Islamic Banking uses interest
“The concept of Islamic banking is essentially based on the idea that Islam prohibits riba, but permits trade and profit-loss-sharing arrangements.” *1
I don’t no why, because there is no fundamental economical reason to prohibit interest. Actually an economy which prohibits interest could face to a serious troubles and that’s something what an Islamic scholars have realized and developed the ”Islamic version of interest”. But I will try to explain why is critics of the west used interest concept needless and I will also point to a fact that the Islamic banking uses the same interest concept as the west banking system.
First, lets look what does interest mean:
“Interest is a fee paid on borrowed assets” *2
and Riba:
“The word “interest" by and large, is now understood as riba.
riba al-fadl: money is exchanged for money hand-to-hand, but in different quantities
riba al-nasiah: where money is exchanged for money with deferment.” *3
The word interest is most often used as a fee paid on borrowed money. But this is not necessary condition, because asset could be also for example some real estate. - interest paid on borrowed apartment is called a rent. (more about meaning of assets via wiki)
interest principle
The fee paid on borrowed assets is not constant. Rents in urban locations are usually very high compared to countryside rents. That’s because demand for estates in urban locations is bigger. The high rent is then a signal for investors about attraction of a locality. More attractive localities are naturally in aim of developers who try to construct more estates in those regions. (increase supply)
A fee paid on borrowed money is almost always expressed as a year percentage ratio (0,5% - size of interest is derived from amount of available capital) and it’s called an interest rate. The reason why is used percentage ratio is purely practical because it allows easily accountability or comparison. International interest rates markets (like LIBOR) then provides a quick capital flow across the whole world. Islamic banking due to the prohibition of interest rate doesn’t have access to those interbank markets neither do have similar simple Islamic interbank market.
There is also no immoral aspect of a fee paid on borrowed assets which would say prohibit interest rate, because every lender has to invest some time to reach assets which he could borrow. He also has to keep value of those assets. (house lenders use rents to house repairs or increasing house quality, money lenders use money from interest rates to cover coasts or to find the best investments)
What’s then a difference between an Islam banking and a West banking loan:
Home loans
The Islamic banking use two basics products Musharaka or more modern Musharaka al-Mutanaqisa. An Islamic bank works as the middle man between a money lender and a money borrower.
basic model of a Musharaka contract
Islamic bank instead of loaning a money, will buy a house and resell it to the borrower with a profit (look at the definition of interest or riba above, this profit is charge for deferment, but this should be forbidden). Part of this profit is then shared with its depositors.
In a more modern Musharaka al-Mutanaqisa contract a bank rent (rent - charge for deferment) house to a borrower, and the borrower is able to buy parts of this house. Size of the rent is based on the current equity share of the partnership. (Musharaka – fixed profit sharing, Musharaka al-Mutanaqisa – float profit sharing)
In order to protect against default, is used strict defined collateral like a house itself.
West banking use product called mortgage, it can have either fixed interest or float interest.
basic model of a mortgage contract
In the west banking model a bank lent money, borrowers will buy a house for them and this house is usually also used as a collateral.
The difference between the west and Islamic banking is not in interest usage, but in the fact that west banks use charges expressed by a percentage ratio and Islamic banking by absolute amounts.
West bank: you will pay loan + 0,5 % every year from your loan as a charge
Islam bank: you will pay a house value + 1000 USD as our profit
Where is then the difference? Nowhere, its the same thing expressed by two different ways. West banking uses unite interest rate system and Islamic banking system have for every kind of a loan some special model and special charge system.
Penalty for late payment is another criticized part, but there is again no moral reason for that. Just imagine if I rented a house for a one year, but used it for two years I should pay a rent for that second year too. That’s why in the western system exist penalty for a late payment, which still looks like a better option than imprisonment in Dubai debtors prisons (more info about escaping foreigners from Dubai here),
Those who still have some doubts about using interest in the Islamic banking can check SAMA website - “central bank of Saudi Arabia” there is a clear declaration that SAMA uses REPO operations as the key monetary policy action. Interest rates of those REPO operations is possible to see here.
