Quote of the week:
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
Showing posts with label Usury. Show all posts
Showing posts with label Usury. Show all posts
Friday, May 9, 2008
Tuesday, May 6, 2008
Letters Edition #1
Quote of the Week:
'Arguments are to be avoided: they are always vulgar and often convincing.' - Oscar Wilde
Commentary for the Week (Letters of the week edition):
Dear Friends,
Welcome to our first 'Letters Edition' where we publish thoughts and submissions from our subscribers. I trust that you will find it enjoyable. The commentary will be back next week.
Letter No. 1:
Dear Jawad,
Comparing the bank's interest income of $50 from $1,000 with your wife's of the same amount from $100 is not comparing like items:
a) The bank is taking an additional risk on the $900 of loans that it does not have covered by her deposit.
b) Very importantly, the bank is facilitating enterprise, or even mere survival, to 10 borrowers who would otherwise remain incapacitated for lack of those funds.
Item (a) - compensation for risk - must surely also be factored into any determination of cost of capital.
Your Dear Friend,
SK
Letter No. 2:
Salam alaikum,
The problem with your analysis of the banks' profitability from the $100 deposit is that you ignore the countervailing consumer surplus generated by 10 loans instead of one. If your wife loans you the money and makes $50, you are worse off by $45, but presumably still better off in a pareto sense, or else you would not have fixed your car. When the bank makes 10 loans to earn the same $50 owned by your wife, it is presumably making nine other people better off, so overall welfare is increased manifold. Even if the bank makes the same absolute profit as your wife, its share of the increased welfare is much less in a relative sense and the net increase in social welfare is presumably on the order of 10 relative to the one transaction with your wife.
Best wishes,
Mohammad Fadel
Assistant Professor of Law
University of Toronto Faculty of Law
________________________________
My response to Letter No. 1:
Dear SK,
As you show little mercy, I respond thusly:
a. There is no $900 ... there is $1000 that only exists as debt owed to the bank, and there is a $100 deposit. The former does not exist as pre-existing wealth or deposits. The only part that is 'capital' and the bank is on the hook for to the depositor is the $100. Furthermore, if the $100 is in a chequing account, the bank would not even be paying out interest to the depositor. This is actually a very key point - the $1000 is not 'capital', the $100 deposit is. The $1000 exists only as debt owed to the bank, not as somebody's deposit that it has to manage judiciously. Of course, any repayment of the $1000 loaned out and the interest charged is profit. I hope that helps because the key to this whole picture is that the capital risk you speak of is intrinsic to the bank's use of leverage in operations, not a result of the fiduciary management of someone's deposits.
b. This is indeed quite a valid observation - something that has been brought up by another honourable genius such as yourself. He probably beat you to opening the email. Unfortunately, you will have to wait until next week for a response. This point is too important for us not to share with everyone...
Point b is quite similar to Dr. Fadel's and is addressed below:
My response to Letter No. 2:
Although I responded to Dr. Fadel's critique privately already, his astute and wise observations deserve wider readership .
As he states, the efficiency gains from having a lower prevailing interest rate are not insignificant. Indeed, if the only loans available were at 50% interest, much of what passes for commerce in today's economy would come to a halt. My wife's $100, left in her own hands it seems, would make for a poor lubricant to the wheels of Progress.
Where I disagree with the good professor however, is on whether efficiency is our only ultimate goal. One of the central problems or tradeoffs that exists in economic decision-making is whether to devote precious resources towards making gains in efficiency or towards those that enhance economic equality, which is a moral standard (I refer you to the work of the economist Arthur Okun). Whereas Dr. Fadel's critique is informed by the imperatives of efficiency, my argument was made more from the perspective of morality. Lowering the prevailing interest rate from 50% to 5% is a gain in the efficiency of the system, not necessarily its morality. What he also reminds us, of course, is that if we could figure out a way, 0% rates would not just be moral, but be exceedingly efficient as well. Again, I don't believe that either of us fundamentally wrong, just that we are not entirely Right either.
I thank Dr. Fadel for allowing us to learn from his wisdom and expertise. For those of whom that do not know of him yet, he is an active, respected and sharp contributor to debates within Islamic Finance. I am honoured to be guided by him and I look forward to many more exchanges, agreements and disagreements with him in the years to come.
Thank you to all who wrote back with their views. A special thank you to people that asked me to get married to someone that charged less interest - I thought that their concern was very touching. The word of the week is 'Hypothetical'.
