Islam and Economics

America's Shame + Muslims' Double Shame = American Muslims' Triple Shame

2012-02-10T10:36:00.001-06:00

This is a draft for my khutba this afternoon.

يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ حَقَّ تُقَاتِهِ وَلَا تَمُوتُنَّ إِلَّا وَأَنتُم مُّسْلِمُونَ

(O community of faith, have the proper measure of God consciousness and do not die except in a state of submission to God = Islam)

And the third pillar of Islam is alms giving (zakah):
:صحيح البخاري: ‏كِتَاب ‏ ‏الْإِيمَانِ ‏.

‏حَدَّثَنَا ‏ ‏عُبَيْدُ اللَّهِ بْنُ مُوسَى ‏ ‏قَالَ أَخْبَرَنَا ‏ ‏حَنْظَلَةُ بْنُ أَبِي سُفْيَانَ ‏ ‏عَنْ ‏ ‏عِكْرِمَةَ بْنِ خَالِدٍ ‏ ‏عَنْ ‏ ‏ابْنِ عُمَرَ ‏ ‏رَضِيَ اللَّهُ عَنْهُمَا ‏ ( ‏قَالَ قَالَ رَسُولُ اللَّهِ ‏ ‏صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ ‏ ‏بُنِيَ الْإِسْلَامُ عَلَى خَمْسٍ شَهَادَةِ أَنْ لَا إِلَهَ إِلَّا اللَّهُ وَأَنَّ ‏ ‏مُحَمَّدًا ‏ ‏رَسُولُ اللَّهِ وَإِقَامِ الصَّلَاةِ وَإِيتَاءِ الزَّكَاةِ وَالْحَجِّ وَصَوْمِ رَمَضَانَ ‏).

(Islam was built on five pillars: confession that there is no God but God and that Muhammad is his messenger, establishing prayers, giving alms, performing pilgrimage, and fasting Ramadan.)

What is the purpose of alms-giving? It is quite explicit in the Prophet's (p) command to Mu`adh:
‏كِتَاب ‏ ‏الزَّكَاةِ :صحيح البخاري
‏حَدَّثَنَا ‏ ‏أَبُو عَاصِمٍ الضَّحَّاكُ بْنُ مَخْلَدٍ ‏ ‏عَنْ ‏ ‏زَكَرِيَّاءَ بْنِ إِسْحَاقَ ‏ ‏عَنْ ‏ ‏يَحْيَى بْنِ عَبْدِ اللَّهِ بْنِ صَيْفِيٍّ ‏ ‏عَنْ ‏ ‏أَبِي مَعْبَدٍ ‏ ‏عَنْ ‏ ‏ابْنِ عَبَّاسٍ ‏ ‏رَضِيَ اللَّهُ عَنْهُمَا ‏ ( ‏أَنَّ النَّبِيَّ ‏ ‏صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ ‏ ‏بَعَثَ ‏ ‏مُعَاذًا ‏ ‏رَضِيَ اللَّهُ عَنْهُ ‏ ‏إِلَى ‏ ‏الْيَمَنِ ‏ ‏فَقَالَ ‏ ‏ادْعُهُمْ إِلَى شَهَادَةِ أَنْ لَا إِلَهَ إِلَّا اللَّهُ وَأَنِّي رَسُولُ اللَّهِ فَإِنْ هُمْ أَطَاعُوا لِذَلِكَ فَأَعْلِمْهُمْ أَنَّ اللَّهَ قَدْ افْتَرَضَ عَلَيْهِمْ خَمْسَ صَلَوَاتٍ فِي كُلِّ يَوْمٍ وَلَيْلَةٍ فَإِنْ هُمْ أَطَاعُوا لِذَلِكَ فَأَعْلِمْهُمْ أَنَّ اللَّهَ افْتَرَضَ عَلَيْهِمْ صَدَقَةً فِي أَمْوَالِهِمْ تُؤْخَذُ مِنْ أَغْنِيَائِهِمْ وَتُرَدُّ عَلَى فُقَرَائِهِمْ ‏).
The Prophet (p) sent Mu`adh (r) to Yemen and told him to call them to witnessing that there is no God but God and that Muhammad is his messenger, if they obey him on that to inform them that God has mandated five prayers on them during each day-and-night cycle, then if they obey to inform them that Allah has mandated them to pay a charity on their wealth, to be taken from their rich and returned to their poor.

Yes, there are as many as eight avenues for the payment of zakah, as per the verse:
إِنَّمَا الصَّدَقَاتُ لِلْفُقَرَاءِ وَالْمَسَاكِينِ وَالْعَامِلِينَ عَلَيْهَا وَالْمُؤَلَّفَةِ قُلُوبُهُمْ وَفِي الرِّقَابِ وَالْغَارِمِينَ وَفِي سَبِيلِ اللَّهِ وَابْنِ السَّبِيلِ فَرِيضَةً مِّنَ اللَّهِ وَاللَّهُ عَلِيمٌ حَكِيمٌ
(Charity is restricted to these categories: the poor, the needy, its distributors, those whose hearts must be won, freeing people from bondage, freeing people from debilitating debt, to struggle in the Way of God, and to support the wayfarer -- this is a mandate from God; and God is the Most Knowing the Most Wise)

And, yes, there are many technicalities that Muslims can exploit -- from using zakah shelters by putting their wealth in assets that were not traditionally subject to zakah to giving too much of it to the building of mosques and other activities that enrich real estate developers and bankers and contribute to their own consumption without helping the poor, the needy, etc. Obeying the letter of the law without understanding its content is the biggest tragedy of today's Muslims, which gave us the travesty of "Islamic finance" that enriches bankers and others by providing inferior financial products at higher costs.

It is also the method through which the champions and multi-million beneficiaries of the mislabeled "Islamic" finance tell us that we should not think rationally about zakah because it is an act of worship -- thus protecting the interests of the real estate developers, the bankers, and those who want to spend only in ways that contribute to their own religious consumption.

The order in the verse matters: poverty comes first!! Yes, scholars cannot tell me that I did not pay my zakah if I spent it all on some building while millions suffered oppressive poverty, but that does not make it right. Scholars also will not tell me that I made any mistake by spending tens of thousands of Dollars performing a second or third Hajj or an umpteenth `umra -- religious consumption -- instead of letting the wealth stay and paying my due share of alms.

The scholars -- and now I am talking about real scholars not those who maximize their consultancy fees -- can't see my heart, and can't wake up my conscience. But I am ashamed to be a hypocrite.

Do I want scholarship, then fine, here is some scholarship, all from Ibn Qudama's Al-Mughni:

Imam Malik said (regarding which areas should receive zakah) that one should investigate where it is needed, and go by order of priority...

(Based on the Hadith of Mu`adh, quoted above) Mu`adh was ordered first to take from their rich and give to their poor, and did not mention any other category for which alms should be given until he received more wealth and could pay a category other than the poor.

Then he (Ibn Qudama) said: "And it is not permissible to move charity from its city to another city at a distance that would justify shortening the prayer" (which is only a few tens of miles)... Ahmad was asked if zakah could be transported from one country to another, and he said no. He was asked if that would be the ruling even if the person's relatives lived in that other country, and he still said no.

It was narrated that `Umar ibn `Abedlaziz returned zakah that was sent from Khurasan to him in the Levant...

The Prophet (p) instructed Mu`adh (r) specifically to take from the rich and give to the poor in the same land. Thus, when Mu`adh later sent zakah money to `Umar ibn Al-Khattab (r), `Umar chastised him by saying: "I did not send you there a tax collector; but sent you (as the Prophet (p) had done) to take from their rich and give to their poor."

Did I get the idea already, or should I read more? Well, I can read more and see that Ibn Qudama says that if one were to violate all these priorities, and give to build a fancy mosque (or in the case of my native Egypt, to the development of a Science city to satisfy the desires of an ego-maniacal Egyptian scientist), or even to give the poor in one's native country, it can still be charged against one's obligatory zakah. Am I then looking for technicalities, or do I want to do the right thing?

The right thing is to look around us and see the poverty in this land of opportunity. America's shame is not only her history of slavery (a history that we as Muslims share), but also the continued racism and denial of opportunity to a massive underclass, including numerous Muslims, most of whom are African American.

This racism and poverty is America's shame, but it is our double shame as Muslims. We are racist too, except for those whom God has blessed. Even dating back to the life of the Prophet (p), we see the following Hadith about one of the most pious men of Islamic history and one of the Prophet's dearest companions:
صحيح البخاري: ‏كِتَاب ‏ ‏الْإِيمَانِ ‏.
‏حَدَّثَنَا ‏ ‏سُلَيْمَانُ بْنُ حَرْبٍ ‏ ‏قَالَ حَدَّثَنَا ‏ ‏شُعْبَةُ ‏ ‏عَنْ ‏ ‏وَاصِلٍ الْأَحْدَبِ ‏ ‏عَنْ ‏ ‏الْمَعْرُورِ بْنِ سُوَيْدٍ ‏ ‏قَالَ لَقِيتُ ‏ ‏أَبَا ذَرٍّ ‏ ( ‏بِالرَّبَذَةِ ‏ ‏وَعَلَيْهِ ‏ ‏حُلَّةٌ ‏ ‏وَعَلَى غُلَامِهِ ‏ ‏حُلَّةٌ ‏ ‏فَسَأَلْتُهُ عَنْ ذَلِكَ فَقَالَ إِنِّي سَابَبْتُ ‏ ‏رَجُلًا ‏ ‏فَعَيَّرْتُهُ بِأُمِّهِ فَقَالَ لِي النَّبِيُّ ‏ ‏صَلَّى اللَّهُ عَلَيْهِ وَسَلَّمَ ‏ ‏يَا ‏ ‏أَبَا ذَرٍّ ‏ ‏أَعَيَّرْتَهُ بِأُمِّهِ إِنَّكَ امْرُؤٌ فِيكَ جَاهِلِيَّةٌ إِخْوَانُكُمْ ‏ ‏خَوَلُكُمْ ‏ ‏جَعَلَهُمْ اللَّهُ تَحْتَ أَيْدِيكُمْ فَمَنْ كَانَ أَخُوهُ تَحْتَ يَدِهِ فَلْيُطْعِمْهُ مِمَّا يَأْكُلُ وَلْيُلْبِسْهُ مِمَّا يَلْبَسُ وَلَا تُكَلِّفُوهُمْ مَا ‏ ‏يَغْلِبُهُمْ ‏ ‏فَإِنْ كَلَّفْتُمُوهُمْ فَأَعِينُوهُمْ ‏).

(Abu Dharr narrated that he exchanged insults with a man and in the heat of argument insulted his mother -- the man according to another narration was Bilal, and the insult was racist; I do not wish to repeat that insult here and list above the narration without the insult -- The Propht (p) told Abu Dharr: "You insulted his mother (in racist fashion), you are a man with jahiliya (ignorance) in your heart...)

I don't need to give you more recent evidence from the Islamic world and Muslim communities here in America...

I must remind myself that the word for zakah as "charity" does not indicate superiority of the giver, but a right for the poor. The poor here, who are predominantly African American. Blackamericans have twice the unemployment rate and poverty rates of other Americans, and the same is true for Blackamerican Muslims. Their college graduation rates are half these of other American Muslims and their poverty rates are twice these of other American Muslims.

This is a travesty, and it is our triple shame. It is America's shame that poverty and racism continues to this day. It is Muslims' double shame that they have even more massive inequalities and racism (to the degree of quasi-slavery in some Muslim countries) despite having a religion that orders the opposite. Like Abu Dharr (r), we still have plenty of ignorance in our hearts, most probably much more. It is therefore the triple shame of American Muslims that we are not doing enough to work with our Blackamerican Muslim brethren to improve their and our lots. We immigrant Muslims can't continue to live like parasites in this society, spending for our religious and secular consumptions and sending zakah money abroad while our own backyard is full of poor brothers and sisters. Shame on us. Triple Shame!

Islam as the Solution in the Age of Islamism III: The Salafi Mutation and Likely Economic Directions

2011-12-06T08:20:00.001-06:00

Events in my native Egypt have simplified my life to a great extent in finishing this string of blog posts. First, the Salafist Nour Party winning nearly 25% of the vote in the first round of elections, compared to the Muslim Brotherhood (MB)'s Freedom and Justice Party winnings of nearly 37% suggests that I was right about the median voter having moved to the right within the Islamist agenda. Second, it has become clear that the question about how "Islam as the solution" will be defined in this age of Islamism will depend on the strategy of the Freedom and Justice Party going forward, and how it would interact with the Liberal (in Egypt they also like to use the word civilian or civil - مدني - really to mean secular علماني, but the latter term has come to carry implications of atheism, so they prefer the former, which also doubles usefully as an antonym of military) and Salafist approaches that will be pulling it in opposite directions.

First things first: I expect that as elections move into rural areas, the Salafist fraction of the vote will decline, and the MB's fraction will increase. The MB has been a stalwart of Egyptian sociopolitical development for nearly a generation, and although it has strong pan-Islamist leanings, remains grounded in Egyptian society to a greater extent than the Salafists.

Second: Salafists seeking political power are not well grounded. Their ethos was imported from GCC countries where migrant workers with weak religious education absorbed the apolitical type of religiosity characteristic of Saudi Arabia and her neighbors -- focusing on dress codes, modes of speech, segregation of the sexes, and most recently "Islamic finance" that is devoid of any social or economic agenda beyond formulaic adherence to premodern contracts and their adaptations by contemporary clerics who glorify premodern jurisprudence in a show of pietism ostensibly to follow Divine commands.

The MB and Salafism shared an agenda of making society more pious, but the latter has certainly been more focused on form, and also more focused on enforcing outward signs of adherence using the State for power. That was the bargain in Saudi Arabia from its inception, whereby the scholars preaching and enforcing the teachings of Muhammad ibn Abdel-Wahhab (including destruction of shrines, veiling and segregation of women, etc.) were given control over society with assistance from the state, provided that they stayed away from politics.

Surprisingly to the Saudis, the advent of many MB members into Saudi society, especially as they fled the persecution of Nasser and to some extent later regimes, politicized some elements of the Salafist movement, even as the latter helped transform the former: MB members well into the 1960s didn't sport beards and their wives were not wearing veils, all signaling devices that only entered Egyptian society in significant rates after the 1970s. To this day, most of them sport the short beards that seem to be a compromise between clean-shavedness and the fist-long beards deemed mandatory in Salafist circles, and their wives mostly wear hair-covering scarves rather than the Saudi-style niqab. In other words, each of the two styles of Islamism -- one (MB) supported by petrodollars to undermine Nasserist pan-Arabism that threatened oil monarchies and the other (Salafism) supported as part of the original sociopolitical bargain for power sharing at the inception of these oil monarchies -- influenced the other. Salafists running for elections are the strongest testament to this phenomenon, given that Salafism considered elections a forbidden innovation and advocated apolitical behavior, to the point that Salafist leaders were preaching that challenging Mubarak as the ruler was against religion, even during the very last days of Mubarak's rule. These are not your father's Salafists, but they share the early Salafists obsession with outward signs of puritanical piety and their enforcement by the state -- a terrifying mixture not only for Egyptian Christians, but also for many Egyptian Muslims.

So, there is no question -- barring a Turkish or God forbid an Algerian coup -- that the near future will bring Islamist economic policies to my native Egypt, but what does that mean? The absence of a coup is not a remote possibility, esp. given the military's insistence so far that in a presidential system, parliamentary majority does not get to form a cabinet. A soft coup would reach a bargain between the military, a secular-minded president with respect for parliament (say Amr Moussa or Mohamed El-Baradei) or a religiously minded president with respect for secularist forces (say Abdul-Moneim Abou-El-Fotouh), and an Islamist dominated parliament. A hard coup would be a disaster. So, assuming no coup, the next parliament will push the country's policies in an Islamist direction. What would that be?

It depends on what alliance the MB makes. Let's assume that when all is said and done, the MB's FJP gets 45% of the vote and the Salafists get 20%. My suspicion is that FJP will not rule out an alliance with the Salafists because that would be a great threat in their bargain with the liberals (and external powers that favor them) for power sharing. However, I cannot believe -- short of total obstinacy on the part of liberals -- that the MB will make an alliance with the Salafists. Nonetheless, the latter will have substantial presence, so the FJP will have to appease them to some extent, and some of the cosmetic and meaningless policies -- like accommodation and promotion of "Islamic banking," which makes no substantive difference whatsoever -- are likely to materialize.

Of course, these are not the "Islamization of the economy" problem that worries people. The introduction of Islamic banking was already ongoing before Mubarak was deposed, in part to compete with Malaysia, Turkey, and others for GCC petrodollars. It is an industry controlled and managed by UK investment bankers and lawyers, and very much part of the international financial system, posing no threat whatsoever to the way business is conducted and appeasing form-oriented Salafists -- which is the reason it was allowed and has prospered in the GCC.

There are problems that will be unique to Egypt, and for which one can make predictions right away, for example regarding tourism. Perversely, more outward Islamicity will drive away western tourists but will not be successful in attracting high spending GCC tourists, who are attracted to Bahrain, Dubai, Egypt, and Europe mainly for their sin industries. Yes, there may be greater inflow of lower-spending Arab tourists, but that will be a catalyst further to drive away the other two categories, and tourism will suffer no matter what alliance takes place. To the extent that one of the most important growth engines for Egypt (and indeed for the whole region) has been construction, and to the extent that the latter is fueled by expectations of tourist receipts, there will be secondary effects on construction and the industries that rely on it, including steel, cement, and banking... This is unequivocally bad news.

The fear of isolationism, including anti-American and anti-Israeli policies, is misplaced, in my opinion, unless a new mutation in Islamism takes place. One needs only to look at the cozy relationships that GCC states have had with the U.S. and Israel to see how mainstream Salafism may up the ante rhetorically in their calls for freeing Al-Aqsa or boycotting products from western producers, but in the end they have not influenced policy in this area. Of course, we have the mutation that resulted in Al-Qaeda, which took elements of Salafism and elements of political Islam and challenged authority including in Saudi Arabia for its cozy relationships with the West. To the extent that the GCC base of funding and support for Egyptian Salafists is likely to continue, I cannot imagine any large and substantive change in the international economic/political behavior of an Islamist-dominated state in the short to medium term -- although the official and tolerated unofficial rhetoric will be quite worrisome to westerners, to be sure.

This leaves us with the domestic economy and likely policies that an Islamist government will pursue. This is the area where it will make a great difference whether the FJP aligns itself more with the Salafists or the liberal forces favored by the military and the West. I have already mentioned that my expectation is that they will form the latter alliance, not only because it will be more expeditious, but also because at heart, the MB has a lot more in common with the personally religious but outwardly secular liberal forces than with the outwardly-flaunting-their-religiosity-and-wanting-to-force-it-on-others Salafists. However, there will be a number of areas, even in this alliance, where the new government is expected to deviate substantially from the neo-liberal policies pursued by the Mubarak regime, which produced high rates of growth but increased inequality and corruption to unsustainable levels. Therefore, we are not going to see neo-liberal or even post-Washington-consensus quasi-liberal policies with higher regulation.

This post has already run too long, so perhaps I should summarize a few areas where economic policy may go in a different direction, and hopefully discuss them in my next post:
1. Privatization is likely to stop completely, and some renationalization of privatized companies may take place
2. Populist policies like employment creation and restricted power to fire workers, emboldened by Islamist-controlled syndicates, and price subsidies and controls are likely to be strengthened
3. Pursuit of massive industrialization policies and infrastructure projects is likely to resume, even as early as the Ganzouri cabinet to be sworn in this week, possibly with positive, but more likely with wasteful resource allocation effects

All of the above (excluding the effect on tourism, which I expect to be unequivocally negative) are likely policies regardless of the Islamicity of the regime, and therefore worrisome for long term economic prospects, but not necessarily unique to Islamists.

Two areas where the advent of Islamists may be helpful are:
1. Corruption may be better contained at the highest levels of government, although this is far from certain, and the gains from any reduction in corruption may be minuscule
2. The environment for small and medium enterprises may improve if credit provision is made possible through changes in the financial sector, and provided that the government does not crowd out private investment at this scale by favoring larger enterprises and using borrowed funds to subsidize prices and boost public-sector wages

Islamists with little faith

2011-11-23T08:34:00.002-06:00

I will not go as far as Hassan El-Banna did when he called those within the group he had founded who planned assassinations "neither brethren nor Muslims." However, I have to admit that the cynicism of the Egyptian Islamists' deal with the military, beautifully and accurately depicted in today's New York Times, suggests that they have very little faith in their Egyptian brethren. As one youth activist said on television yesterday, it is as if they had forgotten the consequences of the bad deal they had made with the free officers in 1952-54, which resulted in 60 years of repression. So, they have conspired with the political and military elites to create an electoral system that they believe favors them and push for elections before alternative and legitimate political clusters have a chance to emerge.

Their main agenda seems to be simply "to apply the Shari`a" and assert the Islamicity of the country, but what exactly does that mean in terms of concrete legal and policy implications? No one knows! The reality is that to find what Islam means in the modern age, we need to take a leap of faith, learning from the best experiences of others, and learning from mistakes as we move forward. Slogans and dogma are not only counterproductive, but also inherently un-Islamic, if you consider how Islam evolved in its early centuries.

This "political Islam" is exactly like "Islamic finance," which is formulaic Islamization of the finance that bankers, Islamists, and incoherently pietist Muslims want to pursue, even though it makes everyone worse off than they would have under conventional finance, holding their substantive financial strategies constant. It appears that Islamist political powers, likewise, just want power. They are a perfect example of Nietsche's will to power in fake "Islamic" garb, just like Islamic finance is a manifestation of the greed and myopia of contemporary finance in fake "Islamic" garb.

The essence of religion is honor, morality, and the willingness to sacrifice for those. I see none of this in today's Islamists, political or financial. Shame on them!

Islam as the Solution in the Age of Islamism II.75: Moderation

2011-11-03T11:26:00.002-05:00

In today's New York Times, Marwan Muasher, a very prominent Jordanian politician and political analyst of the Arab world, has reiterated a point that he and others have made in the past: that it is better to involve Islamists in politics than not to. The argument is that once they are tried with the fire of having to govern, and have to compete against other groups, they will have to moderate their views and policies (he cites examples from Jordan, where Islamists have been given more political room to maneuver in parliament for a number of years).

I do not deny this point at all. The problem, of course, is that assuming a one-dimensional spacial model with liberalism to the left (of course, not Economic left, just a graphical representation) and Islamism to the right, we expect those who win elections among the Islamists to be those who are naturally closer or who choose to move closer to the center. The counterpoint, of course, is that if we do not assume polarization, which would be a bad outcome, and Dr. Muasher is arguing that it will not materialize, then the liberals who will get elected are also those naturally near the center or moving closer by design.

Therefore, in an increasingly Islamist society, with voters moving to the right, therefore moving the center to the right, and even under the most optimistic scenario of centrist policies as Islamists become more moderate, it is still true that centrist policies will have to appeal to the increasingly Islamist population. Of course, I haven't yet outlined what Islamist economic policies (centrist ones, that have a chance of success) would look like, but I thought that I should mention that under the good scenario, even as Islamists moderate, the center is still going to be more centrist than it was, say, in the 1940s, before the party system was banned in Egypt after the 1952 coup/revolution.

Islam as the Solution in the Age of Islamism II.5: Failure of the "Islamization" Project (contd.)

2011-11-02T11:14:00.003-05:00

This is a continuation of the posting from yesterday on failure of the "Islamization of knowledge" project, whether or not participants in that project used this particular phrase. To recap, I am classifying all efforts under this category that treat modern socioeconomic, political and legal developments neutrally, in analogy to treatments of physical sciences and engineering developments, which are neither necessarily Islamic nor non-Islamic, and the demarcation for "Islamic" solutions becomes whether or not a particular practice or institution can be "Islamized."

This would include, say, "Islamic Republics" like Iran, where many of the European parliamentary and presidential machinations were borrowed, but an additional "Supreme Leader" cleric was put in place to ensure the "Islamicity" of the Republic, based on Khomeini's revival of the relatively obscure Shi`i concept of Leadership of the Cleric (vilayat-e Faqih). It also includes "Islamic Finance," of course, which started with Sami Homoud's "Adaptation of Banking Practice to Conform with Islamic Law," which title suggests more than simple "Islamization," but the practice resulting from which, about which I have written extensively, evolved into pure "Islamization," thus producing "Islamic" mortgages, bonds, etc.

I mentioned the Iranian experience because of the explicit religious guardianship, which goes much further than the explicit Islamicity say of Pakistan, that is not materially different from Egypt which likewise stipulates in its constitution materially that all laws must be in conformity with Islamic law (although the language is a bit different). Egypt and Pakistan never officially considered themselves not to be "Islamic" for there to be an issue of "Islamization." The first problem with "Islamization," whether in the Islamic Republic of Iran or Islamic banking and finance, is that you need a certification of Islamicity, provided by the clerics in Iran and "Shari`a supervisory boards" for Islamic financial institutions. Thus, in my native Egypt, the Supreme Court (المحكمة الدستورية العليا) can strike down a law as unconstitutional if it is determined to be contrary to Islamic law, but the issue is thus determined by judges who were thoroughly trained in secular as well as Islamic law and legal theory. (Pakistan is a bit different with the Shari`a Appellate Court, so it may be seen as a hybrid between Egypt and Iran).

Many Islamists see social order as non-Islamic (at the extreme as apostate, in the case of takfiris, but there is a continuum). In this regard, Tunisia is an interesting case (echoed in Libya) where polygamy has been illegal. The vast majority of Islamic scholars agree that polygamy is allowed (and I do not say all, because a tiny minority find the conditions of perfect equality between wives impossible to satisfy, and therefore conclude that polygamy is not allowed except in cases of extreme personal necessity -- such as disease -- or social necessity -- say grossly more women than men in society). Many of them, however, would say that it is possible for a secular power to restrict this permissibility as a form of regulation (تقييد المباح). Al-Qaradawi used this argument to state that if one lives in a country where the laws of the land do not permit polygamy, then because one is required to uphold these laws, and because polygamy is allowed but not mandated, it becomes un-Islamic to marry more than one in that country. Whether or not he feels the same way about an "Islamic" country banning polygamy, say for social reasons of skewed distribution with too many males. There is no doubt left that even "moderate" Islamists feel that the legal frameworks in Tunisia and Libya should permit polygamy. That would be an "Islamization" of the existing state, and this will likely extend to other areas, such as finance, etc., where official binding decisions on Islamicity would have to be issued. The office of Mufti rarely plays that role, because fatwa by definition is not binding, so one should think of the office of Grand Mufti and Supreme Court Justice all rolled into one, which was to some extent the case with Pakistan's Shari`a Appellate Court, although the latter was to some extent subsidiary to the Supreme Court.

I am probably already significantly out of my depth on law, and it is a bit of a digression, but not much. The main point that I am trying to make is that although advocates of "Islamization" may view that default as neutral and check whether something can be "Islamized" to sell to clerics and more conservative Islamists, the latter interpret the situation differently: They practically consider everything by default un-Islamic unless proven otherwise. Thus, they want an "Islamic dress code" (زي إسلامي), even as they repeat general rules of modesty, and they want "Islamic finance," even as they repeat general rules about the default in financial transactions is permissibility, etc. Suspicion that something is not Islamic is easy to raise, and these conservatives (who are increasingly the proverbial "moderates") therefore want to seek fatwa on just about everything, and want to avoid gelatin, onion soup (it might have wine), and even beer-batter (where no liquid is left!), etc. They all seek out "scholars" that suit their degree of conservatism, who become the arbiters of what is "Islamic," and that begins to apply to every aspect of individual and social behavior.

Thus, the "Islamization" program has (perhaps inadvertently) enabled a worldview that is quite different from its proponents and empowered clerics with large following who can certify something as "Islamic." (For example, one is surprised by the number of highly educated Pakistanis who care only what "Justice Taqi" Usmani's opinion was on a particular financial product or institution; an authority that is apparently bequeathed not only to his son but also to other relatives, regardless of the details of the transaction and how convincing the evidence is or isn't). The result is in essence a variation on the Iranian vilayat-e faqih, except that there is no official clergy and procedures to determine competence of the fuqaha (this something that not only I, but many others have lamented about "Islamic finance," even if such a thing were needed).

The incentive structure of fuqaha who have actual or potential followings is another problem that I and others have discussed in the past, and it complicates the problem further.

