CAPITALISM, COMMUNISM AND ISLAM - WHICH OPTION TO CHOOSE?

Umar Chapra, a leading economist in Saudi Arabia writes, “while economic growth is essential, it is not sufficient for attaining real human well-being.” Rather, we depend on “spiritual health at the core of human consciousness, and justice and fair play at all levels of human interaction.” Much more than a business model for specialty banks, he and many others believe that Islamic economics offers a much wider vision. The conventional view of the homo economicus—super-rational, selfish utility maximizer—dehumanizes people, denying the divine stamp on our nature. A truly Islamic economic theory, they believe, should restructure consumer preferences, ensuring that basic necessities are plentiful and luxuries come only after everyone is provided for. People should feel motivated to work by knowing that they share equitably in the produce of their labors. Sharia guidelines for inheritance distribute wealth among families in ways that prevents too much accumulation. More than an economics in the usual “dismal science” sense, this is a comprehensive rulebook for playing well with others. It also claims its authority from God.

The theory has something in mind for governments as well. They are responsible for administering the zakat tax, one of the Five Pillars of Islam. Though often translated as “almsgiving,” it literally means “that which purifies.” Though believers are encouraged to give over and above, the classical jurists developed a system of minimum annual requirements for a person’s accumulated wealth. The rate of zakat varies depending on the resources one owns; it can range between 2.5% and 20%. These funds should be directed primarily toward redistributive purposes, to soften the market’s burden on the poor. However, they can also be used to fund religious causes, a fact which medieval regimes sometimes used to usurp zakat funds for expansionary warfare. But modern Islamic economists, by and large, discourage military spending wherever possible.

The distribution of charitable giving is one of the many high hopes Islamic economists have for government. There is, in the literature, expectation for a kind of elixir effect. “The question of dishonest practices in the case of zakat is quite unexpected,” writes the Pakistani economist M.A. Mannan, “because of zakat’s religio-economic character.” This, at least, is an impression they share with the Taliban and the ayatollahs: if you make the society religious in name and appearance, it automatically becomes religious in character. With corruption so widespread across the Muslim-majority world, it isn’t hard to see the appeal of such a pious panacea.

Islam, the theorists believe, offers a distinct alternative to the other big-picture political economic options, capitalism and communism. By incorporating both markets and redistribution, they see it as the best of both worlds. After the two mega-ideologies spent the Cold War fighting over the allegiances of Muslim countries, the Soviet Union collapsed and now global capitalism is grinding to a halt as well. Islamists suspect that the reason Muslim countries remain impoverished is a fundamental incompatibility between these Western economic systems and the values that Muslim cultures hold dear. Now, perhaps, is the time for a third option to have its chance.

MAIN CULPRIT OF OUR DECLINE......

If a money lender from the time of Christ had loaned an ounce of gold at 5% annual compound interest, it would today require an amount of bullion weighing several planet Earths in repayment. Early bankers knew the profound implications of this fact: a system in which commodity money is loaned out at interest is physically unsustainable in the long term.

With paper money things are different. When the exponents begin their inevitable work, the issuer of such money can simply print a larger face value on his banknotes. In acquiring the legal privilege to create money in this way, the early banks side-stepped a critical failsafe in the financial processes that drive economic activity, though the consequences were slow to emerge.

Other problems with interest could not be resolved so easily. In the real world things experience compound decrement, which is to say they rot and become useless. Meanwhile, interest allows money to grow at compound increment towards infinity. Herein lies the fundamental conflict between interest-based finance and the environment. Money loaned at interest does not obey the same laws as the physical assets that money buys.

The business model of most modern corporations is to borrow money at a rate of interest that is below the rate of return earned when investing that money. For example, by borrowing $100 at 5% and investing it in a one year project that yields 20%, the executive manager can earn $15 for his firm. And the banker will earn $5 of interest on his newly created money. It is a rather cosy symbiosis, but its logical consequence is that firms will grow increasingly large over time. Instead of borrowing $100 in order to make $15 of profit, why not borrow $100 million and make $15 million of profit instead?