Actually, the monetary and banking system in the Saudi Arabia is same as in the rest of world. Saudi banks accepts international Basel II Accord and keep some minimal reserves ordered by the central bank. SAMA website reports that minimal reserves are 7% which means banks must be immediately able to pay 7% of the customers’ deposits. But, I have checked a balance sheet of the Banque Saudi Fransi and their reserves were 6,22% in the Q4 2008 so it seems that SAMA either have not updated its websites or they do not care about it much. Second bank I have checked was the Arab National Bank and their reserves were almost 13% so there were everything fine. Average value of all 12 Saudi banks were according to SAMA 11.48%. This is still relatively good – for example Eurozone limit is 2%.
So as we can see Islamic banking is nothing special and sticker Shariah Compliant is just common commerce in order to lure on as much Muslim customers as possible. Only one difference is then that an Islamic bank should not invest into the prohibited stuff such as alcohol companies or pork farms.
*1, 3 - Islamic Financial Services - Islamic Economics Research Centre, Jeddah
*2 – Wikipedia – Interest
Americans are not in Iraq due to Oil
There has been many theories that Americans invaded Iraq due to Oil revenues, my problem is that the Iraqi oil revenues cannot cover the costs of war at all, so all those theories are based on the idea that they cannot do elementary math in Washington?
Americans are in Iraq because oil profits will pay everything
source of numbers is here
The USA would have to withdraw Iraq now and control all the Iraqi oil production for at least 140 years to cover all its direct costs and more than 500 years to cover total costs!
The Iraqi oil profits cannot pay the total war costs at all.
Americans attacked Iraq because Hussein did not want to use the dollar anymore
Buying power of the Iraqi oil is absolutely minimal compared to the whole American economy, there is also dozens of countries with bigger economy using dollar (China, Saudi Arabia, Singapore, Hong-Kong).
Or take a look at Kuwait, which is a larger economy than Iraq and stopped using the USD and Kuwaiti dinar has been re-pegged to a basket of currencies.
1 – Iraq war costs source – Reuters
2 – Iraqi oil revenues (the biggest annual revenue in the history – 2008) – Energy Information Administration
3 – Iraqi oil profits – my estimate based on profits of large OPEC companies - OPEC
Rumors about Replacing the Dollar in the Crude Oil Market
Today there appeared some speculations on the Independent that Arab states started a deal with Russia, France and China about replacing the USD in the crude oil market. However the rumors has been after a while completely denied by all supposed participants.
This is not a new thing, a year ago I pointed out that behind the peak oil price was actually the value of the dollar and as a proof I have shown the oil price nominated in gold which is much more stable.
This oil-dollar peg has been point of many conspiracy theories that the USA controls all those countries and forces them to use the dollar. Which is, of course, as the most of conspiracy theories a non sense.
Anyone can trade a crude oil in any currency he want to, using the FX market (spot conversion is a matter of seconds). And anyone can calculate the crude oil price in any currency, using basic math of the elementary school level.
So why all of them has used the dollar? Because it was really profitable for them. And because it does not seems that good anymore, there are some talks about changing the dollar leading position.
Consider this, The Saudi Monetary Agency gained more than 1 trillion Saudi ryials (cca 260 billions USD) just in 6 years due to the USD peg. All those money are saved somewhere all around the world, owned by someone in the government. (SAMA annual report, page 46). The same goes for China which gained much much more.
So talks about forcing someone are nonsense, non-US governments will use the USD as long as it is profitable. When it stop being profitable they will simply switch to something different, which is China doing now, so far it has not been much successful.
UPDATE: Just realized that behind this report is 9/11 “Truther” Robert Fisk, that explains all thought
A Lesson On Freedom Of Association From New Zealand
Yesterday, Sir Roger Douglas had a speech about the Education Amendment Bill in the New Zealand Parliament. He greatly argued that in a free society an individual is free of association on all levels, including military service, labour unions or compulsory education.
The goal of a free society is to minimize violence, that’s why all forced associations must be abolished or at least very limited regardless how glorious their usefulness sounds.