If you start from the Abduh view that I think was optimal (at least a century ago, and of course it needs some updating based on social and legal advances that have been made in the past century), and I haven't yet argued why it is optimal, you can see why "Islamization" would therefore be a bad path to take. It emboldens the clerics that you seek to appease and makes people who would otherwise think that progress is in general Islamic (as opposed to neutral or un-Islamic until proven otherwise) would slowly start to migrate in the wrong direction. Instead of "Islamization" bringing the ultra-conservative into the mainstream and convincing them that modernity is at least neutral, it has pulled more liberal conservatives in the opposite direction. In the field of Islamic finance, this is manifest in Malaysia's early "Islamization" campaign, which helped bring many ethnic Malay out of poverty and into the middle class, including financial professionals, only later to reverse course and begin to adopt more conservative and less efficient models of "Islamization" that appeal to the cash-rich GCC conservative Islamists.

The problem, I think, is that "Islamization" is operating in an environment where what is "Islam" is not a fixed target. So, as you continue to "Islamize," always staying at least one step/lag behind the frontiers of progress, new elements naturally look un-Islamic, because they coexist with what has been Islamized but were not simultaneously Islamized. So, the natural tendency is to think that things that have not already been given the label "Islamic" must be problematic for Islamization, and therefore move either from a default rule of Islamic to neutral or from a default rule of neutral to un-Islamic. Even if you speed up the pace of "Islamization" in this environment, people will therefore become skeptical much more readily, and may eventually demand "Islamization" of what you had already claimed to have been Islamized: witness the repeated "Islamizations" of the Pakistani banking system since the days of Zia ul-Haq. The incentives of clerics, who benefit from having a following, is initially to become more lenient to allow "Islamization" to take place, but then to reverse course and denounce what they had permitted: witness justice Taqi Usmani's delegitimization of 85% of sukuk, when he was widely viewed as the main legitimizer of Islamic securitization. Therefore, temporary migration of some puritans toward the mainstream financial sector maybe more than offset with eventual migration of people who used to be in the mainstream to less efficient sub economies, and it is not clear that there is much value added substantively in the entire process, because the industry is based on form-above-substance (justice Usmani was fond of giving a bait-and-switch analogy to halal meat vs regular meat, to justify the exclusive focus on procedures and indirectly justify collecting a fee for certification).

The failure of "Islamization," therefore, was built into its very raison d'être. If there was a need to "Islamize" some advances, then other advances became more suspect and more in need of "Islamization," and even things that had already been Islamized now needed more or renewed Islamization. This infinite regress favored the separatist ultraconservative elements in Islamism, and helped to shift other flavors of Islamism closer to it, achieving the exact opposite of the goal of early advocates of "Islamization." The failure of the "Islamization" program is that it pandered to more conservative elements and ended up losing its way, incoherently producing social orders that neither fit modernity nor conservatism. At one extreme, highly suspect financial practices have been "Islamized," much as one may see a girl with a headscarf but very tight jeans, the former ostensibly "Islamic finance" and the latter ostensibly "Hijab." At the other extreme, people start to denounce the use of any modern finance, Islamized or otherwise, including fiat money, and demand using gold, and conservatively-dressed women start wearing formulaic "hijabs" while those who wore it start wearing the "niqab" (veil covering the face), variations of which were abandoned in the early twentieth century, in part due to the thought of Muhammad Abduh and his follower Qasim Amin.

The net results is that over my own lifetime, which is getting eerily closer to half a century each day, I have observed this undeniable migration toward more conservative and assertive forms of Islamism. Its constant conjunction with attempts at "Islamization" struck me at first as efforts to moderate people's views, especially in social and legal areas. Now I see it as a sad reflection of George Bernard Shaw's infamous "marriage is the only solution to all the problems that it creates." I have said with amusement that Islamic finance is a case of supply creating its own demand, and that was the mark of a great entrepreneur, but that I had a visceral dislike for it when what was marketed was essentially religion. Now, I can see the bigger problem more clearly: the supply of "Islamization" kept creating its own demand in an infinite positive-feedback-loop that is clearly unsustainable.

This is still relatively the easy part, because it would be difficult enough to argue the counterfactual over the course of the past century -- had the "Islamization" efforts been replaced with education and clear thinking instead, taking the view that by default all progress is Islamic, allowing clerics to reflect back on progress after they had observed it instead of participating in this "Islamization" game of certification. It is much more difficult to argue that starting where we are now, this alternative would work and be an improvement over the status quo and the likely path forward under the status quo paradigm....

Islam as the solution in the Age of Islamism II: Failure of the "Islamization" Project

2011-11-01T11:01:00.003-05:00

Anticipating many of the issues that I have outlined, and aiming to harmonize modernity with traditional Islamic scholarship, in the hope of reconciling it thus with Islamism, the project for "Islamization of knowledge" was commonly attached to the late Ismail Al-Faruqi, but characteristic of a much larger intellectual movement in the latter part of the twentieth century. I want fundamentally not to confuse this program of "Islamization of knowledge," i.e. taking advances -- mainly in the humanities and social sciences -- and see how to reframe them in Islamic garb starting from Islamic scripture and classical scholarship, with the Abdul-Razzaq Al-Sanhuri program, which aimed to openly import western advances while applying a filter to adjust for Islamic sensibilities and injunctions (e.g. he imported the French civil code for Egypt with some minor modifications). I believe that the latter is not only more practicable, but also more defensible on Islamic grounds, although of course Islamists who adhere to a different standard of what is "Islamic" would disagree, but we can argue on common ground.

To make the distinction between the two approaches concrete, let's consider something that I have studied somewhat extensively: financial transactions, markets, and institutions. The Sanhuri program (stemming from the authentic tradition of Muhammad Abduh) would not start from the standpoint that Western banking and finance are intrinsically un-Islamic. Of course, this is shared by the "Islamization of knowledge" approach, for after all Islamic banking and finance, which "Islamize" almost every financial product and institution, albeit often incoherently and inefficiently, would not be possible if the objectives and basic methods of Western finance were deemed un-Islamic. The "Islamization of finance" industry has the explicit objective not of reaching any moral, social, or even material "Islamic" objectives, but merely to allow "pious Muslims" (I've called this "incoherent pietism") to partake in the usual Western financial practices but in an "Islamic" way.

So, both the Sanhuri and the "Islamization" approaches agree that just because something is Western does not mean that it is not Islamic or at least Islamic after small effort (i.e. Islamizable at low or moderate cost). On the other hand, the "Islamization" approach has surprising appeal with significant segments of Islamists who do consider Western finance, and even Economics as a discipline, to be "imbued with the ethos of capitalism," which they considered contrary to Islam in spirit not just in form. There has been convergence in views about Islamic finance in recent years between the majority of "Islamic Economists" who came from the traditions of Mawdudi, Baqir Al-Sadr, Khomeini, and other Islamist leaders of the mid-20th-century on the one hand, and people like myself, who came to the issue from the Sanhuri angle: We all recognize that the industry is merely an inefficient replication of what is already there, hence replicating all the disadvantages of conventional finance and adding inefficiency costs and dead weight losses (and as the medieval jurists Ibn Taymiya and Ibn Qayim pointed out, it is less harmful to have simple relatively efficient riba than complex inefficient replications thereof: Shari`a, in their view, could not forbid something and then permit something more harmful). However, those who came from the "Islamic Economics" tradition continue to view the failings of Islamic finance as temporary, and to take pride in its growth, even as they agree with criticisms of its modes and effects. "You shouldn't throw away the baby with the bathwater," one of the most prominent Islamic Economists once told me, as part of his advice to temper my criticism of the legal-arbitrage industry.

It would therefore seem that this brand of Islamism (Islamic Economics, Islamic Banking, etc.) has a better chance in winning over the more extreme forms of Islamism and shepherding Muslim societies closer to some form of harmonious modernity. I disagree, and this is the main point of the next posting. This main point of the current posting is that the "Islamization" program has failed. However, before I get to this point, I should first point out the main difference between the two main approaches: Although both approaches accept the world and its advances the way that they are, the Sanhuri approach is predicated on the view that "Western" advances (especially in law and society) are very much in harmony with "Islamic" principles (the famous Abduh saying was that he found Islam without Muslims in Paris and Muslims without Islam in Cairo), that the legal objectives of Shari`a are not materially different from the objectives of other Western legal systems. In contrast, the "Islamization" approach Western legal and social advances in a neutral or agnostic way, essentially reducing the issue to whether or not the particular institution is "Islamizable" (and as I have argued, in the field of finance, of course, everything is Islamizable if we take a contract-based approach to jurisprudence: it's a theorem).

At the other extreme, of course, there are the most difficult Islamists, who believe that the very spirit of Western socioeconomic and legal advances is fundamentally incompatible with "Islam" as they view it. It is not surprising, therefore, that the "Islamization" paradigm resonated more with this group than the Abduh/Sanhuri approach: Whatever is "Islamized" can be repackaged with or without reference to the original Western version. Al-Faruqi and others in the Islamization school were openly stating that their objective is to get the `ulama (traditional scholars) on board with modernization by rederiving modern advances -- to the extent possible -- from Islamic principles. The `ulama eventually accepted the telegraph, radio, the automobile, etc., without need for "Islamization," although there is a famous (and perhaps apocryphal story about the introduction of the telephone): The story states that some Saudi `ulama refused to introduce the telephone to the Kingdom because they feared that only demons can carry sound at such speeds, but eventually relented when Shaykh-ul-Azhar had a Sheikh recite Qur'an at one end and the Saudi `ulama heard it on the other end and accepted the argument that "demons cannot carry the Qur'an." The story is likely to be apocryphal but to display an Azhari bias against Saudi clerics as less enlightened. Even in this story, though, the phone is not "Islamized." It is a physical technology that was quickly accepted, whereas many socioeconomic and legal advances are still resisted strongly or rejected to this day, unless they are Islamized ("Islamic finance," mortgages as "rahn," some elections as a form of "shura," etc.).

It will be difficult for me to argue that the Abduh/Sanhuri program, which is very much Islamist according to my definition, can be revived and made to succeed based on its track record in dealing with Islamists at the other end of the spectrum. After all, Sanhuri was attacked viciously by rising Islamists in the mid-20th century, and his relative practical success in terms of the current legal system in Egypt still reflecting his version is strongly tempered by the continued calls from Islamists, both of the MB and Salafist types, to apply Shari`a, and the fact that the social contract that allowed this legal framework to survive was an authoritarian bargain where society at large acquiesced to political suppression of Islamists, even as the latter continued to gain social ground. It is not clear at all, therefore, that the Sanhuri paradigm, which assumes that Western (or Eastern, or any human) advances are intrinsically in harmony with Islam unless proven otherwise, can survive in an open marketplace for ideas where Islamists at the other end of the spectrum are gaining political and social ground. So, my self-imposed task in the next posting will be quite difficult.

Might one not argue, then, that perhaps the apparent middle ground, represented by the "Islamization" school, may be the better way to proceed? Advocates of "Islamic finance," for example, would argue that the industry has helped to bring many puritanical Muslims into the mainstream financial system by offering them "Islamized" products. Inefficient as the latter may be, they would argue, there are still efficiency (financial, economic, social, and security) gains by bringing these customers into the formal financial sector. Moreover, some may argue, the resulting engagement with modern society might help to modernize these Islamists who would have otherwise lived in a sub-economy (Timur Kuran's term), with social, legal, and political mindsets that continue to diverge from the evolving standards of modernity. The "Islamization" school would not be a favorite either for the Sanhuri Islamists or for the Mawdudi Islamists, but it would be somewhat acceptable to both, and therefore can get the conversation within the house of Islam going so that an "Islamic" solution to the problem of modernity may be found, along the lines that the late Al-Faruqi and current intellectual and practitioners of "Islamization" -- some of whom today come from the Sanhuri camp and some from the Mawdudi camp, as I have suggested above, showing that the "Islamization" approach has already provided a common ground for the conversation of "Islam as the solution" to continue.

As I write these sentences, I can see the argument as quite compelling, and yet if it were compelling, I would have continued to attend "Islamic finance" conferences and to write extensively on this field, which I haven't for a number of years. At an intuitive (and, dare I say, moral) level, I simply felt that this is definitely not the solution, and continued to criticize with a tone that offended participants in the industry and resulted in disinvitations from conferences, especially as some bankers and many on the "Shari`a board" circuit threatened that they would not go to conferences if I were there. Toward the end, I recall trying to be more diplomatic, but it is very clear that the substance of my criticism was the problem, as even my students were attacked by the same practitioners and Shari`a advisors at later conferences.

My deepest wound is that my late father asked my eldest brother why I was a failure, whereas he and our middle brother have been successful. My brother's answer was that I spent a number of years becoming an expert in a field and then felt morally compelled not to benefit from that expertise (and that includes not only "Islamic finance," but also finance and financial economics more generally). My father told me all of this with anger in his voice, naming in particular Sheikh Muhammad Khater, a former Grand Mufti of Egypt, who agreed to head the Faisal Bank of Egypt early version of a Shari`a board, earning millions as a result. My late father's accusation was that I was being "holier than the Pope," and not only failing to achieve success for myself and my family, but also failing to provide value to society based on the education and expertise that I had acquired. It hurt so much, and still does, because he was right, of course. I've let many people down, myself included. But here I am now trying to express in logical manner why I think that the entire "Islamization" program is not only doomed to failure in forging "an Islamic solution in the age of Islamism," but that it is contributing to the problem...

I need a break, and perhaps take time to think honestly if I do have a coherent argument to make, so the conclusion of this posting (the failure of "Islamization) should be posting II.5...

Islam as the Solution in the Age of Islamism I: Definition and Motivation

2011-10-31T10:58:00.003-05:00

First, I have to define what I mean by "Islamism." Many definitions have been given, of course, but I have to give mine for the rest of my analysis to make sense. My definition of Islamism is the view that "Islam" has something to say about every individual or collective action. This does not really allow me as much wiggle room as you might think. It is an expansive definition because different people and groups will define what constitutes "Islam" differently (some will focus on scripture -- and even then some will focus more on Qur'an than Hadith -- while others may focus on classical -- i.e. premodern scholastic -- opinions and practices, and others still may follow particular contemporary scholars or preachers). However, it is precisely because it is so expansive that it doesn't leave me a lot of wiggle room, because Islamism is thus defined by the individuals' or groups' own choice of what to make "Islamic."

Thus a leftist secularist thinker/politician like Rifaat Al-Said, who has been consistently one of the most outspoken and strongest critics of the Muslim Brotherhood (MB), would still be Islamist in this view, because he is not opposing MB by denying that "Islam" has a role to play in forming political positions and shaping other behavior. He is merely echoing what many other secularists have decried, which is that (other) "Islamists" want to exercise monopoly on what is "Islamic," i.e. in the words of Khaled Abou El Fadl, that they try to convert the authoritative texts of Islam into a source of authoritarianism by usurping Divine authority. Rifaat Al-Said wrote in his book on Hasan Al-Banna (the MB founder): that his writings on MB are built on the cornerstone view that "terrorism starts as thought الارهاب يبدأ فكرا" when a group chooses a definition of "Islam" (and therefore under my definition adopt a particular flavor of Islamism) and consider that they alone follow the true "Islam" and the "other" is by definition off the correct path. In recounting the events of the early 20th Century, he clearly likes the (undeniably Islamist) thought and modernization program of Al-Afghani and Abduh, and laments the transformation of Rachid Rida from a student of Abduh to an advocate of political Islam, whose thought thus helped to shape the thought processes of MB and modern-day salafists.

I have to admit that I generally agree with Said on this ground: I also like the thought of Abduh and the early Rachid Rida and dislike the mid-20th-century mutation. The important point here, however, is to note that even if one is arguing for getting "Islamic" discourse and political brand names out of politics, as Rifaat Al-Said clearly has been, one is forced to argue on the turf of the Islamists whom he opposes. The argument clearly cannot be settled on humanist grounds, because the Islamists with whom one disagrees would not find the basic premises compelling. Therefore, even the anti-Islamists who have a chance of engagement in the debate are forced to argue from the common grounds they have with various Islamists: Islamic scripture, scholarship, and history. Once that is the reference point, one becomes a different type of "Islamist" according to my definition, because even if the point being made through reference to the sources of "Islam" is that "Islam" does not have a specific opinion on a particular subject (e.g. in politics), one must state that "Islam" (according to their interpretation, of course) has a meta-opinion on the subject, which may very well be to leave the subject to human thought and discourse. Thus, anti-Islamists become Islamists of a different kind, by referring to "Islam" in a different way and at a different level of the discourse, but do not deny an abstract "Islam" at the center of debate. This applies equally to non-Muslims in countries that have become Islamist, including Copts, and even the Coptic Pope, in my native Egypt, who have increasingly argued from Islamic scripture and scholarship to counter the arguments of Islamists with whom they disagree.

My definition may be pleasing or unpleasing, but according to this definition, we certainly live in the age of Islamism, and therefore any solution that has a chance of implementation and/or success must by definition be viewed as "Islam." The statement that "Islam is the solution," the powerful slogan of the MB and its offshoots in various countries, thus becomes tautological under this definition of Islamism and the reality of Middle East societies. The question becomes what "Islam" is the solution. What common grounds can we find whereupon a new social contract can be found to replace the broken one?...

Islam as the Solution in the age of Islamism 0: Salafis and the Middle Way

2011-10-27T08:53:00.008-05:00

It is a well-known marketing strategy to make your ideal sales point the middle choice, because people naturally avoid making extreme decisions. So, if you want to sell, say, 12 ounces of a drink, you make the small 8 ounces and the large 16, and more people are then likely to gravitate toward that "middle choice." Something very similar is developing in my native Egypt. The ancien regime tried very hard to portray all Islamists as essentially the same -- a line that was largely bought by Western powers and groups that perceived themselves as threatened minorities, who therefore acquiesced to the authoritarian bargains of Mubarak et al. I must say that my impression is that the latter were not particularly devious in this portrayal of Islamism: Mubarak et al truly believed that all Islamists were the same, much like Turkish secularists have believed for nearly a century, and the supporters of this view in both countries to this day believe that the solution is ultra secularism.

The interesting thing is that the ascent of Salafis in my native Egypt has driven otherwise secularist minded political commentators to think of the Muslim Brotherhood as the middle choice, and hence to make their peace with it, albeit not completely. Of course, Western powers have likewise felt cautiously optimistic about the Brotherhood as a potential part of the solution to problems of the Middle East, including Secretary Clinton's comments about the Brotherhood and France's attitude toward the Tunisian-Brotherhood-offshoot Al-Nahda party, which has been the primary victor in the first post-Bin-Ali Tunisian parliamentary elections. The trend is unmistakable, and in their declaration of liberation of Libya from the Qaddhafi clan, the Libyan National Transition Council (NTC) has clearly indicated that they plan to follow a moderate Islamist agenda.

Everyone should have seen this coming. The rise of Islamism over the past century has gone through multiple phases, from the modernist salafism of Muhammad Abduh to the socio-political program of the early Muslim brotherhood, and later mixture of both with Arabian-based puritanical Islamism (I would have written Wahhabist, except that this term has become pejorative in recent years, and I wish to avoid it). Of course, "Islamist" itself has become a pejorative term, and the Muslim Brotherhood's and its regional offshoots' use of the slogan "Islam is the solution" has been interpreted as a promise of implementing Islamism in the same manner that has been destructive in Pakistan and elsewhere. Certainly, the statement of Mr. Abdel Jalil (of NTC) that singled out allowing polygamy and introducing "Islamic banks" (an oxymoron if there ever was one, based on the incentives and practices of "Islamic bankers") confirmed the fears of many that Islamists really have no concrete agenda, and will resort to identity politics (perhaps even in dress) and cosmetic legalism (as is done in the stratagem-based legal arbitrage that is today's "Islamic finance") at least to appease their Islamist supporters.

I hope to be able to blog on this on a more regular basis. After all, I gave up a lot of my credibility as an academic economist 14 years ago in order to study the nexus between Islamic teachings and economics, so I hope to have something to show for all this time. I first became interested in this issue when I spent an academic year at the International Monetary Fund working on the economies of the West Bank and Gaza, shortly after the Palestinian Authority took charge of these areas. It was the advent of Islamic banks, especially in Gaza, and the palpable rise of Islamism that convinced me that what happened in Pakistan -- the politicians' need to adopt "Islamic" policies, whatever that may be -- will soon be coming to my native Egypt and the rest of the Middle East. Of course, GCC monarchies have for some time appeased their Islamists in a variety of socio-political areas, including accommodation for "Islamic finance," but these countries are not my main concern at this time, although they will definitely have to deal with the secondary effects of the shape that Islamism takes in Egypt and elsewhere, and will therefore be active participants in trying to shape it.

The professional question for me (as an economist) is what economic strategies and policies will emerge as rising Islamism of the population is reflected in national and regional policies. At the risk of offending the many respectable scholars who have worked on "Islamic economics," I must admit that the discipline has not produced much credible or useful research. In fact, most of the researchers in this field (including at the Islamic Development Bank and elsewhere) have been from Pakistan, and the latter has had one of the most abysmal economic performances, and no clear "Islamic economic" agenda.

So, the question is what shape the "Islamic solution" can take for Egypt and her neighbors. The point that "Islam is the solution" must be taken as political reality because a century of rising Islamism, especially after the failures of alternative Arabist and Quasi-Capitalist ideologies (after the defeat of 1967 and uprisings/revolutions of 2011, respectively) have made any solution that cannot be framed Islamically dead upon arrival. Therefore, any solutions with a chance of implementation must be harmonious with the Islamist mindset, and if there is a solution, it must be framable as Islamic. But what exactly is the intersection of the various Islamist mindsets? The answer to this question would require defining what exactly constitutes Islamism (the wiki entry is surprisingly good), then reviewing some of the main thought processes of influential Islamists. Only then can we get to economic policies that might work well in a society that has adopted that mindset.... but that will take a number of posts, on which I hope to work a little bit each day...

A Potential Model for Islamic Microfinance IV: First Working Paper posted

2011-06-15T20:32:00.003-05:00

It has taken a long time to code and analyze the data. I have finally posted the first working paper (the paper is joint with Mohamed El-Komi, Dean Karlan, and Adam Osman) from the research program that I had summarized earlier here: Bank-Insured RoSCA for Microfinance: Experimental Evidence in Poor Egyptian Villages. Feedback welcome.

Revolutions -- preamble

2011-05-13T11:46:00.003-05:00

After hearing Nacht speak at the Doha forum earlier this week about the Russian revolution(s) in 1917, I started reading about it. The February revolution was quite similar to the Egyptian January 25 revolution: Spontaneous, populist, and driven mainly by outrage at how badly the Tsar and his cronies had run the Russian economy and society. It was followed by a brief period of democratic advances, but the latter vanished after the October Socialist revolution laid the ground for the Soviet Union. I do not think that an identical trend will occur in egypt, for many reasons, but it is a useful lesson that (1) revolutions are not over quickly, and may result in secondary and tertiary revolutions, and (2) revolutions may not result in implementation of the ideals or empowerment of the people who participate in them. After talking to a colleague from Mexico, he thought that the Mexican revolution may provide better lessons for Egypt, because the army there was still fully in control after the 1911 revolution, much like the Egyptian army is still very much in control now. So, I have bought two books on the Russian and Mexican revolutions, and plan to read them and see which parallels one can draw to the Egyptian case... More postings as I start to form some thoughts (and try to factor the roles that political Islam may play into the formula).

Tragedy and protection for fallible humans

2011-04-14T08:25:00.003-05:00

In the Islamic tradition, it is said that العصمة لا تكون إلا لنبي (infallibility is restricted to prophets).

As I reflect on what happened to Alaa and Gamal Mubarak, not to mention their father, I have already written that I don't think I would have withstood the temptations of corruption, and I would have rationalized them (as a colleague of mine who went through an AA program always says: you can go a day without food, but you can't go a day without rationalization).

I also reflect on people whom I considered friends when I first began observing Islamic finance, and then who became increasingly more antagonistic toward my criticism that they feared would threaten their very lucrative industry. They rationalized their behavior as useful to all those Muslims who otherwise would not have access to financial services and products, or who would have been engaged in even more forbidden financial activities than what they synthesize for them -- comparing their services to lawyers and consultants. One of them, who was academic at the time, told me that we can only fix the system from inside, but when he went inside, he quit his academic post - which gave him independence and objectivity - and became a full time consultant, eventually making arguments that I know he must know are patently false and possibly fraudulent, but then would avert my gaze and not engage me in discussion any more.

Fallible we are. Very fallible. So, for all of us who have failed in life, we must thank God as often as we can for protecting us through this failure. How tragic is the temptation of "success."

صدق ربنا تعالى: ولقد همت به و هم بها لولا أن رأى برهان ربه

That's a "Scholar"

2011-04-13T15:38:00.002-05:00

Many have written about the phenomenon of paid "Shari`ah Scholars" who are really consultants (most with degrees in fields other than Islamic Law) hired by banks and secular lawyers to arbitrage medieval jurisprudence for profit. In a nice gesture today, Shaykh-ul-Azhar Dr. Ahmad El-Tayeb has donated all the salaries that he had collected back to the Egyptian Treasury. This news item also states that he had never accepted any additional remuneration, and that "Sharia Scholar" advisors retained by Al-Azhar for various legal purposes do not receive remuneration for these services.

What Egyptian expats can do: First and foremost, stay expats

2011-04-13T09:04:00.008-05:00

I have not counted the number of invitations to join groups of Egyptian expats who want to hold conferences, committees, rallies, etc. to help our native homeland, but I am confident that it is in the dozens. This is an expected sign of the euphoria and premature optimism (I think most people who say that they are optimistic are confusing feelings of hopefulness and optimism; the latter requiring evidence to suggest sufficiently high probability of good outcomes).

The most stinging comment that I have seen came from ex-colleagues at Caltech, and pertained to Nobel Laureate Chemist Ahmed Zewail: "I guess when you think about it the next logical step up from Nobel Laureate is Pharaoh :)".

I will return to the prodigal son syndrome, which is the main point of this posting, but first I feel compelled to say something: Now that former President Mubarak and his sons Alaa and Gamal (disclaimer: we went to St. George and AUC at the same time, but I was not part of their circles), as well as many prominent former cabinet members, have been incarcerated pending further investigation, I have to say the unpopular thing -- they are as much victims of the system as villains.

I have to be honest with myself: if I were in Alaa or Gamal's position, would I have really been able to resist the temptations of corruption? I would have observed the ruling elites in all countries getting rich in similar ways. I would have been convinced that I am so brilliant that people are really paying hundreds of thousands to get my business advice and partner with me for my intelligence. How can I believe otherwise, when I know that there are so many smarter Egyptians (not to mention Gazans or any other group with limited opportunities) who are much smarter than me but never had the opportunities that I have.

Which brings me to Egyptian expats who feel that "this is their time to go back and help rebuild." Please do not take me wrong, even 16 years ago, when I was still "Egyptian" in the formal sense of holding no other citizenship, I even wrote delusional poems about the successful return of the prodigal son such as 1 and 2. But that is all these were:

"والشعراء يتبعهم الغاوون ألم تر أنهم في كل واد يهيمون وأنهم يقولون ما لا يفعلون"

(poets lead people astray; do you see not that they wander into every valley, and that they say what they do not do?).

So, let's think of the categories of expats who may return, and why they should stay expats:

1. The thing we want to avoid the most, of course, is a Hamid Karzai type. No need to focus on these people for long, because they would never be allowed by the army.

2. At the other extreme, we want to avoid the wide-eyed Utopian optimist type, who thinks that Egypt will be like Sweden within a generation. The reality is that Egypt a very poor country with extremely high levels of illiteracy. Even if you have "free" elections, votes will be bought by plutocrats and solicited by demagogues (as they are in every country, only in different forms and to different extents). Unless you're highly skilled in playing this game, it's futile -- and my apologies to advocates for Prof. Zewail or Dr. El-Baradei, but academic and UN politics are played with very different people and in very different ways; the best you can hope for them is to be frontmen for some skilled politicians, but then they will be angered by their means and goals and end up leaving voluntarily or by force.

3. In between, you get most of us: Middle-class Egyptians who had enough of an opportunity to be able to get an education and to leave for a more comfortable life elsewhere. I am not talking about those who got their degrees and spent a couple of years in practical training, but those who had actually established a career and family life elsewhere and legitimately adopted another country as their own. The guilt, as I also wrote once, is understandable, and delusions are also understandable, but look at those before us who fit that mold, went back with some wealth and expertise (at investment banks, universities, etc.): they were by and large the enablers and partners of the corruption against which the revolution rose. They thought that they were helping the country (by bringing state of the art investment banking, etc.), but of course we know what they have really accomplished.

