Posted by Rafiq A. Tschannen
FORBES: by Tim Worstall, Contributor
This is a fascinating little interview with Timur Kuran, an expert in Islamic finance. The point being made is that Islamic styles of finance aren’t, in fact, all that different from the “western” type that we are used to. And in fact, in certain situations, being “more Islamic” would actually be beneficial, work better than those traditional western systems.
The heart of the comments about the banking system are here:
Whether the Qur’an bans all forms of interest, or specifically its exploitative forms, was a matter of controversy in the early decades of Islam. It still remains in doubt. What is crystal clear is that what passes as Islamic finance is anything but interest-free. Almost all of the Islamic banks in existence, including those in Egypt, charge their borrowers what any economist would call interest; they also pay their depositors interest as a matter of course. This is not surprising, for interest continues to provide tangible benefits to both lenders and depositors.
In economic terms, while the banks don’t charge or pay what they call interest, the effects are that they do indeed charge and pay interest. Those of us who have dealt with such banks, in however minor a way in my own case, know this to be true. The really interesting, to me at least, point made is the following:
Having suggested that in its present form Islamic banking would not solve any of Egypt’s pressing economic problems, let me acknowledge that Islamic banks might bring benefits by abiding by their stated mode of operation. The charters of Islamic banks instruct them to lend on the basis of “profit and loss sharing” rather than for a fixed return. They are to operate like the venture capital companies that have financed the global high-tech industry. Venture capital firms lend to promising entrepreneurs, for a share of any profits, without regard to collateral, track record, or connections. They take genuine risks, losing money when investments that they finance fail.
With its young population and high unemployment, Egypt desperately needs more venture capital. That is why genuine Islamic finance could bring major benefits to Egypt.
That is, it would be a good idea if these banks, or some of them, stopped copying the western model and actually moved over to the VC model they’re supposed to be based upon.
Or alternatively, perhaps they should adopt a different one of the western models. Instead of calling themselves banks and then going through the contortions that allow synthetic interest (which is really rather what they do) why not go all a#out and adopt that other, entirely sharia compliant, idea of being, well, being venture capitalists?
The reason this all rather amuses and interests me is because it mirrors an argument going on in British politics about banking. Traditionally, the British banks (as opposed to the investment banks) don’t in fact invest in industry or even in business particularly. They’re pretty much into property (both residential and commercial) and consumer finance and that’s it. There’s a desire, usually from the left, to change this. Banks should be lending to business and to commercial enterprises. Further, they should be financing them with capital as well as simply debt. The “should” here is coming from political aims of course. To which I have, for ages, been saying that that’s just fine. Except that what you’re asking them to do is not “banking” as we understand it in English English. You’re asking that they become venture capitalists instead. Which brings with it two rather different problems. The first is that the UK commercial banks really aren’t very good at being VCs. The second is that if anyone ever suggested paying them as if they were VCs then there would be uproar.
There is a difference between the Egyptian and UK cases of course. Egypt doesn’t really have a source of commercial finance or capital outside these banks. Thus why a move to their being more VC-like would be helpful. In the UK we do have many sources of capital, The City, the investment banks, VCs, angel networks and all the rest. Which is why trying to get the commercial banks to do what they’re not very good at might not be all that helpful: we’ve already got people who are doing that job. And given that The City is the world’s premier international financial centre we do have to assume that they’re pretty good at it too.