By the way I’ve been quite surprised by huge money waste in this student associations on public universities, especially when New Zealand is ranked by Transparency International on the second best place in corruption and transparency level in the world.
He got it right
“They stole students money … They stole your money”
I cannot imagine how huge amounts are being wasted in different countries. I wish there were more politicians like Sir Roger Douglas.
We Can Work Without an Elected Government
A recent lesson from the Czech Republic shows that the republic can work without an elected government . What else, it can work even better.
On 24 March 2009, during the Czech presidency of the European Union, Topolánek's cabinet did not gain confidence in a parliamentary vote of no confidence this resulted in creation of new caretaker government and after 4 months they have made even better job than previous elected governments.
The reason for this is simple, they do not have to make political correct decisions. All around the globe governments are increasing their debts, accepting economical packages in order to boost the economy, or saving failed companies. But caretaker government said clear no, the debt was to high so we had to make savings. The result was that every resort had to cut their budgets for 10 – 20%. That means everything – education, healthcare, military, …
Can you imagine some political party to make such a decision? When constant making of new debts caused the crisis, those populist governments are still making new debts but not in the Czech Republic simply because there are no great “economy savers” politicians in office.
Once again I was thinking about the “Lottery Democracy”, a system where are representatives not elected, but drawn in a lottery. Of course even in this system would still exist a corruption, but we would be free from populism at all and with some bonuses from good economic output we could also greatly motivate our "leaders”.
Reminds me that after all Socrates was obviously right, 2500 years ago.
How Is Bill Maher Wrong Or Actually Right?
I know that today is popular to support Obama as a symbol of change and hope compared to his not so famous predecessor. I personally did not like Bush, but it does not create any need for me to fall in love with Obama. However one of the most famous supporter of Obama is Bill Maher. I know Bill has some great points like his support to legalization of marijuana and gay marriage, but his economic thinking doesn’t attract me at all.
In one episode of his talk show he suggested that the fear “the USA is going to be socialistic” is wrong, comparing assets held by private companies and the government from bailout. Check the video on facebook.
I don’t know whether those numbers are correct or not, but M. Barofsky suggested that the limit for bailout is incredibly huge – 23,7 trillion dollars. Yes the limit won’t be reached at all and so far the USA spent just 2 trillions. But compare bailout to big American historical events.
Bill is paradoxically right, the USA is not going to be socialistic country, it already is. When government orders for what you can buy products, for what you can sell products. When it taxes more than 30% of your income and when it is going to order how you should care about your health. What it is if not socialism? I guess we should rewrite capitalism on wikipedia.
In Defence of Pigs in Egypt
Recently I have read some posts of a typical pan-Arab ignoring some basic historical facts. And one her article came to my mind more closely, no I am not going to comment her fascistic attitude towards the Israeli Channel 2 as it has been already done by Carl from Jerusalem:
we would welcome Egyptians and Egyptian television to come here and 'return the favor' but they have no interest in doing so. – see the rest here
But about the funny, not so much for pigs, swine mass murder. Well I understand that some religion can convince people to stop using their reason, it is actually the basics of all faiths but let consider some scenarios/arguments.
Swine flue Epidemic Will Start
If this is going to happen it is a little bit late to kill all the pigs, we simply missed our chance, actually if this was really happened it would have instantaneous effect on economy and mainly on food production. As I pointed before just now without any crisis in Egypt dies about 60 000 kids annually due to very poor economical development. Now imagine a “defcon 1” situation when the food would became enormously limited resource, I bet many Muslims would then thank god for pigs, oh yes they could choose paradise instead.
Government Will Pay For Them
Why I always think, when I hear government’s great solution, that something is wrong here?
The Egyptian Government has allocated 1/2 billion pound to compensate the pigs raisers, I must hint that the poultry raisers have not recieved a penny from the government on their losses in the outbreak of H5N1 and the government already ignores compensating them – via Zeinboia
Well Egypt is known as inflation paradise country, currently practising Mugabe’s money theorem. Have you ever heard about the bubble in the USA? So one of the main reason was Mr. Allan Greenspan who were inflating M2 for 4,5% annually. Now guess what? For Egypt is not a problem to have 14% growth in bad times. I guess they are lucky that during Sadat’s and Nasser’s rule there were no statistics as would realise that Mubarak is not that bad.