It is best for that last category of people to keep their distance and stay expats. We have made other countries our homelands and absorbed (and occasionally contributed to) the cultures in which we live. As the Egyptian proverb goes: صاحب بالين كذاب (can't translate that, but roughly: "someone with two intentions is a liar"). If we are thinking of returning to have a greater impact, we are deluding ourselves. If we are thinking of returning to capitalize on the skills and contacts that we have accumulated, then we are just the next wave of those who led the country down its path for the last 30 years. If we are thinking of returning to retire, reminisce and get buried near our parents, that is something else altogether. If we are thinking of giving advice, then we better know what we're talking about, unlike most international "experts" on economic and social development, who never fail to drive developing countries with their eyes on the rear-view mirror (i.e. trying to imitate successful experiences of other countries that are not appropriate, causing one crisis after another). Most importantly, and interestingly, it is precisely because we are expats who have no ambitions in our native countries, but who care about these countries and their peoples, that we can have credibility -- provided that our promise not to return except to visit and possibly to retire and/or be buried is itself credible. So, let's work on this credibility.

Of course, there will be rare exceptions, and many people will think of themselves as these rare exceptions (like Lake Wobegon, where all the children are above average). The best cure is to remind oneself: There is nothing exceptional about me. There is nothing exceptional about me...

Collective action problems redux

2011-03-04T10:15:00.002-06:00

Thoughts for today's khutba and my research program for the next few years:

I am still reading and trying to figure out the factors that make religion sometimes successful in solving collective action problems and sometimes not. Two cases in point that I've been watching carefully are the perpetual demonstrations syndrome in Egypt and Tunisia on the one hand, and the perpetual building of mosques and similar institutions in Houston, which are manifestations of the same problem: Muslim/Arab countries and communities (and I consider other religious groups that share the cultural foundation, say Copts, to be integral parts of these) have for a long a time failed miserably at solving collective action problems for social, political, and economic improvement of the well being of citizens/members.

Recent success in organizing demonstrations in Tunisia and Egypt were miraculously remarkable, and although neither used (cheap) religious slogans, I cannot but see them as "religious" movements in the true sense of the world: Demanding Justice, which is the dual name of God (Justice in its abstract form = العدل, and Justice in its judicial form = الحكم). It is in this regard that the worst aspects of religion, which in fact defeat the goal of solving larger collective action problems by getting members mired in smaller (club-like, as Larry Iannaccone's brilliant but limited "economics of religion" analysis has shown) solutions to collective action problems -- through superficial sectarian and other exclusivity-inducing mechanisms.

Now that the demonstrators have succeeded, they do not know when to stop. They cannot see their way to solving an even bigger collective action problem: Now that we have dismantled these ridiculously corrupt and oppressive regimes, how do begin to build a new one. What is needed is nothing short of a new social contract. Sure, in Tahreer Square, where my alma mater was located, there seemed to emerge a new social contract for a few weeks. In the meantime, farmers were building illegally on farm lands, criminal gangs were fighting for territory and looting rights, etc. The groups that have found a tool (demonstrations) that worked for one type of collective action problem solving are tempted to assume that the same tool will work for other problems, which it won't.

This is also the problem of our Houston community (and many similar ones): We have successfully solved collective action problems for building mosques, etc. So, we keep doing more and more of that, with huge portions of our community wealth now tied up in this unproductive real estate. When we build schools, we build them to segregate the kids of the "more committed" Muslims, who also dress anachronistically, spend inordinate amounts of time in the mosque when they should care for their families, and so on (again, Iannaccone and Berman have some interesting economic analyses of why costly signals of this form -- mediocre education for one's children, and it is always mediocre at best; lost income and family time etc. -- create solidarity for the "inside group," or real citizens of the mosque as one of our local Imams once called them, in contrast to the people he called green-card Muslims, i.e. less committed).

I see little difference between these inside groups in the mosques and the inside groups in Tahreer square: They have found a hammer and now every collective action problem looks like a nail. But religion teaches a lot more than this. It teaches that there is time for this tool and time for other tools. Using one tool where the other is appropriate is deemed sinful.

Other societies have obviously worked hard at solving the larger longer term collective action problems also with mixed (albeit greater) success. I don't see any difference between the reverence for constitutions (e.g. here in the U.S.) and reverence for scripture (also here as well as elsewhere, and for many religions and denominations). Invariably, of course, these are interpretations of the words of scripture, constitutions, etc. by contemporary men (mostly men, very few women), which also degenerate into dogma and self-defeating rhetoric that creates club to solve smaller and shorter-term collective action problems at the expense of greater and longer term ones.

Political scientists have written a lot about this, including most famously Mancur Olson and Lyn Ostrom (the recent Nobel laureate in economics, who is actually a political scientist but who has worked extensively with economists and other social scientists). I have not so far found in the literature an analysis of this concept of society being trapped in a local optimum by solving the smaller shorter-term problems at the expense of the (more important) larger and longer term ones. Mancur Olson's writings seemed to get close, but not quite. I think that the (correct) definition of religion (from relegare, to bind fast, as the verse orders, quite literally, "و اعتصموا بحبل الله جميعا و لا تفرقوا", and later "و لا تكونوا كالذين تفرقوا و اختلفوا". These and many orders seem precisely to be ordering us to focus on the larger human (not even petty national) collective action problems. That is the Divine command... what it's all about.

This appears to be a very fertile field for research (and personal growth :-). Of course, what I can publish will have to be inane, spuriously quantitative (see, I have numbers and graphs, I must be smart), and obsessed with fake objectivity. However, it would also be interesting to me as I work on it, and that -- of course -- is the ultimate academic arm-chair avoidance of working toward real solutions for collective action problems!

Rating agencies (and Shari`a advising) need to be regulated by governments

2010-05-14T06:30:00.003-05:00

In an interesting development, the U.S. government will now get more involved in regulating the business of rating bonds:

The Senate approved a provision that would thrust the government into the process of determining who rates complex bond deals, in a move to end alleged conflicts of interest blamed by some for worsening the financial crisis.

Likewise, I have often argued that Shari`a advising (rating of Islamicity, albeit on a 0 or 1 scale) should be regulated by government and staffed by salaried employees. This is not an ad hominem attack on any Shari`a advisors, as many like to suggest. It is merely good business practice.

Mutuality in health care

2010-04-14T10:11:00.004-05:00

In my previous posting, I pointed to my work on mutuality and religious law. Now, here is a feature article about a Christian co-op's mutuality in health care provision. I don't understand why the article highlights the "faith" aspect so much, when this appears to be a mutual insurance scheme, not that different - say - from State Farm's. I also don't understand why the article says that health care reform is irrelevant for this. The fear is that many may abandon this mutual scheme, in which case one may be left without healthcare insurance. The new law reduces this penalty by allowing people to buy into another conventional insurance scheme if this one were to fail, so I would think that healthcare reform is in fact good for this kind of mutual health insurance. In the end, customers should also compare prices and quality of service, and it should all be for the customers' (and by inference, in the long run, for the health providers') benefit.

Mistakingly limiting 'sustainability' to 'profitability' and the consequences

2010-04-14T08:21:00.006-05:00

Unfortunately, good intentions, such as CGAP's initiatives in microfinance to help the poor, continue to focus on profitability as the main engine for sustainability of the financial institutions. In other words, non-profit mutual institutions are discouraged in favor of profitable banking practices, which invariably can turn predatory.

A recent New York Times article is a painful reminder of this fallacy of profitability being good in the arena of microfinance. My understanding of the ancient rules of usury (which predate Islam, and Islamic scripture never claimed that it introduced a new prohibition in this regard) is that the extension of credit for profit (whether through direct interest-based lending, as in conventional banking, or through credit sales and leases, as in "Islamic finance") is the essence of usury. It defeats the social insurance aspect, and easily turns profit motives into predatory incentives on the part of lenders and irresponsible spending on the part of borrowers (and, again, structuring the loan through credit sales or leases changes nothing in this regard!).

A Potential Model for Islamic Microfinance III: Proof of Concept Experiments

2010-03-06T15:24:00.003-06:00

I have been working closely with two graduate students, Mohamed El-Komi at UT-Dallas, and Adam Osman at Yale, on the first phases of testing the proposed model of microfinance with zero interest along the equilibrium path. Dean Karlan, of Yale, may become more involved in the project going forward, especially if we proceed to implementation of a field experiment and impact study -- something that he's worked on in other parts of the world.

We received funding from the Kelly Day Foundation at the James A. Baker III Institute for Public Policy, where I have recently begun to serve as a fellow, and started working late summer 2009. In Fall 2009, Mohamed, Adam, and I went to Cairo and began to assemble the local research team; and then Mohamed and Adam went with the research team and ran some pilot experiments in two villages north and south of Cairo (attempts to run pilot experiments in Manshiyat Nasser, a Cairo slum, were discouraged by the locals). In January 2010, they went back and ran extensive "experiments in the field" and we have just begun to analyze the data.

I have added Mohamed and Adam as blog authors. Over the coming days and weeks, we should be posting the model designs that we used (one Grameen-style, and one based on RoSCAs), and showing some basic data summaries and analysis. We also hope to post some of our discussions of potential implementations here. One discouraging point has been the bankers' lack of interest in microfinance (I met some high-level bankers in Egypt last summer, and their notion of microlending was L.E. 5,000 to L.E. 50,000 loans, approx. $1,000 to $10,000, on which they bragged that they make positive returns!). However, to implement the RoSCA design, we cannot simply partner with NGOs. The Post Office, which is the recipient of most micro and small deposits in the country, may be a better partner, but we'll have to wait and see.

At any rate, we shall soon begin a series of posts on the experiments, our thoughts about them, and possible next steps.

The Economist article on European mutuals

2010-01-26T10:12:00.004-06:00

This week's Economist magazine has a nice article on financial mutuals or cooperatives (where the shareholders are the same as the depositors), and their merits during financial market turmoil. In particular, they highlight the inherent risk-management benefits of not having separate shareholders on whose behalf the manager may try to take excessive risk with the depositors' money (they can only lose their capital, and the profit potential is unlimited). The article also talks about how mutuals-of-mutuals have emerged in Europe, to replace partially the need for central banks as lenders of last resort or other ways to bail out failed banks. In my earlier papers and my book on Islamic finance, I have echoed those well known arguments for the benefits of mutuality, and shown that one reading of Islamic jurisprudence is that the forbidden elements of riba are eliminated in the case of mutuals. See three articles of mine on this topic here 1, here 2, and here 3.

Justification and the four-step vicious circle of "Islamic finance"

2010-01-23T11:03:00.008-06:00

I payed attention to "Islamic banking" when it first appeared in Egypt during my college years (1979-82), then again starting in the mid 1990s, and much more vigorously starting in 1998 when I took the "Chair in Islamic Economics, Finance and Management" at Rice University. In all those years, I have observed participants in this industry go (in circular fashion) through four main steps:

Utopianism: Driven by ideological, religious, and social concerns, they seek economic and social answer in the vague financial commands of the Qur'an and Sunnah (the Qur'an does not explicitly say what the forbidden riba is, and doesn't mention gharar, the Sunnah gives some examples of forbidden riba and gharar, but not sufficiently to give unequivocal definitions thereof). We trust the "Scholars" (back in the late 70s and early 80s Egypt, that included household-name scholars such as Al-Sha`rawi, Al-Qaradawi, and most accomplished Azhari scholars).
Engagement: As consumers, practitioners, or consultants, the Utopians start to engage the industry, either directly or through closer observation.
Disenchantment: The engaged Utopians discover that the practice of Islamic banking and finance does not go beyond replicating what was already there, at ridiculously higher interest rates (for example, here in the U.S., "Islamic" auto-loan structures in the 1980s were offered at 22 to 25%, when the going market rates were below 10%.) They become disenchanted. Some disengage, but others remain engaged for one of two reasons: (i) residual Utopianism and dreams of eventually changing the industry through continued engagement (the "young industry" fallacy), or (ii) their livelihood as bankers, lawyers, consultants, etc., has become entangled with the industry, the have become used to higher incomes and living standards and recognize that they have been shut out of the conventional sector because of their "Islamic" identity.
Justification: Those still engaged in the industry pick up the hobby of themselves criticizing the industry that they have participated in creating (it started with some bankers and lawyers, but now even "Shari`a scholars" who are the second-largest financial beneficiaries after lawyers, and who legitimized the industry by leveraging religious-legal authority, including Taqi Usmani and others, have joined the fray). A new narrative emerges, about the need for a different benchmark to replace LIBOR, new structures that are closer to the "Islamic ideal," etc. Those assertions help to shape a new Utopian vision of "true Islamic finance," which revives Utopianism (if cynical) within the engaged community (serving thus as justification for their continued engagement) and attracts a new wave of Utopians, leading back to step 1.

Those, like myself, who have decided to disengage and say that the entire enterprise is incoherent, are deemed "controversial." Recently, a very smart young man was seeking my advice on getting an advanced degree in Islamic finance and joining the industry. I told him that as it stands, all justifications in step 4. notwithstanding, engagement with the industry can only lead to one of two outcomes: (i) co-option and corruption if one remains engaged and perpetually engaged through incoherent justifications, or (ii) frustration, demoralization, and eventual disengagement.

Neither is a good outcome. So, for all fresh-minted Utopians out there: Keep your distance, and keep Utopian dreams where they belong.

UNEPFI Membership: Will Islamic Finance turn to positive injunctions?

2010-01-17T08:57:00.005-06:00

Michael Gassner pointed out to me his call for institutions engaged in Islamic finance to jointhe United Nations Environment Programme's Finance Initiative. This initiative aims to"promote linkages between sustainability and financial performance."

This is consistent with my earlier call in my book on Islamic Finance that those engaged in Islamic finance should support the earlier UN initiative for financial markets knows as "who cares wins."

I have long been a critic of the Islamic finance industry focusing mainly on avoiding prohibitions, but not recognizing that prohibitions are secondary to positive injunctions:

إن الله يأمر بالعدل و الإحسان و إيتاء ذي القربى و ينهى عن الفحشاء و المنكر و البغي، يعظكم لعلكم تذكرون

"God commands justice, beautiful dealings, and generosity to one's kin, and forbids ugly dealings, blameworthy behavior, and transgression; he admonishes you, so that you may remember."

For instance, why are "Shari`a compliance" screens for stock investment simply negative in nature (avoiding certain types of stocks based on ratios that are often questionable religiously and economically, but that is another subject) and letting fund managers decide based on purely financial risk-return tradeoffs within the allowed universe of securities. It would make more sense for an "Islamic" portfolio to also balance how much good a company does in deciding how much weight to give it in an investment portfolio.

I second Michael Gassner's call, and hope that the trend toward more positive aspects in "Islamic finance" will eventually justify the name (rather than simply focusing on how to make people excessively indebted or otherwise mimic conventional financial players in ways that utilize medieval legal tricks).

Panel discussion on Al-Jazeera TV

2010-01-08T10:40:00.002-06:00

I participated in this panel discussion on Al-Jazeera TV on Tuesday. I found what the other panelists said to be outrageous: Islamic bankers do not seek profit? We have a lot to teach the West? Conspiracy theories?... how could they say this stuff with a straight face? I guess they were pandering to a particular Arabic-speaking audience rather than trying to state the truth as they see it. If that is the case, then it is a tragedy. If they truly believed what they said, then that is an even greater tragedy:

إن كنت تدري، فتلك مصيبة ... و إن كنت لا تدري، فالمصيبة أعظم

Have we learned nothing? Here come the "Islamic Credit Default Swaps"

2010-01-03T08:10:00.005-06:00

Mohammed Khnifer, Islamic Banking Senior Editor at Al-Eqtisadiah and Al-Masrifiah Islamic Banking Magazine, pointed out this new development to me.

In a recent article, it is reported that the end of the year 2009 was punctuated with 10 defaults on "Islamic Sukuk" (otherwise known as poorly designed bonds), and then suggested that the "experts" want Credit Default Swaps to protect investors against the risk of default on Sukuk!! Here's a translated excerpt:

A group of informed experts on the Islamic finance industry called for a "partnership" between Islamic takaful (insurance) industry and Sukuk, toward the end of assisting the latter in providing "protection" for investors against losing their funds that they invested in these Islamic instruments.

Those calls became louder after the recent registration of the Pakistani cement company Maple Leaf as the last company with defaults on its Rupis 8 billion Islamic bonds.

The experts suggested during their interview with "Al-Iqtisadiya" that Takaful companies should find a new insurance instrument for Sukuk, which can protect the Sukuk holders from the risk of default, by providing "partial" compensation in the case of default.

This only months after the conventional CDS industry nearly brought down the entire international financial system.

"Islamic finance" started with a suggestion that the "Islamic economics" philosophy rests on sharing in profits and losses through partnership (i.e. equity) finance. In practice, of course, the industry moved toward debt finance, where the only risk is default risk. Now, they want to insure against credit risk as well, which is of course possible, but defeats the entire purpose.

You see, risk -- like matter -- can neither be created nor destroyed. Sharing in profits and losses provides for continuous risk sharing at moderate magnitudes. Debt financing provides for less frequent but larger losses in cases of default. Debt financing together with credit default swaps provides for very infrequent but catastrophic systemic collapse, which is very unlikely at any point in time, but highly likely to occur sometime within an extended period.

So, the most recent crisis has not taught the participants and experts of today's "Islamic finance" much (I use the quotation marks because they do Islam a great disservice by using it as a brandname to market their grossly inferior and poorly construed products for a profit). Will the customers at least finally see that this is not an infant industry that needs to grow?

Pain, not gloating

2009-12-04T07:39:00.007-06:00

A number of people emailed to ask me why I haven't written blog entries in recent months.

The main reason is that most of the trouble that I have warned against in recent years, including about the faulty legal structures of so called sukuk as well as other debt instruments marketed as "Islamic" (see my 2006 book Islamic Finance: Law, Economics, and Practice, Chapter 6 on faulty sukuk structures), and the speculative bubbles that were again plaguing the Middle East (my 2009 book with Amy Jaffe -- an expert on energy markets -- Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold), have come to pass. Contrary to what those who criticized me for my gloomy predictions may think, I had wished all along that I was wrong. When bad things happen, sincere people do not gloat: they feel too much pain to do that.

Therefore, I do not want to write to say "I told you so." I am, instead, starting to work on my next book project on Middle-East economic development. To the extent that the region's limited absorptive capacities have contributed to local bubbles and then global credit bubbles (1980s and again this decade), enhancing the region's real (i.e. industrial) growth prospects is in the region's as well as the world's long-term best interest. However, national-level industrial plans (as in Saudi Arabia, for instance) are too limited in scope.

My argument at recent conferences has been that we need an industrial plan at the regional level. Unfortunately, this type of plan would run contrary to the short-term profit motives that have fueled speculative bubbles, of which the debt culture that has been marketed as "Islamic finance," as well as closely-related debt-driven construction booms, are but two examples. Commissions that short-term rent seekers can collect in those two bubble industries prevent the region from focusing on the task ahead -- the last opportunity to use the region's mineral wealth as an engine for long-term industrialization.

Microfinance experience vs. credit union -- Grameen I

2009-08-18T09:15:00.005-05:00

I am reading a good book that gives details on the institutional history, structure, and experience of Grameen and Grameen II. The book is Asif Dowla and Dipal Barua's The Poor Always Pay Back: The Grameen II Story, Kumarian Press, 2006. A number of interesting thoughts came to my mind, especially in relation to my thought of using RoSCA-JAK hybrid structures to generate credit unions organically using the existing institutions in Egypt. The notes in this post relate to Chapter 2 of Dowla and Barua's book, which focused on the original Grameen model and its evolution. Quotations from the book will be in quotation marks, followed by my comments/thoughts:

Interestingly, Grameen itself has a mutual structure, with all members forced to save with the bank, and part of those savings are shares in the bank itself (on which, at least as of 2005, the shareholders did not receive dividends; they received 8.5% interest on their deposits). This begs the question why Grameen was not set up at the outset as a non-profit credit union (more on that later).
One potential answer is the following: "A major reason for the prior failure of credit cooperatives in Bangladesh was that the groups were too big and consisted of people with varied economic backgrounds... more affluent members captured the organization" (p.18). This suggests, perhaps, that those cooperatives were structured more like mutual savings banks (one share = one vote) rather than credit unions, which are much more democratic in nature (one shareholder = one vote).
Grameen used presaving to qualify for loans, which I did not know from reading secondary and tertiary sources: "To receive a loan, borrowers were required to save ... [in the form of] deposit[ing] a fixed amount weekly... [in addition to] a 5% deduction from the loan... [as a] group tax. The compulsory weekly savings and loan deductions were used to create a group fund, and the borrowers were paid 8.5% on their deposits." (p.19) This is somewhat reminiscent of JAK structure, except that interest was paid on deposits and charged on loans (mostly at 20% for general loans).
Branches borrowed from the main office at 12% and lent at 20%, eventually covering their costs and making a profit after three to four years of operation. (p.30) Why is sustainability always associated with profitability? A nonprofit credit union can be more sustainable than a profit-maximizing bank.
The structure is standard banking practice: the poor had to save and deposit with the bank, earning 8.5% on deposits and 0% on shares; then the bank lends funds at 12%, and the branches lend them on to the poor at 20%. The miracle of Grameen is that it was very successful in growing, mainly by providing credit to those whom the banks did not consider creditworthy or sufficiently lucrative. However, that is not nearly sufficient to suggest Grameen over a credit-union structure, where all deposits were shares earning dividends, and where loans are made at the lowest possible interest rate to avoid losses (without necessarily resorting to the weak argument that at least the interest rate is lower than what loan sharks would charge).

Microcredit and usury

2009-08-13T13:04:00.006-05:00

Today's Wall Street Journal online has an interesting article about a microloan credit bubble. Is this not the very definition of usury:

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more.
"I took from one bank to pay the previous one. And I did it again," says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.
At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance "increased our desires for things we didn't have," Ms. Taj says. "We all have dreams."
Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That's equal to about a fourth of her annual income.

As with every other type of credit, when it can be extended for profit, the incentive to overfinancialize can be impossible to overcome. I have made the argument more than once, in part based on works in classical Islamic jurisprudence and legal theory, that profiting from the act of credit extension is the essence of forbidden usury/riba. The approach through non-profit mutuals, credit-union style, is vastly superior, and agrees with the spirit of early experiments in Islamic finance in Egypt and the Subcontinent.

Unfortunately, people's good intentions have been subverted in Islamic finance toward serving the interest of profit-maximizing multinational banks that have, de facto, rewritten modern Islamic jurisprudence to maximize their profitable arbitrage opportunities. Likewise, this article shows how the very essence of microfinance has been subverted by rent seekers to enrich themselves at the expense of the poor debtors (who may benefit briefly, but will ultimately suffer when the bubble bursts).

FT Op-Ed: Debt is capitalism’s dirty little secret

2009-06-30T16:08:00.002-05:00

Ben Funnell wrote a great piece in Financial Times:

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.
The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.
Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it.

Interview with Ash-Sharq Al-Awsat

2009-05-26T08:14:00.001-05:00

This interview on Islamic finance is buried many links deep on the website.

Islam in America and the Clash of Exceptionalisms

2009-05-24T09:42:00.005-05:00

This is the summary of a khutba (sermon) that I gave at ISGH Main Center on May 8, 2009. A number of people asked me to write it down, so here is a brief summary.

One of the traditional verses to start a sermon is [59:18]:

يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَلْتَنْظُرْ نَفْسٌ مَا قَدَّمَتْ لِغَدٍ وَاتَّقُوا اللَّهَ إِنَّ اللَّهَ خَبِيرٌ بِمَا تَعْمَلُونَ

The traditional translation is: "O ye who believe! Fear Allah, and let every soul look to what (provision) he has sent forth for the morrow. Yea, fear Allah: for Allah is well-acquainted with (all) that ye do." I would not limit the collective order اتَّقُوا, which is repeated twice in the plural, I would not limit it to "fear", because the notion of taqwa encompasses God-consciousness, God-wariness, and other concepts besides fear.

Our focus for today is on the following: the verse does not say "let every soul" or "let each soul" (و لتنظر كل نفس) but rather "let a soul" (و لتنظر نفس), focusing on the community of the faithful (addressed: يَا أَيُّهَا الَّذِينَ آمَنُوا) as a single organism. In other words, although we are accountable individually, we are also accountable for the future (مَا قَدَّمَتْ لِغَدٍ) that the community as a single organism forges for itself.

This notion of humanity as a single organism is also prevalent in the Qur'an. Verses [4:1], [6:98], [7:189], and [39:6] all proclaim that all mankind were created from a single soul, e.g. [4:1], another traditional introductory verse for sermons, states:

يَا أَيُّهَا النَّاسُ اتَّقُوا رَبَّكُمُ الَّذِي خَلَقَكُمْ مِنْ نَفْسٍ وَاحِدَةٍ وَخَلَقَ مِنْهَا زَوْجَهَا وَبَثَّ مِنْهُمَا رِجَالا كَثِيرًا وَنِسَاءً وَاتَّقُوا اللَّهَ الَّذِي تَسَاءَلُونَ بِهِ وَالأَرْحَامَ إِنَّ اللَّهَ كَانَ عَلَيْكُمْ رَقِيبًا

"O mankind, be wary of your Lord who created you from a single soul and created its spouse therefrom, and put forth from the pair many men and women, so be wary of God whom you ask for favors and be wary of your ties of kinship, verily God is ever watchful over you."

Therefore, depending on the context, one may think of all mankind as a single organism (created from a single soul), think of any given community as a single organism, and so on. Within the context of the community of faith, the Prophet (p) said (as narrated in Muslim):

مثل المؤمنين في توادهم وتراحمهم وتعاطفهم مثل الجسد إذا ‏ ‏اشتكى ‏ ‏منه عضو تداعى له سائر الجسد بالسهر والحمى

"The example of the faithful in their mutual empathy, mercy, and sympathy, is like the [single] body, when one organ complains [from injury] the rest of the organs empathize through sleeplessness and fever."

Let's take this metaphor of the body to address the recent affair of Houstonian Zubair Bouchikhi. He has been recently released on bond, but for many months, his case of incarceration was discussed in our mosques and gatherings. It is normal to feel and share the pain that he and his family have suffered, just as the Prophetic Saying suggests parts of the body should respond to one another with empathy.

Taking the metaphor of the single body to the next level, let us ask: how did the rest of the body (our community) lead this part of the community (Zubair) to incarceration in the first place? It is easy to blame overzealous informants, whose numbers in our mosques have grown exponentially in recent years as part of this lucrative growth industry of xenophobia toward Islam and Muslims. We must also blame ourselves, however, for not understanding our home (America) and the difficult transformations that it has been undergoing in recent decades.

I touched some raw nerves a few years ago when I discussed this very issue. The anger that some of you felt at that time was a natural coping mechanism to being exposed to the fact that our story as Muslims in America (which we are authoring as we play the lead roles) is different from the story that many of us think that we're living. It is safer for me to do what I have done since then, which is to focus on mainstream Islamic teaching on the importance of perseverance, God-wariness, thankfulness for blessings, etc., which would not push anyone in the congregation out of their comfort zone, and you would all leave happy.

However, this topic of American Islam is too important to leave unspoken. If there is to be an Islam in America 100 years from now, it must be an American Islam that fits comfortably in the fabric of American society. This requires abandoning the rhetoric that there is only one Islam, which is patently false, since Islam in Malaysia is different from Islam in Indonesia, Islam in Pakistan, in Saudi Arabia, in Egypt, etc. Each community evolved within its own historical and cultural context, and although they share some common factors, they are distinctly different. I will try to push you a bit out of your comfort zone of the Orthodoxy narrative, which we feel compelled to profess on the pulpit, in order to start the community thinking about those problems. I hope not to push you too far out of your comfort zone at this time.

First, we must understand our place in American history. As Abraham Lincoln pointed out sarcastically in his debate with Stephen Douglas in 1858, the founding fathers meant that "all [white Protestant] men were created equal." This was, and continues to be, an integral part of American exceptionalism. Of course, this exceptionalism has been fading over time: We elected a Catholic President in 1960 and a black President in 2008.

It is interesting that this transformation (the fading of American white Protestant exceptionalism), which accelerated with the civil rights movements, coincided in 1965 with removal of visa quotas and the ensuing latest (and perhaps final) wave of Muslim immigrants. Earlier waves (Muslim Moorish sailors on the Columbus crew, West-African slaves, 1920s auto workers brought from Lebanon and Palestine to work in Ford factories, etc.) were different. Those of us who came in the 1960s onwards were graduate students and professionals, who built Muslim Student Associations, Islamic organizations, mosques, etc.

Because American exceptionalism was beginning to fade when we arrived, we did not feel compelled, as Jewish immigrants felt in the 19th Century, to create a reform movement that would integrate our Islam with the dominant Protestant Christianity that defined America in her earlier phases. We were given space to practice our religion as we had in our native countries, and we were even given space to profess the Orthodoxy of Islamic exceptionalism, which sustained some of the more myopic among us into thinking that Islam can survive in America without becoming an "American Islam."

