Tuesday, July 17, 2007

Allah or Mammon

The Netherlands wants to become the center of Sharia Banking. The Brussels Journal reports quotes Dutch Finance Minister and Labor Party politician.

[We want to encourage Islamic banking.] In the first place because Islamic banking meets a demand from the Muslims living in the Netherlands. In the second place because we see an opportunity here for the Dutch financial sector. A third reason is that banning Islamic banking from the perspective of fighting terrorism will have a counter-productive effect. Denial of an actual need can lead to money-flows running via alternative channels out of the sight of the government.

Another dhimmi surrender or some sharp operators taking the gullible to the cleaners? At a recent lunch discussion, it was argued that Sharia banking, objectively considered, just another ethical product like carbon trading, in which you can charge a premium for what is essentially psychological value-added. After doing some research it turns out that the key to getting many Muslims to bank at all is to is to rename what Western bankers call interest as something else -- profit sharing, leasing, etc. Forbes Magazine recently ran an article on it (which for some reason is not generally available) titled "Don't call it interest", but fortunately a Sunni forum quoted it in full.

How does a God-fearing Muslim finance a gas well? With sort of a sale-leaseback. If you are a devout Muslim, you can't invest in a company that produces alcohol or pork. The Koran forbids interest, so a conventional home mortgage is verboten. So would be a debt-financed business asset. You can't use derivatives or buy into conventional hedge funds.

It's a tricky business to participate in a modern economy without running afoul of sharia, or Islamic law. But it can be done. For a fee you can get a consultant to arrange financial transactions that would pass muster with Allah. There may be extra steps or additional paperwork, but sometimes the outcome is the same as you'd get without sharia.

Big money is at stake. Moody's (nyse: MCO - news - people ) says $800 billion is available for investing in sharia-compliant assets. UBS (nyse: UBS - news - people ), HSBC (nyse: HBC - news - people ), Barclays (nyse: BCS - news - people ), Deutsche Bank (nyse: DB - news - people ), Standard Chartered, AIG, Lloyds TSB (nyse: LYG - news - people ), Morgan Stanley (nyse: MS - news - people ) and Swiss Re are some of the Western financial institutions rushing sharia-compliant financial products to market. ...

"We have a higher documentation fee because documents are not spit out of some loan production package," says David Loundy, vice president at Devon Bank. "But we price an Islamic financing transaction same as we would a conventional loan." In other words the interest rate--if there were an interest rate--would be about the same, but the closing costs will run a few hundred dollars extra. God forbid you borrow for the extra costs. This is how one mortgage banker analyzes such deals: "The price for getting into heaven is about 50 basis points."

So essentially Sharia banking is the financial equivalent of Halal food. It is money prepared and profits denominated according to accepted ritual. And the attraction of offering it is that you, as a consultant, can get to charge for making sinful old interest wear a pious garb. Forget I said that. Now I know why the Forbes article was not widely distributed.


Blogger wlpeak said...

I don't think it is anything really sinister, just the Dutch making some lemonade.

7/17/2007 11:05:00 AM  
Blogger Alexis said...

Another dhimmi surrender or some sharp operators taking the gullible to the cleaners?

Neither. I see it as a means for the Dutch government to extend regulatory control over a hitherto unregulated industry. If there is going to be a market for "halal" banking, it ought to be regulated by the state, much as the Netherlands regulates marijuana and prostitution.

Islamic banking may very well have met its match -- Dutch red tape.

Actually "Islamic" banking is banking with every bit as much casuistry as late Medieval "Christian" banking. Riba (usury) by any other name is still riba, no matter how much lipstick is painted on the pig. That which we call interest has four parts -- the cost of keeping an account, inflation, risk insurance, and profit. A moral case can be made for giving up profit (or at the very least unreasonable profit), but to expect a money lender to pay for expenses, inflation, and risk is not reasonable.

I hereby declare this fatwa:

Interest, in moral terms, is the interest rate minus the cost of inflation minus the cost of keeping records minus the risk assessment.

7/17/2007 11:17:00 AM  
Blogger Mike said...

Feh. We Jews have done the same thing since the time of Hillel two thousand years ago.

As far as I know, Christians just flout the Bible in this regard.

How do you reconcile the enormous good of capitalism with the word of G-d? Sometimes, you need a good legal fiction.

I don't even see this trend as caving into dhimmihood. We're not discussing the informal banking networks that transfer money to the bad guys. Just helping religious Muslims invest money. No different than helping them buy halal meat.

7/17/2007 12:31:00 PM  
Blogger Marzouq the Redneck Muslim said...

Those creative Nederlander businessmen do it again. There is so much America can learn from that little nation!

I think of New Orleans and the Corps of Engineers. That little country, Nederland, could sure teach those Army engrs something in that area.

When it comes to the drug and prostitution thing, I think they have the right idea too.

The entpreneur in me and my Muslim trader mindset kinda inspires me to open a Sharia bank, a brothel and a pot parlor here in USA! Too bad there are laws against it.

Ahanda Allah! Just got another idea! If Afghanistan switched from poppy to pot cultivation (they grow some gooood shit), not only could their economy improve, they would be an energy producer! We can make diesel fuel out of the stuff! And textiles too!

Yeah the world needs a change, insha Allah. America needs to adjust too. It is a racket here with the drug and oil companies, if you know what I mean.

Salaam eleikum Y'all!

7/17/2007 04:08:00 PM  
Blogger John J. Coupal said...

The translation of the Dutch finance minister's decision:

"We surrender to the Muslims that have overrun us. Please don't hurt us anymore. Please strike the Americans and British instead,


For a once-great nation, it's pathetic.

7/17/2007 05:01:00 PM  
Blogger Marcus Aurelius said...

I was teaching my students in the way of percents and my ignorant self talked about Mohd putting money in the bank earning 10% interest.

Later on in a general meeting I heard talk of some bonehead teacher using the Prophet's name in an illustration of using interest. I wish they would have understood themselves.

Anyway, I have no problems with this. I trust Dutch authorities to make sure the money is not going to terrorist types more than I trust the authorities in Dubai. I don't believe the Dubai authorities are malign, I just think they are lax Mafi mushkala, 'di ba?

7/17/2007 07:32:00 PM  
Blogger Brian H said...

Flouting the Bible, huh? BFD. So, loan me $100,000. In ten years, I'll give you back $100,000. You won't do it? How 'bout I give you $110,000? No? How 'bout $162,889.46? Yes, I thought so. That happens to be accumulated interest compounded at 5%.

Spare us the religious hypocrisy.

7/17/2007 08:14:00 PM  
Blogger Mike said...

Brian -

Maybe I wasn't clear - I think capitalism (and interest) is a good thing. I have a graduate degree in finance and work in the industry.

However, none of this alone negates the prohibition on interest found in the text followed by the three Abrahamic religions.

I don't think there's anything wrong in Muslims (or anyone else) taking their religion seriously, as long they aren't harming someone else. And if the Dutch (or Brits or Americans) make a buck by being helpful, great.

7/18/2007 03:28:00 AM  
Blogger David A. Smith said...

I believe Sharia banking is a good and important thing because lack of banking impoversihes nations; I've posted about this specifically, at some length, on my housing blog, start here:
http://affordablehousinginstitute.org/blogs/us/archives/1049. So it's to be encouraged.

7/18/2007 07:37:00 AM  
Blogger David A. Smith said...

Addendum: the blog is http://dasblog.org, the post starts in 7/11/07, and the title is "Financial Velocity and Islamic Banking." (Previous comment had its URL truncated.)

7/18/2007 07:38:00 AM  

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