Banks and mutual funds that comply with Islamic law have largely evaded the fallout from toxic debt
Kuala Lumpur - This might be a good time for investors to pick up a copy of the Koran. Stocks and other investments that adhere to sharia, or Islamic law—though hardly unscathed—have fared better than the broader market. That’s thanks largely to rules that forbid investing in collateralized debt obligations and other toxic assets that have caused the carnage in conventional financial circles.
A big part of the appeal of Islamic finance is its simplicity. Speculation is taboo under sharia, and there’s a ban on assessing interest because the Prophet Mohammed said debts must be repaid in the amount that was loaned. Money proffered must be backed by collateral, and if financial instruments are traded, they generally have to sell for face value, which deters banks from repackaging debt. “This is one way to keep both feet on the ground,” says Rozali bin Mohamed Ali, head of an Islamic finance university in Kuala Lumpur.
Islamic finance guys stayed away from companies that trade in deravitives. It was too risky and made no sense. Thats the reason they have not been hurt much.
There is no way to structure an economy this way except to use force as consumer preferences will probably not allow the economy to hold this structure.
First, the part about avoiding speculation is nonsense. Everybody speculates. I fill up my car on Tuesday because gasoline goes up in price on Wednesday is me speculating on gasoline. I pay an insurance company so I don’t have to assume all the liability of getting sick. As for the type of speculation, it is all the same.
As for not charging interest, that is saying that there is a fixed relationship of consumption and savings, i.e. there is no payoff for deferred consumption. That may be good sometimes like maybe now but terrible on average as people have a wide range of preferences for consuming now versus saving.
I have a much better economic theory: Freedom.
Let business go without crazy regulations and let their success and failure be determined by consumers in the free market place. Then we don’t need Islamic Law or anything else to determine winners and losers as customers will do this.
The only reason derivatives are “bad” is that the central banks and governments backup the entities creating and selling these instruments. If the central banks and governments back off then there is no problem at all.
“People are beginning to realize that the apparatus of government is costly. But what they do not know is that the burden falls inevitably on them.” Bastiat.
I am interested in the notion that Islamic banks do not charge interest. Here is an example taken from a BBC news page to illustrate the supposed difference:
Is there really any substantive difference here? Surely the markup will vary according to the supply of funds available for “lending” and the demand for “borrowing”. And isn’t a western loan still secured by the asset in question? In both cases, if the borrower defaulted on repayments, wouldn’t the bank repossess the car and attempt to sell it again to reclaim what they have lost?
Is this all just a difference of semantics? A way of packaging things up so they don’t call it “interest” but it achieves the same thing in the end?
Very interesting observation. I agree with you that is is just semantics. Fiat money has value only because of the interest attached to it when it is created.