The mass murders of September 11, 2001 may have been a catalytic transformative event, by bringing more law enforcement and intelligence informants into our mosques, but our problems - and the problem of Zubair - cannot be attributed to 9/11. After all, the mass murderers of 9/11 came from somewhere else, they were not home grown. European experiences suggested that home grown problems should also be a concern, but I would suggest that Zubair's problem has a different origin.

Zubair's problem was the following: Most of us do not live the Orthodoxy, nor do we profess it. We all have family members who are the equivalent of Jewish reformed, taking the occasional drink, maybe praying only on festivals and other occasions, etc. Most of us in the mosque are probably conservative: making all prayers, fasting, etc., but not adhering totally to the Orthodoxy as professed, say, in Saudi Arabia, and generally doubtful of the Islamist myth of the "ideal Islamic society". Of course, we also have our Orthodox, who do not wish to mix with the other sex or with other faiths, but they are a tiny minority, mostly composed of non-violent puritans (ultra Orthodox in the Jewish taxonomy).

However, most of the conservative who come to the mosque regularly want the comfort of hearing the Orthodoxy professed from the pulpit. They lionized those who professed that Orthodoxy, albeit alien to their daily lives both temporally and spatially: The Orthodoxy does not represent who we are, and it does not even represent who the Saudis are -- it belongs to a mythical place in time and space. It is accommodated in our native societies as harmless narrative, but it scared the informants who are increasingly frequenting our mosques and who were not familiar with that narrative. They did not think that this rhetoric is harmless (and maybe for good reason, given the European and more recent American experiences of home-grown cells). They found it quite alarming. The parts of our community that lionized the profession of the Islamist exceptionalist Orthodoxy by Zubair and others is primarily responsible for his predicament.

When America listened and heard our profession of the Orthodoxy of Islamic exceptionalism, this awakened the worst and ugliest of America, the part that America had worked hard for two centuries to overcome: Islamic exceptionalism clashed with and awakened American exceptionalism. America has grown since the 1960s to accept diversity, until part of this diverse mosaic began to profess its own (transnational) exceptionalism, and this made it more difficult to envision Muslim Americans as an acceptable part of the American mosaic.

I promised not to push you any further away from the comfort zone of listening to the familiar Orthodoxy: familiar because we've heard it professed from our pulpits for decades, albeit alien to who we really are. Therefore, I will stop here. However, I beg you, for the sake of my grandchildren and yours, who are and will be fully American and Muslim. They are not only Muslim Americans, but also American Muslims, in the sense that they are culturally and politically different from Muslims native or immigrant to other parts of the world. Let's drop the anachronistic and alien Orthodox rhetoric, and replace it with a narrative that is consistent with who we are as American Muslims. This is the only way to have an Islam in America two generations from now: It has to become (institutionally) an American Islam that defies Islamic exceptionalism even as it defies American exceptionalism.

Parable of the Growth Tragedy

2009-05-03T08:46:00.004-05:00

Everyone, from IMF officials to G20 leaders to the rest of the world, are obsessed with restarting economic growth: It is the only way out of poverty, we are told. It is the only way that we can be happy, they imply.

[Postscript: thanks to Michael Gassner for pointing me to the original reference for this story, authored by Heinrich Böll in 1963.]

This reminded me of a story that my professor in economic development told us nearly 30 years ago (I think that it was Galal Amin, but I am not sure; it does sound like him, though). The story goes as follows (with some license due to memory deficiencies and the desire to express some thoughts):

A man lived alone on his island. Every morning, he went out of his hut, jumped into the water, caught two fish, and then sat on the shore cooking and then eating them.

An entrepreneur watched the man for a while. Then, he approached the man, and said: "why don't you give me one of your two fish." The man said: "but I like to eat two fish, why should I give you one." The entrepreneur said: "if you give me one fish, I'll give you some of this green paper." The man said: "but I don't eat green paper, I only eat fish."

The entrepreneur said: "you don't understand: you work harder to catch 3 fish and give me one, then you sell me that extra fish and get some green paper, once you have accumulated enough green paper you can give it to me, and I will give you a fishing rod." The man said: "but I don't need a fishing rod, I can't eat it, and I can catch all the fish that I need without it."

The entrepreneur said: "but with a fishing rod, you can catch four fish with less work." The man said: "but I only eat two." The entrepreneur said: "So, you eat two and give me two, so that I can give you double the amount of green paper." The man said: "we've already been over this -- I don't eat green paper, I only eat fish." The entrepreneur said: "you're really slow -- when you've accumulated enough green paper, you can give them to me, and I'll give you a fishing boat."

The man said: "but I don't eat boats, I eat fish." The entrepreneur said: "with a boat, you will catch 8 fish a day with even less work." The main said: "but I only eat two." The entrepreneur said: "so, you eat two and give me six so that I may give you more green paper, and before you ask me any further, you will soon have enough green paper to have a fleet of fishing boats, and you can eat as much as you want without doing any work and just keep getting more green paper."

The man said: "maybe I am the slow one, but let me ask you this: would I not then be obsessed with useless green paper, lazy, fat, and possibly exploitative of my fishermen?" Then he added: "and with all those fishing boats, do I not run the risk of overfishing the sea to the point that we all starve in the long run?" In the meantime, "I am happy now, catching my two fish, staying fit, and having time for other things."

The entrepreneur left, thinking to himself: "I'll find somebody else who sees the brilliance of my idea, and you will someday work on one of his boats just to survive, as there will be no easy-to-catch fish readily available near the shore."

Crooks in the name of Islam

2009-04-12T07:46:00.002-05:00

As I was thinking of a good name for the RoSCA management and insurance scheme that I wanted to propose for Islamic microfinance, I thought of the name بنك القرية (the village bank). I was extremely depressed when I googled that term, and ran across this article about embezzlement of funds. So, I stopped writing this string of posts. Then, yesterday, I was watching an Egyptian television show on Dream Channel, which covered another wave of شركات توظيف الأموال (fund mobilization companies, similar to the ones that were popular in the 1980s when real interest rates in Egypt became significantly negative). The show discussed a recent case with the wrinkle that marketing was done by the son of the Egyptian Minister of Economic Growth. We all know about the pyramid schemes in the 1980s under the same banner of "Islamic finance".

What is it about this industry that invites snake oil salesmen in religious garb?

Maybe it was a mistake even to contemplate doing research in this field. One should stay away from the snake oil salesmen lest one's reputation and religion be compromised.

A Potential Model for Islamic Microfinance II: Resisting The Banking Temptation

2009-03-29T08:05:00.004-05:00

When developing an Islamic financial model, the temptation is very strong to try to mimic what bankers already know. Indeed, that has been the history of Islamic banking and finance: start with the conventional practice that you forbid but want to mimic (e.g. an interest-bearing loan), break it down into its pieces (e.g. money now from A to B, more money later from B to A), and then reconstruct the pieces with some degrees of separation (e.g. goods sold for money now from C to A, goods sold on credit for more money later from A to B, and goods sold for money now from B to C -- this is tawarruq if the bank conducts all three transactions, or commodity murabaha if the bank only does the first two pieces and leaves it up to B to make the spot sale to C or another party D). This is the silly model marketed variously as commodity murabaha or tawarruq (including red arrows formally):

A comment to the previous post mentioned the practice of "chit funds" in the Indian-Pakistani subcontinent, wherein participants in a RoSCA who have not yet collected the pot bid for the pot at each stage of the cycle. This adds an explicit interest rate (discount pricing, similar to the way Treasury Bills are sold) to the implicit one imposed only by the order of collection.

There are many other ways that one can explicitly add interest rates to the basic structure of a balanced RoSCA:

Later rounds of the RoSCA, approved by jurists, as described in the previous posting, may be for larger pots. This gets around the problem of introducing interest payments within a single RoSCA cycle -- which is the focus both of commercial "chit funds" and much of the Economics literature (e.g. Besley, Coate, and Loury, American Economic Review, 2003). As I shall discuss below, I think that this focus on a single cycle of the RoSCA misses the main significance of investment in social capital: one is compelled to participate (as a later recipient) in a RoSCA when one is asked. Social capital is the availability of a pool of people willing to lend you at zero interest at some/any point in the future. One should focus on the repeated game rather than one stage.
Participation in one or more RoSCA has been shown to increase with reported religiosity, as shown in Indonesias' participation in one or more arisan using probit and ordered probit estimation by Sowmya Varadharajan. This is very useful because an individual who cannot in one period fulfill their obligation in one RoSCA may start another of which they are the first recipient to meet liquidity problems. In other words, the social capital invested in one's circle of friends/family/... provides guaranty against default and dissolution of earlier RoSCAs. This can easily be used to manufacture banking products through staggered overlapping RoSCAs: the second recipient of the first RoSCA is simultaneously the first recipient of the second RoSCA, the third recipient is the first recipient of the third, and so on. This way, later recipients of the pot from earlier RoSCAs can receive explicit interest for the loans that they extended by receiving an interest free loan of equal or larger size. It would be very easy to mimic any amortization table using such structures (a simple spreadsheet would do).
Unfortunately, the latter possibility makes these structures vulnerable to the creation of pyramid schemes. Indeed, in the different but related JAK system, it appears that a pyramid scheme did develop in the earlier experiment before the bank was licensed and regulated. There is an inherent pyramid scheme in every fractional reserve system (otherwise, what is the banking multiplier other than a pyramid scheme), and we have seen ample proof over the past few months to illustrate that our entire financial system is one gargantuan-sized pyramid scheme (as Krugman called it, the decade at Bernie's). Of course, one has to be particularly careful not to build pyramid schemes in the name of Islamic finance, especially given recent decades' experiences in Egypt, Albania, and other countries (in addition to numerous unfortunate web-based pyramid schemes in Malaysia and elsewhere). However, that is a regulatory concern that extends well beyond the specific problem with which we are currently concerned.

So, it is clear that we can deform RoSCAs the way that Islamic finance lawyers and consultants have subverted classical Islamic contracts (e.g. structuring loans cynically through the trust sale known as murabaha, which was simply negotiation of a profit margin instead of the final price, trusting the seller to reveal their cost -- i.e. negotiating markup over invoice, without any credit sale component). However, this would defeat the purpose of trying to reboot Islamic finance.

The idea is not to have as one's goal replication of the existing conventional finance. Indeed, my argument has been that if we can replicate a conventional practice, then we should use that replication as a form of juristic identification (تكييف فقهي), for example of mortgages, to permit the more efficient conventional practice in such cases. In cases where we or our target audience find a conventional practice to be forbidden Islamically, the objective should be to take an existing practice that is generally accepted by the Muslim public, and (credibly) approved by religious scholars who issued their opinions independently from institutions that make profits based on their religious opinions, and then to see if we can make the practice (e.g. RoSCAs) more efficient. In this quest, we should keep the structures as simple as possible, in order to avoid confusing religious scholars or potential customers.

My proposal (to discuss in the next post) is to organize the leveraging of social capital inherent in RoSCAs using a hybrid of the mutual banking structure of JAK (which is conducive to development into a credit union model) and the theory of takaful (literally: mutual cooperation, but the term is used for non-commutative forms of insurance marketed by Islamic finance providers, albeit not structured properly as mutual insurance).

A Potential Model for Islamic Microfinance I.5: RoSCA permissibility

2009-03-28T17:52:00.003-05:00

In my previous posting, I referred to this article for a summary of juristic opinions in Saudi Arabia on the permissibility of Rotating Savings and Credit Associations known as gam`iya or jam`iya in most Arab countries. Here's a translation of this article:

Workers' Cooperative (جمعيات الموظفين)

Among the popular financial dealings between people is that known as "workers' cooperative." There are three main forms of such cooperatives as explained by Associate Professor Abdullah bin Abdulaziz Al-Jibrin in the Teachers' College in Riyadh:

A group of people agree each to pay the same amount each month. At prespecified periods, they take turns collecting the entire pot. A full round is finished when each member has collected the pot once. At each step, the payments are equal, and the pot is of the same size. Thus, everyone pays the same and collects the same as everyone else. The cooperative may continue for two or more rounds if all parties wish it. Most often, the "banker" of the cooperative collects first followed by the next person to join the cooperative. Sometimes, a lottery determines who collects if all parties to the cooperative were equal. At other times, the one most in need collects first.
...
Another variation would require that two or more rounds must be completed, with the order of collection changing from round to round so that the first borrower in the first round would be the final collector in the second, and so on.
... This is an old practice that has been addressed by classical scholars, including Abu Zar`a Al-Razi, who was one of the leading narrators of Prophetic Traditions, and he indicated that it is permissible, as stated by Dr. Khalid Al-Mashqih, a Saudi scholar.

Scholars' Rulings on the Practice

... Contemporary jurists have issued two opposite opinions:
One group of scholars forbid such cooperatives. This group includes Sh. Abdulaziz Al Sheikh the Mufti of the Kingdom of Saudi Arabia, Sh. Saleh Al-Fawzan, a Saudi scholar, and some members of the Saudi Council of Major Scholars
The majority (جمهور العلماء) opinion among contemporary scholars is permissibility of this practice. This was the opinion of the late Sh. Bin Baz, the late Sh. bin `Uthaymin, Sh. Muhammad Salih Al-Munajjid, Sh. ibn Jibrin, Dr. Abdulla Al-Faqih, and other scholars, including the majority of the Saudi Council of Major Scholars who thus adopted this majority opinion as its official position in opinion #164 dated 26/2/1410 H, during the 34th round presided upon by the late Sh. Abdulaziz bin Baz...
Grounds for disagreement

The reason for differences in opinion regarding this practice is how it is classified juristically. Some viewed it as a loan that is beneficial to the lender, and thus forbade it, and others saw it otherwise and permitted it.

The reason that some saw it as a beneficial loan is that participants extend a loan with a stipulated condition of another later loan, which is beneficial. Thus, those who adopted this position cited the Prophetic Traditions: "every loan that is beneficial to the lender is [forbidden] riba" and "if one of you makes a loan and then receives a gift or a favor to ride the borrower's animal, then he should neither ride nor accept the gift, unless such courtesy had occurred before" (reported by Ibn Majah).

Those who permitted the practice argued that the benefit that accrues to the lender does not result from any financial loss to the borrower. On the contrary, they argued, the benefits were mutual and virtually equal. Thus, both the lender and the borrower are beneficiaries, without any harm imposed on either party or any benefit at the expense of the other. In this regard, the benefit that is forbidden in loans is the type that accrues only to the lender. However, mutually beneficial loans that benefit both lender and borrower are permissible...

Those who permitted the practice also argued that the default ruling for financial transactions is permissibility. Therefore, prohibition requires proof, and there was no valid proof for prohibition in this case. On the contrary, they argued, this is classified under mutual assistance, good charity, and assistance of fellow Muslims.

In addition, the "proof" of prohibition is based on the Tradition "every beneficial loan is [forbidden] riba", which is a weak tradition with faulty chain of narration. The scholar of Tradition ibn Hajar said that its chain of narration is weak. In this regard, the weak tradition was admittedly accepted as a juristic rule, but not every benefit in a loan is deemed forbidden. The other tradition ostensibly presented as proof for forbidding the practice is categofically invalid, as Al-Haythami said in Al-Zawa'id: "it contains `Utba ibn Hamid Al-Dabi, whose narrations are rejected by Ahmad and Abu Hatim.

Therefore, all proofs of prohibition are weak. In contrast, the proofs of the majority who permitted the practice is much stronger...

In this regard, the great scholar ibn Taymiya listed examples of permissible mutual benefit when he said: "There is no harm for a farmer to say to another: `help me to do my work and I will help you to do yours; you work with me today, and I work with you tomorrow'."

In summary, "financial cooperatives" (الجمعيات المالية) are permissible Islamically, and it is best to use collateral or guaranty (ضمانات) for participation, to minimize disputes, and to document the mutual debts for all participants in a manner that guarantees each party's rights.
(My emphasis at the end, because this is rarely done in a systematic way: which is the opportunity for microfinancial improvement)

The Egyptian Dar Al-Ifta (opinion #5568) went further by arguing that such mutually useful practices are not only permissible, but commendable because mutual cooperation is one of the best religious works.

A Potential Model for Islamic Microfinance I: Introduction

2009-03-28T08:49:00.009-05:00

I am embarking on a potential research program with established researchers in developing-country microfinance experiments (the research team of Dean Karlan). I am not sure if this research program will take off the ground (law enforcement logistics of doing anything in majority Muslim countries are often difficult). I gave a couple of presentations on the proposed structure, including in Abu Dhabi, hoping that somebody from ADIB would be there to give us feedback and possibly to facilitate the experimental study, but had no luck.

Part of my thinking was motivated by a senior thesis on which Mubeen Khumawala, a student at neighboring University of Houston, asked me to serve as external reader. I had known most of the details, but was struck by the sheer magnitudes:

Approximately 528 million poor (below $2/day) Muslims in five countries: Indonesia, Bangladesh, Pakistan, Nigeria, and Egypt
Approximately another 100 million poor Muslims in India
Incredibly high degrees of financial exclusion of Muslims in OIC countries and India (67-80% of Muslims have minimal or no contact with the formal banking sector)
A recent Consultative Group to Assist the Poor (CGAP) study by Karim, Tarazi and Reille (2008) reports results suggesting that large numbers of poor Muslims in various countries reject all forms of loans, including Grameen-style microloans, on religious grounds
"Islamic microfinance" using the same ridiculous and insulting (sorry, I couldn't resist taking another shot at the nonsense that is marketed in the name of Islam) 1970s-style murabaha property flipping and other inefficient structures has failed miserably, keeping this subsector to 1% of overall microfinance even though Bangladesh, the epicenter of microfinance, is obviously mostly Muslim. Apparently, the poor illiterate Muslim majorities want something more than the cosmetic and expensive "Islamic" brand name

I have spent far too long arguing with highly-paid bankers, lawyers, and Islamic banking experts regarding the permissibility of conventional mortgages, and suggesting to their potential customers that their portrayal of Islamic jurisprudence is incoherent (e.g. what constitutes a loan as qard and what does not). With mostly illiterate poor populations, that is of course a lost cause, and the highly paid bankers, etc. have -- so far -- made it clear through their actions that they have no interest except for public relations purposes.

The structure that I proposed is a hybrid between the interest-free model of the Scandinavian JAK bank and the well known Rotating Savings and Credit Association (RoSCA) models that are popular in all Islamic societies (as well as non-Islamic developing countries). This model is known in the Egypt, where I grew up, and the rest of the Arab world as gam`iya (financial cooperative). It is a practice that the majority of traditional jurists, including the late Bin Baz have approved.

The need for a hybrid of the two interest-free models follows from shortcomings of each:

The JAK model is very much focused on mortgage financing, where member loans are secured by the properties financed. (i) This makes it applicable, for example, as an alternative structure for North American or other countries' mortgage markets, but not for the microfinance sector. (ii) Also, the JAK model lacks the ability to utilize social capital through peer-monitoring, which is indigenous to RoSCA structures and successfully adapted by Dr. Yunus in his group-lending Grameen model.
The RoSCA model suffers from (i) fragility, because one person's withdrawal would ruin the finance facility, (ii) symmetry of contributions to the pot, which makes it difficult for financing smaller consumer and larger business microloans simultaneously, (iii) does not have the flexibility to provide equity positions and/or return on savings for older/richer participants who do not need to receive the pot but would like to participate and receive a return, and (iv) is not conducive to growth and institutional development into bank or credit union structures.

I plan to summarize my proposed hybrid structure in the next posting.

Rebooting Islamic Finance: It's Time

2009-03-28T08:40:00.002-05:00

I have been very critical of Islamic finance as it has evolved since the 1970s: an inefficient part of the international financial system that served no purpose except line the pockets of lawyers and experts. Now that the tools of structured finance have been proven to be as much a disaster as others and I had warned, perhaps participants in this industry - many of whom are sincere, I am sure - will hopefully abandon their response to my critiques: "what is wrong with SPVs, that is how all finance is done with success."

Perhaps now is the time to switch from negative criticism to positive suggestions of how to do things differently.

This is not an area where I believe in keeping ideas to oneself until one publishes them or makes some money in consulting fees for proprietary structures. Also, it is an area where open discourse may help to improve upon proposals...

So, here we go, starting with possible innovations in microfinance structures that I hope to start investigating experimentally this summer: و على الله قصد السبيل

Substance over form, finally!

2009-03-26T11:15:00.002-05:00

Following early statements by Gordon Brown on the need for proper financial regulation, Secretary Geithner has finally decided that economic substance should supersede form in financial regulation

To that end, Mr. Geithner said: “Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take,” Mr. Geithner said. “We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.”

His full statement is available here.

Now, if only an Islamic jurist would say the same... Oh, wait a second, they have been saying that for centuries, including ibn Qayim in I`lam al-Muwaqi`in and the Ottoman Empire's jurists in Majallat al-Ahkam al-`Adliyya. The problem is not about rhetoric, but practice and implementation. I hope for everyone's sake that "substance above form" will become the practice in all financial circles.

More on rating agencies and sukuk

2008-10-22T10:59:00.002-05:00

During the boom years, many were cheering the absurdly mispriced and risky sukuk issuances, and the rating agencies who approved them. I have listed a number of the problems with sukuk structures in my book and elsewhere. Now, it has become clear that those S&P and Moody's were simply engaged in a race to the bottom:

Oct. 22 (Bloomberg) -- Former executives from Standard & Poor's and Moody's Investors Service told lawmakers today that credit raters relied on outdated models in a ``race to the bottom'' to maximize profits.
Jerome Fons, a former managing director of credit policy at New York-based Moody's, told the House Oversight and Government Reform Committee today that originators of structured securities ``typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.''
Representative Henry Waxman, the committee chairman, said that the recent history of the credit rating companies ``is a story of colossal failure.'' ``The result is that our entire financial system is now at risk,'' Waxman said.

Thank you, Secretary Powell

2008-10-19T11:27:00.004-05:00

Finally, a man of the stature of former Secretary of State Colin Powell has said it:

Mr. Powell mentioned Mr. Khan’s death to underscore why he was deeply troubled by Republican personal attacks on Mr. Obama, especially false intimations that he was Muslim.
Mr. Obama is a lifelong Christian, not a Muslim, he said. But, he added, “The really right answer is, what if he is?”
“Is there something wrong with being Muslim in America? No, that’s not America,” he said.

The quest now is to integrate our thought not only as fully American but also as fully Muslim in the internal American thought processes about financial regulation, international relations, and other areas of political discourse, without being dismissed off-hand as being somewhat alien to our homeland of choice. This is not in any way a violation of the separation of Church and State. Our religious choices determine our preferences for society, and bring a wealth of human history and experience that should enrich the political process without tarnishing its areligious nature.

It is unfortunate that majority Muslim countries of today have suggested that Islam does not allow separation of Church and State -- contrary to historical evidence dating back to the immediate days following the death of the Prophet (p) -- thus preventing their own wealth of history to inform their policy making positively. It is difficult to blame poorly informed westerners for irrational fear of everything "Muslim" when Muslim leaders in various parts of the world are actively nurturing this fear toward political and financial ends.

"Islamic Economics" and the Financial Crisis

2008-10-11T09:56:00.006-05:00

A prominent Islamic economist emailed a description of the current financial crisis and a supposed solution in Islamic jurisprudence, which he characterized by morality, emphasis on equity, and the prohibitions of riba (which he equated with interest) and maysir (gambling). The following was my response:

I think that the broad lines of the current crisis are indeed as you have described them. I'd be happy to discuss the specifics at a later stage, but I'd like to take this opportunity to disagree respectfully regarding the classical "Islamic economics" solution that you are advocating. Let me organize my thoughts in four main points:

1. There is a fundamental tradeoff, as you have suggested, between growth and efficiency on the one hand and equity and stability on the other. In a world where some societies choose a high-growth path and others choose the equitable-stable path, the former societies eventually invade or otherwise overtake the others politically and economically. Hence, there is need for a social contract, which you have put under the banner of morality, to shepherd mankind to the safer more equitable path.

2. Morality cannot be legislated, and reliance on social and economic players to exhibit moral conduct voluntarily is a form of Utopianism. There are numerous verses in the Qur'an and numerous Prophetic Ahadith that explicitly characterize mankind as gluttonous wealth seekers. Pious members who are satisfied with little, etc., as you describe, were a minority even immediately following the death of `Umar ibn al-Khattab, as evidenced by the grand fitna and the later paths pursued by the Umayyads, the Abbasids, etc.

3. Islamic jurisprudence used and refined many of the earlier scriptural and human-legal provisions for creating the more equitable and less turbulent path, through restrictions on leverage, fragmentation of estates, redistribution of wealth, etc. In the arena of finance, the prohibitions of riba (absolute) and gharar (relative, but absolute for the extreme of maysir) can be seen as regulations of risk taking. In the ancient world, this was accomplished by permitting certain contracts and forbidding others. I have argued that adoption of this approach in the modern era of financial engineering, where transaction costs of circumventing the prohibitions have become minimal, is incoherent.

4. The mirror-image-problem of this product-oriented regulation of financial markets has been at the core of the current financial crisis. Insurance markets have been generally regulated to keep them from becoming gambling (maysir) tools. For instance, I cannot buy an insurance policy against another person's losses, lest this may be at best a form of gambling and at worst an incentive to harm that other. Credit default swaps and other modern derivatives may equally be seen as forms of insurance, but ones that lack sufficient regulation to prevent gambling. I was tempted in July to buy put options on oil, thinking that a global recession is inevitable and the price of oil will have to fall. I stopped only because I think that this is a type of maysir, because "markets can remain irrational indefinitely, certainly longer than I can remain solvent." Numerous others made the bets, I am sure, and conditional on counterparty risk, some have made small fortunes doing that. The incentive to gamble is simply too great.

There is nothing uniquely Islamic about modesty, contentment, shunning risk and gluttony, or even the prohibitions of riba and maysir. Even those who do not believe in revelation (to Moses, Jesus, or Muhammmad; p) can be convinced that those ancient prohibitions and injunctions were distillations of human wisdom over the millennia. Calling those injunctions and prohibitions "Islamic" strikes many as exclusionary and encourages others to engage in hateful and myopically-triumphalist celebration of our collective failure (Islamic finance is just as guilty as conventional finance for bringing about the current crisis).

It is not clear that majority-Muslim societies are particularly better equipped to solve the collective-action problem required to find a low-growth-low-risk social contract. In a world where others will pursue higher-risk-higher-growth paths, it is not even clear that pursuing that lower-risk-lower-growth path is warranted (isn't that how Madinah lost to Damascus during the time of Mu`awiyah?). Is it possible to reconfigure our rhetoric to make it less exclusionary (avoid separatist and triumphalist use of the "Islamic" brandname) and to convince multiple populations at very different stages of economic development to shun fast growth in favor of greater equity and stability? The dialogue would likely be very similar to the one witnessed in negotiations over polluting rights. Perhaps we can learn more from the successes and failures of this global dialogue than we can from inspecting ancient laws for outdated modes of regulating financial markets.

Definancialization

2008-10-10T09:12:00.007-05:00

It is most unfortunate that "Islamic Economists" over the past two decades have given in to the "Islamic Finance" paradigm of replicating conventional financial markets and institutions in Islamic garb. A few of us have tried to argue that the essence of Islamic jurisprudence and earlier religious teachings on finance is shunning excessive trading in risk (indeed, I have argued that the forbidden gharar is "trading in risk" and that the forbidden riba is "trading in credit," which is an extreme form of gharar). Of course, the financialization of the U.S. and global economies, and the simultaneous financialization of Islamic economic thought and practice over the past three decades, has been primarily about intensified trading in credit and risk through multiple "innovative" approaches ranging from securitized debt instruments to derivatives.

Innovation by itself is not a bad thing, and one expects new more efficient financial instruments to evolve over time. The problem has been an excessive emphasis on financial profit-making, at the expense of substance. My argument for mutualization was thus predicated on eliminating the profit motive from finance, thus reducing the incentive to take very large risks. My argument with Dr. M. Nejatullah Siddiqi (posted on this blog two and a half years ago) shows how some of the more conservative Islamic economists gave in to the temptation for faster growth at the cost of increased risk.

Today, an article quotes Stiglitz on the folly of following the hare-vs-tortoise recent western model of capitalism:

"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do — hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us."

Now we should probably see many of the terribly-designed and labeled sukuk backed by shoddy risk analysis and myopic for-hire interpretation of Islamic jurisprudence will begin to collapse. The model of Islamic finance that has emerged since the roaring 1980s should come to an end. Many have blamed the current financial crisis on the greed of financial-market participants. Some of the top bankers and most of the top "Shari`a scholars" will probably keep the millions that they have "earned." One of the prominent Shari`a scholars from the Gulf, whom a central banker from the Middle East said netted $3 million last year, once chastised me in KL, Malaysia, for questioning the fees that they collect: "the lawyers make more money," he said. How many, I wonder, will still feel that they have earned that money.

