I heard somewhere that Islamic countries don’t lend money at interest. It’s to do with religious beliefs: “time belongs to God”.
Two questions:
Is this true?
If it is true, what are the effects of no interest rate in their economy, particularly regarding inflation and (mal)investment?
There are loopholes used to avoid the ban.
There’s “Islamic Banking” where repurcahse agreements take the place of loans. Alternatively, instead of a 30 year mortgage, someone agrees to sell you the house at a rate of 1/30 per year for 30 years.
There’s nothing inherently evil about loaning money at interest. The problem is when bankers and the State collude. In a true free market, banking is not evil.
Suppose I agree to perform work now, without consuming, in exchange for the ability to consume later? There’s nothing evil about that. If you consider lending money at interest in that light, it’s not evil. It’s only evil when the State regulates banking, allowing insiders to profit at the expense of everyone else.
Islamic banking is very fascinating, I wish Mises.org would discuss it more in articles, but given the current global climate, discussing anything Islamic is a uncomfortable.
Interest is haram. Sin. It goes back to the Abrahamic traditions against usury. Someone one told me Christianity also advised against usury, but I’m not a theologist, or even a believer, so I can’t say for sure. I don’t know about “time belongs to God” but it was my understanding that the idea of profiting from helping someone else is a not cool.
As I understand it, Islamic banks operate as co-ops. You invest your money in the bank, and the bank will issue you a dividend based on profits made.
I do not believe there are any countries with 100% Islamic banking systems. The scourge of central banking and fiat money is everywhere.
This may be an imperfect example, most of my knowledge of this comes a friend who got a “mortgage” from an Islamic bank, which prompted me to ask him all sorts of questions.
He wants to buy a house. House is valued at $100k. He has $5k to put down. The Islamic bank fronts $95k to make $100k and the house is bought. Title remains with the Islamic bank, until it is fully paid back. In the meanwhile, they take rent, with 5% of the rent returning to the renter. Whatever he pays up and above rent, decreases the share of the Islamic bank in rent, and increases his own share.
So let’s say he gets a bonus at work, of $2000. He puts that towards the principal. He now keeps 7% of the rent (which he can reapply to principal) and the Islamic Bank keeps 93% of the rent. And so on and so forth until the property is paid off. There are no fixed terms. There are no penalties.
Rent collected is issued as dividends out to the Islamic bank capital providers.
This was the example as I understood it.
That sounds about right.
If you live in a country where “Islamic Banking” and regular banking exist side-by-side, you would pay more for “Islamic Banking”, because there’s probably only a few vendors.
I’m always amused when religions come up with loopholes to cover situations in modern life.
Well, this friend was buying a house in Canada from a Canadian Islamic bank, which was not a proper registered bank, but more like a community association, and it was all arranged by private contract. It’s uber libertarian.
But like I said, you can’t talk about anything Islamic in a positive light, it is absolutely looked down on since 9/11. Unfortunately, this Islamic banking stuff is very interesting from an Austrian and Libertarian perspective.
Edit, in fact, I bet a lot of this could be used as a template for agorist/private banking. Hmmmm… Very interesting indeed!