05 Jun, 2005
Actually, it's about Islamic banking. There is not need of correcting the typo because the premise of Islamic banking is nothing but banging the economy anyway, where banging should be interpreted in slang.
Economics has many siblings - Keynesian economics, Marxian economics, classical economics, etc. etc. and the new kid on the block is Islamic economics, based on the concept of "Riba" or interest free banking system. May be comical but it's not economical at all. The new fashion of Islamic financing does not comply with modern economics or the Quran, it's kind of transsexual, neither a male nor a female.
The macro economic concept of Quranic law gave birth to so-called interest free Islamic banking at a micro economic level. Malaysia in the mid-forties and Pakistan in the late fifties introduced small-scale interest free banking system. However, these two pre-matured babies did not survive. In 1963, Ahmed Al-Najjar of Egypt tried the system one more time and managed to outlive along with conventional banking. Soon at the beginning of seventies, abundant petro-dollars inspired bigots to create Islamic banks. In 1974, IDB (Islamic Development Bank) was formed by the OIC (Organization of Islamic Countries) to help member Muslim countries with a desperate attempt to isolate Muslim countries form rest of the world.
Until recently, more than 100 financial institutions are involved in this freaky business. Muslim apologists claim that Islamic banks of the world altogether have around $200 billion dollars in assets. Big deal! It's a negligible amount compared to any other conventional banks. Bank of America of USA alone has over $700 billion dollars in assets. Conventional Banks are not supported by free money; they have evolved from natural economic phenomena. Islamic banks, on the other hand, are mostly state-sponsored, if not fueled by free petro-dollars.
Islam is not the only religion that talks about Interest free banking; Christianity also has the same formula, hidden in their religious books. While interpreting, Matthew 13:12 and 25:29, Luke 19:26 and 8:18, Old Testament, Exodus 22:25, many scholars agree that accepting or paying interest is hazardous to people's health. Seldom, they protest with a faint "m..e..o..w" like a cat but never try to make it an issue. They understand the impact of interest on modern economic machine.
The Federal Reserve System, shortly known as "the Fed," is the central bank of the United States. It's not a profit-making organization and it works independently within the government. Fed conducts nation's monetary policy, regulates banking institutions, maintains the stability of the financial system and provides certain financial services. In order to maintain a fiscal discipline, Fed often changes the short-term interest rate that makes a tremendous affect on domestic economy and international market as well.
Dr. Alan Greenspan, the chairman of "Fed" is considered the God of monetary world. He carefully reviews different factors of economy with the board members and decides to change the interest rate. Dr. Greenspan is an admirer of Ayan Rand, the pioneer of "Objectivist movement" who advocated capitalism as a social and economic philosophy. Dr. Greespan has set a milestone in modern economics and he has been showered with honorary degrees from Harvard, Yale, Pennsylvania, Leuven (Belgium), Notre Dame, Wake Forest, Colgate, and Edinburgh universities. According to Islamic law, Mr. Greenspan will definitely go to hell and turn into Red-spank i.e. he will be spanked until he becomes red. More importantly, Dr. Greenspan is aware of interest free banking system but he would not dare to propose the stone-age idea, because he does not want to turn USA into a poor Islamic country.
Islamic banks are practicing a twisted concept of current interest based economic system. Usually, Investment financing is done in three different ways.
Musharaka: Sounds like mushroom but it did not grow like mushrooms. It's a joint venture between the bank and a business farm. They split loss and profit in a pre-arranged fashion. Bank may withdraw gradually after a certain period of time. However, Bank is making money out of the investment.
Mudarabha: Another idea of murdering the economy. In this peculiar system, bank contributes the money and the entrepreneur provides expertise, management and labor. Profits are shared by both the partners but lose is carried by the bank.
Estimated rate of return: The bank determines an estimated rate of return on a specific project. If the project makes more than estimated amount, the client keeps it but bank will take a lower amount if lose occurs.
The objective of a traditional bank is lending and securing money, it's not a bank's job to poke its nose in all ventures. When an entrepreneur submits a plan to build an industry, bank reviews the viability of the project but they are more concern of enough collateral. It's the entrepreneur, who takes the risk with his/her last penny. On condition of receiving a percentage of interest, Bank will comfortably loan any amount of money as long as it's secured.
Profit and Loss Sharing or "PLS" (not PLO), is the sweetened name of Islamic financing. The goal of an Islamic bank is ensuring the profitability of a project. An Islamic bank will never lend a dime unless it's guaranteed that the project will make money. They surely don't want to take a loss. A bank should finance various types of projects; it may be a chemical plant or a charcoal project, candy factory or panty hosiery. When an Islamic bank takes the position of an entrepreneur and tries to oversee each and every project, they become "Jack of all trades-master of none". It's impossible for a bank to have knowledge on various types of business. Nonetheless, Islamic banks are making profit, aka interest, on their invested money.