Religion as the solution to collective action problems

2008-04-06T09:14:00.003-05:00

In the West, and in westernized circles in the Islamic world, religious movements are generally regarded with great fear and trepidation. Many of the images associated with the Taliban in Afghanistan, the post-revolution Iranian quasi theocracy, and even the religious establishment in Saudi Arabia, suggest that "Islam is the solution" is at best a vacuous slogan, and at worst a dangerous recipe for replacing one tyranny with another, or creating a cooperation between tyrannies: one secular and military, and the other religious.

Those worries are justified. Indeed, mixing religion with identity politics and sociopolitical activism has been counterproductive more often than not, in Islamic as well as world history. The political platform of the Muslim Brotherhood in Egypt, which was published last year in draft form, suggests that the leaders of today's better-organized Islamist groups may lack the political acumen to produce viable alternatives in the short-to-medium term, as Diaa Rashwan -- arguably the best contemporary analyst of Islamist movements -- has suggested.

The obvious success story that Islamists would cite, and anti-Islamists would challenge, is the current Turkish experience with Justice and Development Party. The challengers are correct, of course, that Turkish circumstances are different from those of other majority-Muslim countries -- for one thing, the mainly Sufi Turkish Islamist tide of the Nursi-inspired Gulen is very different from the poorly-named "Salafi" tide exported from Arabia to most other parts of the Islamic world over the past four decades. Those fundamental differences notwithstanding, and earlier failures of the AKP's Erbakan-led predecessor, the Turkish experiment, and its lessons for other Muslim-majority countries, should not be minimized.

At a recent conference in Cairo, I asked the speaker -- who was speaking about collective-action problems, and the pattern of replacing one corrupt leadership with another in various parts of the developing world -- I asked him why he had omitted religion from his analysis. Doesn't religion by its very nature constitute a long-term social contract that solves even the most difficult collective action problems? I was thinking at the time, of the Qur'anic verse [3:103], which explicitly advocates unity through religion as an alternative to social dysfunction, which currently plagues many majority-Muslim countries. The speaker admitted that Islamist groups have in fact been more successful even than their countries' governments at providing social services and otherwise solving collective action problems.

The problem, of course, is that seeking the solution in religion is a very risky strategy. The examples of Taliban, Iran, Sudan, etc. should not be minimized either. The fear is not accurately explained in the glib Bernard Lewis warning that political Islam would be "one man, one vote, once." The fear more generically is that political leaders who reach positions of power on religious platforms tend to claim Divine authority, directly or indirectly. This makes them less open to criticism by those who question their views on secular or alternative-interpretation religious grounds. Thus, one corrupt and misguided secular-military tyranny is more than likely in this scenario to be replaced by a corrupt and misguided pseudo-religious tyranny.

In the absence of any other mechanism for political opposition to the status-quo regimes to solve their collective action problems, one must therefore ask three questions:

Is the status quo sufficiently destructive to justify playing the very risky political-religion card? Some contemporary analysts seem to conclude that the risk of invoking anti-humanist fundamentalist-religious solutions is greater. A counter argument would be that elitist humanism, and condescending characterizations of religiosity of any kind as fundamentalist and anti-humanist, betrays a fundamental misunderstanding of the tenets of humanism that the protagonist purports to champion.
Is it riskier to allow political-Islam movements to learn on the job? Al-Turabi is arguably one of the most enlightened and sophisticated of the proponents of political Islam, and yet, his Sudanese political-Islamic experiment of learning-by-doing was catastrophic.
Is it possible to integrate political-Islamist movements in more seasoned opposition and ruling-party platforms? This approach seems to have had a checkered history in contemporary politics, dating back at least to the short-lived partnership of the Muslim Brotherhood with the Egyptian Free Officers before and shortly after the 1952 revolution/coup, serving more recently as legitimacy and political vehicles for presidents as different as Egypt's Sadat and Pakistan's Zia Ul-Haq, and making carefully-managed parliamentary appearances in Jordan, Egypt, and elsewhere. Those experiments seemed promising in principle, but have always failed because the group in power truly has no incentive to concede it to political-Islamic groups, neither in the short nor in the long run.

This brings us back full circle to the Western and western-minded apprehensions regarding political Islam: Yes, this is a force that may solve today's critical collective action problems of the Islamic world and replace the current dysfunctional social environment with a viable social contract. However, unleashing the forces of religious identity politics and incoherent pietist rhetoric may prevent religion from playing this positive role; and may even exacerbate social, economic, and political problems, as many failed experiments have demonstrated. Can we afford to wait for "destructive chaos" to produce functioning social mechanisms? Can we afford to let political Islamists learn from failures of incoherent-pietist regimes so that they may find a realist Islamic-democratic template that embodies the true essence of religious social contracts?

We cannot expect any elected official(who worries about her or his political future and legacy) or business community (who worry primarily about their immediate economic fortunes) to contemplate those questions seriously. Likewise, we cannot expect the ideologues and the political opportunists who are most likely to influence political-Islamic movements, either to find viable solutions or to convince the political and business elites to adopt them.

This leaves us with the general public, who stand to win the most if the religious-political solution succeeds in delivering a functioning social contract. The collective action problem of forging this social contract appears to require solving what appears to be a more difficult collective action problem of channeling increased religiosity into viable political processes. This is often possible -- especially in the Islamic world -- only through the emergence of highly- charismatic (almost-prophetic) leaders who can articulate the vision for that social contract. Without the support of military, political, and business leaders, such leaders are highly unlikely to succeed, or even to survive.

All hope is not lost: The tide of increased religiosity has begun to reach those upper echelons of military, political, and economic circles. Unfortunately, it is a type of religiosity that is highly personal and generally divorced from any notion of changing the political and social status quo. A religious-reformist agenda, such as that of Muhammad Abduh in the early twentieth century, may tap into that swell of religiosity to forge the nucleus of a new social contract and functioning Islamic-democratic political system. Candidates for leading this reformist tide must resist political, financial, and social bribes, while avoiding the risks of offending the various powers' vested interests. This is a very tall order. On the other hand, it is also the nature of religiosity that one never loses hope, and waits -- despite all expectations of failure -- for a successful reformation.

New York Times Magazine Article on Shari`ah (Islamic Law)

2008-03-16T07:31:00.003-05:00

New York Times Magazine Article on Shari`ah (Islamic Law):

In fact, for most of its history, Islamic law offered the most liberal and humane legal principles available anywhere in the world.

The article is well-researched -- distinguishing between Shari`ah and fiqh, and outlining the deficiencies and advantages of various common law traditions. The political dimension of Islamism is generously portrayed as an issue of "rule of law:

The answer lies in a little-remarked feature of traditional Islamic government: that a state under Shariah was, for more than a thousand years, subject to a version of the rule of law. And as a rule-of-law government, the traditional Islamic state had an advantage that has been lost in the dictatorships and autocratic monarchies that have governed so much of the Muslim world for the last century.

Finally, a good western understanding of the rise of political Islamism. Thank you Professor Feldman. Needless to say, there are vulgar understandings of the nature of Islamic law on the part of many Islamists as well as many western observers. The debate over exactly what the Shari`a entails (i.e. contemporary fiqh) is still in its earliest stages.

Rating agencies, shoddy risk analysis, and sukuk

2007-08-15T19:08:00.000-05:00

A recent article in the Wall Street Journal identifies the role played by rating agencies in perpetuating the credit boom that is currently imploding. The primary fault of investors, of course, is that they believed that credit ratings of new and unknown instruments, such as credit derivatives, are meaningful in any way. It is obvious that credit and asset-backed derivatives are signficantly different from the types of bonds that rating-agency experts are qualified to to assess (in terms of default risk).

In the case of sukuk, the silly bonds marketed as "Islamic" by rent-seekers, there are numerous legal risks that are very poorly understood, including by the lawyers and bankers who structure the instruments. The problem in this case is self-inflicted: the lawyers want to structure the instruments, e.g. lease-backed bonds or sukuk al-ijara, in such a way as to assure "Shari`a scholars" that bond-holders have material ownership of the underlying assets and receive "rent" rather than "interest". At the same time, they want to assure markets and rating agencies that the instruments are indistinguishable from conventional bonds, where the only mateiral risk is credit risk of the issuer. The rating agencies read the legalese and conclude that the lawyers are right: the "Islamic" structure is merely a fiction, and there is only credit risk. They give the sukuk the same credit rating they would give any other unsecured bond issued by the same entity (see, e.g. S&P's analysis of Qatar's Global Sukuk, where the rating was based on the soundness of the Qatari economy, without any significance lent to the asset ostensibly being leased back by the issuing SPV).

Unless and until we have a high-visibilty case of bankruptcy, we will not know with any certainty who owns what in the maze of SPVs that lawyers and structured financiers love to use. Until then, many will continue to line their pockets with legal, structuring, and advisory fees, as they congratulate themselves on "innovative Islamic products." What a shame!

Zakah and Waqf -- Form & Substance Revisited

2007-07-26T07:25:00.000-05:00

Dr. Fahim Khan recently made an argument on IBFnet that we put the cart before the horse by jumping to Islamic banking and finance, which put the industry in bankers' hands, and therefore turned to satisfying historical forms of Shari`a, without any interest in substance. His prescribed cure is to turn to religious and historical Islamic institutions, Zakah and Waqf, focusing on Islamic economics, rather than merely finance -- which will take care of itself if we define proper economic objectives. I think that there is merit to this argument, but I fear that it is not sufficient.

First, and very briefly, financial considerations have been at the forefront of most economic activities nowadays. If we look at the real estate boom in Saudi Arabia, where Dr. Fahim lives, we will see that it is merely a mortar-and-steel manifestation of a financial bubble (that showed up first in the Saudi and neighboring stock markets, and in commodities, and then ultimately in the ridiculous waste of petrodollars in the building of vacant tall buildings in Dubai, Bahrain, Qatar, etc.). In the U.S., where I live, finance has also taken over much of what we do, with hedge funds and private equity firms buying and selling companies to turn a quick profit, rather than to restructure them and make them more productive.

Second, and more importantly, I fear that focusing on the historical institution of Waqf can be as detrimental to Islamic economics as focusing on sales and leases has been detrimental to Islamic finance. Moreover, the focus on Zakah is also misplaced given the narrow religious frame that real Islamic scholars (most notably, Dr. Al-Qaradawi) have imposed, despite the attempts of economists such as the late Dr. Mahmoud Abou El Saoud. Let me elaborate.

Problems with Awqaf

There is nothing distinctively Islamic about Waqf. At the advent of Islam in Arabia, there were two models of charitable trusts that the Muslims could have borrowed: the Roman and the Persian. The first texts in Sunna tell us that the first waqf in Madina was formed by one of the Medinese wealthy Jews, and then the second was by `Umar ibn Al-Khattab (r). In the second Hadith, the Prophet (p) simply told him "make it a waqf," clearly establishing that this was already a known practice. In fact, the Islamic Waqf, as the rules were later established by scholars, mimicked the Persian system. As historians have shown, this system of waqf then evolved with different rules, as scholars were very liberal in awqaf, since their essence
was charitable. In fact, however, awqaf quickly became means of circumventing inheritance rules -- to avoid division of property -- while ostensibly remaining charitable due to clauses that they became so once the waqif's genetic line ended.

Timur Kuran has written extensively on the inefficiencies of awqaf in Turkey and elsewhere in the Ottoman empire. The Iranian Bonyads continue to be a major source of monopoly power and inefficiency in the economy.

Of course, that does not mean that the trust/waqf model is inherently inferior to corporations, as Timur has argued. Indeed, one of the most powerful monopolies in the previous round of globalization around the turn of the 20th century was Standard Oil, which was a trust -- hence the U.S. has "anti-trust" rather than "anti-monopoly" laws, even when applied to corporations such as Microsoft.

Historians have traced the roots of the Anglo-American trust system to Awqaf, which King Roger II knew during his youth in Sicily. However, that model evolved in different directions, giving us much more effective trusts in the west today than the awqaf that have survived governments' attacks in the Islamic world. The evolution of the trust as an "un-corporation" might have given us a superior institution, as some legal scholars have argued recently, see Robert Sitkoff's papers on the topic. However, the Islamic world has in fact failed to make awqaf even play their own traditional role, let alone to become an engine for economic growth and development.

Thus, I fear that our focus on awqaf as a historical institution will put us in the same trap of looking at it as some kind of sacred institution, ignoring that there are no set rules for awqaf that are written in stone, and adhering again to form rather than substance.

Problems with Contemporary Zakah

Zakah is fundamentally a poverty-alleviation mechanism (the poor and destitute being the first two categories of recipients listed in the Qur'an), and therefore its role is by necessity quite restricted. In a country with limited poverty, it might turn into more general public finance, but even then restricted by scholars' categories of spending "in the way of Allah" (they include education, infrastructure building, etc.).

Those problems of spending Zakah funds notwithstanding, the biggest problem today with Zakah has to do with the collection of funds. The biggest source of Zakah funds if we were to apply the classical rules would be a percentage of oil and gas wealth (zakat al-ma`adin w al-rikaz). However, since those resources are generally nationalized, there is no point in going there!

For private individuals, there are numerous Zakah shelters. The rules of Zakah as a wealth tax was appropriate for the categories of merchants, shepherds, and farmers who possessed wealth during the Prophet's (p) time. Those rules are grossly inadequate today. Dr. Al-Qaradawi himself commented that when he visited Malaysia, he found that small farmers who produced grains and fruits paid the Zakah (zakat al-zuru` w al-thimar), but that the richer landowners who grew trees for the production of rubber paid no Zakah, since the classical rules do not include a tax on trees that did not bear fruit!

Worse, yet, today's capital for the average well-to-do Muslim may be in large part human capital (lawyers, doctors, etc.). Those can earn huge incomes, but then live in equally huge homes (Zakah exempt) and drive equally expensive cars (Zakah exempt), etc. In the end of the day, they have no gold or silver, no merchandise, no livestock, etc., and therefore pay no Zakah. The late Dr. Mohammad Al-Ghazali, and the late Dr. Abou El Saoud, tried to argue for an income Zakah, but Dr. Al-Qaradawi argued that Zakah contains a major ta`abbud (ritual worship) element, as the third pillar of Islam, and therefore did not want to apply analogical reasoning with much liberty. Needless to say, wealthy Muslims were more than happy to adopt this conservative view that allowed them to pay less!

Again, we have a problem with religious substance giving way to pietist adherence to forms. This is the general malaise of Muslims today. It is not restricted to finance.

Rising Islamism and (Bad) Islamic Economics

2007-07-04T09:16:00.001-05:00

Any keen observer of the Islamic world must see this. Islamism is on the rise, first and foremost in terms of identity politics of the Muslim masses. Other forms of identity have failed, and have been abandoned by the masses: Arab nationalism and socialism of Nasser and the Ba`th; ancient nationalism such as Pharonic Egypt, Babylonian Iraq, Phoenecian Lebanon, and Cyrus's Persia, etc.; and globalized westernism. Elements of all three tendencies continue, of course, but they are constantly being pushed to the margins, as a new brand of Islamism is on the rise.

When they think of rising Islamism, people (and governments) in the west tend to think mainly of violent "jihadists", as they like to call them, but that is far from accurate. My own casual observation identifies mainly two groups. The first is a group who adopt the appearance of religiosity, in dress, language, etc., but retain a true identity that is some mixture of the three aforementioned (non-Islamist) tendencies. This includes people who use religion to advance their economic objectives, or simply to fit into an increasingly religious society.

The second group is much more interesting, but it appears to be suffering an identity crisis. They seek to live according to an Islamic ideal, but quickly discover that the Islamic ideal is largely fictional. This group includes well-meaning Muslims who turn to religious studies, only to discover the irrelevance and corruption of what they had considered scholarly circles. It includes MBA-holders who decide to get into "Islamic finance", only to discover that it is a racket for enriching cynical English bankers and lawyers, along with some corrupt, gullible, or greedy Muslims.

Most importantly, the second group includes most of the masses in Egypt, Pakistan, Indonesia, Malaysia, Turkey, and elsewhere, who would like to embrace the slogan "Islam is the solution", but fail to see how that solution would work in reality. This is the greatest failure of the school of thought generally known as "Islamic Economics", which sought to develop an understanding of Political Economy from "an Islamic perspective".

Timur Kuran has written a lot about this school of thought and its failures (most of those writings were reproduced in his recent book Islam and Mammon). Timur's conclusion is that the historical and intellectual record of "Islamic economics" illustrates that Islamism has also failed. It is definitely true that the brand of mid-Twentieth Century Islamism, which is still unfortunately marketed by most formal Islamic organizations, including the Islamic Development Bank and others, have indeed failed, and failed miserably, especially in the countries where it was taken most seriously -- Pakistan, Iran and Sudan.

However, if we are interested in real economic development in the Islamic world (beyond just pumping oil and gas, erecting buildings, and selling cell phones), we cannot dismiss the rising wave of Islamism. Indeed, religious inclinations can serve as a greater social bond for a new social contract than any nationalism or western materialism.

The difficulty is this: to find or develop and workable "Islamic solution", one must abandon historical and pietist utopianism. Islamic history, from its earliest days, has never painted a rosy picture. Islamic societies prospered when they were open to learning from others: Sassanid, Byzantine, etc. The famous Prophetic tradition said: "seek knowledge (`ilm), even [if you have to go to] China", and yet our young still seek knowledge (`ilm) only by going to Saudi Arabia, Pakistan, or Egypt, centuries after the Islamic world ceased to be a main depositary of knowledge.

The result is "Islamic finance", "Islamic jeans", and "Islamic Cola", along with satellite channels that broadcast feel good televangelist speeches about Islam, and broadcasting songs about Hijab and the Prophet in between MTV-style videoclips. This pattern cannot satisfy the increasing Islamist sentiment for long. Suspicions about the Muslim Brotherhood, Hamas, and other political Islamist groups notwithstanding, it seems almost inevitable that the growing wave of Islamism will bring a wave of political Islamists to power throughout the region.

The choice is most likely restricted to one of three scenarios:

(1) If they use the current pietist/historical brands of Islamism, those Islamist groups will fail, just like their predecessors did in Pakistan, Iran, and Sudan. Advocates of western capitalism will point to that failure to advocate abanadoning the Islamist identity. The Islamists will increase in their opposition to western capitalism, arguing that the fault was not with the ideal, but with its implementation. The rift between the two groups grows until every country in the region looks like Turkey.

(2) Some may follow the Erdogan route, but that is really just western capitalism dressed in Islamist garb, and thus unlikely to serve any long-term socioeconomic goals. In the meantime, as we learned from the recent Turkish presidency campaign fallout, the secularists will not allow even some token symbolic victories to Islamists. To survive, the Islamists must make more compromises to prove that they are "moderates", but they will only be tolerated if they become effectively more secularist than the secularists.

(3) A new definition of Islamic-democratic political economy emerges. It is not clear that Muslims have the requisite political and intellectual human capital to develop such a paradigm over the course of few decades. Daunting as the task may be, this seems to be the least painful of the available options, and the one most conducive to bona fide economic and social development in the short to medium term.

Islamic student-loan alternatives

2007-06-03T09:47:00.000-05:00

I have just sent this to IBFnet, but post it here also to get all the useful ideas that I can:

There is no doubt that education is one of the most important Islamic social objectives (no need to repeat numerous Hadiths here that we all know). Unfortunately, the typical way that Muslims in the west can afford the best education (including college as well as law school, business school, medical school, etc.) is by resorting to student loans.

In the U.S. Sallie Mae and other government sponsored initiatives try to make interest rates on those loans lower than market levels, but the accumulated debt can still be quite substantial. Moreover, I have met a number of young men and women at local masajid in Houston who accumulated student loan debts (some of which were marketed to them quite aggressively) but then failed to complete their degrees and therefore have a terrible problem with debts that they cannot repay with their low service-sector wages.

I know that there are alternatives in the GCC, including tawarruq to synthesize the loan (two spot and one credit trades of a commodity to give the student cash now in exchange for a debt owed later), but those are just inefficient replications that increase the cost of funds to the poor students without reducing the bad effects of debt.

I have read about another alternative based on the banks buying spots at universities and then leasing them to the students. Again, this seems awfully inefficient. One way to structure a similar but better alternative is to endow scholarships at the target elite universities, thus giving the students something to compete for, and then a means to get the elite education that they cannot afford, once they are admitted to the university. I know of some scholarships of this kind (e.g. King Faisal) for graduate studies. However, it would be nice if wealthier Muslims will focus on creating scholarships at elite universities for bright Muslim students who cannot afford those schools otherwise.

I discussed other "Islamic" alternatives in a recent lecture at a local Masjid mostly catering to the Nigerian Muslim community in Houston (some of whose youth either already have problems with student-loan debt, or need access to student-loan alternatives), and at a recent khutba in our main local Masjid. Perhaps I can spell out some of those ideas here and hope to start a useful discussion that can produce good Islamic products.

The starting point is that there is no better Islamic investment than in the education of our community's children: see a summary of the earlier set-up khutba at the earlier posting: Poor Muslim-American Islamic Investment Strategies.

Since this is a forum for financial professionals and those interested in the field, let's focus on the financial mechanics.

One idea that would work relies on cooperatives (why am I not surprised :-) such as credit unions. A very good Muslim banker friend of mine doesn't like credit unions because they are "one member one vote", so we can structure the institution as a mutual savings bank, where it is "one share one vote".

Make the institution not for profit, so that it can also be eligible for (tax deductible) zakah funds used for community development, and deserve the Islamic label (profit is OK, but profit from extension of credit seems awfully close to the essence of riba, as I have argued elsewhere in defense of mutuality).

We can have networks of mutual financial institutions tied to our Islamic centers. As churches do in this country, we can require that young men and women who wish to gain access to our student loan alternatives must be shareholders of the mutual financial institution (one share is, say, $5) and active members of the community (volunteering at the Islamic centers and in the community, etc.).

Funding to those students can be given based on the story of Musa and Shu`ayb [28:27]. Shu`ayb tells Musa that he owes a certain debt, but he can pay more if he wishes. It is well documented that the Prophet (p) repaid debts with more than he owed (unilaterally). We are not resorting to the Malaysian Investment Certificate method, based on the Egyptian Ahli bank investment certificates (C) with "gifts". This is the opposite case, where the debtor is a member of the community who is helped by the community to attain an education and then pays the community by returning more than was lent to him voluntarily, and possibly buying more shares in the mutual to fund the education of later generations, etc.

The adverse selection and moral hazard problems associated with giving money to people who are not obliged to pay interest (and whose debts will be forgiven if they cannot pay) is ameliorated by the requirement of being a member of the community in good standing (again as churches do). Investment in those members of the community should pay off manyfold, iA, as some of them become very successful and pay back by investing more in the community, etc.

Growth and sustainability can also be supported by zakah money, which can be spent on education by the agreement of Dr. Al-Qaradawi (today's authority on zakah) as well as premodern scholars. This can be set up as educational funds that grants scholarships and concessionary student loans, or it can be handled directly by financial mutuals that cater to other social needs of the community.

Suggestions of better products and structures would be greatly appreciated and encouraged. I would be happy to provide free advice to anyone working on this or similar products that justify the "Islamic" label by more than juristic mechanics (to the extent that I may have any value to add, of course :-).

Ibn Qayyim on Riba and more expensive Riba: Which should we choose?

2007-05-28T12:50:00.000-05:00

Let's hear the voice of ibn Qayyim al-Jawziyya on the ruses used today in Islamic finance (be it named `ina, murabaha, tawarruq, or anything else):

فمن المستحيل على شريعة أحكم الحاكمين أن يحرم ما فيه مفسدة و يلعن فاعله و يؤذنه بحرب منه و رسوله و يوعده أشد الوعيد ثم يبيح التحيل على حصول ذلك بعينه سواء مع قيام تلك المفسدة و زيادتها بتعب الاحتيال في معصية و مخادعة الله و رسوله. هذا لا يأتي به الشرع؛ فإن الربا على الأرض أسهل و أقل مفسدة من الربا بسلم طويل صعب التراقي يترابى المترابيان على رأسه

فيالله العجب. أي مفسدة من مفاسد الربا زالت بهذا الاحتيال و الخداع؟

It is impossible for the Law of the Wisest of the wise [God] that He would forbid a harmful dealing [riba, or usury], curse its perpetrators and warn them of a war from God and his Messenger, and then to allow a ruse to result in the same effect with the same harm and added transaction costs in constructing the ruse to deceive God and his Messenger. This cannot be in accordance with the law, because riba on the ground is more facile and less harmful than riba with a tall ladder atop of which the two parties conduct the riba…

I wonder, which of the harmful effects of riba was removed by this deception and lies?"

Source: Ibn Qayyim Al-Jawziya, I`lam Al-Muwaqqi`in `an Rabb Al-`Alamin, Beirut: Dar al-Kutub al-`Ilmiyya, 1996, vol.3, p. 92.

And the legal abitrageurs will still come around quoting "God permitted trade and forbade usury" (deceptively, twisting the meaning) to justify their trade!!

Recommended books on Islamic finance

2007-05-26T23:05:00.000-05:00

I received the following email

Besides your book, what other books on "Islamic Finance" do you recommend (in English)? It would be a good idea if you could post your answer on your blog so that other viewers benefit.

Here's a partial list of some recent books that I have found most useful to read:

Saeed, Abdullah, Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation, Brill Academic Publishers, 1997. A wonderful scholarly work.
Lewis, Mervin and Latifa Algaoud, Islamic Banking, Edward Elgar, Pub., 2001. A good survey with a nice interfaith introduction covering Abrahamic religious views on usury.
Warde, Ibrahim, Islamic Finance in the Global Economy, Edinburgh University Press, 2000. The best political-economy coverage of Islamic finance that I have read.
Henry, Clement and Rodney Wilson (eds.), The Politics of Islamic Finance, Edinburgh University Press, 2004. The best collection of essays on the political economy of Islamic finance that I have read. See, in particular, Dr. Monzer Kahf's chapter.
Vogel, Frank, and Samuel Hayes, Islamic Law and Finance:Religion, Risk, and Return, (paperback) Springer, 1998. Very scholarly work. Vogel's part is a learned survey of classical jurisprudence and its interpretation by contemporary participants in Islamic finance. Hayes's part is an example of superior Islamic financial engineering (of which I am not fond, but if one is to do it, it is better to do it right).
Usmani, M. Taqi, An Introduction to Islamic Finance, Springer, 2002. This book was published earlier in Pakistan and elsewhere, and free versions were available online when I last checked. You can think of this as the bible for Islamic financial engineers. Justice Usmani is the most respected name on the "Shari`a scholar" circuit, so widely respected in fact that a number of his family members are quickly becoming prominent members of that scholar circuit as well as he nears retirement.
Maurer, Bill, Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason, Princeton University Press, 2005. An anthropologist's social scientific study of Islamic finance as a social phenomenon, with comparison to other unorthodox financial systems.
Kuran, Timur, Islam and Mammon: The Economic Predicaments of Islamism, Princeton University Press, 2005. A collection of earlier essays by Timur Kuran, constituting the most blistering attack on the bulk of Islamic economics, revealing its political and economic failures, as well as its academic incoherence. If you are sympathetic to Islamic economics, as I am, you have to get beyond your first (knee jerk) reaction to Timur's relentless attack. Once you get over it, you will see that most of his points are very valid, and accepting such criticism may be the first step toward coherent thought about Islam and economics.

Incoherent Pietism and Shari`a Arbitrage

2007-05-23T03:33:00.000-05:00

This Op-Ed piece appeared in today's Financial Times. Due to space constraints, the editors removed the paragraph wherein I claimed that microfinance institutions, and not today's multinational marketers of structured "Islamic finance", are the rightful heirs to the legacy of early initatives in Islamic banking in rural Egypt, India and Pakistan. They also removed my sentence on the use of the term sukuk, which I had only heard in my school years in Egypt in reference to sukuk al-ghufran, the Arabic name of the Easter Church's version of pre-reformation indulgences.

Identity politics and Islamic law

2007-05-15T03:37:00.000-05:00

In a recent conference entitled "Shari`a (Islamic law), Identity, and the Constitution", a group of scholars reaffirmed the identity-political nature of adherence to Shari`a. On the other hand, the scholars who spoke at the conference, including Dr. Yahia El-Gamal (no relation), Dr. M. Salim Al-`Awwa, and others, affirmed that theocracy is not known in Islam, and that Islamic states are civil/secular, even if the laws are derived from Shari`a. In this regard, the issue of objectives of the law (Maqasid al-Shari`a) again featured prominently in the discussion, suggesting that -- outside the area of theology and acts of worship -- specific rulings are not as important, and the main Islamic legal principles are identical with those underlying other human legal systems.