In this manner, financial leverage has enabled a relatively small number of corporations to achieve market dominance, while their bankers collect interest on an ever-growing pile of debt. And because the commercial banking system has the ability to create new money almost without limit, there is correspondingly nothing to restrict the extent of financial leverage. The result is that economic growth of a highly aggressive kind is being forced upon humanity.

Imagine a world in which holders of surplus wealth invested with entrepreneurs only on a profit and loss sharing basis. Here the investor gains or loses according to the entrepreneur's business fortunes. Under this kind of finance, the interests of both parties are closely aligned. The investor will be more careful when examining the entrepreneur's project plan and personal history before investing. This contrasts with the attitude of many interest-based lenders who attach greater importance to the borrower's collateral than to his business plan. This is because collateral can be repossessed and sold on the market in order to repay the original loan plus interest. Bank loans therefore tend to be directed towards those members of society who already have wealth, not necessarily to those with the best projects. A poor man may have a good business idea but, without collateral, few banks will finance him. Interest-based finance therefore tends to increase wealth inequality, whereas pure profit and loss sharing tends to reduce it.

In Islam, any benefit accruing to a lender of money is regarded as a form of usury and is prohibited. There is no such thing as a "usurious" rate of interest in Islamic law, because all rates of interest are usurious. And although the prohibition of usury is not a cure-all for the maladies of modern life, where it has been implemented as part of a wider regime of Islamic regulation the historical precedents are excellent. The universities, hospitals, welfare systems and infrastructure of Iraq, Spain and the Ottoman Empire were funded without resort to interest-bearing loans. Within twenty years of the institution of Islamic law, the Arabian peninsula was transformed from a scene of poverty to one in which deserving recipients for welfare payments could not be found. The lesson is clear. Interest-based finance is not a pre-requisite for society's material advancement.

In today's context, the prohibition of interest would yield immediate benefits to the majority of the world's poor. If the developing countries were to cease their debt service repayments today, they would find themselves richer by more that a billion dollars a day. That would make a very real difference in a world where as many as three billion people are each living on less than two dollars a day. Their hunger is our luxury, and usury makes it so.

1400 years ago the Prophet Muhammad (peace be upon him) told his followers, "though usury be much, it always leads to utter poverty". When such words are uttered by a Prophet, they carry the force of an economic law. They warn us that even the wealthy nations of the world are in a race against time. If we do not defeat usury, usury will defeat us too.

(Article is originally written by Tarek Al-Diwany, published by Resurgence Magazine in Issue No. 248, May/June 2008)

WHY SHORT SELLING IS HARAM IN ISLAM?

'In Islamic Finance, we deny the conventional way of thinking, which aims of creating a new dollar out of every dollar', says renowned Pakistani Shariah scholar Sheikh Dr. Taqi Usmani. By selling a stock short, the 'investor' may gain while the underlying company loses value - a clear violation of the ban of unjust deeds, stated in the Holy Quran, Surah Al Baqarah, 2, 278 - 279: 'Deal not unjustly, and ye shall not be dealt unjustly'.

Islamic Finance is about serving society. By selling a stock short, an avalanche of more short-sellers might be triggered, leading the firm to expensive stock buy-back initiatives or in the worst case to bankruptcy.

As well as short selling, day trading is labelled as speculation and therefore is counted as haram as well. Market participants are certainly allowed to profit, but this should add value to the entire economic system.

The aspect of Tauhid, or unity, is also core in Islamic Finance. It is not only about investing in 'pure' stocks or avoiding interest. It is about protecting society from trickery, fraud and social tensions. Furthermore, Shariah banking bans sector which allegedly hurt Muslim society and family values as well.

Sectors which are unacceptable or haram under Islamic Law (Shariah) are well-known. An Islamic Fund manager is not allowed to invest in stocks pertaining to alcohol, tobacco, pornography, entertainment, defense and the conventional banking and insurance sector.

With the temporary ban of short-selling, Western financial regulators adapted for the first time a core principle of Islamic Finance. Will they now look at the Quran more closely in order to avoid another Black Monday?

Remember, most Islamic Banks in the GCC have so far achieved double-digit gains in 2008 while conventional banks currently recount their biggest losses in history.