Trade financing of Islamic banks is the most deceitful technique. They use Mark-up, Leasing, Hire-purchase and Sell & buy back procedures. In each case, clients end up paying more than the original price, which is nothing but mirrored image of traditional interest based loan system.
An example will expose the true picture of Islamic banging. Mr. John Doe buys a nice car and gets the financing from a traditional bank. The price of the car is $30,000 and he agrees to pay $588 a month for 5 years at the rate of 6% interest. After 5 years he will pay $35,280, out of which $5,280 is interest.
Now, Mr Mohammad Akkelmond buys the same car and he decides to deal with an Islamic bank because of his religious pregnancy. Islamic bank will buy the car for $30,000 and Mr. Mohammad will agree to pay an amount of $35,280 after 5 years. Obviously, He will not be able to pay $35,280 at a time. So, they will agree that Mr. Mohammad would pay $588 per month for 5 years. Did the bank accept any interest? Naujibillah! (God forbid!), there is no such thing as interest.
Islamic banks also have loans with a service charge. Is service charge a form of interest? Islamic bowlers, I mean scholars will shake their beards and violently say, "NO". Any reasonable person can see that the interest is merely hidden and relabelled, if not redefined.
Money has a time value. Today's $30,000 is worth less the amount after 5 years. Also, many economists consider "interest" as "rent" on money. Therefore, when money is borrowed, we have to pay the rent to compensate the time value. Just like any rental, the interest is subject to change to reflect market conditions. The flexibility of changed interest may or may not help the consumer; lower rate is more auspicious than higher rate. However, the flexibility of changing rate is influenced by many factors and it's the outcome of free economy.
Quran, the moronic book of Islam talks about prohibiting usury in four places (see ref. below). Interestingly, all of these verses mentioned "Riba", which means usury and not "Faida" meaning interest. What is usury? According to Webster dictionary it does mean "interest" but it also classifies as, "an unconscionable or exorbitant rate or amount of interest; specifically interest in excess of a legal rate charged to a borrower for the money".
Keeping the technicality aside, Quran is more specific about the topic, verse 30.39 dictates, "That which ye give in usury in order that it may increase on (other) people's property hath no increase with Allah-.". In other words, money should not increase when borrowed. Aren't the Islamic banks are doing exactly the same thing? Also, verse 3.130 confirms, "O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper-". Despite Allah's warning, western countries are prospering very well with the help of interest based economy.
Verse 2.275 is very clear - "-..but Allah hath permitted trade and forbidden usury-". Inspired by the verse, Islamic banks are pretending to do trade while investing the money to rip off the interest. According to most of the scholars, only one loan is acceptable in Islam and it's called "qard-el-hassan" or literally good loan, where the lender does not charge any interest or additional amount over the money lent.
Mohammad was an unsuccessful businessman and he did not learn anything from his first wife Khadija, which inspired him to take a short cut and start "no money down-prophet hood" business. When Mohammad made all those verses, he had no idea of sophisticated interest-based banking system. While Islamic banks are taking interest under cover and professing "Profit & loss sharing" system, they are still having trouble in financing in different areas, such as, a) participating in long-term low-yield projects, b) financing the small businessman, c) granting non-participating loans to running businesses, and d) financing government borrowing.
Western countries are extremely flexible in adopting new system that seems to be beneficial. As mentioned earlier, Islam does not have the sole proprietorship of interest free banking system; Christianity shares the same proposition too. Yet no one talks about the hypothesis because modern economic machine is running very well.
In contrary, Islamic countries do not have the luxury to experiment new
economic system. They should follow the proven system and recover from
the current economic turmoil that they are going through. Not surprisingly,
they won't buzz because Islam takes top priority and not the citizen.
Everything has to be Islamic, even if it leads to destruction.
030.039 PICKTHAL: That which ye give in usury in order that it may increase on (other) people's property hath no increase with Allah; but that which ye give in charity, seeking Allah's Countenance, hath increase manifold.
004.161 YUSUFALI: That they took usury, though they were forbidden; and that they devoured men's substance wrongfully;- we have prepared for those among them who reject faith a grievous punishment.
003.130 YUSUFALI: O ye who believe! Devour not usury, doubled and multiplied; but fear Allah; that ye may (really) prosper.
002.275 YUSUFALI: Those who devour usury will not stand except as stand one whom the Evil one by his touch Hath driven to madness. That is because they say: "Trade is like usury," but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (The offence) are companions of the Fire: They will abide therein (for ever).