Haunted by Amartya Sen's Identity and Violence: The Illusion of Destiny

2007-04-20T08:02:00.000-05:00

As I sit this morning, getting ready to prepare my khutba for later today, I have tried four different topics, but keep getting back to a book that's been haunting me ever since I read it two weeks ago on the plane back from DC (after participating at a GMU conference honoring one of my ex-colleagues who is near retirement). The book is Amartya Sen's Identity and Violence: The Illusion of Destiny, NY: Norton, 2006. The book's main idea is obvious (we all have multiple identities, and trying to reduce any individual or group of individuals to a single identity can only lead to trouble).

The book is based on a series of lectures, and therefore it is somewhat simplistic and repetitive, at least as compared to Prof. Sen's more profound writings. Yet, I was captivated -- and still am -- by the book's strong message. Consequently, there is no escaping the topic for my khutbas this month. The first challenge, ironically, is how to make the book's universal message "Islamic" so that it may be appropriate for a sermon, without chauvinistic claims that Islamic principles are necessarily universal, or vice versa. The second challenge is to avoid being excessively critical of my communities of Arab Americans, Muslim Americans, Egyptian expats, Arab expats, Muslims in America, academic economists, etc.

I have been trying to focus in recent khutbas on positive messages, conducive to building the community and integrating it in society in productive ways, and that is -- of course -- difficult to accomplish without attacking the separatist and triumphalist approaches that have plagued many communities and countries (a disease that is not by any means restricted to Muslims, although people usually cannot see the same disease in their own nationalisms and religious chauvinisms, even if you put up a mirror to their faces -- see the movie Borat for a great example of how embarrassing the realization can be). There will not be any shortage of scriptures (Qur'anic and from the Sunna) to support my message. Unfortunately, there will not be any shortage of scriptures to support the opposite message either. So, am I about to commit intellectual (and/or religious) fraud?

Al-`Awwa on the need to reinvestigate Legal Objectives (Maqasid)

2007-04-18T17:34:00.000-05:00

In an interesting article on islamonline.net, Muhammad Salim Al-`Awwa, the Secretary General of the Council of Islamic Scholars, is quoted to have argued in a lecture delivered on April 11 for continuous reinvestigation of the Objectives (Maqasid) of Islamic Law (Shari`a). He cited, for example, the methodology of the great contemporary scholar of Zaytuna Al-Tahir ibn `Ashur, who added such Maqasid as justice, liberty, and egalitarianism to the usual lists by Al-Ghazali and other scholars of the classic era. See this discussion of a translation of ibn `Ashur's treatise on Maqasid. Also, the middle part of this article provides a basic introduction to the thought of ibn `Ashur.

Al-`Awwa is reported to have argued that in modern times, we can infer Maqasid (Islamic legal objectives) based on our understanding of society, not necessarily being restricted to the religious Canon. Utilizing that methodology himself, he added fairness of wealth distribution and fairness of elections to be among the Maqasid of Shari`a today (an implicit reference, no doubt, to the current conditions in his native Egypt).

Business Week on Equity-Sharing Mortgages

2007-04-17T18:49:00.000-05:00

In a story this week, Business Week reports on family members helping out by taking an equity stake in their younger/poorer relatives' homes. This is a topic that I had addressed a while ago on this blog, within the context of hedging home equity risk.

The following two paragraphs appears toward the end of the BusinessWeek article:

At the moment, shared equity financings are largely ad hoc legal agreements negotiated between well-off parents and their young adult children. There was an attempt in the 1970s to popularize "shared appreciation mortgages," but they never took off because the terms were unfavorable to investors.

In the next couple of years a more formalized shared equity arrangement could get new life. At least that's the vision motivating real estate scholars like economist Andrew Caplin of New York University. He and a number of other experts are designing standardized shared equity mortgages that would allow outside investors to buy a piece of the equity gain. Caplin estimates that about 25% of first-time home buyers could find such arrangements attractive. When they do come along, investors in it for the money will extract stiffer terms than mom or dad.

Even though I had known Caplin's Psychology and Economics work, I was not aware of this literature on housing partnerships. This is of course reminiscent of some of the mutual/musharaka models such as the Islamic housing coop in Canada. I wonder if this will soon become a more viable (and more Islamic, as some would argue) alternative to the bad replication of mortgage loans currently being provided via multiple structured sales or leases.

Poor Muslim-American Islamic-Investment Strategies

2007-02-11T08:21:00.000-06:00

The topic of this posting and a recent khutba is the real "Islamic finance": How to maximize the good that one can do, or in our quasi-materialistic religious rhetoric, how to maximize our wealth of hasanat or good deeds.

In this regard, the Islamic canon clearly preaches a "financial planning" approach: start with your moment of death, and work your way with backward induction to current time. What are your goals? What are the resources and investment tools that you can use to attain those goals? What is the best investment strategy to have a wealth of good deeds in the final account?

Most of our sermons are about how to maximize earning of good deeds (better times to pay to charity, better times and places to pray, etc.). That is good. But then the analogy we seem to have in mind is one of the good deeds going into a checking account and sitting there until we have the accounting. But nobody ever got wealthy putting money in a checking account, no matter how much income that person was earning. So, while we should indeed maximize that income of good deeds, we should also invest it wisely if we are going to generate wealth.

So, let's approach the problem of Islamic financial planning. What does the canon tell us about the resource endowments on which we'll face accounting. Those are the same endowments that we can use to generate income, and then to invest that income to generate wealth. In the Hadith narrated by Mu`adh ibn Jabal, the Prophet (p) said: "No human's will move from his station of accounting until he is asked about four things: (1) his lifetime, how did he consume it, (2) his body, how did he wear it out, (3) his knowledge, how did he use it, and (4) his wealth, how did he earn it and how did he spend it."

So those are our four endowments: time (the most essential and most precious of all), physical existence, knowledge, and material wealth. Another Hadith, narrated by abu Hurayra tells us the three investment vehicles that we can use to make this wealth grow long after our time is up, our bodies are decaying, our knowledge is obsolete, and our wealth belongs to someone else. The Prophet (p) said: "When a person dies, his works stop except for three things: (1) perpetual self-sustaining charity, (2) useful knowledge, and (3) pious children who supplicate for their parents."

A good investment strategy would require three things. The first is that we have to work with what we've got. We shouldn't wait until our income is large in order to start saving and investing. We should start saving and investing with however little resources we have. Now, as American Muslims, we have no wealthy people. None of us can endow a Gates foundation to fight against aids or other epidemics. None of us can endow a Carnegie foundation and sponsor various types of research and information dissemination. On the other hand, we are collectively above average for the society in terms of income and wealth. That means that we have to act collectively in order to reach the critical mass required for the best investments in good deeds.

The second aspect of good investment is that we need to diversify our portfolio of moral investments. For example, if we ignore our children, what good are all the mosques we are building: little more than hollow buildings that are idle 99% of the time today, and likely to be emptier in the future. More importantly, when it comes to beneficial knowledge, why are we not sufficiently encouraging our children to be scientists -- where just one success, say in developing a cure for cancer, can save many more lives than any doctor can, even if the expected income of the doctor is higher than that of someone engaged in basic research? Why are we not encouraging them to be political scientists or historians, whose work educates society and helps to shape public policy in directions that save and improve lives in much more meaningful ways?

Finally, we should seek the highest return on our investments, subject to being sufficiently diversified. In fact, given the current portfolio of Muslim-American investments, we can increase the expected return and reduce risk simultaneously by diversifying away from the current wasteful strategy. Yes, of course, if you build a mosque you should expect to earn some good credits, but it is risky to have nothing but mosques, and the return on that investment is very small compared to other strategies.

I gave an example without naming specific projects. If you are in the process of putting together $3 million to build yet another mosque in Houston (we already have around 80 mosques for a Muslim population estimated to be around 100,000!). Yes, while we do not have wealthy Muslims, we have some rich ones, so 20 or more people can get together and build such a mosque. But think of the opportunity cost: You can use those $3 million to endow six scholarships for Muslim children who get admitted to top universities but cannot afford to pay tuition. In twenty years, you would have helped 30 young members of the community graduate from the best universities to become successful scientists, engineers, etc. Some of them may even get some crucial patents and generate some serious wealth that can be invested to do even more good: sponsor more research that can help humanity, etc. Having enabled that growth of good deeds decade after decade, and century after century, one surely would have invested today's good deeds much more intelligently that just building another structure.

The Pope, The Condescending, and Closet-Intolerance

2006-11-28T11:06:00.000-06:00

Now that the Pope is trying to rebuild "bridges" with the Islamic world, I think that one can reflect on his now-infmaous speech without eliciting angry responses. I would like to draw analogies between the Pope's remarks on the one hand, and what appear to be very different but are in fact very similar remarks on the other: As reported recently by BBC UK Chancellor of the exchequer Gordon Brown expressed his desire to make his country the global "gateway" for Islamic finance. The latter is a combination of ratinoalist desire to enrich one's own country (fat fees for investment bankers and lawyers), and the typical condescending attitude that "politically correct" and "tolerant" non-Muslims exhibit toward Islam.

Parsing Chancellor Brown's message, one cannot but conclude that acceptance (on face value) of the ludicrous claim that Islamic finance can do finance without interest is simply to say that Islam does not have to make sense (or even use coherent language). That is no different from the Pope's ahistorical claim that Islam favors dogma over rationalism. The Pope's charge is historically inaccurate, and -- depending on the particular historical period -- may be applied to his Church or any other form of organized religion during its dark ages. It just so happens that the Pope's remarks may be very applicable to Muslim societies today: he merely stated what others (who are condescending and closet-intolerant) dare not say.

For my money, I appreciate the Pope's remarks more than the Chancellor's.

Short Selling and the Travesty of Islamic Finance

2006-09-15T07:21:00.000-05:00

I received an email this morning from a young practitioner in the Islamic finance field:

Dear Professor El Gamal

I would like to pick your brains regarding some recent developments In Islamic finance, if I may.

I have just returned from an Islamic Funds conference in Dubai. I was somewhat surprised to find there was a widespread assumption amongst the fund managers speaking that taking short positions was now Islamically acceptable and basically a done deal. Names of Sharia scholars who had accepted it were bandied about

2 questions please.

1. How does it work ? I was told that there was some combination of Murabah + Arboun but no one would tell me exactly how it worked, for obvious proprietary reasons.

2. Is it a done deal Sharia speaking ?

3. If it is a done deal why is everybody not doing it ? Or are they ?

Here is my response:

Dear Mr. ______:

As I have argued repeatedly, every contract can be "Islamized" in the age of financial engineering. That is why the industry's obsession with the Islamicity of contracts, and the identities of jurists-for-hire who certify them, is a disastrous combination.

Every beginner's textbook in financial engineering shows how to synthesize short sales and leveraged buying from forwards. The easiest way to get a forward "Islamically" is with the use of salam, which has an element of short-selling already built-in. The use of `urbun as call option allows you to use call-put parity to do the same and synthesize a forward.

It is a silly game. The distinction between contracts that are "now allowed in Islam" and those that aren't is only a function of who is willing to pay sufficient fees for the rent-a-jurists to certify an engineered product, and how high are the transaction costs of the reengineering.

Those people have made a mockery of Islam.

In my recent book, I have shown in detail how to synthesize a forward from salam and a credit facility characterized as murabaha or tawarruq, depending on preference and cost. From forwards, we can then synthesize everything. That is a theorem. So, why are we wasting everyone's time with those big announcements of "the first ever Islamic this or that"? Because it is the selective prohibition of some modern practices and synthesis of others from medieval contracts that creates rent-seeking Shari`a arbitrage opportunities, and that is -- regrettably -- the nature of Islamic finance as practiced today.

Unfortunately, my interlocutor responded back with this:

Yes the Salam route was discussed but the Murabaha Arboun route was the one alluded to throughout. I will try to find out how it works.

I responded as follows:

Why do you care about the specific mechanics?

Short-selling is short-selling. So do it in the most efficient manner possible, or don't do it at all.

I obviously don't get it.

John Esposito explains Islamism and rising anti-Americanism

2006-08-20T08:31:00.000-05:00

In a new article, John Esposito, no doubt one of the world's foremost experts on political Islam, tries to explain the roots of anger in the Islamic world, but also the roots and goals of Islamism more generally. Washington's failure to distinguish between moderate and extreme Islamism -- in his opinion -- is feeding the cycle of extremism:

As Islamist parties continue to rise in prominence across the globe, it is necessary that policymakers learn to make distinctions and adopt differentiated policy approaches. This requires a deeper understanding of what motivates and informs Islamist parties and the support they receive, including the ways in which some US policies feed the more radical and extreme Islamist movements while weakening the appeal of the moderate organizations to Muslim populations. It also requires the political will to adopt approaches of engagement and dialogue.

He implicitly mocks the Washington doctrine of supporting democracy, but only if their favorite candidates win and enforce their favorite policies:

A critical challenge for US policymakers will continue to be the need to distinguish between mainstream and extremists groups and to work with democratically-elected Islamists. US administrations have often said that they distinguish between mainstream and extremist groups. However, more often that not, they have looked the other way when autocratic rulers in Algeria, Tunisia, Egypt, and elsewhere have intimidated and suppressed mainstream Islamist groups or attempted to reverse their successes in elections in the past several decades.
...
Global terrorism has also become the excuse for many Muslim autocratic rulers and Western policymakers to backslide or retreat from democratization. They warn that the promotion of a democratic process runs the risk of furthering Islamist inroads into centers of power and is counterproductive to Western interests, encouraging a more virulent anti-Westernism and increased instability.

The article includes reference to a detailed Gallup study of opinions in the Muslim world. His final conclusion comes as no surprise to most Muslims and careful observers of the Muslim scene, and clearly contradicts the "clash of civilizations" view that "they hate our way of life". In fact, they mostly want a similar way of life, but feel that failed and malicious policies by their own and foreign governments are frustrating their aspirations to better economic and political conditions.

Of course, as in most cases, the true cause of the problem is economic in nature:

In a major policy address, Ambassador Richard Haass, a senior State Department official in the George W. Bush administration, acknowledged that both Democratic and Republican administrations had practiced what he termed “Democratic Exceptionalism” in the Muslim world: subordinating democracy to other national interests such as accessing oil, containing the Soviet Union, and grappling with the Arab-Israeli conflict.

For better understanding the role of oil in U.S. foreign policy toward the Islamic world, especially in recent years, there is no better reference than Kevin Phillips' recent book: American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century.

Esposito concludes:

Finally, most fundamental and important is the recognition that widespread anti-Americanism among mainstream Muslims and Islamists results from what the United States does—its policies and actions—not its way of life, culture, or religion.

Impatience and intolerance: the deadly global partnership

2006-07-29T09:40:00.000-05:00

There is a large and growing literature on hyperbolic discounting (excessive impatience that favors instant gratification) in human decision making, which leads to dynamically inconsistent behavior and other problems. I have relied on this literature in part for my understanding of the paternalistic prohibitions in Islamic jurisprudence for certain types of trading in risk and credit (resp. prohibitions of gharar and riba).

In recent weeks, I have been depressed by the events in the middle east: most depressed of course by the senseless and tragic deaths of innocent civilians.

I think that those regional problems are tragic manifestations of the same problem of excessive impatience:

The US and Israel are impatient in their desire to "resolve" the regional problems. This is exemplified by the many paradoxical views held by those parties, from Secretary Rice's delusions of an imminent birth of a "new middle east" to Israel's alternating hopes for peaceful coexistence with its neighbors (with full normalization of relations, economic cooperation, etc.) and simultaneous pulverization of all militant opponents of that vision, which those opponents see simply (and not entirely unreasonably) as continued hopes of American/Israeli hegemony that aborts the dreams of future indigenous economic growth and political/democratic institutional development in the region.
Arabs and Muslims generally have also been extremely impatient. They cling to memories, and more often, highly mythical dreams of a glorious past when their ancestors had built the most advanced societies on earth. They do not recognize that it would take centuries to rebuild another civilization of which they can be proud. Resentment of other advanced civilizations and their satellite groups in the region (including wealthy enclaves around Cairo and elsewhere in the region, which serve as economic satellites for the advanced western economies), and employment of destructive force, will only widen the gap between the wealthy west and the resource rich but otherwise extremely poor region.
What we need is a new partnership between the West and the Arab and Islamic worlds. A partnership that is not built on myopic self-interest, but one wherein each group is willing to sacrifice some of its present well-being for future development. The billions of dollars spent on destruction can and should be directed toward education, institution building, and poverty alleviation. By education, I do not mean indoctrination and the desire to raise like-minded generations of Arabs and Muslims. I mean genuine education that respects differences and aims to assist those societies in outgrowing their sick rentier mentality which was exacerbated and entrenched with decades of reliance on oil receipts. By institution building, I do not mean the mechanics of democracy (elections, civil society, etc.), but rather the marginalization of interest groups who have successfully aborted the development of genuine social and political institutions, even as they adopt empty shells of Western institutions...
That is a tall order. It is unfortunately easy for Congress and other sources of funds in various parts of the world to approve and finance the spending of billions upon billions that lead to nothing but destruction and entrenchment of the sources of the current crises. The ease with which this money is thrown at the highly profitable war machine contrasts with the great difficulties in trying to raise money for curing disease, eliminating hunger, or improving education (where a million dollars is considered a very large sum).

Thus, impatience and greed have sown the seeds of death and misery. Just as impatience and dynamic inconsistency at the individual level can be remedied with religious and social norms in the form of prohibitions of certain types of trading in credit and risk, the tragic consequences of those same diseases can be remedied at the social level with basic norms of international decency, morality, norms, and laws. Sadly, there appear to be virtually no recognizable force on the international scene today that shows even the slightest bit of decency and morality. Consequently, there appears to be no end in sight for this catastrophic condition of the miserable human species.

The economics of middle east turmoil

2006-07-18T19:38:00.000-05:00

With numerous self-styled pundits commenting on the current events in the middle east, I am surprised not to have heard anyone yet bring up a simple economic formula: If you are a major oil exporter, and you spend $1 in any direction that increases turmoil in the region, or ensures continuation of turmoil, you are likely to reap the fruits manyfold through higher oil prices.

Wars have always more than paid for themselves from the point of view of arms dealers, etc. Now, they are also an economically profitable trade for oil exporting countries. (Or course, some oil exporting countries in the region are nervous about long-term implications of the fighting, but they cannot deny that the fighting makes them much richer). Some countries lose tourism receipts, of course, but (a la Kaldor-Hicks efficiency analyses), they can be -- and probably will be, directly or indirectly -- compensated for those lost receipts. Construction firms will make huge profits, no doubt...

All in all, the more turmoil there is, the more that the rich will grow richer. The poor and dispossessed will die, but their surviving family members can be fed empty slogans by beneficiaries on all sides. In the final analysis, economists can even celebrate the eventual rise in per capita income, especially if the death tolls are substantial.

Wisdom of ibn `Ata'illah

2006-07-14T20:28:00.000-05:00

For the last couple of days, I have been obsessed with the second of the Wisdoms of Ibn `Ataillah al-Sakandari:

إرادتك التجريد مع إقامة اللّه إياك في الأسباب من الشهوة الخفية‏،‏
وإرادتك الأسباب مع إقامة الله إياك في التجريد انحطاط عن الهمة العلية

Here is my (non-literal) translation of the couplet [updated July 17, to make it more accurate]:

When you're stationed with worldly means, wish not that they're withdrawn: Fight your hidden desire;

And wish not for the worldly means when they are stripped away: Lose not the quest that's higher.

I hesitated whether or not to post this on the blog, and then recognized that this is at the heart of Islam and Economics.

Khallaf on inferring legal rules from Texts -- Parts 3, 4: Logical inference, necessary implication, and ranking the four methods of inference

2006-07-13T08:40:00.000-05:00

This is the translation of continuation of detailed discussion of The First Rule.

3. Logical import of the text (دلالة النص): The meaning inferred logically from the Text is that which is understood from its spirit and logical import. Thus, if the Text implies a ruling in a particular instance based on a particular instigating factor (علة), then if there is another instance wherein the same instigating factor applies equally or more strongly, and that is understood immediately from the language without need for inference or analogy, then it is understood that the Text applies to both instances, based on this correspondence of instigating factors.

For example, Allah (swt) says with regards to parents: "do not say to them `uff' " [17:23], the instigating factor for that prohibition is prevention of inulsting and hurting one's parents. Clearly, there are worse means of hurting and insulting one's parents, such as physical abuse and verbal insults, which are thus forbidden by this Text forbidding ta'affuf. This follows since it is linguistically clear that the prohibition of such display of intolerance applies more appropriately to more severe forms of abuse and insult, and thus the unspoken is more worthy of the legal ruling of prohibition than what was mentioned.

Another example is the verse: "those who devour property of orphans unjustly devour none in their bellies but fire" [4:10]. It is understood directly from the Text that it is forbidden to devour or eat the orphans' property unjustly, and it is understood logically that it is forbidden to burn, waste or otherwise destroy the property of orphans, since all such transgressions would be equivalent to wrongfully devouring the property of one who is incapable of protecting his property. In this instance, all means of destruction of the orphan's property are equal in instigating factor to eating it, and thus the prohibition applies equally to all such forms.

... [example from Egyptian civil code]

4. Necessarily implied meaning of the Text (إقتضاء النص): What is understood as a necessary implication of the Text is any meaning that is not mentioned explicitly, but that is required for the Text to be meaningful.

An example is the Prophetic Tradition [literal translation]: "acts of my religious community ('umma) based on error, forgetfulness, or coercion have been lifted". The apparent meaning of this Hadith's language suggests that the very act based on error, forgetfulness, or coercion is itself lifted (rufi`a). This is not a correct meaning, since the act cannot be lifted once it is executed. Thus, to make the Text meaningful, we infer a missing term, indicating that the sin of such acts has been lifted [thus, the proper translation would be that "my religious community has been absolved of sins based on ..."]. Thus, "sin" is an ommitted term, but its impilcation is necessary for the Text to be meaningful.

Other examples include the verse "your mothers and daughters are forbidden for you", meaning in marriage. Similarly, the verse: "forbidden for you are dead animals, blood, and pork meat", means the prohibition of eating such objects or using them to other beneficial ends. In such instances, prohibition is not attached to the mentioned individuals and objects themselves, thus the forbidden aspect or action must be inferred for each Text according to its appropriate context.

...[more examples of necessarily implied meanings]

[Summary of first rule:]

Based on this detailed analysis of the four categories of Textual meaning, we conclude that any meaning inferred thus can be a legal proof. In this regard, (1) the most apparent meaning is the one intended by its context and understood by its phrasing, (2) the meaning based on Textual hints is necessarily attached to the phrasing, (3) the meaning inferred logically is based on the spirit and logical import of the text, and (4) the meaning derived from necessary implication is the one without which the Text cannot be meaningful.

In this regard, the immediate Textual method of inference is stronger than the Textual hints method, since the former is immediately understood and intended by the context while the latter is necessarily attached and not intended by the context. Both of those two methods are superior to logical implication, since they are both based on the Text itself and its phrasing, while the logical implication is based on the spirit of the Text and logical analysis thereof. Thus, if the meanings are in conflict, we give precedence to the immediate textual meaning over the hinted textual meaning, and both are given precedence over the logically inferred meaning.

As an example of conflict between the immediate Textual meaning and the hinted one is the Prophetic Tradition: "the shortest period of mensturation is three days, and the longest is ten". The immediate Textual meaning of this Hadith is that mensturation period cannot exceed ten days. In a different Hadith, the Prophet (p) said: "a woman spends half her life neither fasting nor praying", which hints at the possibility of mensturation extending to 15 days. However, since the first meaning is immediately inferred from the Text, and the second is only inferred from a Textual hint, the first is given precedence, thus limiting the legal period of mensturation to a maximum of ten days.

...[example from civil code]

As an example of conflict between hinted and logically inferred meanings, we consider the verse: "whoever kills a believer wrongfully should free a believing slave". This verse would imply logically that one who kills a believer intentionally should also free a believing slave, since that is a more severe crime. On the other hand, the verse: "whoever kills a believer intentionally, his punishment wll be hellfire, within which he will reside indefinitely" hints that there is no worldly punishment for this crime, since the only mentioned punishment is residing in hellfire forever. Since the two meanings are in conflict, the one inferred from Textual hint is given precedence over the one inferred logically, and hence the premeditated murderer is not required to free a slave.

Next posting will begin coverage of the second rule, iA.

Khallaf on inferring legal rules from Texts -- Part 2: Textual hints and conjoined meanings

2006-07-06T06:47:00.000-05:00

This is the continuation of detailed discussion of The First Rule, translation of which was started in the previous posting.

2. Textual Hints (إشارة النص): A textual hint is a meaning that is not immediately apparent from the words, but a conjoined meaning based on the specific words used, even if it is not the meaning intended within the specific textual context. Thus, since this type of meaning is linguistically conjoined but not intended primarily within the linguistic context, it is thus inferred from the text based on hints, rather than explicit statements. The conjoining of such meanings with primary ones may be manifest or hidden, and that is why scholars have noted that understanding textual hints may require careful reflection and much thought (although, sometimes, it can be understood with very little reflection).

As an example, we consider the verse "[the father] for whom the child was born is required to provide for them food and clothing, according to the best conventional norms". The most direct meaning of the Text, and the one intended by its context, establishes that fathers are responsible for feeding and clothing the mothers of their children. Moreover, the text hints that the father is solely responsible for all expenses of his child, and thus the tribal affiliation of the child follows that of his father. It also follows that if he needs it, the father has the right to take from his child's property without compensation to meet his financial needs. Those latter meanings were inferred from the Textual hints, since the use of the letter lam in (على المولود له) establishes that the child belongs to the father, and that -- in turn -- establishes the rest of the rulings. Those meanings are conjoined to the primary meanings because of the specific wording, but they are not intended by the context, and thus they were inferred from Textual hints, rather than direct Textual wording.

As a second example, we consider the verse enumerating those entitled to a share in fay' (war booty taken without fighting): "to the poor immigrants who were expelled from their homes and properties, seeking provision from Allah, and His good pleasure". The Text here hints at the fact that those immigrants have lost ownership of the properties that they left behind, since they were called "poor" (فقراء), which implies that they no longer own property. This also is a meaning that is conjoined to the language, without being an intended meaning in the Textual context.

... [examples from man-made laws]

It is important to be careful when inferring meanings based on Textual hints, restricting such inference to meanings that are conjoined to the Text in a necessary manner. This is to be contrasted to encumbering the Text with meanings that are quite different, and not necessarily conjoined to the words of the Text, which constitutes subversion in understanding the Texts that is quite different from the inferences based on Textual hints discussed here.

In the next installment, we shall continue with the 3rd component of the First Rule: logical inference from the Text (دلالة النص).

Khallaf on inferring legal rules from Texts -- Part 1: "Allah has permitted trade and forbidden riba" + polygamy and monogamy

2006-07-05T09:00:00.000-05:00

Please see the previous post on the full citation of this article from the Egyptian Journal of Law and Economics January 1940. The translated text will be shown in red and indented, any comments of my own will be shown in this standard grey font, without indentation.

The rules herein were derived by scholars of Islamic legal theory from the linguistic methods of reading words and phrases in Arabic, with the tacit approval of leading Arabic linguists regarding the meanings of words. Those rules are applied equally to inferring rulings from Canonical Islamic Legal Texts as well as interpreting rulings from any other Arabic-language legal texts. This is the case since the Legislator's legislation in any particular language must intend for the terms and articles in the written law to be understood according to the standards of that language and the understanding of its people. Thus, we shall ensure that our practical examples for each rule are given from the Canonical Islamic Legal Texts as well as from our own man-made legal texts (أن تكون من نصوص القانون الشرعي و من نصوص قوانيننا الوضعية). We hope that our legal experts will give us more opportunities for making such applications.

[M.E-G: For brevity, I shall only translate examples dealing with Islamic Legal Canonical Texts.]

The First Rule

"An Islamic Legal Text (النص الشرعي) may be used for inference based on phrases (عبارته), hints (إشارته), inferences (دلالته), or necessary consequences (اقتضائه). Those methods vary in the strength of their resulting inferences. Thus, if they lead to different inferences, what is understood linguistically from the phrase supersedes what is understood by hint. Both linguistic and hinted meanings would supersede inferential meanings. This applies equally to any legal text written in the Arabic language."

The general eaning of this rule is that any legal Text (i.e. from Qur'anin verses and Prophetic Hadith) leads to inferences beyond its immediate linguistic meaning, since it may also have other meanings inferred based on hints, logical inference, or necessary consequences. All such meanings can be used as proofs inferred from the Text, since one who is bound by the legal import of a Text is bound by all its linguistically-accepted inferred meanings, using all of the listed methods. As mentioned before, the means of inference vary in strength, which becomes relevant when opposing inferences are derived from the same text.

