In a large portion of the world financial transactions are routinely scrutinized for their compliance with Shariah, the Islamic divine law as interpreted through a variety of institutions and authorities. Moody’s estimated in April 2010 that banking and financial institutions that aspire to Shariah compliance managed roughly $950 billion in assets. With such numbers, it is not surprising that Shariah-compliant finance has of late attracted a good deal of attention (sometimes cynical, sometimes starry-eyed) in the non-Islamic world.
Are those institutions offering an alternative to western finance, perhaps a superior variant thereof? It is clearly in important ways distinct, and it is certain that western and Islamic finance will of necessity interpenetrate on this small planet. The terms of that interpenetration are the subject now, in effect, of complicated and only half-aware negotiation. This article may in some small way advance the self-awareness of the de facto negotiators.
Prohibitions and Loopholes
Shariah-compliant institutions, by definition, reject both riba and gharar (roughly and respectively, interest-paying loans and speculation). But what, exactly, is left? Suppose a high-net-worth individual has more money than he can spend or can easily fit in his pillows, and he wants to put it to work somewhere. What will he do? The natural answer — for one brought up with western financial institutions, anyway — is that he might lend it out. This has a lot of variants. He might lend it to his country’s Treasury by buying bonds. He might lend it to a local bank by opening an account. He might lend it to a next-door neighbor who has plans for a new business. The likely common denominator, in any of these cases, is that the lender expects more back at the end of a year than he parted with at the start of that year. Inflation, risk, and the simple passage of time all justify the expectation of a greater sum later, even from one’s neighbor. So one accepts or negotiates a contract providing for the payment of interest.
If that is prohibited as riba, what other alternative is there? How else can you put money to work? The would-be investor might become a partner with his entrepreneurial neighbor, staking him the money to start his business not in return for any fixed amount of money back, but in return for an agreed upon share in the equity of that business. But isn’t this speculation (gharar), since any business startup is inherently risky? Muslim jurists often explain gharar in terms of the sale of fish. A fisherman cannot properly sell the fish that are still in the sea, only the fish already in his net. Yet what is a startup venture? It is a new fishing vessel, so to speak, and an equity interest therein is necessarily an interest in still-uncaught fish.
On a naïve but plausible view of these two prohibitions, then: together they could eliminate all investment. To the extent a contract renders return secure, it is riba. To the extent return is not secure, it is gharar. It is necessarily either secure or not, yet both are banned!
Actually, the situation is not that dire. There have grown up a variety of accepted transactions that are deemed to steer safely between the offenses of riba and gharar. A cynic might say that they are so many means of either making speculative investments or making interest-bearing loans without acknowledging either.
Yet before such cynicism becomes unduly corrosive, Westerners might recall that in 1311, Pope Clement V declared that belief in the permissibility of usury was heresy, and that secular legislation that purported to allow usury was of no effect. The rapid development of the institution of banking in a quite modern sense in Italy over the subsequent two centuries took place against the backdrop of intense theological hostility.
The Medici and the Saud
In late medieval Italy, too, it turned out that there were exceptions to the prohibition. For example, a lender could charge a fine for late repayment of a loan. If Fred lends Ricky $100 and Ricky keeps it until Friday, and then gives Fred $110, they have both committed a sin. But if Fred lends Ricky $100 on the understanding that Ricky could either pay it back at principal by Wednesday, or pay an extra $10 if he were two days late, and Ricky did in fact pay Fred $110 on Friday – ahhh, that was the payment of damages and the Christian conscience of both parties could sleep in peace. In practice, of course, both transactions amount to the return of the same amount of money for the same principal on the same date.
The use of fines as unacknowledged interest was but one of many loopholes that developed, and that the Medici, along with their other less storied peers in the developing world of finance, thoroughly exploited. When something must happen, it will happen, and theologians will find a way to let it happen.
Indeed, one can draw out the analogy between the theological/financial issues of late medieval period in Christendom and those of contemporary Islam. Who might best serve as the contemporary analog to the Medici clan? The Saud family comes to mind. And who seems destined to play their nemesis, Savonarola, who so effectively (for a brief time) called down the punishments of heaven upon the Medici/Saud usury and the evasiveness of their technicalities? That would be Osama bin Laden.
The need to comply with theological structures, even if they are designed loosely, is a cost and a drag for a system of finance. Further, if they are designed loosely enough to accommodate growth, then religious critics and demagogues will move into the opportunity created and will demand strictness. The danger of periodic bouts of piety upsetting settled arrangements is a greater cost. An objective observer has to conclude that the whole tradition of usury prohibition is a drag on productivity wherever it is strong, and should probably hope — not especially for the success of the Arabian Medicis, but for the eventual arrival of a Calvin that will profoundly change the dynamic.
This article was supplied by William James from Constant Content.