Just for example in last decade Egyptian Pound lost more than 60% of its value to the Czech Crown – a currency of the country which national food contains pork and national drink is beer.
Fiat money compensation does not solve anything, it creates more problems and does harm the real economy!
Act of Prevention
Oh yes such a common utilitarian argument that from this action will benefit the whole society.
I am definitely, those dirty pigs should be eliminated as soon as possible ,we can’t jeopardize the life of millions for no good reason. – via Zeinboia
She has also provided us with a report about victims of Swine flue from the Minister of Health in Egypt.
Dear Zeinobia for last 6 years swine flue killed 260 people, Islamic terrorism has in the same time killed more than 100 000 people. And victims of Islamic Conquests are estimated to be more than 100 millions, there is one much bigger thing you can do for the case of humanity – stop being a Muslim.
Yes utilitarian arguments are stupid, but not always it must look so clearly anyway as we know human stupidity is endless so kill the pigs.
P.S. kill all chimpanzees, gorillas, and forest antelopes in Africa spreading Ebola, a virus 10 times more deadly than flu. Kill all Guinea-Bissaus and Gabons for spreading the H.I.V., in the end kill all the birds for the birds flu.
What could go wrong indeed.
Should NASA Stop Building Space Ship On the 40th Anniversary of Apollo 11
Yesterday I was watching an interview with the CEO of SpaceX company and he was pretty clear about the NASA spaceship program, as for the first time in the history American astronauts will use the Russian Soyuz space rockets.
Flights surely won’t be cheap and that’s exactly what the CEO doesn’t like. In his words: “why we should send money to Russians if we can keep them in our economy.” I disagree we can send them to Russians if they will be able to provide cheaper and safer flights. But this is most likely not going to happen.
So there is question, if SpaceX shuttles are successful and if they will be able to fulfill their missions properly do we need a new NASA shuttle anymore?
Dragon spacecraft which can be used for transport to the ISS
I think we would not because global prosperity can be achieved only by doing things more effectively, including spaceships.
By the way, do you remember that Wernher von Braun, disobeying orders, continued work on the design of new Jupiter rocket which in many ways over ran US military accepted projects. Braun with his Army Ballistic Missile Agency then could do much better work without direct government funds and even with the order to stop the works. By the way his rockets were later used for Apollo program.
So how do we actually know that NASA is right, can be SpaceX better. I say let the market choose.
However I wish guys from Apollo 11 have a good health and hope we’ll see you here in next 10 years and together celebrate 50th anniversary. You’ve made a great job up there.
Dumb-Jazeera How Israeli Boycott Kills Arabic Children
Its not so far when I pointed at a typical economical leftist nonsense in the New York Times, and just yesterday Al-Jazeera scored. Lets go to the video
information value = zero so at least enjoy a pretty journalist
How many times I will have to say that trade is not a zero sum game? From trade profits both sides! Any regulation against the voluntary trade will lead to decrease of wealth on both sides.
Farmers want to end imports from Israel, how bad must be those Israelis who can sell their products cheaper, and why any Jordanian farmers did not protest when they were selling food to Israel during the Shmitta year. Actually I have my doubts that 2000 tons of food will ruin Jordan agriculture as it produces only 166 000 tons of cereal per year. What about the whole food production then.
Anyway even if it was a true why is so bad that the people in Jordan will have cheaper food? But I have an idea , all those loosing farmers can buy that cheap food and sell it in Egypt, couldn’t they?
It would not work?! Have you ever heard about boycott? The Israeli “Apartheid” boycott exists because they want to stop the killing of kids. Well it is not a bad idea isn’t it? There are now two kind of boycotts first is voluntary organized (by the way the site is using an Israeli technology) and second is organized by the Arab League.
But here still obtains that any forced boycott will harm both sides. For example Strategic Foresight Group had calculated that Arab states have lost an opportunity to export $10 billion worth of goods to Israel between 2000-2010.
