Nadine Marroushi interviewed the Editor at www.islamic-finance.com in London during Summer 2007.
Q. What are your reasons for thinking that "Islamic banking isn't Islamic"?
A. "My point is a little more refined than that. I am saying that Islamic commercial banking is not Islamic, and this is because commercial banking is a combination of usury and misrepresentation. The practice of usury is obvious and involves the advancing of money now in return for more money later, while the misrepresentation is less obvious and involves the creation of money out of nothing. Most of the time, the money that commercial banks lend is money that they themselves have created. Since neither usury nor misrepresentation can be Islamised, and since the business model of commercial banking requires both, there cannot be such a thing as Islamic commercial banking. For the same reason, there cannot be such a thing as an Islamic central bank. Historically, the Muslim world has had neither commercial banks nor central banks, though of course it did have institutions that fulfilled permissible functions such as payment transfer. In our rush to create an Islamic banking and finance industry, we have forgotten to ensure that the money we are using is itself Islamic. Islamic finance cannot be practiced with money that is un-Islamic. We therefore need a very fundamental reform of the institutional framework in Islamic banking and finance, but unfortunately the industry is simply refusing to address the issue."
A. "Globally, the banking and finance sector is earning as much as two trillion dollars of gross profit a year. A lot of this profit arises from the receipt and payment of interest within the financial system. Since Islam is the only major ideology to challenge that practice in today's world, the interest-based institutions face two basic choices. Either they openly oppose the Islamic banking and finance movement, or they try to neutralise it from within. I believe they have chosen to do the latter. This helps to explain why critical issues are being swept under the carpet, and why the core practices of Islamic banking and finance are beginning to look indistinguishable from interest. Then there are the financial realities of life to contend with. Graduates in London are more likely to choose to work for a major global financial institution on a starting salary of 60,000 pounds a year, than with us for 10,000 pounds a year. They're not necessarily bad people, but money talks and can often change a person's outlook on life. This is one reason that the modern system of usury is so difficult to overturn. Too many of the world's most influential people are earning a good living out of it. So the issue remains that we need to reform the system, and we can't rely on existing commercial forces to do that for us. Why would the dominant financial institutions of today want to change a system that has made them so profitable? Would institutions that depend upon interest for their continued success help to establish a paradigm that aims for the abolition of interest?"
Q. Is anyone listening, and doing anything about it?
A. "Many people, and a few institutions, are beginning to listen and campaign for financial reform in various ways. These include the members of other religions, for example the Christian Council for Monetary Justice in London, which has been campaigning for four decades against usury and the creation of money by the banking system. One also occasionally finds mainstream politicians supporting some key policies of monetary reform. American Congressman Dennis Kucinich has argued for the adoption of interest-free finance in public projects, and the former prime minister of Malaysia Dr. Mahathir Mohammed has promoted the use of gold in international monetary transactions. Vincent Cable, the Liberal Democrat Shadow Chancellor in the UK, has argued for controlling inflation by raising bank reserve ratios instead of raising interest rates. All of these are policies that I have argued for."
Q. What do the well-known scholars in Islamic banking and finance think of your ideas?
A. "Naturally, the scholars who are promoting the current version of Islamic banking and finance won't agree with what I'm saying. How could they? I think that much of what they are doing is a gigantic mistake. But I don't say that they are bad Muslims. One must presume that they are sincere in their thinking, and everyone is entitled to his own opinion of course. If we could only discuss our opinions on a level playing field, we might start to make some progress in this industry. Unfortunately, what has happened is that a rather narrow set of opinions from a small group of scholars has been used to define the nature of modern Islamic banking and finance, when in many cases there is little or no consensus to support those views. Some of the scholars that I work with, and many of the bankers and lawyers, say that the Islamic banking game is a scam."
Q. Can you name some of the scholars that share your views?
A. Shortly before he died, Sheikh Ibn Uthaymeen in Saudi Arabia called Islamic banking "the usury of deception". For this reason he regarded it as worse than interest-based banking. At least the latter doesn't pretend to be anything other than what it is. Even Mufti Taqi Usmani, a father of the modern Islamic banking movement, is reported to have said that what the industry is doing now is not so much the jurisprudence of Islamic transactions as the "jurisprudence of Islamic legal tricks". Here in London, Sheikh Haitham al-Haddad has argued consistently that most of the current range of retail Islamic banking products contains riba. And traditional scholars such as ibn Taymiyyah were arguing against tawarruq centuries before Islamic banks adopted it as the basis of their loan facilities.
