Taking Notice

Every so often I run across an article that touches on something that I think deserves far more attention than it receives, not just in the specific instance but more generally, and today I’ve run across two. This article in the Financial Times (hat tip: Lounsbury) touches on two such issues:

Iran’s new central bank governor, appointed on Tuesday, aroused fears among bankers about government interference by mentioning a plan to eliminate interest rates on loans as a way to encourage “real and genuine” banking services.

Tahmasb Mazaheri, a former finance minister seen as close to Ayatollah Ali Khamenei, supreme leader, vowed to bring practices into line with laws against usury.

Mr Mazaheri is sympathetic to the populist policies of Mahmoud Ahmadi-Nejad, Iran’s president, who has promised widely affordable “profit rates” – as interest rates are referred to in Iran’s Islamic banking system.

Former economic officials warned of the potentially disastrous consequences. “There is no doubt that the government won’t be successful, but such a measure can disrupt the whole economy,” said Mohammad Tabibian, a prominent reform-minded economist.

The government worried bankers and economists when it formed a committee last month to study “revision of banking regulations”. The agenda of the 10-member committee, led by Parviz Davoudi, first vice-president, is unclear.

Mr Ahmadi-Nejad has urged banks to give cheap loans to those on low incomes. The president clashed with Ebrahim Sheibani, the last central bank governor, over rates. He said banks’ profit on loans must be cut to less than the inflation rate – which officially stands at 14 per cent and unofficially may exceed 20 per cent. In May, he imposed rate cuts, from 14 to 12 per cent at state-owned banks, and from 17 to 13 per cent at private-sector banks.

The first subject this article touches on that I think deserves much more attention than it receives is usury. Usury is lending money at interest. All successful modern economies are based on usury which is condemned by Islam and used to be condemned by Judaism and Christianity, too. However, every successful religion has a practical streak and Judaism and Christianity abandoned their distaste for usury long ago in a flurry of reinterpretation of Scripture. Islam is currently holding fast but, well, where there’s a will there’s a way and Islam, too, has found ways of lending at interest that satisfies at least some of its moral theologians. As a digression when anyone ever says “Islam this…” or “Islam that…” my eyes glaze over. Religion as it is practiced is a different creature than religion in its pure, distilled theoretical form. Where there’s a will, there’s a way.

The second subject is economic theory under Iran’s mullahs. Pegging the rate of interest, er, profit rate below the inflation rate sounds like a good way to either dry up liquidity or drive your banks out of business. Complete idiocy. To the best of my knowledge there are only two places where these theories of economics have been tried—Iran and Afghanistan—and they’ve been disasters both places. They can’t say they haven’t been warned, including by the informed among their own people.

The other article is this one from the Times of London:

Almost half of Britain’s mosques are under the control of a hardline Islamic sect whose leading preacher loathes Western values and has called on Muslims to “shed blood” for Allah, an investigation by The Times has found.

Riyadh ul Haq, who supports armed jihad and preaches contempt for Jews, Christians and Hindus, is in line to become the spiritual leader of the Deobandi sect in Britain. The ultra-conservative movement, which gave birth to the Taleban in Afghanistan, now runs more than 600 of Britain’s 1,350 mosques, according to a police report seen by The Times.

The Times investigation casts serious doubts on government statements that foreign preachers are to blame for spreading the creed of radical Islam in Britain’s mosques and its policy of enouraging the recruitment of more “home-grown” preachers.

The subject this article touches on that I think doesn’t receive enough attention is the Deobandi sect of Islam. I hear all sorts of complaints about Wahhabism and Salafism (with varying levels of informedness) but not that much about the Deobandi sect. The last thing I am is an expert in this area but I can’t help but think that Binladenism (for lack of a better word for the current variety of violent radical Islamist thought) is some sort of cross-pollenization between Salafism and Deobandi.

8 comments… add one
  • Ahem.

    If I may. First, usury usually refers to lending at “abusive or excessive rates of interest.” Of course Abusive and excessive are subjective terms.

    Second: All successful modern economies are based on usury which is condemned by Islam and used to be condemned by Judaism and Christianity, too. However, every successful religion has a practical streak and Judaism and Christianity abandoned their distaste for usury long ago in a flurry of reinterpretation of Scripture.

    As a point in fact usury remains condemned in all the Abrahamic religions (baring perhaps some bizarro American Protestants), but what is meant by usury (all interest, versus parsing the idea to mean abuse) has changed. Nor would I say “long ago” for Xtianity. Rennaissance really.