We now discuss this rule, and the four means of inference listed therein, in some detail:

1. The Legal Phrase: (عبارة النص) By "legal phrase", we mean the text itself, consisting of its words and sentences. What is understood from the legal phrase is the immediate meaning that is derived from its phrasing and that is the most likely intended meaning from that phrasing. Thus, the immediate linguistic inference is the legal meaning that can be derived directly from the linguistic structure of the text (its phrasing) directly or indirectly.

There are numerous examples of such explicit phrasing of legal texts to make the ruling manifest. Indeed, every religious or man-made legal text has such an immedite linguistic meaning. Some of those texts have additional meanings inferred from hints, logical inference or necessary consequences, and others don't. There is no need to give simple examples where the legal text has an obvious meaning. Instead, we shall give examples to distinguish between the immediate linguistic import and the inferred meanings of legal texts.

Allah (swt) said: "and Allah has permitted trade and forbidden riba". This Text's language has two manifest linguistic meanings, both of which were intended by the context. The first is that sales are not similar to riba (أحدهما أن البيع ليس مثل الربا). The second is that the legal ruling of sales is permissibility and of riba is prohibition. Both meanings are inferred from the text, even as the first meaning is the fundamental one, since the verse in its context was a reply to those who claimed that sales are similar to riba. The second meaning is derivative or indirect (و الثاني مقصود تبعا), because denial of similarity required clarifying the legal status of each transaction, so that one may infer from the difference in ruling that the two are not similar.

[M.E-G: The economist in me cannot resist making a comment at this point. This verse has been invoked whenever economically minded participants at Islamic finance conferences object that Islamic banking practices are identical to the conventional practices that they accuse of violating the rules of riba. All you've done is add layers of spurious sales, leases, etc., we argue, but the result is the same, so either both are riba or both are not. A favorite response by Islamic bankers and jurists on their payrolls is to quote this verse, claiming that Allah (swt) did not deny that sales and riba are similar, but maintained nonetheless that one is permitted and the other is forbidden. They thus invoke this verse to argue that form is what matters in the transaction, even if the substance is made arbitrarily similar to what they argue to be riba, which leads to terrible incoherence in the service of their brand of religious peddling. However, as Khallaf points out, the statement that one is forbidden and the other is permitted is to inform us that the two are in no way similar. It thus becomes our job to find the fundamental differences and avoid what is forbidden, rather than focusing on artificial differences to enrich ourselves in the name of religion.]

Allah (swt) also said: "If you fear being inequitable towards orphans, then marry as many [other] good women as you wish, two, three, or [up to] four; but if you fear that you will not be fair, then one".

Three meanings can be inferred from this verse: (1) permissibility of marrying a number of good women, (2) restriction of the permissibility to a maximum of four wives, and (3) the requirement to restrict oneself to monogamy if one fears being unfair if polygamous. It is clear that all three meanings follow immediately by the phrasing of the Text, and all are intended meanings based on the context.

However, the first meaning is derivative, while the second and third are intended to make fundamental statements. The first meaning is derivative since the verse is within the context of plenipotentiaries for orphans, who were afraid of taking the responsibility of guardianship lest they abuse their control of the orphans' property. Thus, Allah (swt) alerted them to the fact that their fear of abuse in dealing with property should also extend to a fear of unlimited polygamy. Thus, restricting marriage to a maximum of four or one is a requirement on anyone who fears transgressing against the rights of others, which is the fundamental intended meaning of the verse based on its context. Thus, the permissibility of marriage is not the fundamental meaning, but a derivative one, while the fundamental meaning is -- in fact -- restricting marriage to four or to one [as the case may be].

[M.E-G: It appears to me that Prof. Khallaf in this last passage is making a strong case for monogamy, while maintaining the upper limit of four made permissible by the verse. By arguing that the essence of this verse is restriction of the scope of marriage to avoid unfairness, and arguing that the restriction of the number is addressed to those who fear to be inequitable in dealings with orphans or others, he clearly implies that it is better to restrict oneself to monogamy, since there is no room for inequity between wives if there is only one. Of course, the unspoken connection is to the later verse "and you will not be successful in seeking [perfect] fairness between women [that you marry]...".]

Next installment, iA, continuation of the detailed discussion of The First Rule, starting with 2. Textual hints (إشارة النص)

Khallaf on inference of legal rulings from Texts - from an earlier Journal of Law and Economics

2006-07-03T02:11:00.000-05:00

I picked up an old article from my grandfather's library last night, and plan to post its translation in several blog postings over the next few days, iA.

The article is by the brilliant late Azhari scholar Abdul-Wahhab Khallaf, published in Arabic in مجلة القانون و الإقتصاد (Journal of Law and Economics), which was a publication of the Professors of Faculty of Law (didn't mention which University, probably Fouad I, which later became University of Cairo). Professor Khallaf's affiliation is listed as "Professor of Islamic Sharia; Faculty of Law".

The article was published in volume 10, issues 1 and 2, January 1940 (note: they had a "journal of law and economics since 1930! University of Chicago should feel jealous :-). Its title is "القواعد الأصولية اللغوية في فهم الأحكام من نصوصها" ("Linguistic-based legal-theoretic rules for inferring legal rulings from [Canonical or Civil Code] Texts").

I found many of the rules that he listed in the paper very thought-provoking, especially, for example, the rules relating to general (mujmal) Texts, such as the Qur'anic verses relating to riba.

The article is not very long, so I plan to post a full translation, iA, as soon as I have access to a real keyboard.

A Simple Mutualization Argument Based on Al-Qarafi's analysis

2006-06-21T16:27:00.000-05:00

I have posted a short note supporting my previous arguments for mutualization in Islamic financial intermediation. The central inspiration for this note is Al-Qarafi's difference #201 in Al-Furuq, in which he explains why interest-free loans are permitted despite containing both riba and gharar.

The abstract of the note follows (follow this link to the paper):

Islamic finance is a prohibition-driven industry, aiming to avoid the prohibitions of riba and gharar. It is well accepted in Islamic jurisprudence that riba and gharar do not affect the legal validity of non-commutative financial contracts (e.g. gifts). Jurists have long viewed this as a potential solution to the problem of gharar in commercial insurance, proposing mutual insurance as a non-commutative alternative. Likewise, Al-Qarafi had shown that loans are exempted from the rules of riba and gharar because of their non-commutative (in this case charitable) nature. It is thus argued that a substantial portion of Islamic financial intermediation can and should be conducted through mutual financial institutions.

Muslim-Western Discourse: What to Think and What to Say

2006-06-19T21:23:00.000-05:00

I received a number of private emails regarding the previous post on the NYT article. In particular, many fellow Muslims objected to my rhetorical question about whether one can be a Muslim and not hold a separatist-triumphalist viewpoint.

So, let me explain further: The answer to the rhetorical question is that -- of course -- the mainstream Muslim view is triumphalist, while Muslims vary in their views of optimal levels of separatism. In this regard, Mr. Shakir was merely representing the orthodox view, even though I am not sure that he is entitled to speak on behalf of all Muslims (i.e. we are not allowed to declare one who disagrees with this view as a non-Muslim if he or she professes to be one).

The real problem is the following: Western observers were scared of the likes of Mr. Shakir when they glorified violence and employed anti-American rhetoric. Now, he has professed that he denounces violence, but still wants to convert America into a Muslim country. For non-Muslims (and many Muslims, I might add) who are scared -- based on experiences that they had in countries that declare themselves "Islamic" -- of what his vision of a "Muslim country" might entail.

Let me explain: If the image in the minds of most non-Muslims and many Muslims is that of the Taliban's Afghanistan, the fact that Mr. Shakir now aims to reach his goal through legal means of persuasion appears even more threatening. Put yourself in the shoes of someone who fears that a "Muslim America" will replicate the historical worst case scenario perpetrated in the name of Islam. Fix the likelihoods of success of the Islamization program under a violent and a peaceful scenario. Now, if the advocates of an Islamic state try to reach it by illegal violent means, that becomes a security issue, which allows you to reduce the probability of success dramatically. If, on the other hand, they play by the rules of the game, then there may be very little that you can do legally (although, or course, discrimination would help reduce those chances of success -- and thus increased discrimination against Muslims is the most likely result that we are likely to observe in coming years).

One must respect Mr. Shakir's honesty in articulating what he and many or most Muslims believe (although the vision of what a Muslim country would look like varies tremendously within that group). However, you can see that for practical purposes, those who considered him intolerant before will be even more worried now. This is the fear that the west has had regarding Islamic movements in the middle east (FIS, MB, etc.). As Bernard Lewis coined the term, they fear that it will be "one man, one vote, once". Now, they fear, Western Muslims want to bring this threat right to their own homeland (witness the increased interest in U.S. media and politics in European Muslims, especially in France, where their proportions are relatively high).

So, if you believed that Mr. Shakir's approach was intolerant before, you would think that it is now better packaged, but even more dangerously intolerant.

This is a very difficult issue to face as Muslims. Too many Muslims repeat the rhetoric of Mr. Shakir in their homes, mosques, etc., but deny it when dealing with people of other faiths. Some even go as far as to claim that they respect other people's faiths and wish for them to respect ours (as evidenced by the now infamous Danish cartoons episode). Honestly, however, if you think that the other person's is wrong, and that he will only be saved if he converts to yours, you do not have as much respect for their faith as you profess, or as you hope that they will have for yours.

Of course, this is a problem with the doctrine of tolerance more generally: Can we tolerate those traditions that are intolerant. Likewise, a doctrine of mutal respect finds trouble in the face of separatist and triumphalist traditions, as ours admittedly is.

Yet, we ask others to be tolerant towards us, and to respect us, in ways that we may not be able to reciprocate.

It is up to our public leaders to formulate a coherent vision for dealing with this quandry. To the extent that I implicitly criticized Messrs. Yousuf, Shakir and Khaled, it was because they either avoid those thorny issues altogether, by focusing on positive aspects of relations with "the other", or they profess a view that is contradictory to the type of non-adversarial relationship that they wish to have with that other.

Of course, as I discussed in a previous posting ("asking difficult questions, seeking easy answers") there is evidence from the episode told about Amr Khaled's visit to Germany that his audience and devotees would abandon him if he were to address those issues. In the meantime, more intellectually oriented leaders like Tariq Ramadan -- who criticized Amr Khaled and other televangelists for avoiding those difficult issues -- have not to-date been able to provide solutions that capture the imagination of the masses of Western and Eastern Muslims.

In the areas of economics and finance, I think that I have found ample evidence in traditional scholarship to solve the problems of separatism and triumphalism (which others may or may not accept, but at least I think I see a way forward).

In this more important area, we are looking for better leadership, but I have not yet found it (I like Tariq Ramadan's approach a lot, but it is still work-in-progress, and I am not confident that the Muslim masses would accept his finished product).

Tolerant, or still separatist and triumphalist?

2006-06-19T06:23:00.000-05:00

I am sure that by now most people interested in modern Islam would have read the New York Times feature of Hamza Yusuf and Zaid Shakir. They were protrayed as the face of emerging Muslim moderation -- showing discomfort with their pre-9/11 anti-American rhetoric.

Underneath the veneer of tolerance and the merchandising acumen of Muslim Deepak Chopras, one wonders if there lurks the same separatist and triumphalist view of Islam that inspired their previous glorification of violence and anti-Americanism.

It is the same separatist triumphalism that I sensed in "Islamic finance" circles: Those in the know recognize that all they have produced is an inferior analog of convnetional financial products, and yet there is no denying the triumphalist boasting about the rate of growth of the "industry".

Likewise, in the NYT article, the closing quotes by Mr. Shakir show unquestionable separatist triumphalism:

He said he still hoped that one day the United States would be a Muslim country ruled by Islamic law, "not by violent means, but by persuasion."

"Every Muslim who is honest would say, I would like to see America become a Muslim country," he said. "I think it would help people, and if I didn't believe that, I wouldn't be a Muslim. Because Islam helped me as a person, and it's helped a lot of people in my community."

Like the Amr Khaleds of the Islamic world, the new discourse of the Hamza Yusufs does not seem to find adequate solutions to the difficult questions. First and foremost, can you even call yourself a Muslim if you do not hold a separatist and triumphalist view of Islamic hegemony over other religions? You can avoid the issue, and talk about tolerance "in the interim", but that is no more tolerance than the Christian Zionists' tolerance of Jews (they are only supported to bring about the second coming of Christ, when they all either die or convert).

Are they really a face of tolerant Islam, or just better packaging of their older selves?

Islam, ART and World Cup Broadcasting

2006-06-17T07:21:00.000-05:00

Many will be familiar with the uproar in Arab countries over the monopoly of world cup games by the subscription-only satellite/cable channel ART. The network has struck deals with local authorities in Arab countries to ensure that their local populations can only watch world cup games on ART, which sells at prices well beyond the reach of the middle classes in those countries (over L.E. 1000 in Egypt, $600 in Palestine!). Some may be able to circumvent that monopoly by using dishes that can pick up European satellite channels, but that is generally a more expensive alternative.

Adding insult to injury, many of the semi-legal cable connections that some Egyptians had used for years to receive Arabic satellite channels were ordered severed, just as the world cup was starting, based on complaints by ART. So, to protect the monopoly, people who had actually been paying to receive ART and other channels now lost access (unless they agree to pay more for what they had already bought!). Ironically, in richer Saudi Arabia, the King forced ART to make some games available for free. However, in poorer Egypt, the monopoly stands strong.

Needless to say, monopoly is quite un-Islamic. If this were a new sports event that ART was showing, they can obviously charge anything they want for it. In this case, however, they chose a sport and an event that people have grown accustomed to watching on free broadcasting for many decades. Then, they struch a deal with governments so that others cannot make it available at lower prices. Thus, this was purely a case of monopolizing a market for which demand was originally built-up by low prices, and then raising the prices dramatically by virtue of that monopoly power.

Letter and Spirit of the Law

2006-06-10T09:02:00.000-05:00

In a brilliant analysis of the Enron affair, Business Week magazine reduced the problem to one of obeying the letter of the law while subverting its spirit. Skilling was a master of adhering to the letter of the law, the article argues, on which the Enron style was centered:

The Enron trial was at heart about the difference between the letter of the law and its spirit. It was the most complicated of the half-dozen or more big corporate corruption cases that have come to trial, not just because of the scope of the meltdown, but because the fraud at Enron was accompanied by the most obsessive and careful concern for the letter of the law.

The most beautiful analysis of the trial, and the general issue of letter and spirit of the law, to which this blog is dedicated, came in the middle of the article:

A trial by definition is about the letter of the law, but in starting the way he did, Berkowitz pointed out that you can't reliably interpret the letter without talking about its spirit as well. That was the thing Skilling couldn't see.

One day, I hope that Muslims can recognize the same point: the law is meaningless without understanding the maqasid. In the area of Islamic jurisprudence of financial transactions, Abdul-Wahhab Khallaf said it best: the law is there to serve certain ends, and the ends are more important than the mechanics of the law.

Naked short selling on NYSE: Makes you wonder

2006-06-09T07:28:00.000-05:00

In an article on possible illegal short selling of Vonage stock, contributing to its fall, Wall Street Journal reported the following:

Some of the NYSE regulatory questions in the letter appear aimed at determining whether dealers or their customers may have violated rules curbing the practice of "naked short selling," or selling shares without having them available or knowing how they can be provided to the buyer when the transaction settles after a few days.

The rules against naked shorting were tightened in mid-2004 by the Securities and Exchange Commission, and took effect in January 2005. They put new requirements on exchanges to police trading. As an SEC official noted at the time, naked shorting could drive down a stock price in an "abusive or manipulative way."

This makes one wonder about the extent of abuses in Arab exchanges, and how much they may have contributed to massive reallocation of wealth from those without access to brokers to those with such access.

The Economics of Islam -- Part II: A New Social Contract

2006-06-08T06:43:00.000-05:00

This is a more serious posting. It relates to the dysfunctional relationships between Muslim populations and their governments. Muslim populations have grown restless after the welfare state-mentality -- following the socialist movements of the 1950s and 1960s and/or the oil revenue spike of the 1970s -- has given way to the stark reality of the terrible poverty and underdevelopment of those countries (including the oil rich countries, which are nonetheless incredibly poor).

The way out of this economic underdevelopment will not be easy. The medicine that is required to wean those countries off their rentier mentality, get rid of kleptocracy, and instill a culture of saving and genunire entrepreneurship, is very bitter. It requires a new social contract, for which the rise in Islamic fervor may be harnessed.

In his controversial book "The Great Test" (الفتنة الكبرى), Taha Hussein proposed an interesting political-economy interpretation of Islam: The resistance of Quraysh to Islam had very little to do with its monotheistic message, he argued -- most of the elites were agnostic at any rate, using religion only as a vehicle for political and economic power. It was the socioeconomic message of Islam that they found most disturbing: it affirmed private property and enterprise, and hence could not easily be dismissed (in today's language) as Utopian socialist or communist, but at the same time emphasized equity and the evils of excessive wealth accumulation. Worst of all, argued Hussein, Islam threatened the aristocracy created by marriage of money and power, declaring that the noblest are in fact the most pious.

According to Taha Hussein, the righteous leaders of the first fifty years of Islam (610 to 661 CE, spanning the beginning of the Prophet's mission until the Umayyads established their dynasty following the assassination of Ali, the fourth and last of the rightly guided Caliphs), with the possible exception of `Uthman (whom Hussein argued had good intentions but bad policies) -- the reason that his book was so controversial -- led by example: The Prophet (p) was a middle-class merchant, but when he became leader, he chose to die poor. The same is true of `Umar, Abu Bakr and Ali (r), who all insisted on keeping the Muslims from enjoying the great riches of conquered lands, and led by example -- living very simple lives. By living as the poorest do (`Umar eating only bread with oil when others suffered under famine being the most famous example), they could ensure a more equitable model of economic development (as opposed to the model where the rich get richer and the poor poorer).

The exceptions, of course, were `Uthman (r), who allowed the Prophet's companions to trade land, live more luxurious lives in the conquered lands, etc. Once this undisciplined materialism took hold of a big fraction of Muslims, argued Taha Hussein, the end of the socioeconomic regime started by the Prophet (p) in Madina had begun. `Ali tried to bring back the discipline of the earlier decades under `Umar (r), but to no avail -- too many Muslims by then could be lured away from his strict standards by the promise of riches under Mu`awiya.

The current state of affairs in Muslim societies combines the worst of both worlds: the elites of Muslim societies remind us of Yazid, son of Mu`awiya -- they do not even use economic incentives skillfully to further the public interest in any meaningful way; they are merely infatuated with fabulous and previously unimaginable riches. Consequently, they spend excessively on unproductive activities that their extremely poor countries (including GCC countries, who are very poor by international standards, despite the windfall of oil revenues that is likely to last them only a century or less) cannot afford, and buy the public's temporary happiness with transfers of their short-lived energy rents. Investments are also geared towards consumables and fast profits, as the business communities try to share in the fabulous wealth of the political rentiers. Public investments, including infrastructure building, is in most cases inappropriate for the very early stages of development of those countries, if they were to decide to develop economically.

Hence the need for a new social contract. The new Islamic adherence is becoming clear among all but the top-most cirlces of the rich and powerful. However, it seems mainly to stop at the feel-good level of paying some charity, excessive performance of `umra and Hajj, sponsorship of religious entertainment, etc. If those groups take their religion deeper, and convince the elite circles that they should be good Machiavellians and mimic the increased religiosity of their governed public, then a new social contract may be forged to enhance savings rates, make competition more productive, and redirect investment to more appropriate forms conducive to economic development. (Interestingly, Khatami and Ahmadinejad in Iran seem to follow that model, and that may be part of their mystique for their peoples. Is this the new breed of political leaders that we may see around the Islamic world in future years? Perhaps those who are more politically adept will learn from the domestic political successes of those currently seen as demagogues, and forge this new social contract).

More specific day dreams will follow in later postings, iA.

The Economics of Islam -- Part I: If I owned a hotel in Egypt

2006-06-07T06:35:00.000-05:00

A dimension of Islam and Economics that I haven't touched upon is the economic dimension of increased religiosity among Muslims worldwide (at least in form for most, and in substance for many). Manifestations of the economic dimension of this increased religiosity cannot be missed. For instance, one may cite:

Clothing stores specializing not only in modest clothes, but explicitly marketed or labeled as "clothes for muhajjabat" (ملابس المحجبات). Part of that movement is to create a parallel fashion industry, built around the notion of an Islamic "uniform" (الزي الإسلامي), as it is sometimes called. This makes it difficult for preexisting clothing stores to compete for this -- the fastest growing garment market segment, hence giving the "Islamic clothing store" a decided competitive advantage.
Arabic satellite TV channels started with televangelist models (Amr Khaled being the most obvious example, but other models exist, catering variously to the fiqhi oriented, the spiritually oriented, the historically oriented, etc.). They have recently branched into the video clip channels as well (which remain the most watched channels, if coffee shops at shopping malls in Cairo are any indication). First, the songs of Sami Yusuf started showing up every 20 or so songs, then the Qur'anic reciter Mishari bin Rashed's "tala`a al-badru" started playing even more frequently. Now, it is probably only a matter of time before a 100% religious-oriented video clip channel is launched, to rival the soft-pornography variety (although it is far from obvious that deviating from the current mixed format of entertainment and religion would be profitable; the owners of those satellite channels may have done their research).

At any rate, what I plan to do here is to write about obvious extensions of this model of "economics of Islam" that may prove useful for Muslim countries and businesses. The first idea is to utilize the "religious entertainment" phenomenon -- started by the likes of `Umar `Abdul-Kafi in private gatherings of Egyptian upper-middle-class women -- to jump start a new type of religious tourism.

If I owned a hotel in Egypt, say at Hurghada or Alexandria, for instance, and I wanted to make a lot of money, here's what I would do: during holiday seasons, I would invite a televangelist like Amr Khaled or Tariq Suwaidan, along with a singer like Sami Yusuf or local variations thereof, maybe even some of the offshoots of Sufi Tariqas whose traditional songs are modernized by the likes of Sami Yusuf. I would invite them to stay at the hotel for a week, giving one performance after lunch and one in the evening. Then, I would publicize the event widely. I am sure that the hotel will be fully booked for those events. To maximize leverage of those events, one could spread the lectures/concerts over two weeks, say, by having them only over long weekends (Thu, Fri, Sat), and requiring bookings for the whole week if a family wants to stay at the hotel during those performances.

Then, I would have a contract with those religious entertainment figures to spend random periods of time at the hotel (minimum of four days a month, say, in addition to the widely publicized weeks). The understanding will be that if you happen to be staying at the hotel, then you would meet with people informally for a lecture, song session, etc. Lured by the chance to be part of a smaller gathering with those cult heroes, hotel occupancy rates will stay high most of the year.

There will be a substitution effect, no doubt. You wouldn't get many Italian or German tourists if you become known as "the Amr Khaled" hotel. However, your business would be booming just as a clothing store that switches to "muhajjaba clothes" would.

Immature stock markets + poor Islamic governance = Arab stock market (now crashing) bubbles

2006-06-04T05:32:00.000-05:00

Most people who are interested in the middle east know about the crashing stock markets in the region. I only have very little anecdotal evidence, but here's the likely scenario: Many rich investors, and few poor ones, are allowed to buy on margin (borrow to buy stocks and leverage their returns when stock prices are rising). This starts a speculative bubble, with price increases accelerating and more small investors trying to get in. Then, the rich investors stop buying (they buy gold and platinum instead, or buy other markets, real estate, etc.). Simultaneously, banks start to tighten credit for margin buyers, and the rich start to sell and short sell (i.e. borrow the stocks from prime brokers to sell them, paying interest and dividends to the owners, hoping to close their short positions at a later date when the price falls) the over valued markets. In certain instances, some of those large investors may have access to insider information about bank policies, since they may own or operate the banks and brokerages that allow margin trading and short selling. The result, of course, is what we see.

Islamic jurisprudence had built-in regulatory controls to prevent this game. The prohibition of borrowing to invest (margin trading) is obviously the prohibition of riba, which everyone knows very well: greed drives one to borrow in order to leverage his resources in investing, but riba leverages losses the same way it leverages gains -- and now you are gambling. The Hadith also explicitly forbids "selling that which you do not own/possess", which is an explicit prohibition of short selling. Needless to say, contemporary jurists and lawyers have found ways around those prohibitions (for "Islamic hedge funds" and other dealings that received jurists' blessings; of course, most traders engaged in such schemes couldn't care less about Islamic jurisprudence). It is the rich investors who are manipulating the markets as described and profiting from those relaxations of or non-adherence to Islamic prohibitions, and the small investors who are lured in with those relaxed rules, only to lose their life savings and fall into terrible debt. That is extremely un-Islamic.

Remembering Imam Muhammad `Abduh

2006-06-03T08:39:00.000-05:00

1266 AH/1849 CE -- 1323 AH/1905 CE

Remembering Imam Muhammad `Abduh: A leader of the aborted Islamic reform movement of the past century. His approach to following the example of the early Muslims (al salaf) was turned upside-down by "Salafis" of the second half of the past century.

Political-establishment and reactionary-religious interests combined to assassinate him politically, forcing him to resign from Al-Azhar in 1905. He died shortly thereafter.

It has been over a century since his death, and we are still speaking of a long-awaited reform, disagreeing over what needs to be reformed and how.

رحم الله الشيخ الإمام

Activism and Academic Research

2006-06-02T08:23:00.000-05:00

I had a nice lunch conversation with Timur Kuran a few days ago in Houston. One point that he made, which continued to bother me days later, was that I may be making a mistake by linking my academic research (in the economic analysis of Islamic law) too closely to an activist agenda (a reform mentality inspired by the century-old work of Imam Muhammad `Abduh and his students). My academic mindset forces me to acknowledge that -- ideally -- academic research should be done objectively, independent of one's political or other inclinations. However, my training as a social scientist also tells me that there is no such thing as objective social science, and one is most objective when one declares one's biases up front and writes in the most transparent manner possible.

Honesty and integrity dictate trying to approach objectivity, i.e. reporting analyses that contradict or detract from one's preferred conclusions. However, when writing on a topic with such subjective roots as religion, economics and social order, it is impossible to claim success in approaching objectivity. This makes it difficult to claim that one's analysis holds a higher intellectual ground relative to purely ideologically-driven treatise (e.g. by Islamic economists or others) that assume the conclusion and provide half-baked arguments to support it, relying on the sympathies of their readership who agree with the conclusions regardless of the analysis.

So, what is the solution? To avoid writing on those topics altogether and leave the domain to pure ideologues, to bury one's bias in obscure academic jargon and haughty intellectualism, or to continue doing one's best in a transparent but intellectually honest manner hoping that future readership can distinguish between the different genres of writing? The rhetorical question is framed to favor the third option, but it is far from obvious that this is indeed the best course of action.

Captive market analogy

2006-06-01T10:13:00.000-05:00

More evidence has surface to show that minorities are being charged higher mortgage interest rates than their white counterparts with similar credit ratings and incomes. This is the proper analogy -- in my opinion -- to Islamic finance, where Muslim customers who are forced t deal with "Islamic financial providers" are obliged to pay higher interest rates. Part of the premium is caused by genuine (albeit spurious) transcation costs due to additional trades, SPVs, legal fees, "scholar" fees, etc. The rest of the premium (which may or may not exist in the short term, while providers are seeking to build reputation and market share) is the rent-seeking incentive that brings most providers into that industry. If "Islamic finance" providers can extend credit to those minority borrowers at lower rates than they are currently charged, there may be a mixed blessing in the whole charade.

Islamic Jeans

2006-05-20T20:43:00.000-05:00

It was only a matter of time after Islamic finance and Islamic cola to see the latest item described today on Al-Jazeera: Islamic Jeans. The jeans, which the news article says was designed in Italy (just like "Islamic finance" is designed in London) has features that make it easier to pray while covering one's backside and safekeeping personal items in appropriate pockets. It has a green trimming (!), and has the word al-Quds (Jerusalem) written in arabic on the change pocket (!!).

The article goes on to say that Jamat-i-Islami had declared in the 1980s that jeans were unacceptable as a dress form.

The funniest part of the report is in the last paragraph, where Grand Mufti Rafi Usmani is quoted to have praised the new jeans, and which states that his only reservation was that its name "al-Quds jeans" (or "Jersualem jeans") was not appropriate (would he favor "Islamic Jeans"?).