Finance News:
1. A very timely story for what we have been discussing here ... if you get a chance to read a book on finance this year, try Satyajit Das' 'Traders, Guns and Money' ... it is both funny and insightful. This interview is a good introduction ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071124.r-takingstock24/BNStory/robColumnsBlogs/?cid=al_gam_nletter_maropen
2. A very interesting development in the mining sector has been the recent proposed buyout of Rio Tinto by BHP Billiton ... I encourage you to try and follow this story because there is something deeper going on ... First, at around $150 Billion, it is not a small buyout. Second, the shareholders refuse to accept $150 Billion because they know that what they have in the ground (minerals) are worth more than the dollars (paper) they are being offered today ... http://www.theglobeandmail.com/servlet/story/LAC.20071203.RBHP03/TPStory?cid=al_gam_globeedge
3. Who watches out for investor interests in Canada? The ROB discusses whether they are doing an adequate job ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071203.wimet1204/BNStory/robNews/home
Economic News:
1. How the Subprime loan mess is related to the credit crunch and how that is related to the US $ ... http://www.atimes.com/atimes/Global_Economy/IK16Dj02.html
2. Think you know the Price of Oil ... I mean the Real Price of Oil ... http://www.atimes.com/atimes/Global_Economy/IK22Dj02.html
3. How the wealth of the world has shifted towards the East, and how the new centres of power are behaving relative to the old ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/The_worlds_new_financial_power_brokers_2084
Middle Eastern / Islamic Finance:
1. S&P begins to question legal ownership in some 'Islamic' structures ... http://www.zawya.com/story.cfm/sidZAWYA20071126121542
2. How much is the slide in the US $ hurting OPEC? ... http://www.economist.com/finance/displaystory.cfm?story_id=10191717
Miscellaneous:
1. Ever thought about having solar power? ... Here is some inspiration for you ... http://www.theglobeandmail.com/servlet/story/RTGAM.20071203.wlsolar03/BNStory/lifeMain/home
2. The economist rediscovers that the Middle East has more than Oil ... http://www.economist.com/daily/news/displaystory.cfm?story_id=10235761&fsrc=nwl
'Arguments are to be avoided: they are always vulgar and often convincing.' - Oscar Wilde
Commentary for the Week (Letters of the week edition):
Dear Friends,
Welcome to our first 'Letters Edition' where we publish thoughts and submissions from our subscribers. I trust that you will find it enjoyable. The commentary will be back next week.
Letter No. 1:
Dear Jawad,
Comparing the bank's interest income of $50 from $1,000 with your wife's of the same amount from $100 is not comparing like items:
a) The bank is taking an additional risk on the $900 of loans that it does not have covered by her deposit.
b) Very importantly, the bank is facilitating enterprise, or even mere survival, to 10 borrowers who would otherwise remain incapacitated for lack of those funds.
Item (a) - compensation for risk - must surely also be factored into any determination of cost of capital.
Your Dear Friend,
SK
Letter No. 2:
Salam alaikum,
The problem with your analysis of the banks' profitability from the $100 deposit is that you ignore the countervailing consumer surplus generated by 10 loans instead of one. If your wife loans you the money and makes $50, you are worse off by $45, but presumably still better off in a pareto sense, or else you would not have fixed your car. When the bank makes 10 loans to earn the same $50 owned by your wife, it is presumably making nine other people better off, so overall welfare is increased manifold. Even if the bank makes the same absolute profit as your wife, its share of the increased welfare is much less in a relative sense and the net increase in social welfare is presumably on the order of 10 relative to the one transaction with your wife.
Best wishes,
Mohammad Fadel
Assistant Professor of Law
University of Toronto Faculty of Law
________________________________
My response to Letter No. 1:
Dear SK,
As you show little mercy, I respond thusly:
a. There is no $900 ... there is $1000 that only exists as debt owed to the bank, and there is a $100 deposit. The former does not exist as pre-existing wealth or deposits. The only part that is 'capital' and the bank is on the hook for to the depositor is the $100. Furthermore, if the $100 is in a chequing account, the bank would not even be paying out interest to the depositor. This is actually a very key point - the $1000 is not 'capital', the $100 deposit is. The $1000 exists only as debt owed to the bank, not as somebody's deposit that it has to manage judiciously. Of course, any repayment of the $1000 loaned out and the interest charged is profit. I hope that helps because the key to this whole picture is that the capital risk you speak of is intrinsic to the bank's use of leverage in operations, not a result of the fiduciary management of someone's deposits.
b. This is indeed quite a valid observation - something that has been brought up by another honourable genius such as yourself. He probably beat you to opening the email. Unfortunately, you will have to wait until next week for a response. This point is too important for us not to share with everyone...