Now do you know what is the biggest killer in the world? This is an example from great episode of 20/20 broadcasted many years ago. (you can see worth of watching episode here)
even in modern countries is the biggest killer poverty
By the way in Egypt for example organization Save the Children estimates that every year die about 60 000 kids as the result of the extremely big death rate for children under the age of five.
So I am just suggesting why the economy which have huge water consumption (4 times more than Israel per capita) and not developed agriculture if the world leader in agriculture is next door.
Just imagine if that rate fell only for 10% it would save 6 000 kids per year. For example between 2000 – 2007 has been killed about 1000 Palestinian kids by Israel, according to B’tselem (note that they are not much kosher numbers). Former Prime Minister of Israel Golda Meir once said: "
Peace will come when the Arabs will love their children more than they hate us
I know she was talking about suicide bombers, but with the boycott we are reaching absolutely new level. So who is actually bigger bad guy if 42 000 kids could be saved by cancellation of the boycott or if 1000 kids could be saved by “wiping Israel out of the map”?
Why Capitalistic Greed Rocks and Religious Solidarity Not
Probably the most famous rebuke against capitalism is that the capitalism is based on greed. Once I have read interesting statement:
If someone thinks that he lives alone in this planet he's wrong, because we have to help each other and go forward. To think at my own prosper is a crime.
the Morality of Motive
I do disagree with that quote, but why? At the beginning we need to find out what the greed is and for this we could use ideas of a German philosopher Immanuel Kant. He made an interesting statement about ethics:
Act only according to that maxim by which you can at the same time will that it should become a universal law.
Kant in his studies of duty suggested that higher moral purpose can’t be found in the output achieved by our action, but in the motive that is behind the action. What does it mean in a practical example?
I will try to compare it with Islamic morality as Islam is one of the most fatalistic religion and also one of the biggest political religions criticizing morality of capitalism. But we could easily find same examples in another religions.
My Muslim friend has told that the responsibility of every Muslim is not only to pay Zakat which is some kind of tax used as a help for poor people, but also Sadaka which is a non-profitable secret help, meaning I am the only one who knows about that help. When I die, god will ask me what have I done for others. Then based on my actions during my live he will decide if I am worth of going to the paradise.
But according to Kant, help based on the motive of the last judgment is not moral, because if I pay Zakat or practice Sadaka with knowledge or faith that it will help me to reach paradise, heaven or better next live, I do act greedy as my goal is to success during the last judgment and go to the paradise.
Just to be clear, I do not criticize charity or actions which has been done for example by Mother Teresa. I am trying to find higher moral principle behind our actions and this can be according to Kant in the motive with the knowledge that for my help I will in the end pay a big price. Sadaka and Zakat as actions can be moral, but the motive for them can’t.
What is very interesting for a Muslim would be then on of the most moral things which he could do an attempt to destroy Islam in order to stop many conflicts caused by Islam directly or indirectly (some of them were probably more brutal than the World War 2) with the knowledge that by this action he has signed an infinite suffering in hell. This would be a great example of the very moral motive.
This morality paradox greatly shows that almost behind every action we can find some greed, that is why capitalism put greed as the basic and natural motive of a human action.
the Morality of Action
But how to limit this greed? Can we find some morality in actions? I guess you would no be surprised if I say yes we can, and capitalism in this question scores very well.
I have answered that charity as an action is for me moral, and of course theft is not moral for me, but why? (do not forget that even a thief can have a very moral motive for his action, for example father trying to save his child)
To explain it, I will show you three concepts of law.
- Objective (natural) law – is the law created by man, and its goal is to show us bad actions which should be forbidden and which are common for every human and shared by the whole humanity because they are based on human nature. Follow this law is necessary if we want to achieve prosperity. Typical example is theft.
- Positive law – is the law which is not objective but relative, for example created in order to avoid something bad. Like if I made drugs illegal people would not be able to use them so much. Typical examples are, drug illegalization, gun ownership illegalization, …
- Divine law – is the law sent us by god which we must follow in order to achieve prosperity. Typical examples are illegalization of homosexual marriages or adoptions, blasphemy or adultery, ..
