Sauvik has been writing a series of posts on Banking, the latest one here, and he makes a reference to the phenomenon of interest under Islamic jurisprudence. That reminded of this Abhishek Manu Singhvi article on the benefits of “Islamic banking”-

It is important not to throw the baby out with the bathwater. It is important to realise the great strengths, efficiencies and virtues of free market systems and yet temper them with inclusive growth and distributive equity. Analysts are increasingly turning to Middle Eastern banking models, which have blended Islamic principles of banking within an overall capitalist mould. Such banking systems have exhibited a far greater degree of resilience during the current turbulence, though they have not been trouble free. The Islamic injunction against usury has led some of these financial institutions to practise innovative and off-beat financial models aimed at bringing those who have spare money in contact with those who are in need of money.

The three distinguishing features of Islamic banking are that it is interest free, that it is multipurpose and not purely commercial and it is strongly equity-oriented. For example, if a business is interested in purchasing property, instead of borrowing money to make the purchase, the bank acquires the property and leases it out for a set fee. Many Sharia-compliant instruments are much less speculative and involve a far greater component of community banking, ethical investments, affinity marketing and investment in the real economy than their more ephemeral and speculative counterparts.

Read it to see how easily he stitches together unrelated topics such as growth, “distributive equity,” islamic banking, socialism and capitalism. The first thing that needs to be understood is – the edicts against usury have a religious angle to it, are part of every major religion, and are over 4000 years old. Second, as Farouqui rightly points out, if a devout Muslim follows “Islamic banking,” he is being had-

[I]n India, because of the educational backwardness of Muslims, not only has bank interest become a much-debated issue, it is also one that is used by elite Muslims to exploit poor Muslims in the name of Islamic banking.

Thus, unscrupulous Muslim Shylocks in the country operate in a very clever way to fool Muslims in the name of Islamic or non-interest banking. The modus operandi is very simple and one can find these banks in every locality where a substantive Muslim population exists.

These people open accounts in nationalised banks and make huge collections deposited in them from poor Muslims with small savings on the counters of Islamic banks. They use their knowledge and skills of the banking system very shrewdly – deposit 80 per cent money in nationalised banks in different fixed deposits as hardly 20 per cent of the money is in circulation – to profit from the interest earned on the deposit of the collected sum.

The common investor who has entrusted his principal amount to the usurer gets back his original amount only when needed, little knowing that the interest from his money is being used for the moneylender’s business plans. Whenever Muslims need money, the Islamic bank gives them loans, keeping gold ornaments or their land as security, and charges interest calling it ‘service tax’ instead. So the Islamic banking system not only makes money for its unscrupulous operators but also keeps the Muslim community from becoming part of the modern economy.

One thing the “Islamic bankers” forget is that “fiat currency” and government monopolies on banking did not exist during the Prophet’s times, and neither did the phenomenon of “inflation.” Interest, in modern times, is no longer a “rent on capital” but a hedge against legalized theft – against inflation. Today, anyone who lives on the interest he gets from a bank deposit is a fool because he is not living on interest but on capital. Try an experiment – make two deposits of 100,000 rupees in some bank; let interest accumulate on deposit #1, and use the interest from deposit #2 for your expenses. See what happens after twenty years.

Substituting “interest” with “profit” or “service tax” is just a play of words. The lender lends because “interest” is his “profit” for the risk that he takes with his money. Without interest, why would anyone lend anything at all? The same phenomenon is visible in regular trading, as Sauvik points out; the “cash discount.” The quicker the payment, the more the “discount.” If risk is not rewarded, no one will take any risk. [Update: Scratch that. Risk is important, but it only affects the “rate” of interest. I charge interest as compensation for loss of liquidity. I charge more interest if I think the loan is riskier than usual.]

The issue is not whether people prefer to charge interest, or act as landlords (who too are “rentiers”, incidentally), but whether the “socialists” are willing to let us kick the State out of the world of finance. The answer will be- Never! Further, since Singhvi is a Congressman, his sudden affinity for “Islamic banking” in the midst of the recession and upcoming elections must also be seen from the minority appeasement angle. I think he would have written a glowing tribute to Bohm-Bawerk and Ludwig von Mises if they had written under the names al-Bawerk and al-Mises and their school had been named Persian Economics. Such is the tattered state of Indian politics.

“The Philosopher” was a wise man; he had a major influence not only on Islamic Philosophy where he became the “First Teacher”, but also on Christianity. But his views on politics and ethics have to be taken with a pinch of salt. He was not a big fan of “interest”; in the “Politics,” he writes-

Men seek after a better notion of wealth and of the art of making money than the mere acquisition of coin, and they are right. For natural wealth and the natural art of money-making are a different thing; in their true form they are part of the management of a household; whereas retail trade is the art of producing wealth, not in every way, but by exchange. And it seems to be concerned with coin; for coin is the beginning of exchange and the measure or limit of it. And there is no bound to the wealth which springs from this art of money-making. As in the art of medicine there is no limit to the pursuit of health, and as in the other arts there is no limit to the pursuit of their several ends, for they aim at accomplishing their ends to the uttermost; (but of the means there is a limit, for the end is always the limit), so, too, in this art of money-making there is no limit of the end, which is wealth of the spurious kind, and the acquisition of money. But the art of household management has a limit; the unlimited acquisition of money is not its business. And, therefore, in one point of view, all wealth must have a limit; nevertheless, as a matter of fact, we find the opposite to be the case; for all money-makers increase their hoard of coin without limit. The source of the confusion is the near connexion between the two kinds of money-making; in either, the instrument [i. e. wealth] is the same, although the use is different, and so they pass into one another; for each is a use of the same property, but with a difference: accumulation is the end in the one case, but there is a further end in the other.


Of the two sorts of money-making one, as I have just said, is a part of household management, the other is retail trade: the former necessary and honourable, the latter a kind of exchange which is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term usury, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of all modes of making money this is the most unnatural.

Roderick Long’s “capsule credo” says

The libertarians are right about economics and politics. The Greek philosophers are right about everything else.

I agree, for the most part. Everyone else should simply drop dead.

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