Point b is quite similar to Dr. Fadel's and is addressed below:
My response to Letter No. 2:
Although I responded to Dr. Fadel's critique privately already, his astute and wise observations deserve wider readership .
As he states, the efficiency gains from having a lower prevailing interest rate are not insignificant. Indeed, if the only loans available were at 50% interest, much of what passes for commerce in today's economy would come to a halt. My wife's $100, left in her own hands it seems, would make for a poor lubricant to the wheels of Progress.
Where I disagree with the good professor however, is on whether efficiency is our only ultimate goal. One of the central problems or tradeoffs that exists in economic decision-making is whether to devote precious resources towards making gains in efficiency or towards those that enhance economic equality, which is a moral standard (I refer you to the work of the economist Arthur Okun). Whereas Dr. Fadel's critique is informed by the imperatives of efficiency, my argument was made more from the perspective of morality. Lowering the prevailing interest rate from 50% to 5% is a gain in the efficiency of the system, not necessarily its morality. What he also reminds us, of course, is that if we could figure out a way, 0% rates would not just be moral, but be exceedingly efficient as well. Again, I don't believe that either of us fundamentally wrong, just that we are not entirely Right either.
I thank Dr. Fadel for allowing us to learn from his wisdom and expertise. For those of whom that do not know of him yet, he is an active, respected and sharp contributor to debates within Islamic Finance. I am honoured to be guided by him and I look forward to many more exchanges, agreements and disagreements with him in the years to come.
Thank you to all who wrote back with their views. A special thank you to people that asked me to get married to someone that charged less interest - I thought that their concern was very touching. The word of the week is 'Hypothetical'.
Finance News:
1. A very timely story for what we have been discussing here ... if you get a chance to read a book on finance this year, try Satyajit Das' 'Traders, Guns and Money' ... it is both funny and insightful. This interview is a good introduction ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071124.r-takingstock24/BNStory/robColumnsBlogs/?cid=al_gam_nletter_maropen
2. A very interesting development in the mining sector has been the recent proposed buyout of Rio Tinto by BHP Billiton ... I encourage you to try and follow this story because there is something deeper going on ... First, at around $150 Billion, it is not a small buyout. Second, the shareholders refuse to accept $150 Billion because they know that what they have in the ground (minerals) are worth more than the dollars (paper) they are being offered today ... http://www.theglobeandmail.com/servlet/story/LAC.20071203.RBHP03/TPStory?cid=al_gam_globeedge
3. Who watches out for investor interests in Canada? The ROB discusses whether they are doing an adequate job ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071203.wimet1204/BNStory/robNews/home
Economic News:
1. How the Subprime loan mess is related to the credit crunch and how that is related to the US $ ... http://www.atimes.com/atimes/Global_Economy/IK16Dj02.html
2. Think you know the Price of Oil ... I mean the Real Price of Oil ... http://www.atimes.com/atimes/Global_Economy/IK22Dj02.html
3. How the wealth of the world has shifted towards the East, and how the new centres of power are behaving relative to the old ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/The_worlds_new_financial_power_brokers_2084
Middle Eastern / Islamic Finance:
1. S&P begins to question legal ownership in some 'Islamic' structures ... http://www.zawya.com/story.cfm/sidZAWYA20071126121542
2. How much is the slide in the US $ hurting OPEC? ... http://www.economist.com/finance/displaystory.cfm?story_id=10191717
Miscellaneous:
1. Ever thought about having solar power? ... Here is some inspiration for you ... http://www.theglobeandmail.com/servlet/story/RTGAM.20071203.wlsolar03/BNStory/lifeMain/home
2. The economist rediscovers that the Middle East has more than Oil ... http://www.economist.com/daily/news/displaystory.cfm?story_id=10235761&fsrc=nwl
The Question of 'Non-Usurious Interest' - An Inconvenient False
Quote of the Week:
'There's too much political freedom, too many legal rights, too much media. By contrast, I was in Shanghai recently and one day passed a bunch of huts beside the road. The next day they were all gone. The third day there were a bunch of guys rolling out sod and planting trees. And on the fourth day they inaugurated a park.' - Rajiv Singh - (Vice Chairman of DLF [India's largest Real Estate developer]).
