Sunday, May 08, 2005

Islamic economics, "Islam & Mammon" by Timur Kuran - Dynamist (Aug 2004, NYT)

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In a new book, ''Islam and Mammon: The Economic Predicaments of Islamism'' (Princeton University Press), Timur Kuran, professor of economics and law and the King Faisal professor of Islamic thought and culture at the University of Southern California, looks at the cluster of ideas known as Islamic economics.

This concept, he notes, is a 20th-century one, developed in India before independence, when many Muslims worried that they would become an oppressed minority in a Hindu-ruled state. Some feared that Muslims might be so marginalized that they would lose their identity.
...
In recent decades, Islamic economics has come to mean three things, all supposedly rooted in the ''golden age'' of seventh-century Arabia: a ban on interest, a wealth tax known as zakat, and honesty and altruism in commercial dealings.

In his book, Professor Kuran compares the ideal versions of these practices with the reality. Not surprisingly, he finds that in economic life even the most promising ideas tend to be modified, if not corrupted entirely. That is especially true in countries with weak civil societies and legal systems.

Take Islamic banking, which spread with the booming oil wealth of the 1970's. Instead of charging interest, Islamic banks are supposed to share profits and losses with the enterprises they finance.

If you read an Islamic bank's charter, Professor Kuran said, ''you will say, 'What a magnificent institution this is -- exactly what the Middle East needs.''' Islamic banks are supposed to act like venture capital funds, investing in good ideas from people who do not have the connections or collateral to get loans from conventional banks.

But Islamic banks learned the hard way that risk sharing does not work in countries where businesses keep false accounting records. ''Many people came to borrow money with wonderful ideas, and they just walked away with the money,'' Professor Kuran said. The banks could not reliably audit the books, and if they took a client to court, the business would just claim a loss.

Consequently, the banks all started charging what amounted to interest for loans.

The most common way around the interest ban is known as murabaha. The bank buys a capital good, a computer, say, for a client, who agrees to buy it back, with a markup, at a particular time in the future. In effect, the markup represents interest.
...
He argues that the Koran's famous ban on ''riba'' is not, in fact, a ban on ordinary interest, which moneylenders have charged throughout Islamic history. Riba, he writes, was a pre-Islamic practice in which a ''borrower saw his debt double following a default and redouble if he defaulted again.''

Riba often left borrowers enslaved until they paid off their debts. As with modern bankruptcy law, banning riba limited the penalties for default.
...
Islamic economics, he writes, ''has promoted the spread of antimodern, and in some respects deliberately anti-Western, currents of thought all across the Islamic world.''

Strangely, the Islamist version of history eliminates everything from the mid-seventh century to the colonial period. Islamists ignore the many examples of advanced Muslim societies.
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