Islamic Finance: What's the fuss?

Islamic Finance is making headline news; from Boris Johnson to the Dubai royals, Islamic Finance is beginning to demand attention from businessmen, the banking sector and economic pundits all over.

But the question is WHY?

Islamic Finance is a relatively new concept to mainstream banking, despite its roots dating back 1400 years. But how do you go about understanding it? Well one way is to strip it to its bare essentials to understand the foundations on which Islamic Finance is based to make sense of the hubbub surrounding it.

The core values of Islamic Finance are:

•      The belief that humans are only the trustees of wealth; all things belong to Allah

•            Interest (Rib’a) is forbidden as it creates inequality in society
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•       Material pursuits (pursuing wealth) must be balanced with spiritual needs

•       Societal responsibilities and social justice must be considered i.e. ensure all economic transactions are fair and equal

•              Equal and a responsible free market is encouraged and strict regulations are placed to ultimately direct the market's functioning towards social responsibility. Monopolies are therefore outlawed.

•        The risk between investor and borrower must be shared

•        Uncertainty in transactions/contract is forbidden e.g. one party may not be as fully informed as the other, or neither party has full control over the outcome of the transaction e.g. insurance

•        Investing money into anything prohibited by Islam and is harmful to society e.g. gambling, pork, alcohol, tobacco

Islamic Finance essentially revolves around earning wealth through responsible, honest and equal means whilst consistently taking social responsibility into consideration. Compare this with today's financial system where its endemic risky nature, irresponsible lending and borrowing, the high interest rates have caused global recession.

Perhaps that's WHY Islamic Finance is coming into the spotlight. People are wondering if the word 'recession' would be familiar to us at all if Islamic finance was commonplace.  

Leaving interest - The classic argument

If you approached a financial expert and said, ‘Hello, lets ban usury’ you would likely get one of the following responses:

• Outright panic
• A fit of endless screaming
• Uncontrollable sobbing
• Hysterical ranting

OR

• If you like the metaphor of 'fat cats' - they would arch their backs and start hissing

Getting rid of interest seems preposterous to many, because it has become an integral part of our lives. The mere thought of separating interest from our finances is as alien as the idea that Britain could ever experience a heat wave – but wait, it did happen!

So IS the idea of not paying or receiving interest really all that hard to comprehend?

Well it certainly wasn’t for some of the greatest thinkers in human history.

Even from ancient times, philosophers such as Aristotle, one of the most celebrated minds in history (Muslim intellectuals of his time called him ‘The First Teacher’), whose contribution to Western philosophy, mathematics, sciences and the arts is forever revered, disliked the idea of interest. He viewed interest as an unnatural and unjust trade.  Money to him was a sterile commodity and a product of law which was intended to be used for exchange not for growing or profiteering solely off of it.

However, Aristotle wasn’t the only philosopher to oppose usury.

Plato, known for his sophisticated writing, establishing the first institution for ‘higher education’ also denounced the practice of interest. To him, usury was the cause of many social problems and the opposite of what he called “virtuous citizenship”, that is a society with morals. He saw interest as pitting one class against another and predicted it would destroy the state. He wrote that an ideal society would be one where interest is never practised and saw it as a solution to containing the “evils of society” such as poverty, negligence and the lack of morality.

Cato the Young was a politician in Ancient Rome and famous for his incorruptible morality and charismatic speeches. He was very public about his contempt for usury. He was once asked “In terms of the best way of property management, what about usury?” Cato sharply replied “what about killing a man?” He viewed usury as a criminal practice and when acting as a magistrate on the Island of Sardinia he commanded for all usurers to be exiled from the island, a decision for which he was criticised as being ‘too harsh.’ In numerous speeches he compared usurers to thieves and on some occasions he said that usurers were far worse than thieves!

So – what does all of this mean?

It means that opposing interest isn't just some crazy idea cooked up by the religions. It has been put forward by classical thinkers as a sustainable idea to prevent social injustice, class division and overall destruction of society.

So one might ponder, if modern Western civilisation was inspired by the laws, philosophy and intellects of ancient Rome and Greek and Democracy was carved by the great minds of the ancient world, would then banning usury be all that alien to us?

Aristotle, Cato and Plato didn’t seem to think so, but then again what would the architects of Western civilisation, philosophy and culture know, right?