Reproduced from the preface of the third edition of The Problem With Interest (Kreatoc Ltd., 2010, ISBN: 978-0-9544974-1-5)
In the seven years since the second edition of The Problem With Interest was published, the global economy has completed another boom-bust cycle. It is a cause for great concern that the banking system which is responsible for this latest crisis should be bailed out by the very governments and taxpayers who have been so hopelessly indebted by it. Where in ages past the culprits would have been deported and their system of oppression dismantled, today they are consulted on possible solutions and given still greater powers to implement them. The fox has been placed in charge of the chicken run.
In official statements and media interviews, apologists for the banking sector feed the public with disinformation on the causes of the banking collapse. They are given a comparatively easy ride by a corporate media that depends for much of its income and financing on the largesse of the banking sector itself. Meanwhile, public sector officials seem unable or unwilling to put long term interests above short-term expediency. They tell us that the financial crisis has been caused by too much bank lending and, simultaneously, that the solution is for the banks to lend more. The same British politician who was once congratulated for giving independence to the Bank of England is now congratulated for nationalising some of Britain's biggest banks. The same government that could not find the £40 million necessary to fund a 2.5% pay-rise for the British police in 2007 can suddenly find more than £200 billion to save the British banking system, courtesy of the Bank of England printing press. Some of us ask why, if the Bank of England can create £200 billion of new money to save the banking system, it cannot also create another £170 billion to pay off the budget deficit? We are told that such action would cause rampant inflation and that we have no alternative but to cut the budget. So the priorities are clear. We can risk inflation to save bankers, but not to save public sector services and the most needy members of our society.
And so life has been breathed back into a system of banking and finance that should have been left to wither, but which will now live on to cause yet another crisis in years to come. If the people had decided for themselves to proceed in this way, although no free and informed nation would have done so, then one would at least have expected precise and audited data to be made available on the nature of the bank bailout. Yet the standard of performance here has been shameful. In Britain, in a report published during January 2009, the House of Commons Treasury Committee highlighted the failure of the relevant authorities to disclose even basic data on the liabilities that had been assumed by the government during the previous two years. And in America, on 7 November 2008, Bloomberg News commenced legal proceedings against the Federal Reserve in an effort to force the release of information on how some one-and-a-half trillion dollars of bailout funds had been deployed. This in a society which prides itself on transparency and good governance and which lectures the developing world on its failures in precisely these areas.
No industry other than the banking industry could have raised such huge sums of new capital, loans and guarantees in a few short months. That these funds should have been provided with such little conditionality is incomprehensible unless one accepts that some of the most important decisions of government are in fact taken by the banking lobby. At the height of the crisis, one leading public official at a well known central bank remarked to me that 'the bankers are in the bunker with the government'. Meaningful change cannot be achieved in these circumstances and one is forced to conclude that the present establishment is incapable of reforming itself.
The volume of new money that has been created by central banks in the course of rescuing the global banking system is so large that inflation may soon become the most pressing of our financial problems. While this will help to reduce the real value of Western debts it will also undermine its currencies. But in the absence of such inflation, government, corporate and personal indebtedness will eventually become unserviceable. Many a previous empire faced the same impossible choice, under a mountain of usurious debts. As this problem is most acute in the West, it is likely that the larger economies of the East will accelerate their challenge in both the economic and military domains. In recognition of this possible transition of empire, businesses in many parts of the world have already begun to realign their commercial allegiances. The dollar is no longer the automatic choice of trading currency, and Western corporations are losing tenders for joint ventures that they would once have expected to win easily.
However, such a transition is no solution to the financial problems that are faced by the world as a whole. The financial system of the East is essentially the same as that found in the West. Usury, speculation, fiat money, fractional reserves and limited liability are as much a part of Chinese and Indian financial life as they are in America, Britain or Germany. Meanwhile, multinational corporations are becoming ever more integrated into the economic and political fabric of the major cultures of the world. They bring with them an essentially secular and materialistic set of values in finance, and much else besides, which employees are expected to adhere to. As this internationalisation continues, the likelihood diminishes that the East will adopt a radically different financial paradigm from that of the West. Yet the need for such a paradigm remains urgent. Many a demagogue has risen to power in the face of economic and social distress and wars have been fought over the earth's resources in far better times.