Instead of detailed describing and explaining of those laws and philosophical creation of property I will try to prove why the objective law is the only one moral and right. However anyone who would be interested in detailed description I recommend this Alex’s comments of Rothbard’s book The Ethics of Liberty and of course the book itself is worth of reading too. You can do it for free here.
The best statement showing ideals of objective law is:
Law is to be objective because if law cannot be applied rationally, law cannot be applied universally.
It says that if we want to find universal law for everyone we have to explain it in an objective logical way! Why divine law doesn’t contains any objectivity greatly explains this statement:
I contend that we are both atheists. I just believe in one fewer god than you do. When you understand why you dismiss all the other possible gods, you will understand why I dismiss yours.
This quote deducts that all religions are subjective and that is why none of them is probably completely right. Also if you have heard any debate between people of two different religions, you know that both sides tried to argue objectively. For example “your religion says kill those, my says protect those” so mine is better.
Second problem of divine laws is that we can very easily beat them by other religion. Islam says that it respects other religion and its goal is also to set up Islamic laws in Islamic society, but what if my god sent me capitalism and said that capitalism must be achieved in the Arabic Peninsula as well. Would Islam tolerate me? I doubt so.
To find out which religion is better we just must use reason, but the question is then why we don’t leave divine laws at all and try to create our own laws based on reasoning, because this option obviously works much better.
Divine law is nothing more than some kind of positive law and the problem of the positive law is simple, it is against objective law. Against something which is natural part of every born human. Try to avoid bad things by committing crimes against our basic human rights is impossible.
Basic human liberties we are born with, others can only take them out.
For example well known illegalization of homosexual rights is not moral because it is against objective law, actually it means that it is an aggression against natural right of every people. If you want to know why it is against it you will have to read the link posted above. Basically because homosexual marriage is a deal between two persons which does not harm non involved persons.
Objectively immoral actions are those which are against the objective law, anything else is subjective (you do not have to like red colour but it does not mean people can’t wear red). If you support illegalization of homosexual marriages you have to support another positive laws, like this one:
I forbid praying in order to increase labor , just imagine that possibilities if everyone would work 15 minutes longer per day instead of praying!
Moral goals of capitalism
Pure capitalism is derived from classical liberalism which invented terms freedom and objective law. Capitalism is the only one model of society which include objective law and does not brake it.
Wealth and development which capitalism gave humanity is enormous. 200 hundred years ago in the times when the capitalistic industrial revolution began, the Archduchess of Austria Maria Theresa had sixteen kids. But only nine of them reached 18. Mortality in kingdom families was extremely big what even then in a common families. Today 200 years later in the same country there is a 99,98% chance that every born baby will reach 18. Actually there is 99,1% chance that it will reach 60. Mortality is today extremely low!
Many people says that capitalistic society consume to much, but this is simple not true, capitalistic society is one of the most effective ever, lets compare two countries: Israel and Egypt:
Israel has a population about 7,4 million and area approximately 22 770 square kilometres – big part of area is created by the Negev desert.
Egypt has a population about 76 million and area approximately 1 001 449 square kilometres – big part is created by the Sahara desert.
What we see here is that Egypt has 10 times more people and 43 times bigger area – much more land resources, much bigger absolute consumption so how does economical output look:
GDP of Egypt: $442.640 billion
GDP of Israel: $200.630 billion
Despite of the massive Mubarak’s secularization and capitalization in Egypt last years the Islamic law have still strong position in the land which has shown the recent decision about swine slaughter. And obviously it does harm. Average Israeli produces almost 5 times more effectively than average Egyptian and Israel has almost 20 times more effective usage of land. Does it mean that Iraelis work 5 times more? No they do not, capitalistic economy can simply plan much better than anything else. (for a hairsplitters amount of the USA help is almost similar for both countries)
Because today post is full of statements I will end it with one too.
A religious people are to support greedy capitalism, because it is the only way for really tolerant, prosperous and moral way of society.
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