Presumably, political freedom, legal rights and media are mere shackles to be cast off. A park, on the other hand, is Progress.
(The source is his interview with the McKinsey Quarterly -) http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Putting_a_roof_over_India_An_interview_with_the_countrys_biggest_developer_2066
Commentary for the Week:
The Question of 'Non-Usurious Interest' - An Inconvenient False:
This past week I received an excellent email from one of our dear subscribers. Her previous thoughts on Islamic Finance had led her to a point where the definition of usury and the definition of interest were complementary but not the same. Thus, it is possible in this scenario to have 'usurious' interest and 'non-usurious' interest. Non-usurious interest, in this view, is a tolerable 'cost of capital'. Without picking on my dear friend (who is indeed a genius and gets to the heart of the matter very quickly), and indeed others involved in banking / finance / regulation (whether 'Islamic' or not) - I would like to put forth a different view. As always, please remember that Truth is a very precious commodity, something that the Divine has spread among many. Similar to my dear friend, I have been blessed perhaps, with only a portion - my views are solely mine, and certainly do not carry the definitive authority of being 'Islamic'.
At the moment, traditional Islam is perhaps the only large religion where any excess charge / repayment on loans is thought to be expressly forbidden. Christianity, taking its cue from its Catholic subset perhaps, has come to define usury as 'excessive' interest. This latter view is either a very deep understanding of usury that is beyond me, or an inescapable compromise made at a time of great hardship for the Church. Traditional, pre-reformation understanding among the Abrahamic Faiths at least (I do not have any familiarity with others) was that usury is any excess charge or repayment over a loan.
But that is neither here nor there - I can quote texts and texts can be quoted against me. Let us use a simple, but illustrative example instead.
Let us suppose that my wife is rich, and I am quite the opposite (not a bad approximation of reality, but I digress). She has $100 lying around and I need $100 to fix my car. If she were to loan me $100 and stipulate that I must pay her $150 in one year, our moral sense would be revolted. That translates to a robust and definitely usurious interest rate of 50%, and a usurious gain of $50 in absolute terms. If I was to indeed agree to her terms, my wealth would be transferred to her quite quickly.
Let us say then, that in Scenario B, I refuse her terms. I go to a bank/lender who has advertised a very reasonable sounding %5 on loans instead. Let us assume that this is the bank where my wife deposited the $100 in the morning. Since her deposit, they have had an excess capital of $100, against which they can lend more money. As per prevailing regulations and business practices of the conventional system, they are now in a position to loan out 10X the deposited amount, or $1000 (a reserve ratio of 10% for the technically-minded). All day, people such as me go to the bank and borrow what they need, until the $1000 has been completely loaned out. For me, this means that I will have to repay $105 in a year, which is definitely more manageable than $150. I thank my loan officer profusely and walk (remember my car is still being fixed) away happy, feeling that 5% interest is really not that bad compared to my wife's loan-sharking.
Evaluating these two scenarios from my personal perspective, I am clearly better off monetarily in scenario B. But if I leave it at that, not only will I have marriage problems, I have also perhaps missed an important part of what actually just took place. As a concerned husband and citizen, perhaps I should ask - what of my wife, the bank, and the rest of society? If my Mrs. had been the lender, I would have paid an excess of $50 and she would have made $50 (50% x $100). In the second scenario, I would have paid only $5, but how much did the bank make off the same $100 that my wife could have loaned me directly?
I think that if you do the calculation, you will find that 'Lo and Behold!' (my only textual reference for the day), the bank also made a grand total of $50 (the total amount loaned x interest rate or $1000 x 5%=$50). Let me ask you, from a societal perspective what is the difference between my wife making $50 from a principal of $100, and a lender making the same absolute gain from the same $100? Why did we label her business practices 'usurious', but feel warm and fuzzy about the bank? If our moral sense screamed out under the first scenario, why is it so quiet in the second? In both cases, $50 has been taken from society on a principal of $100. Which $50 gain is usurious?
Of course, many will quibble with my simple example. Let me address that right up front. In Canada these days, and under the Basel II Banking Accords (which we helped develop and to which we are a sovereign signatory) - reserve requirements for lenders are actually lower than 10%. This means that lenders can actually lend out more than 10X their deposits. Also, the rates for unsecured loans are substantially higher than the 5% used in this example. In short, the only thing I have grossly overestimated is the capriciousness of my wife, who is in fact quite nice and uninterested in any interest whatsoever.
