[Reader-list] FINANCE: GreenLeft's Guide to Wall Street Meltdown

[Kshmendra Kaul]

Dear Naeem
 
Some thoughts after reading your posted link. The comments therein about Wall Street Meltdown and Marx led my thoughts to one of my favourite topics - Islamic Financing.
 
I have often wondered whether Marx had studied Islam. 
 
On this list one often sees people discuss Marxism in depth. Presumably at least some of them would also have a detailed knowledge of the thought processes and influences that Marx went through.
 
I would be highly obliged if any person would give some informed opinion on whether Marx was influenced by Islamic thought.
 
Some of the finest precepts in Islam find themselves reflected in some of the finest precepts in Marxism. One of those is the distaste for the bullying and arm-twisting that 'capital' resorts to. 
 
In the context of the "Wall Street Meltdown" and what led to it, it is my contention that the world would be better off and benefit from applying the Islamic Principles connected with Finance and Financing.  
 
Islamic thought seeks to protect individuals and society from the greed and fear and exploitation that almost invariably gets associated with 'capital'.
 
In this context the finest of advisories come from Islam on the regulatory environment in which 'capital' should be allowed to operate.
 
One of the basic principles in Islam is that anything about the future is unknown to man.
 
This principle would debar the existence of the obscenely exploitative Credit Card system. Since man has no certainty of whether he will exist in the future (next moment, day, month or year), the promise to pay back would be made on a false premise even if the intention were sincere. A Charge Card also would flout the principle.
 
The "Debit Card" would be appropriate under Islamic norms since it can be used only to the extent that funds are already lying in the Bank Account of the holder.  
 
Purist Islamic Financing takes this principle to also exclude "Personal Loans" since such Loans seek to repay from earnings in the future. 
 
Modern Islamic Financing has tried to stick to this but improvised by modifying "Personal Loan" to "Mortgaged Financing" or "Hire Purchase". So a window is opened for financing acquisition of 'Goods for Personal Use (including residences)'. If there is an inability to re-pay (for whatever reason), the Goods are simple repossessed.
 
This would seem to be identical to "Non-Islamic Financing". It is not supposed to be in two ways. 
 
One, Purist Islam does not allow loading of Interest on the cost of the goods. The "Financier" would therefore try to ensure the goods are available at the lowest price so that they are easily resaleable after any eventuality of repossession. Meaning that the goods are mortgaged (or co-owned) at the lowest possible value.
 
Purist Islamic Finance Institutions would not apply "Interest" in any of their transactions whether in lendings or borrowings or deposits. They would be expected to operate only on "Shared Profit and Loss".  There are varied opinions on this as to whether "Interest" per se is 'Haraam' (forbidden) or "Exploitative Interest" ('Ribba' - Usury) is forbidden.
 
My personal opinion is that Interest in any form and to any small or large extent is forbidden. 
 
Unfortunately, most so called Islamic Financing does use the instrument of "Interest" under various guises. So the above "Mortgage" or "Hire Purchase" goods would have their cost structured in such a way that Interest is woven into it. The "Interest" part of the costs is sought to be recovered at the start of the repayment so that in the eventuality of repossession the goods have the lowest face value or depreciated value.
 
The other difference, and a critical one, that Purist Islamic Financing would have with "Non-Islamic Financing"  is that the "Repayment Schedule" is not the sword of Promissory Notes which if not honoured on specified due dates separates the Goods from the User by immediate repossession. Islamic Financing is expected to show understanding for any unaccounted for problems faced by the User. It is expected to be kind, compassionate and benevolent. Repossession would therefore be the absolute exception and a rarity.
 
Of course Non-Islamic Financing also restructures repayment if the borrower has a difficulty. This is however done mostly in such cases where the Financing Institution itself will seriously suffer or collapse if the borrower 'goes under'. Most times the Financing Institution moves in for quick repossession because they would usually Profit from that especially in cases where the borrowings are of the 'less rich'. That is how the Loans are structured.
 
Also, in Islamic Financing, the "Mortgage" or "Hire Purchase" value of the goods would not change with "supply and demand" leading to change in "market value". So, "Mortgage Top-Ups" would be obviated.
 
In my opinion, Purist Islamic Financing (even with the improvised modifications) would not finance any such acquisition that is even remotely outside the 'economic bracket' of the User. It is my firm belief that no Financial Institution (Islamic or Non-Islamic) should finance any such acquisition whether for House, Vehicle or "White Goods". 
 
In Islam (as in any sensible philosophy), living "beyond your means" is heavily frowned upon. It is the responsibility of the "State" to look after those citizens who are the less fortunate in terms of their 'economic well being' and have no immediate possibility of bettering their lot. Look after their needs to a reasonable extent.
 
I hope that the above will be seen in the context of the "Wall Street Meltdown" and the generally known reasons that seem to have led to it.
 
The above comments on Islamic Financing for "Goods for Personal Use (including residences)" are subjective to my own understanding of this topic.
 
To my mind, the absolute brilliance of Islamic Financing is recognisable when applied to "Business". 
 
At the time of Mohammed, Agriculture and Trade were the main businesses. Consequently most of the advisories from Mohammed are connected with the two. There are numerous illustrative examples of the Islamic Principles as advised to be practiced by Mohammed in the "Hadeeth" (reportings of Mohammed's life and advices) especially in the 6 Hadeeth Books called 'Sahih Sitta' which are revered and followed predominantly by the Sunni Sect of Muslims.
 
These advisories can be extrapolated in their principles to any form of "Business". Some salient points (as interpreted by me):
 
- Interest application in any form at any stage under any guise would be "Haraam"  (forbidden)
 
- The "Financier" does not simply Loan money but buys into the "Business" and is therefore receives an 'agreed upon return' or can be a pro-rata recipient of Profits or Loss (of what has been given).
 
- The participation can be in the form of Money or Goods, or Services or any form of 'Capital Investment'
 
- Even if 'Money' has been given, return in monetary form is frowned upon. The "Financier" is expected to take his return in the form of produce/products/goods/services and then monetize it.
 
- Since the "Financier" is co-owner (of sorts), there is essentially no "'fixed repayment schedule". The "Financier" is expected 'know' the 'business' before participating and 'know' what to expect and 'when'.  
 
Interestingly, (to my mind) the finest example of application of the Islam Principles of Business Financing can be found in what without any argument has been globally the fastest growing 'business'. That is the IT Software (and connected) Industry.  The growth impetus was (arguably) primarily from the Venture Capital system.
 
The Venture Capital system of Financing mirrors the finest principles of the Islam Financing System for Business.
 
My thoughts, so I alone carry the responsibility of an errors.
 
 
Kshmendra 
 
 
 


--- On Sun, 10/12/08, Naeem Mohaiemen <naeem.mohaiemen at gmail.com> wrote:

From: Naeem Mohaiemen <naeem.mohaiemen at gmail.com>
Subject: [Reader-list] FINANCE: GreenLeft's Guide to Wall Street Meltdown
To: "sarai list" <reader-list at sarai.net>
Date: Sunday, October 12, 2008, 10:33 PM

http://www.greenleft.org.au/2008/770/39726

A guide to the Wall Street meltdown
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