Come to think of it, this jeans may actually provide value to customers, unlike Islamic financial practices. The Islamic-finance-style jeans would just cut a couple of inches off the bottom to make it shorter, add the green trim, and cost 20% more than the original jeans (while continuing to expose them to the same or more backside-risks :-).

Peddling Religion Hits the Big Time

2006-05-20T08:31:00.000-05:00

In today's Financial Times article on so-called Shari`a advisors, the inflation of fees paid for certifications of Islamicity is attributed to shortage in "Islamic Scholars Versed in Finance":

The fees charged for shariah advice are a closely guarded secret, and much of what is received is reportedly paid to charity. However some investment banks say they have paid up to $500,000 for advice on large capital markets transactions, a dramatic increase from the levels seen a few years ago.

The shortage, of course, is in the market for individuals who can market themselves as "Islamic scholars", and who know how to "play ball" with the bankers and lawyers offering "Islamic financial" products.

What a mockery of Islam this has become.

Micro- or Predatory-Lending?

2006-05-15T06:33:00.000-05:00

In today's Wall Street Journal, an article appeared about profitable micro-lending. The story focuses on the pioneer of a more efficient model of micro-lending in India being able to cut costs and capitalize better on the high repayment rates of micro-borrowers. He has thus turned microlending into a profitable enterprise. One of the main financiers of his efforts declared this brand of microlending to be lower risk and higher return.

ICICI Bank Ltd., India's largest private-sector bank in capital, has gone so far as to give Mr. Akula an open line of credit. The bank says its more than $10 million in loans to SKS have been low-risk and give it a slightly higher return on capital than it gets from its corporate borrowers.

If the risk is so low, shouldn't the microlenders charge a lower interest rate to their customers? Otherwise, should we not conclude that this is a thinly veiled predatory lending practice? Citing "benefactor fatigue", the article suggests that this is a good alternative to more traditional forms of microlending. The ability to generate profits is good, since it suggests that the model is sustainable. Should they not have set up the institution as a mutual (credit union, e.g.) to eliminate return on equity provided by large for-profit banks?

Muslim financial professionals

2006-05-07T22:38:00.000-05:00

A bright ex-student at my university asked before accepting a job in investment banking: An acquaintance had told her that his father was an investment banker who knew a lot about Shari`a, and had declared that this profession is extremely sinful (I pointed out the inconsistency that questions that person's knowledge and/or credibility). The ex-student emailed, half jokingly, asking my opinion: After all, she said, she didn't want to work in a profession that is only slightly better (or worse) than running a casino or brewing beer.

Hers is hardly the exception. Muslim finacial professionals around the world are getting the message that they are engaged in a sinful (haram, un-Islamic) industry, and that they need to get out of it as soon as possible. Some merely resent that those who don't understand what they are talking about (religiously or professioally) can pass judgement on them and make others pass similar judgements. Many decide to try their hand at so-called "Islamic finance", only to discover quickly the nature of that racket. For some of those, it may be too late to return to legitimate financial industry, and they feel trapped in a lie. All are left worse off, along with the rest of Muslims who are victimized by misperceptions and abuse both from within the Muslim community as well as from without.

My message to the ex-student was simple: I am not qualified to give fatwas, and she should look elsewhere for a fatwa. My second advice is that as an intelligent and well-educated professional, she should not seek a fatwa (opinion) from an unqualified, lesser educated and significantly less intelligent usurper of sacred authority. As an economist, I argued, I can see how you can behave Islamically or un-Islamically regardless of the contracts used, or the name and certification of the institution within which you work.

For Muslim financial professionals who conduct their craft Islamically, wherever they work -- who are observing justice, fairness and morality, and seek to use their craft for the betterment of humanity -- I wish that next time someone accosts them with uneducated and uninformed charges of un-Islamicity, ... I wish that they will turn the tables and tell that person: "How dare you! Fiqh means understanding of the Shari`a, and from what I see, hear and read from your quarters, you do not understand very much!"

Opium of the people

2006-05-05T20:38:00.000-05:00

After returning from the Harvard Islamic Finance Forum a couple of weeks ago, a friend from Canada called to tell me that his friend (a Canadian Muslim lawyer) hated my presentation on mutuality in financial intermediation: "El-Gamal's Marxist view of Islamic finance", he called it.

I was reminded today of Marx's [in]famous statement that religion is the opium of the people as I sat through a khutba (Friday sermon), wherein the khateeb prescribed spending more time at the mosque (praying dawn and evening prayers there in congregation) as the cure to all the ills of Muslim societies. "Opium of the people", I thought to myself. Of course: no one can argue against spending more time in the mosque. I dared once to argue with a fellow parishioner after my khutba that if one spends so much time in the mosque (early mornings and evenings), then one will have no time for one's family, especially children who would wake up to find one in the mosque and go to bed while one is in the mosque. Needless to say, that fellow parishioner was outraged: "they let just about anyone get on the pulpit and give a sermon", he complained, "What kind of a Muslim would argue for not spending more time in the mosque?"

But that is another story: let's get back to Islamic finance. At Harvard, jurists, bankers, and economists were all in agreement: "you cannot expect Islamic finance to solve all the economic problems of Muslims, we are merely trying to help Muslim businessmen live according to the percepts of their religion." I had my own outburst as a response: "if the customer wants the smoke and mirrors circus show, fine, give them the circus show, but for Heaven's sake, try to provide some value in the process". "It is my hope to drive [the current breed of Islamic finance practitioners] out of business, if I can."

The form-above-substance approach is nothing but opium, very expensive opium. The poor still have no access to credit in the Islamic countries, but now the multi-millionaires and billionaires can get their murabahas and sukuk as multinational banks and law firms make their millions, and the jurists-for-hire make their hundreds of thousands. I was attacked by one of those jurists in Kuala Lumpur (when I was still being invited to Islamic finance conferences): "he writes that we have sold our souls to the devil", he complained; "but the lawyers who structure the deals make a lot more money", he said. "Yes, indeed, they are the devil", I replied jokingly from the audience (to nervous laughter from the young Malaysian students sitting around me).

Opium abounds in the Islamic world:

You can keep increasing the gap between rich and poor, but the rich can now do their financing "Islamically"
We can separate men and women, cover the women head to toe, and ignore rampant homosexuality and adultery
We can monopolize resources, deprive the poor from their financial rights through various zakah-shelters (homes are exempt, and I have 2 in Monaco, 2 in the Bahamas, etc.), but claim to be abiding by the Shari`a
We can leave our children confused about religion, in a culture that encourages critical thinking, and spend more time with other escapees at the mosque

We can do all that and more, and claim to practice Islam.

Opium of the people, indeed!

Asking difficult questions, seeking easy answers: The Amr Khaled Phenomenon

2006-05-02T17:14:00.000-05:00

A recent New York Times Magazine article about the Egyptian televangelist Amr Khaled has helped me understand his appeal to Muslims who did not grow up steeped in Islamic culture and scholarship. The biographical information about him explains how he can identify with the journeys of newly religious Muslims, ones who are searching for easy answers to complex questions about their existence and mission in life. It also explains why more scholarly, but equally westernized, Muslims of the same generation -- like Tariq Ramadan, who was quoted in the article -- feel that Khaled is evasive on all the truly difficult issues.

Most interesting in the article, however, was the report of Amr Khaled's own frustration when he visited Germany and tried to convince his audience that their primary goal is to integrate in their societies, interacting fruitfully with non-Muslims. All the proposals he heard had to do with teaching Arabic to new Muslim immigrants, and similar activities that had nothing to do with his main message. It reports some of his devotees challenging him on the message, which suggests that they may defect from his camp if he continues to push them on difficult issues. What they like is the use of modern methods and language (reformist language), assurance that they area adhering to traditional Islam (salafist language), and comforting spirituality (Sufi influence). When he tried to push them to think outside the box and explore difficult choices that they have to make as Muslims in the modern world. The reporter mentioned that Khaled asked her if she thinks that his audience understood what he was saying, saying that he thinks what he said didn't sink in.

So, here is the problem: even if you build your popularity and credibility with the masses through a combination of Joel Osteen and Dr. Phil methods, as the reporter described, you can't get the Muslim middle classes to address difficult questions that are important for their life in the modern world. How can we get them to think about religion not merely as a feel-good-about-yourself aid, but as a vehicle for social improvement and change?

Chicken, adultery, and other bad "Islamic finance" analogies

2006-04-28T16:14:00.000-05:00

The pietist view of Islamic finance is often defended based on bad analogies. A version of the first analogy was heard repeatedly at the Harvard Islamic Finance Forum, following a National Bank of Pakistan assertion that beef burgers at McDonald's in Karachi taste the same as beef burgers in Boston, but the former is halal and the latter is haram. I'll get to this analogy later, at the risk of losing credibility with many Muslims (since I do eat McDonald's burgers both here in the U.S. and elsewhere, after saying the basmala).

Let's first get to the second bad analogy, which is easier to dismiss: It is asserted that the only difference between marriage and adultery is a proper marriage or nikah contract. Similarly, the argument goes, the difference between a secured loan and murabaha financing (the ludicrous contract in which the bank buys a property and then sells it, assigning the ultimate buyer as an agent to buy the property on the bank's behalf and then to sell it to himself, incuring additional costs to sustain a fiction of "trade" as opposed to "loan") is merely the difference in contract.

The obvious reason that this analogy never gets off the ground is that the default ruling in sexual relations (or bud` as classical jurists said, most graphically) is impermissibility, unless there is a valid marriage contract. In contrast, the default ruling in financial transactions is permissibility, unless there is proof of existence of riba or gharar. In this regard, see my earlier challenge on secured lending operations, such as mortgage financing, wherein legal and equitable title are separated, and which cannot be classified under the same category as the classical qard, wherein interest is forbidden riba. In fact, as the OCC has concluded, murabaha and other "Islamic" financial forms are nothing but elaborate variations on the standardized western models of secured lending -- which are part of the business of banking.

In addition, there is clear benefit in requiring proper marriage contracts: Those contracts protect the rights of married parties to inheritance, protect the rights of unborn children, etc. Were one to write another contract that fulfills all of those legal functions (e.g. civil marriage contracts in western societies), without using the Arabic word "nikah" as Al-Shafi`i required, for instance, one would still have a valid marriage. Hence, the purpose of using the contract name is substantive (in the absence of complete contracts, the contract name provides many unwritten provisions, as dictated by jurisprudence or custom) rather than spuriously formalistic.

Now we get to the issue of halal meat, chicken, etc. There, too, one can argue that the prohibition technically disallows Muslims from eating two types of meat: (i) meats of animals or birds that were not properly slaughtered, and (ii) meats of animals or birds that were slaughtered as ritual sacrifices for pagan gods. In the first instance, (a) there may be health hazards due to blood not being drained properly, and (b) there may be inhumanity in the way that the animal was killed (e.g. painfully, or slowly), which Muslims should never support. In the second instance, eating animals that were sacrificed for pagan deities may support the pagan cults, help them to recruit more members, etc., which also should never be supported. Otherwise, if the animal was properly slaughtered, and the names of pagan or other deities were not invoked in its slaughter, one can take the juristic opinion of saying "bismillah" and eating -- which I do, as do most Muslims whom I know.

Of course, there are Muslims who insist on halal dhabiha, and would pay extra for its meat. That is their choice, but they shouldn't call that meat "Islamic" (implying that other meat is haram or un-Islamic). Likewise, I may be willing to buy financial products and services from Muslims, even if they cost more, just to support their businesses, in the same way that I support Muslim food stores that sell "halal meat", even though I consider the other meat halal as well (either as food of "people of the book", or as properly slaughtered meat on which no names of deities were invoked, thus allowing me to say the basmala). If they call it "Islamic meat", however, I would probably be just as offended as I am by the cheap marketing brand name "Islamic finance", which insults the name of my religion.

To the new breed of Islamic finance jurists

2006-04-26T07:39:00.000-05:00

At a conference last weekend, I might have gone overboard in criticizing Islamic financial practice as smoke and mirrors with no value added to Muslim customers. Mr. Nizam Yaqubi's response was to say that I may agree with Sheikh ul-Azhar that bank interest is not the forbidden riba, but that the majority of Muslims do not accept that opinion.

Of course, the various fatawa by the current Sheikh ul-Azhar Dr. Tantawi, Mufti Dr. Gum`a, previous Mufti Sh. Wasel, and others, were not categorically to permit all types of bank interest. Moreover, in my own writing, I have argued that much of the improperly collateralized lending by Egyptian banks, which put them in deep trouble with large nonperforming loans, was obviously ribawi from economic as well as juristic perspectives.

The point, though, is the following: Perhaps the new breed of Islamic finance jurists (Dr. El-Gari, an economist who was or still is an Associate Prof. of Economics at King Abdulaziz University; Mr. Yaqubi, an economics BA holder from McGill and private businessman, etc.) view much of conventional financial practice as perfectly fine, and view classical Islamic jurisprudence as an impediment to its utilization by pious Muslims. Their job, according to this view, would be simply to synthesize every possible conventional practice from ancient contracts, and to do it as efficiently as possible.

Of course, that is the perspective of the non-Muslim lawyers, and their view can be that they are in fact providing value to the customers of Islamic finance: at least the value is psychological if they were using financial products but feeling guilty about it, and the value may even be material if they had refrained from using the conventional products before they were synthesized "Islamically". I find it more difficult to recognize that Muslims can also hold the same view: "I'm providing some value, and if I make some money in the process, what can be wrong with that?". Mr. Yaqubi even said at a conference in KL -- chastising people like me who criticize them for taking so much money -- that the lawyers make a lot more money than they (the "scholars") do. Dr. El-Gari also chastized me once at a conference in Dubai that my arguments -- regarding the aforementioned Azhar fatawa, which date back a century -- were not appropriate for a conference on Islamic finance.

It would be much less lucrative for them, but wouldn't it be better for those modern-day economist-jurists to educate the public about the nature of Islamic jurisprudence of transactions instead of perpetuating the misguided pietist approach and profiting therefrom? Would they not have a clearer conscience doing that? Wouldn't it be more Islamic?

The monumental mistake: Contract-centric thought

2006-04-25T18:10:00.000-05:00

There is much that is depressing in the house of Islam today. As an economist, I find little that is more depressing than what is falsely called "Islamic" finance. The premise of that industry is that Islam permits or forbids contracts only. Thus, all that we need to do is to synthesize the forbidden contracts with permissible ones. Indeed, that is much for what is peddled today as Islamic finance: e.g. if you can't take a loan -- just buy some commodity on credit and sell it for cash, paying the same interest you would have paid for loans plus added transaction costs for the trades. That so many Muslims can view this as permissible is truly symptomatic of the malady that has afflicted Muslim minds. Contrast this with what Ibn Qayyim reports of his teacher saying about tawarruq (in I`lam Al-Muwaqqi`in in the book on changes in fatwa -- proof of the prohibition of hiyal:

And our teacher (God bless his soul) forbade Tawarruq. He was challenged on that opinion repeatedly in my presence, but never licensed it [even under special circumstances]. He said: “The precise economic substance for which riba was forbidden is present in this contract, and transactions costs are increased through purchase and sale at a loss of a commodity. Shari‘a would not forbid the smaller harm and allow that which is more harmful”.

In other words, Ibn Taymiyya did not simply look at the contract, but how and why it was used. Even though tawarruq technically used sales, it was clearly a device for extending an interest-bearing loan, in which we cannot verify if the interest rate charged was fair -- hence forbidden riba. In other words, if the purpose of the sale was not genuine interest in that commodity, then one could trade Aluminum to mimic the rate of return to LIBOR, or to mimic the rate of return on pork bellies, etc. In what sense would one be a trader of Aluminum? In what sense is this genunie bay`.

Given the advances in structured finance, one can easily disguise riba in any contract, and it would be the ultimate of disingenuousness to say "but this is bay` (sale), and Allah has permitted bay` and forbidden riba". The objective of the Legislator (S) cannot possibly be to enrich lawyers and consultants at the expense of Muslims who receive no value for the added price that they pay for credit or other financial services. This was done in the past by loan sharks, who would sell a piece of cloth to a needy farmer for a credit price of 200, when its cash price -- which everyone knew was the only thing that the farmer sought -- was only 100. That is riba of the worst kind, an unjustified increase that can eventually enslave the poor farmer, as had happened for many centuries.

Conversely, advances in structured finance, information technology and regulatory frameworks can also allow us to remove riba and gharar from forbidden contracts. For instance, in the famous Hadith of trading dates for dates, the Prophet (p) told Bilal (in one narration) to sell the low quality dates and buy high quality dates with their proceeds. If there were posted spot prices on an exchange, forcing the barter trade to take place at the appropriate ratio of spot prices would effect the same equity in exchange that the Prophet (p) sought.

Should we then look for the objectives of the Law: justice and fairness in exchange, and see how best to achieve them by utilizing the advances in legal and information technologies, or should we use those technological advances to arbitrage the gap between ancient contract forms and modern financial practices? In the former case, Muslims would prosper by achieving fairness and justice while cutting down costs. In the latter case, they will pay more and receive less, without necessarily ensuring equity and fairness.

Is this really a difficult choice to make?

I suppose that it is only a difficult one to make if you decide that Islamic law need not make sense. That it is a set of formulae to follow, and the only objective is thus to follow the rules, even if you incur what some bankers have been calling "cobm" (cost of being Muslim). Of course, that would require abandoning the primary Usuli principle (as articulated, e.g. by Al-Shatibi) that God never forbids beneficial things unless there is a greater harm.

Of course, one may argue that there may be a greater harm that we cannot see with our current economic knowledge. However, that argument cannot possibly be reconciled with consulting "Shari`a scholars" who have extremely limited knowledge of economics and finance, let alone ones who are hand-picked by bankers and paid handsomely for sanctioning their "Islamic" products.

Do those sincere people who give this sanctioning so much weight fail to recognize that jurists of the classical period were the economists of their time, and thus were the best qualified to rule on the basis of benefit-analysis?

Do they simply wish to hang their potential sins on someone else's neck (the literal meaning of imitation or "taqleed")?

Do they not distinguish between issues that relate to man's relationship with the incomprehensible Deity (e.g. acts of worship), wherein logical analysis plays a minor role (although we do defer to engineers on the direction of qibla, for instance, despite early resistance by jurists who thought only in terms of Cartesian maps), and matters that relate to life and transactions, where the vast majority of today's jurists are clearly unqualified to issue opinions?

I can't understand my fellow Muslims' minds.

Sacred authority and theatrics

2006-04-24T11:14:00.000-05:00

The late Sheikh Muhammad Al-Ghazali (a real scholar, the da`iya of our time, as Al-Qaradawi is the faqih of our time) made fun of those whom he saw in London wearing clothes made for the desert of Najd, as if religiosity had anything to do with costumes. But those who have attended a number of conferences on Islamic finance have surely seen the increase in theatrics. People who are marketed as "religious scholars" have increasingly been attending conferences wearing their national costumes, which naive Muslims and non-Muslims wrongly associate with piety. Of course, we have seen the same costume-based status in our local mosques, making one wonder: why does a checkered red and white cloth on your head -- with "made in England" printed on it -- make you pious or knowledgeable. King Abdul-Aziz Al-Saud wore that type of head covering while establishing his kingdom, and it has become a national symbol. So, if people wish to wear that national costume for nationalist reasons, there is obviously meaningful symbolism in it. But now we have those national costumes, which do appear exotic in London or Boston, implicitly signaling religious knowledge.

The majority of Muslims cannot read or understand Arabic. So, as someone told me at a conference, as soon as a person in an exotic costume starts to cite Qur'an, Hadith, or even mediocre juristic analysis from eight centuries ago, it sounds like a priest speaking in Latin. It sounds sacredly authoritative.

Never mind that the speaker may have no formal advanced degrees in religious studies, finance, or any relevant field. They can simply cite an unverifiable list of names of "shuyukh" with whom they studied, and without formal degrees, you'll never know whether they ever understood what those shuyukh were saying (or if those shuyukh themselves understood the practical areas about which the self-made expert is supposed to be knowledgeable). Just imagine if a medical doctor performing an open-heart surgery on you had as his credentials the fact that he had sat down -- with many other wanabe doctors -- and listened to other doctors. Here is the recipe:

Put on a costume. Even if you traveled in regular western clothes, you need the costume for appearances when you attend the meetings. If you are worried about being seen in the western clothes, you may want to keep the costume on more often.
Thicken your accent: it makes you sound more exotic and knowledgeable.
Pepper your talk with superfluous Arabic words, for which perfectly good English terms exist.
Try not to mix with the masses: Always walk with an entourage. Instead of going to the microphone like others, ask for the microphone to be brought to you, etc.
Make sure to use at least one dirty joke in each appearance: it helps break the ice and make you seem more exotic and learned.

Interestingly, some of the real scholars, like Dr. Hammad, actually come to conferences in a suit and tie -- even when the conference is held in Dubai or elsewhere in the Arab world. I guess they have legitimate degrees and do not need costumes.

But that doesn't sell as well to the second-rate bankers looking for a distinctive brandname that will allow them to get as rich as the better bankers. It doesn't sell well because most Muslims suffer from the need for authoritative figures who can claim possession of sacred knowledge. So, you just need someone who is moderately literate, and has good theatrical abilities, and voila: your second-rate product is "Islamic".

That is an affront to a great religion and a great tradition. Those who engage in this charade should be ashamed of themselves.

I strongly recommend the sadly funny cartoons by Tarek El-Diwani posted here. I would laugh harder if they were not so true

VE RI TAS

2006-04-22T21:38:00.000-05:00

"Why am I here?" the dissilusioned economist wondered as he stared unbelievingly at the shield and the letters written on it: VE RI TAS.

Veritas?
Which truth and which reality?

Here is the truth and reality of Islamic finance, according to Newsweek. Is this the truth that was discussed? The truth that plagues the poor Muslims. The truth of poverty, malnutrition, illiteracy.

Some tried to talk about this, but no, we were told that "Islamic finance" only has the mandate of allowing businessmen to conduct their buiness "according to the Shari`a" [according to whose interpretation, one might ask!].

Veritas?

The truth and reality of bankers recodifying Islamic law by buying their favorite fatwas ($100,000 a year per "Shari`a scholar" should get you the very best), buying their regulators' accommodation (intimidation by playing the religion card gets you a long way), and buying their academic hosts' credibility (I don't know how much academic credibility is sold for nowadays)?

No, of course not. That cannot be said.

The truth and reality of making a mockery of Islam and Muslims?

No, of course not. We can't be that honest.

"Of course, the Islamic sukuk will cost around $50,000 more [incoherent mumbling about "different asset class", and comparing "Islamic sukuk" to Yen-denominated assets, even though those bonds have nothing left but credit risk, and are priced based on credit ratings by the same credit agencies that have made that determination] but that is much better than before", the speaker said. "International banks will have an advantage in Islamic finance... because they have a lot of available hamburgers, and all we have to do is to Islamize some of them", he continued.

Religious peddling of the worst type? Capitalizing on the religious insecurity of Muslims? Our own self-creation of a culture of indulgences and money changers' tables? How can we start with a religion that is inherently a reformation religion and then regress to this level?

If the Prophet Muhammad (p) was there, would he not have been outraged? If Jesus (p) was there, would he not have turned over the money changers' tables? If Moses (p) was there, would he not have burned this golden calf and thrown it into the sea? Where is the Islam in Islamic Finance?

Will anyone speak the truth about this depressing reality?

Veritas -- the shield said, but very few could even bring themselves to hint at it.

Who needs truth and reality when lies, deception, smoke and mirrors can be so profitable?

Do you think that if anyone tried to market this nonsense as Christian or Jewish finance they would have gotten this platform to give credibility to their craft? Whom should we blame? The Muslims who allow the name of their religion to be abused in this fashion, or the snake-oil salesmen who exploit the arbitrage opportunities that we create for them?

Veritas? What Veritas?

Riba as an extreme form of gharar -- Thinking aloud

2006-04-19T20:25:00.000-05:00

I had taken it for granted that if you accept the view of the forbidden bay`u al-gharar as trading in risk, then you would recognize riba as an extreme special case of trading credit risk. Dr. Siddiqi objected that the essence of gharar is uncertainty, but -- he said -- there is no uncertainty in riba. I guess classical writers and Islamic economists for too long have been saying that riba is forbidden because the interest received is not compensation for commensurate risk, to the point that people have taken this to be true. This means that I need to have a full section dedicated to this issue in my academic paper. For now, let's see why it should be obvious that riba is an extreme form of gharar.

Economists regularly divide the types of asymmetric information that lead to market failure (due to uncertainty) into two categories: adverse selection and moral hazard. Let's look at the manifestations of those problems in riba and gharar, using examples from canonical texts and classical jurisprudence. We begin with adverse selection:

Adverse selection in gharar examples:
- Defective merchandise: seller knows if the good is defective but buyer doesn't
- Diver's catch: diver knows if this is a good spot to dive but buyer of catch doesn't
- Unborn calf: seller knows if cow has had previous miscarriages, etc., but buyer doesn't
Adverse selection in riba examples:
- Debtor knows if he has defaulted before, creditor doesn't
- Debtor knows better the chances of solvency at maturity of debt

Then, of course, there is moral hazard:

Moral hazard in gharar examples:
- Defective merchandise: temptation to deliver lowest quality acceptable goods
- Diver's catch: temptation to shirk
- Unborn calf, unripened fruit, etc.: temptation not to care for cow or orchard, since risk has already been transferred to buyer
Moral hazard in riba examples:
- Of course, this is the classical example: debtor has an incentive to take large risks with the creditor's money, since all return up to the interest payment goes to creditor, and -- depending on bankruptcy laws -- liability may be limited.

Classical writers looked at the creditor/debtor relationship as creditor receiving return without commensurate risk, which is obviously incorrect. If that were the case, other crediors would compete for that riskless return opportunity, driving the interest rate all the way to zero. The problem is that the risks are difficult to quantify, and there is too much asymmetric information, which modern financial markets and institutions reduce with various structures and regulations:

The creditor is exposed to credit risk and interest rate risk, thus favoring that the debtor takes very little risk with his money (explaining in part why a deposit, which is a contract of trust, turns into a loan, or contract of guaranty, if the depositary uses the property). However, due to moral hazard conditions, debtor may be tempted to take excessive risk.
The debtor is exposed to business risk and bankruptcy risk. Of course that risk was substantial not only in antiquity, but well into the modern age, where quasi-slavery still resulted from excessive indebtedness to loan-sharks, white-slave traders, etc.

So, we can see that for the creditor (buyer of credit risk), the risk is very extreme, since incentives could encourage the debtor to take excessive risk and expose him to the possibility of losing all his money.

For the debtor, the risks may be substantial if bankruptcy laws are not in place to protect him, and may still be substantial if default makes it impossible to obtain further credit or get into other business arrangements.

Hence, riba is an extreme form of trading in risk (credit risk), or an extreme form of gharar.

Continued discussion on Mutuality and Riba with Dr. M. Nejatullah Siddiqi

2006-04-17T11:18:00.000-05:00

See previous two posts for background. This is continuation:

MNS: Salam alaikum. I mean to press on the point relating to gharar. The essence of gharar is uncertainty. But there is no uncertainty about riba.

ME-G: wa `alaykumu s-Salamu wa raHmatu Allahi wa barakatuh. Yes there is [uncertainty in riba]: You do not know if the debtor will be solvent and able to pay (credit risk, which is very difficult to quantify), and for solvent debtors, there is uncertainty as to whether the interest collected is lower or higher than short term rates at collection time (interest rate risk).

MNS: I think you are alone in regarding riba an extreme kind of gharar.

ME-G: I recognize that this is a new statement, but I think that it has plenty of economic backing, and has great potential to solve a number of outstanding problems in Islamic economics.

MNS: The view has no support, neither in classical literature nor in modern writings.

ME-G: I agree, and it may be presumptuous on my part to propose this. However, it is a standard way conventional economics and finance looks at debt (credit and interest rate risk), and in that regard, all that I am doing is bringing our best economic and financial knowledge to bear on the religious issue.

MNS: I do not remember what you are referring to as Rachid Rada stuff. Please remind.

ME-G: It wasn't part of this debate. I had made earlier entries in my blog on Rachid Reda's response to the Hayderabad fatwa -- which argued that interest on loans that is stipulated at the inception of the loan is not the forbidden riba (even saying that Abu Hanifa only made it reprehensible). The translations and comments on that publication are posted in three parts:

MNS: Ibn Araby text you qoute in the Blog has nothing to do with gharar.It refers to one of several kinds of riba.

ME-G: Yes, I had raised it as proof that the riba al-jahiliyya mentioned in Qur'an was regarding debts from credit sales, not interest at the inception of loans [please see the context of requesting the Ibn Arabi quote in previous messages]. The "Riba as an extreme form of Gharar" (just as "maysir is an extreme form of gharar") argument is separate.