By seemingly 'saving' myself $45 by dealing with an institutional lender, I have altered the payout for myself, but have not affected the impact on society. In both scenarios, the result at a societal level has been sub-optimal. Perhaps, just perhaps, this example is a reflection of why trying to define non-usurious interest is futile - and God really does know best.
In this case, while that $45 I 'saved' will indeed come in handy for me personally, the fact that the original pain has been spread around amongst many is thin and shallow satisfaction. The sad fact of the matter is that usurious gain is still being made somewhere on God's Green Earth. Even if you and I are no longer paying it in person, our engagement with society means that we do end up paying for it personally.
Of course, in the meantime, all the other fellows who borrowed to have their cars fixed have driven up the price of mechanics and now the $100 is not enough. If only I could be a banker ... (again), but that can be a story for another day ...
Thank you to all who wrote back with their views. A special thank you to my good friend, who wrote in with her views in an articulate and tasteful manner. I apologize for making her views public but not only is pooling our knowledge and questions the way to success, it is perhaps an important measure of success itself. Of course, these views are mine alone and not designed to cause offense, just elicit dialogue on things we usually don't talk about. If you feel you have derived some value from this newsletter, please be kind and forward it to two or three people you would like to have introduced to Islamic Finance so they can subscribe (there is a link to forward the email below). I will NOT be sending advertising or purchase offers to this newsletter list unless my wife calls in the loan.
Finance News:
1. A must see video ... British humour takes on the recent banking crisis ... http://www.youtube.com/watch?v=axAjb6fDsPY&feature=related
2. Back to Portus ... remember how there were two accused co-founders? ... well, this is the prisoners' dilemma in action. For as long as one of them was out of Canada, the other did not confess. Now that both founders are in Canada, one realizes that the individually smart thing to do is to make like a canary and sing ... will this be a duet? ... over 25,000 investors lost money through fraud and Canary No. 1 gets two years ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071119.wportus1119/BNStory/Business/home
3. Absolutely and completely a bad idea ... the last thing we need is somnolent Central Bankers being put in high-pressure situations with public money ... oh wait - we already have that .... but they definitely do not need more powers. Think about it - every crisis that you think they have averted or will avert will be paid for through either inflation or tax increases ... let the market do what it does best and sort itself out ... why should everyone pay for the folly of a few? ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071120.wduguay_staff1120/BNStory/robNews/home
4. Devastating news for the lending and securitization businesses in the US ... if the institution that forwarded the initial loan and the institution trying to foreclose on that loan are different, no foreclosure is possible ... undermines the very foundation of securitization practice, which is that loans can be sold off to other institutions with no adverse effects on legal rights ... http://www.canada.com/nationalpost/financialpost/story.html?id=5ccd6db0-ed6d-45e6-af07-bb41a916d1d9
Economic News:
1. An excellent dissection and blow-by-blow account of the recent Asset-Backed Commercial Paper (ABCP) crisis in Canada ... perhaps some of you will write to the editor of the Report on Business and let him know that we appreciate good journalism ... the must read article for the week ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071116.r-cover17/BNStory/Business/home/?pageRequested=all
2. An excellent 2 page summary of where we stand in our understanding of credit markets, derivatives and money supply ... http://www.blackswantrading.com/files/b7cd13bc5373d1e/bsccc112107.pdf
3. Perilously close to parity ... after my comment last week - stay up loonie, stay up ... don't want to be eating humble pie already! ... Please note that currency markets are notoriously fickle ... they will right themselves and agree with my sentiments in good time ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071119.wloonie1119/BNStory/robNews/home
Islamic Finance:
1. Dare I say that this is a well-run enterprise? One of the few Middle Eastern companies to invest in knowledge-bases abroad ... http://www.zawya.com/story.cfm/sidZAWYA20071108111034
Management Training:
1. Harvard write-up on Moral Leadership ... http://hbswk.hbs.edu/item/5801.html
2. News to use ... How succession issues are likely to dominate operational and financial planning for small businesses in Canada over the next few years ... Not something that people should attempt without good advice though ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071113.wxsmallsuccession13/BNStory/specialSmallBusiness/home
'There's too much political freedom, too many legal rights, too much media. By contrast, I was in Shanghai recently and one day passed a bunch of huts beside the road. The next day they were all gone. The third day there were a bunch of guys rolling out sod and planting trees. And on the fourth day they inaugurated a park.' - Rajiv Singh - (Vice Chairman of DLF [India's largest Real Estate developer]).