By restructuring their domestic financial systems in a way that is fair for all of their citizens, and by adopting policies that offer some hope to the nations that they interact with, the empires of the East and the West can reduce these risks. For the first-mover in this regard, a great political prize awaits in the form of new friends and alliances. The possibilities here are so much more attractive than what awaits us on our present road. But to make such a choice requires a vision that is based upon justice and spirituality, rather than material gain or military supremacy. This is one reason why Islam offers the kind of hope that capitalism and communism never have.
I left the interest-based financial sector in 1992 because of a conviction that God had prohibited what I was doing for a living. My departure was therefore an act of faith, and in retrospect it had to be that way. I had been brought up on an orthodox understanding of economics and the priests of this particular religion do not tend to undermine their own paradigm with empirical evidence. Thus I rarely encountered the evidence upon which a rejection of orthodoxy could be based.
In the years since my departure from interest-based finance, I have looked at the world through new eyes, opening doors that were not opened for me in my youth. The evidence that has emerged from this process is so well explained by the framework of Islam that in recent years I have spent more of my time sharing both the framework and the evidence with bankers from the secular world. These efforts have required more patience than I first expected. There is a general perception that the interest-based financial system wouldn't have survived so long if its harms outweighed its benefits, hence my data is often greeted with silence or a doubting smile. For a world that likes to accept evidence-based opinions, mine is a set of evidence that goes too far. It calls into question the rather basic assumption that merit is rewarded and inefficiency punished. It asks practitioners to leave their zone of comfort and in some cases accept that a whole career has been spent peddling a lie.
Professional spoiling tactics don't make the vital task of education any easier. Some years ago, in response to a frank but technical discussion that I had written on the subject of home finance, a leading bank cancelled its entire advertising budget with the publisher of my article. If this is what can happen to a small and relatively unknown finance magazine, one wonders what tactics are being applied to more widely circulated publications. On the Islamic banking and finance conference circuit, key speaker slots are gobbled up by major banks and financial institutions in return for money. Many of the executives who come to prominence in this manner seem happy to compromise genuine Islamic financial solutions in order to make a profit, and many more have little or no idea what those solutions look like in the first place.
In matters of governance, similarly grave problems abound. Financial regulators have been established by the same Islamic banking institutions whose activities they are supposed to be regulating. Islamic scholars are paid large amounts of money by the very clients whose financial products they are asked to pass judgment upon. One shouldn't need to say this, but banks don't tend to hire scholars who oppose their business model on religious grounds.
Now that the Islamic banking and finance sector has begun to suffer from some of the same illnesses that afflict the interest-based sector, the general standard of discourse in the industry has in some cases shown signs of improvement. A few prominent figures have had the courage to express public or private regret over the direction that has been taken. But in other cases, the industry's response to its own failings has been an even greater level of mendacity. Executives who spent years lining their pockets with the proceeds of the Islamic banking bandwagon are now turning to audiences with the message that big mistakes have been made, that we should think again, that we need a new direction, that, actually, Muslims did very well for several centuries without an Islamic bank. This delicate process of repositioning is both repulsive and fascinating: not so fast as to appear opportunistic, not so slow as to be overtaken by the tide of public opinion.
In this environment, those who study Islamic banking and finance must be prepared to look behind the public narrative in order to know the reality. They must ask what, if any, commercial or political interests lurk in the background. It is a process of investigation that can easily lead to cynicism, but researchers can take some encouragement from the fact that increasing numbers of practitioners have begun to question the methodology and product range that has dominated the last three decades of Islamic banking and finance. Among these practitioners, some have resigned their positions on principle and have thereby set a powerful example for those who are at the outset of their careers. Others have decided to remain on the inside, on the grounds that Islamic banking and finance cannot be left to the mercy of the global banking brands. For those with a sufficiently strong constitution, this is perhaps a valid strategy.
Whichever choice each of us makes in this regard, we should have the comfort of knowing that truth will in due course defeat falsehood irrevocably. Ours is not a political campaign, where slogans become worn out and allegiances change every few years. It is a matter of black and white, a choice between justice and grotesque injustice, and those who recognise this fact once never need re-convincing of it.
Tarek el-Diwany, 2010