improvements on the one hand, or becoming ostracized by the Islamic finance legal and financial communities as well as the conventional industry, thus losing their livelihoods. Just over the past couple of days, I advised a couple of people who fall in this category not to jeopardize their livelihoods and potential livelihoods by being vocally critical of this racket. They can do honest work within that industry, just as they can do honest and Islamic work within conventional finance.

The most positive approach that I can think of now is to do what Dr. Muhammad Yunus and before him Dr. Ahmed El-Naggar did (with Grameen and Mit Ghamr banks, respectively). It is curious to watch the Islamic finance community now trying to embrace microfinance after Dr. Yunus and Grameen shared the Nobel prize. He was in fact ostracized by the "Islamic finance" community for "charging interest". I think, in fact, that there may be more humane/Islamic structures for microfinance, and would love to have had the appetite for risk and the social skills for dealing with people that would allow me to do something on the ground. Alas, I am most comfortable as a recluse academic. I am waiting for action oriented people who want to start Muslim credit unions, Islamic microfinance outfits, etc. to share ideas and learn from their experiences... Are you by any chance one of those?

Best, wa s-Salam,


10:18 PM  
Blogger Sadaqa India said...

Dear Dr Mahmoud

Salam. I urge you to continue your good work on mutulization and microfinance. Believe me, there are many others like me who look forward to you as a mentor and leader for "clues" that would enable us to differentiate between the truth and the falsehood - between the real Islamic economics and the trash that is peddled by powerful vested interests. And there are many other researchers like me who would like to "do something on the ground" and experiment with what you have in mind - the "more humane/Islamic structures for microfinance."

Talat Yasmin
Coordinator, IBF NET

5:56 AM  
Blogger Mahmoud El-Gamal said...

Thank you for the kind words. That is very encouraging. I hope to turn back to this subject when I finish some of my current writing obligations.

2:29 PM  
Blogger Mohamed Magdi Ahmed said...

Dear Dr. Gamal,

How is microfinance any different from a traditional loan from a bank as far as whether it is halal or not?

10:30 PM  
Blogger Mahmoud El-Gamal said...

If you think that halal is a function of contracts only, then would you accept a usurious loan for a needed person that is structured by selling him a $10 pen for a deferred price of $20 due in one week (when you know that the person will sell the pen to get $10 with which to feed his family)? It is obvious to me that there is something fundamentally with this contract-based approach (read my paper "Incoherence of Contract-Based Islamic Financial Jurisprudence in the Age of Financial Engineering" for further details.

It is reasonable to be concerned about mechanics as well, which can be easily handled along the lines of my most recent posting on student loans. Forgetting about the mechanics for a second, microfinance is a proven method for bringing families out of poverty, which is a lot more than can be said for the legal ruses used to structure bonds and other transactions, enriching only lawyers and international bankers and their consultants.

11:43 AM  
Blogger Mohamed Magdi Ahmed said...

I agree with you completely as far as to the "hiyal" employed by todays Islamic Finance. In fact this trickery stretches across all aspects of Islam currently. Witness "Islamic" Democracy amongst others.

However that still leaves us trying to produce acceptable solutions to our everyday problems whether they be economic, political, or the the multitude of issues we as muslims face on a day to day basis, that stem from Islamic Sources of Legislation.

While your argument to the effectiveness of microfinance and how that financial technique raises people out of poverty might be a fact(I've not done my research on this, but I'll accept it as fact for now), it still does not answer the question of what the hukom al-shar3y on it is?

If we apply the same logic, then traditional banks are a proven way of being effective. Are they not? However would that imply that the main function of a bank is halal?

One thing I encountered in my skimming of your papers that caught my attention was something along the lines of coming up with solution from first principles. However I don't see that happening. It's true that the inherited fiqh is not by itself authortative, it gains legitmacy if it addresses the reality as it is now and has solid evidence backing it.

7:23 PM  
Blogger Mahmoud El-Gamal said...

The main functions of banks and other financial intermediaries are pooling of the resources of savers and diversification of their investments to ameliorate risk. Both of those functions are legitimate, and there is nothing in Islamic law to forbid them. This applies to regular financial intermediaries as well as ones that focus on microfinance.

Premodern fiqh focused on contracts, and to the extent that one can find hiyal to work around those, I was arguing in my previous response, one can also use the same hiyal but at least focus on community-development efforts for poor Muslims.

My academic research is not primarily concerned with practical solutions: it is merely focused on trying to develop a coherent economic framework for fuqaha to think about issues in today's world. My personal feeling about practical issues is that I'd rather invoke the rule of necessity than create a poor alternative that I label "Islamic".

9:31 PM  
Blogger Raj Mohamad Maiden said...

Respected Prof.El-Gamal, I recently came across an article on Stock Borrowing & Lending deemed as Shari'ah compliant by the Malaysian authorities. This treatment will facilitate Muslim investors to participate in the Hedge fund industry which has long-short strategy. Would like your take on this? Thank and Was s-salaam.

1:21 AM  
Blogger zaza said...

Dear Dr. Gamal,


I noticed several comments and responses on your blog pertaining to the relationship between Islamic finance and microfinance. I am a grad student currently researching both. So I was wondering if you have studied or done any work on their potential synergies. (Also I am sure you heard about (or perhaps attended) the Harvard Law Islamic Legal Studies Program’s Symposium “Financing the Poor: Towards an Islamic Finance” last year? or saw CGAP’s recent Focus Note: “Islamic Microfinance: An Emerging Niche Market”

You said you hoped some "action-oriented" people would take up the cause. Well, in fact some have, in the MENA region there have been several "successful" Islamic microfinance institutions: Jabal al-Hoss in Syria using the village bank system and Hodeidah program in Yemen. Success is mixed partially because the jury is still out on whether microfinance does alleviate poverty and whether poor are more willing to pay more for credit that is considered Islamic.

Any thoughts or further discussion on this would be mumtaz.


All the best, wa s-Salam


4:27 PM  

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