Presumably, political freedom, legal rights and media are mere shackles to be cast off. A park, on the other hand, is Progress.
(The source is his interview with the McKinsey Quarterly -) http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Putting_a_roof_over_India_An_interview_with_the_countrys_biggest_developer_2066
Commentary for the Week:
The Question of 'Non-Usurious Interest' - An Inconvenient False:
This past week I received an excellent email from one of our dear subscribers. Her previous thoughts on Islamic Finance had led her to a point where the definition of usury and the definition of interest were complementary but not the same. Thus, it is possible in this scenario to have 'usurious' interest and 'non-usurious' interest. Non-usurious interest, in this view, is a tolerable 'cost of capital'. Without picking on my dear friend (who is indeed a genius and gets to the heart of the matter very quickly), and indeed others involved in banking / finance / regulation (whether 'Islamic' or not) - I would like to put forth a different view. As always, please remember that Truth is a very precious commodity, something that the Divine has spread among many. Similar to my dear friend, I have been blessed perhaps, with only a portion - my views are solely mine, and certainly do not carry the definitive authority of being 'Islamic'.
At the moment, traditional Islam is perhaps the only large religion where any excess charge / repayment on loans is thought to be expressly forbidden. Christianity, taking its cue from its Catholic subset perhaps, has come to define usury as 'excessive' interest. This latter view is either a very deep understanding of usury that is beyond me, or an inescapable compromise made at a time of great hardship for the Church. Traditional, pre-reformation understanding among the Abrahamic Faiths at least (I do not have any familiarity with others) was that usury is any excess charge or repayment over a loan.
But that is neither here nor there - I can quote texts and texts can be quoted against me. Let us use a simple, but illustrative example instead.
Let us suppose that my wife is rich, and I am quite the opposite (not a bad approximation of reality, but I digress). She has $100 lying around and I need $100 to fix my car. If she were to loan me $100 and stipulate that I must pay her $150 in one year, our moral sense would be revolted. That translates to a robust and definitely usurious interest rate of 50%, and a usurious gain of $50 in absolute terms. If I was to indeed agree to her terms, my wealth would be transferred to her quite quickly.
Let us say then, that in Scenario B, I refuse her terms. I go to a bank/lender who has advertised a very reasonable sounding %5 on loans instead. Let us assume that this is the bank where my wife deposited the $100 in the morning. Since her deposit, they have had an excess capital of $100, against which they can lend more money. As per prevailing regulations and business practices of the conventional system, they are now in a position to loan out 10X the deposited amount, or $1000 (a reserve ratio of 10% for the technically-minded). All day, people such as me go to the bank and borrow what they need, until the $1000 has been completely loaned out. For me, this means that I will have to repay $105 in a year, which is definitely more manageable than $150. I thank my loan officer profusely and walk (remember my car is still being fixed) away happy, feeling that 5% interest is really not that bad compared to my wife's loan-sharking.
Evaluating these two scenarios from my personal perspective, I am clearly better off monetarily in scenario B. But if I leave it at that, not only will I have marriage problems, I have also perhaps missed an important part of what actually just took place. As a concerned husband and citizen, perhaps I should ask - what of my wife, the bank, and the rest of society? If my Mrs. had been the lender, I would have paid an excess of $50 and she would have made $50 (50% x $100). In the second scenario, I would have paid only $5, but how much did the bank make off the same $100 that my wife could have loaned me directly?
I think that if you do the calculation, you will find that 'Lo and Behold!' (my only textual reference for the day), the bank also made a grand total of $50 (the total amount loaned x interest rate or $1000 x 5%=$50). Let me ask you, from a societal perspective what is the difference between my wife making $50 from a principal of $100, and a lender making the same absolute gain from the same $100? Why did we label her business practices 'usurious', but feel warm and fuzzy about the bank? If our moral sense screamed out under the first scenario, why is it so quiet in the second? In both cases, $50 has been taken from society on a principal of $100. Which $50 gain is usurious?
