Sunday, May 19, 2013

I’m not impressed by Islamic finance.

At least not if this advocate of Islamic finance is any guide (around 16.15 and 1.04.30). Once the video is running, click on the rectangle at bottom right for full screen view, and Esc to exit full screen view.

He puts the bog standard argument favoured in Islamic finance, namely that lenders should take a share of the profits in any business they lend to, rather than charge interest.

Well the first problem there is that a large proportion of lending goes to entities which are not businesses and which cannot possibly make a profit: mortgagors.

Next, the speaker argues that if interest is allowed, loans tend to go to those who can provide collateral, who are, so he claims the rich.

Well if your net assets are zero then you aren’t “rich”. But you might still be able to get a 100% mortgage if you have a secure and reasonably well paid job.

As to lending to a project or business that cannot come up with the requisite collateral (i.e. a business not run by “rich” individuals), any lender/investor will look for a relatively big return REGARDLESS of whether they charge interest or take a share of the profits. And they’ll do that to pay for the inevitable cases where what seems to be a viable project turns out to be a lemon, and where in consequence the lender/investor makes a big loss because there is no collateral to grab. So prohibiting interest won’t do much for asset poor would be borrowers who claim to have viable projects in mind.

As for the Muslims who point to the fact that in some cases, lenders charge exorbitant  rates of interest and exploit debtors, well we’re all well aware of that. That’s why the authorities in the UK and elsewhere have for a long time tried to control the activities of loan sharks who prey on the less well off. So that particular “anti-interest” point is not unique to Islamic finance.

Next, the Muslim speaker in the video is a goldbug. That is he advocates what Keynes called that “barbarous relic”: the gold standard.

And the final nail in the “Islamic prohibition of interest” idea is that banks that supposedly abide by Sharia law and the interest prohibition in fact charge interest in all but name. E.g. see here.

Conclusion: I’ve never paid much attention to Islamic finance, and will continue to pay little attention to it.

(Hat tip to Positive Money for the video.)


PS (22nd July 2013).  While the unpleasant little creeps who make up the ranks of the politically correct will doubtless want to accuse me of being a racist or xenophobe for expressing the above sentiments, the sentiments are repeated in a Financial Times article entitled “The best place to practice Islamic finance has to be a divinity school”, by William Barnes. See here.

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