    Further, as a matter of fact leading (although not all) Islamic scholars in the early 20th century went back on the blanket interpretation of usury as interest.

    So, “Islam is currently holding fast but, well, where there’s a will there’s a way and Islam, too, has found ways of lending at interest that satisfies at least some of its moral theologians. As a digression when anyone ever says “Islam this…” or “Islam that…” my eyes glaze over. Religion as it is practiced is a different creature than religion in its pure, distilled theoretical form. Where there’s a will, there’s a way.
    Is largely spot on, but the POV being pimped by the “Islamic Finance” people – who are largely Salafi inspired at the roots – is but one that has gotten momentum due to some people with big money pushing it.

    As for your last observation, yes, actually a lot of modern Takfir Salafism is rather more a combination of extreme Salafiste thought from the Arab world (more Egypt and learned areas than Ibn Wahhab’s illiterate followers, who have merely bank-rolled something closer to their primativism) and Indian sub-Con extremist neo Deobandi thought. I’d call it neo-Deobandi btw rather than Deobandi flat out as the original movement, like original Salafism was not as problematic as the modern forms.

  • I have no problem with your diction on this, Lounsbury, and thanks for the original tip. The history of how usury, which used to include not just exacting interest but even taking a fee for changing money, came to mean charging abusive or excessive interest is kind of intriguing. In Christianity the argument on the subject was really launched in something like the 13th century with Aquinas arguing rather definitely against and Henry of Segusio listing cases in which charging interest was acceptable.

    Although the Catholic Church formally accepted instances of charging interest in the 16th century, Benedict XIV continued to condemn charging interest as late as 1745. He did, however, specify some workarounds not dissimilar to those of “Islamic finance”. As I said, where there’s a will, there’s a way.

  • PD Shaw Link

    Blackstone explained the difference in his commentaries:

    “When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called interest by those who think it lawful, and usury by those who do not.”

  • Good contribution, PD. The key point (at least for me) is that lending at interest (however one considers it) is the basis of successful modern economies.

  • Absolutely, time value of money.

    Now, the original Abrahamic prohibitions were not entirely irrational. Ancient practises on lending were positively… well loan sharking.

    The key in creating space for rational approaches to risk and return of course has been via creating rational and reasonable approaches to interest.

    BTW, in Aqoul both Shaheen (who’se an Arab entrepreneur as well as occasional blogger) and I have gone on now and again about this issue.

    Sadly much pimpery of Islamic Finance has been really rolling back some “redefining” that occurred about 100 years ago – and equally sadly rather too much of the neo-Salafi movement in the Islamic world is infected with anti-commerce ideas ported in from Arab / 3rd World socialism.

  • FWIW, within Judaism as well as within Islam there is room for getting around usury or, if you prefer, lending with interest. That is to convert loans into a joint investment allowing the lender to benefit as a partner from the profits of the investment. I’d guess that this entails a bit more of a risk on the part of the lender than a traditional loan. I’m not going to profess expertise at exactly how this works, but the mechanism is there.

  • The proposition of “joint investment” as a technical matter really is one of whether one merely dresses up debt in different clothes or one takes an actual equity position. The difference is in fundamental rights on the profits generated by a given investment.

    Debt guarantees a certain return (or rather a right to a certain return or some recourse if that minimum is not met), and leaves all excess return to equity and pretends to no significant rights over the owners / managers (in most markets and even in developed market this is synonymous – i.e. owner / manager). In effect, debt in a regulated market that prohibits (limits to criminal margins) loan sharking and extortion disguised as ‘lending’ represents an entirely different method of providing capital than equity, one which at once requires a minimum return but claims on interfering operationally with management.

    Equity, of course, above all in its “private” (unlisted) form does, and presents a terribly different risk profile given rights that are rather more limited, and in most of the world, rather deep reluctance on owners to give up any form of control or ownership that has any genuine meaning.

    To say “a bit more risk” is to fundamentally mischaracterie (or misunderstand) the problem in a very profound way. And ironically in a manner that the religious promoters of “Islamic” finance do consistently.

    Oddly, it also seems typical of Americans when they approach emerging markets, as the culture of risk and management in the US is … well profoundly different (not always better, but profoundly different)

  • I should note that my concern here is not merely theoretical. Pretending that one can do credit type risking taking with venture capital levels of risk (and often without any informed understanding of parties what than requires / means) has but two effects: losses and inefficiencies. Less firms get financed at higher cost.

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