Q. In practical terms, what is wrong with the product range of Islamic banking today?
A. "Two basic types of contract that can be used in trade and finance are contracts of investment and contracts of exchange. The current Islamic banking industry has based almost all of its products on contracts of exchange such as sale on a deferred payment basis, or the leasing of some kind of asset. These contracts are not controversial on their own, though their purpose is easily distorted when several of them are combined into a single transaction. For example, I might buy some metal from an Islamic bank for one hundred and ten pounds payable next year, and then sell it to someone else for one hundred pounds payable in cash now. If the bank organises these two transactions for me, then I am effectively borrowing cash at 10% interest. Reading through the detailed contractual documents for some of these products makes one wonder what connection they have with all the lofty talk of risk sharing that one hears on the conference circuit. In the event of a big recession, we'll quickly see that the financiers are sharing little or no risk in most of these deals. The bottom line is that contracts of exchange are intended for use by traders of goods and services, not by banks. If a bank wishes to trade cars, let it become a car dealer. If it wishes to rent property, let it become a landlord. And if it wishes to lend money for a profit, let it not use the word 'Islamic' to describe the process."
Q. You say Islamic finance is now mainly based on contracts of exchange, but what about the Islamic investment products emerging like private equity and hedge funds? Isn't Islamic finance also based on investment products?
A. "Of the two main contract types, it is the contract of investment that is the more suitable basis for funding businesses in Islam since it involves a sharing of risks and rewards that cannot be achieved with a contract of exchange. Profit sharing securities issued by individual companies, or funds comprising such securities, are much more in line with the principles of risk sharing that Islamic commercial law proposes. This is the kind of product that Islamic investment managers should develop and build upon. There is a whole world of genuinely Islamic products to develop if we stick to our principles here. Why not develop revenue sharing securities? Or true property partnerships between investors and developers? Why not launch an Islamic education fund to develop Muslim schools and colleges in the private sector? There is so much we can do if we have some vision and confidence in ourselves. The alternative is that we continue to copy the methodologies and product ranges of interest-based finance, and that will lead us nowhere in the long run."
Q. Do you work with these principles at Zest Advisory? And if the money being used in Islamic finance is un-Islamic, how can your company participate in product development?
A. "We develop financial products that avoid controversial legal techniques and that promote the core principles of Islam. We do this as far as is possible given the legal and economic environment around us. Here in England we designed and developed a commercially viable home finance scheme in which the financier and the homebuyer own a property as partners. The homebuyer buys portions of the financier's share of the property as the years go by, and in the meantime he rents the financier's share in order to live in the property. Crucially, the homebuyer is not forced to buy the financier's share of the property during the life of the contract, therefore he is never in debt to the financier, cannot be repossessed by the financier, and cannot find himself in negative equity. Imagine if that product was widely available today. Millions of people would want it. And they would respect the Muslims for making it available. As it is, non-Muslims look at the Islamic home finance products offered by banks and often they say "that's interest, and you people aren't fooling anyone."
Q. How do you go about achieving the larger changes that you say are necessary?
A. "In the past, the state put money lenders into prison for practicing usury. Now, those money lenders call themselves bankers and in many cases governments have put them in charge of the economy. They call it "central bank independence" which is a polite way of saying the same thing. Semantic distortions of this type are to be found everywhere in modern finance. Banks don't practice usury anymore, they "sell you a home mortgage". To make any meaningful change, we must first recognise that our idea of what is normal in matters of banking and finance have been very heavily influenced by the interest-based establishment. The volume of "research" being produced by the central banks, the World Bank and investment banks is truly enormous, but the underlying value system is very narrow in scope. Students who grow up with this kind of material might think they're being educated, but I would argue that the process has more in common with brainwashing. So we have to allow much greater openness and breadth of thought in our education and in our industry dialogue. We need to discuss the core issues calmly and sensibly, and not allow commercial or political forces to tempt the discussion one way or other. Then we need to hope that Allah gives us political and commercial leaders who are willing and capable of implementing the recommendations that emerge from the new thinking. Most importantly, the people should want the change and we will therefore need to help them understand the seriousness of the financial situation that faces them. The Americans failed to prohibit alcohol consumption because the people didn't believe it was the right thing to do. Contrast that with the prohibition of alcohol consumption in Medina. The streets were flowing with discarded wine as soon as the prohibition was announced. Likewise, if the Muslims of today are not interested in change, then we probably won't succeed in making a genuine reform. We certainly can't put the onus of change entirely on the banks."
Q. Can you make a comment about what you think the role of banks, and the state, should be with the above idea in mind (no money creation by private enterprises)?
A. The money creation function should be returned to the system that worked so well in the era of commodity money. New money is pumped into circulation when the mining companies produce gold or silver (for example) and take it to the mint for conversion into coinage. If the amount of precious metal expended in paying the costs of mining exceeds the amount of metal so produced, then no new metal will enter circulation in the form of coinage. And vice versa. That is a truly fair, market-based mechanism for allowing changes in money supply to occur. It is not based upon interest or debt, and neither the state nor the banking system retain any power to arbitrarily change money supply. It is also the traditional monetary system of the Islamic world. Commercial banks can continue as providers of payment transmission services, they can become financial advisors and arrangers, and investment managers, but they must not retain the right to create money out of thin air. That is far too great a power to place into the hands of any profit-motivated company.
This interview was originally published in Islamic Finance Today March 2008