Of course, many will quibble with my simple example. Let me address that right up front. In Canada these days, and under the Basel II Banking Accords (which we helped develop and to which we are a sovereign signatory) - reserve requirements for lenders are actually lower than 10%. This means that lenders can actually lend out more than 10X their deposits. Also, the rates for unsecured loans are substantially higher than the 5% used in this example. In short, the only thing I have grossly overestimated is the capriciousness of my wife, who is in fact quite nice and uninterested in any interest whatsoever.
By seemingly 'saving' myself $45 by dealing with an institutional lender, I have altered the payout for myself, but have not affected the impact on society. In both scenarios, the result at a societal level has been sub-optimal. Perhaps, just perhaps, this example is a reflection of why trying to define non-usurious interest is futile - and God really does know best.
In this case, while that $45 I 'saved' will indeed come in handy for me personally, the fact that the original pain has been spread around amongst many is thin and shallow satisfaction. The sad fact of the matter is that usurious gain is still being made somewhere on God's Green Earth. Even if you and I are no longer paying it in person, our engagement with society means that we do end up paying for it personally.
Of course, in the meantime, all the other fellows who borrowed to have their cars fixed have driven up the price of mechanics and now the $100 is not enough. If only I could be a banker ... (again), but that can be a story for another day ...
Thank you to all who wrote back with their views. A special thank you to my good friend, who wrote in with her views in an articulate and tasteful manner. I apologize for making her views public but not only is pooling our knowledge and questions the way to success, it is perhaps an important measure of success itself. Of course, these views are mine alone and not designed to cause offense, just elicit dialogue on things we usually don't talk about. If you feel you have derived some value from this newsletter, please be kind and forward it to two or three people you would like to have introduced to Islamic Finance so they can subscribe (there is a link to forward the email below). I will NOT be sending advertising or purchase offers to this newsletter list unless my wife calls in the loan.
Finance News:
1. A must see video ... British humour takes on the recent banking crisis ... http://www.youtube.com/watch?v=axAjb6fDsPY&feature=related
2. Back to Portus ... remember how there were two accused co-founders? ... well, this is the prisoners' dilemma in action. For as long as one of them was out of Canada, the other did not confess. Now that both founders are in Canada, one realizes that the individually smart thing to do is to make like a canary and sing ... will this be a duet? ... over 25,000 investors lost money through fraud and Canary No. 1 gets two years ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071119.wportus1119/BNStory/Business/home
3. Absolutely and completely a bad idea ... the last thing we need is somnolent Central Bankers being put in high-pressure situations with public money ... oh wait - we already have that .... but they definitely do not need more powers. Think about it - every crisis that you think they have averted or will avert will be paid for through either inflation or tax increases ... let the market do what it does best and sort itself out ... why should everyone pay for the folly of a few? ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071120.wduguay_staff1120/BNStory/robNews/home
4. Devastating news for the lending and securitization businesses in the US ... if the institution that forwarded the initial loan and the institution trying to foreclose on that loan are different, no foreclosure is possible ... undermines the very foundation of securitization practice, which is that loans can be sold off to other institutions with no adverse effects on legal rights ... http://www.canada.com/nationalpost/financialpost/story.html?id=5ccd6db0-ed6d-45e6-af07-bb41a916d1d9
Economic News:
1. An excellent dissection and blow-by-blow account of the recent Asset-Backed Commercial Paper (ABCP) crisis in Canada ... perhaps some of you will write to the editor of the Report on Business and let him know that we appreciate good journalism ... the must read article for the week ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071116.r-cover17/BNStory/Business/home/?pageRequested=all
2. An excellent 2 page summary of where we stand in our understanding of credit markets, derivatives and money supply ... http://www.blackswantrading.com/files/b7cd13bc5373d1e/bsccc112107.pdf
3. Perilously close to parity ... after my comment last week - stay up loonie, stay up ... don't want to be eating humble pie already! ... Please note that currency markets are notoriously fickle ... they will right themselves and agree with my sentiments in good time ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071119.wloonie1119/BNStory/robNews/home
Islamic Finance:
1. Dare I say that this is a well-run enterprise? One of the few Middle Eastern companies to invest in knowledge-bases abroad ... http://www.zawya.com/story.cfm/sidZAWYA20071108111034
Management Training:
1. Harvard write-up on Moral Leadership ... http://hbswk.hbs.edu/item/5801.html
2. News to use ... How succession issues are likely to dominate operational and financial planning for small businesses in Canada over the next few years ... Not something that people should attempt without good advice though ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071113.wxsmallsuccession13/BNStory/specialSmallBusiness/home
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