How the West Came To Run Islamic Banks

[North brother]

[dhuusa_deer]

[quote="gurey25"]DD

Thats where the differance between interest and profit arise.
One can recieve interest on his accumulated money without that money
bieng involved in the creation of other wealth.
This is also where the differeance between money and Wealth also come in.
[/quote]

Gureey,

But aren't Islamic banks doing the same by using the money the public deposited to buy products and then sell them at higher price? Isn't that using money that doesn't belong to the bank to make profit?

[Steeler [Crawler2]]

Guys
Forget religious edict for a minute and think this through logically. I you are a bank, you have to earn money. Without interest rates on loans, how do you generate revenue? That's what banks do.

Now, let's say I have this great buisiness idea. But I need capital to make it happen. Well, the place I go to get capital is the bank. So I need to convince the bank to loan me money for my project. Well, ask yourself, without interest, what's in it for the bank? Why should they loan me money if they are not going to make money?

Now for small scale communities, where the amount of money is small, you can get around this. But if you want to build the Petronas Towers, you can not. This takes large amounts of revenue. The bank has to have incentive to which allows it to accumulate such revenues and to lend them.

You simply can not run a modern economy without interest.

[Ducaale004]

[quote="MAD MAC"]Guys
Forget religious edict for a minute and think this through logically. I you are a bank, you have to earn money. Without interest rates on loans, how do you generate revenue? That's what banks do.

.[/quote]


Certainly, the money making variations for financial institutions are huge, not limiting their source of income or returns on only interest they charge on borrowed money. The cost of borrowers' money aka the interest aka the Haaraan in Islamic circles has become embedded in banking business as well as stocks. I believe to conduct business with these western banks is to assume risks associated with the possibility of getting interest. It is, therefore, difficult to be interest-averse if you want to stay on top of your business game or be competitive. Interest goes up and down based on the market risk. In U.S.A, for instance, the Federal Board of Government initiates actions to balance the market conditions during inflation or deflation by raising interest rate high or low. When a disaster befalls, like the Katrina, they lower interest rates because lowering interest will increase the value of property. Besides, consumers and businesses's power purchasing would be so high as to offset the condition from worsening. For practical reasons, interest is a regulating device and has direct control over its stakeholders. eg. Creditors, mostly, make profit through charging interest without lifting a spade.


Interest is indeed an evil business and it hampers the growth of individual entrepreneurs.


A cursory look of the Stock exchange, Mawhawk, pointed to us the Saudi prince who owns half of the Citibank, runs this type of business in his country. He is a shareholder, thus shareholders invest their company by buying stocks or profile and expect required returns (interest paid to stockholders) when their company's capital gains are high. Stockholders receive their income either in dividend (periodic payment based on discretion of Co.) or in increased Capital Gains of the firm. When the creditors and expenses of the firm are all satisfied, the remaining aka residual income goes to the shareholders. HOwever, there are ethical issues (known as Agency problmes) that most corporations face today from the CEO or Board of Directors. These problems like false reports on their financial statements cost corporations money and put them at legal risks and ultimately their collapse or bankruptcy.

[Steeler [Crawler2]]

Without interest, there is no lending. It's pretty straightforward here. There has to be an incentive for someone with large amounts of capital to loan that capital. Either by a stake in the venture, or through interest (which is, essentially, a stake in the venture).

[Ducaale004]

Of course, there is no incentive for a wealthy man to loan his money without something in return that is why it is really difficult to own fixed assets in Western countries. I am assuming the Islamic banks offer short-term loan or bond -long-term loan based on your current assets: How much money do you have, houses, business etc, that could be used in case you default on the repayment of such loan. The question comes though, why would any person issue money with no profit? I think they can charge fees on and enter some type of inner agreement that if the money being borrowed generates huge amount of money at an agreed rate , then a certain percentage should be assessed to it for issuer to get.

[Steeler [Crawler2]]

Ducaale
Your version is interest with a different name. Bottom line: The investor is looking on making a profit on his investment. That is what interest is. Profit on invetment.

[Ducaale004]

Mad, No it is not interest. Interest is money on money , be it quarterly payment, semiannual payment or annual payment. Most interest are paid on either one of these three periods . It also has a maturity, a certain date that the whole repayment is due , if not, the borrower is penalized and subjected to bad credit history or wage garnishment. On the other hand, Islamic banks assess one time fees and not periodically and continuously. I am not really expert in the Sharia field, i would leave it to probably guys who can enlighten us on it.

[Steeler [Crawler2]]

Yes interest is more fixed. But what generates interest is profit on investment. The lender lends the money to his client, who in turn invests the money in something that is going to make him money. He then pays back more than he lent, which is turned around as interest. Whether you call it interest or Riba or whatever, it really doesn't matter. What you have going on is the individual or consortium that controls the funding lends it with the intent of getting more back than they lent. Same for me. I just bought a CD (not the music kind). I am getting 3% on the CD. To get 3% I had to tie that money up for one year. That allows the bank to loan that principal out without me touching it, providing stable currency available for loans. In return for me committing my money in an "untouchable" location, I get a 3% return (which in this case means I make one thousand dollars for tying that money up for one year). If I were not going to get some fixed percentage I would not have tied up the money. Like investing in a fund, you do so based on the premise that the fund is going to earn interest. Some funds have risk associated, and the possibiltiy of high return. You wouldn't invest your hard earned capital in a high risk scheme unless you thought the prospect for high end return were good. In short, in order for large projects to happen, there has to be a return on investment. Interest is the way that return and said loans are structured. This isn't the 7th century. I am convinced that when Mohammed was talking about interest he meant (but failed to specify) usury interest - which is why loan sharking is illegal.

[Raaxeeye_Burcaawi]

MAD MAC,


Why you sucking Sharon? How much you are being paid?

[gurey25]

[quote="MAD MAC"]Without interest, there is no lending. It's pretty straightforward here. There has to be an incentive for someone with large amounts of capital to loan that capital. Either by a stake in the venture, or through interest (which is, essentially, a stake in the venture).[/quote]

If you look at both "Islamic" banks and western backs that is the case.
they behave allot like western comercial banks
Yes you can run a modern economy without intrest.
It depends on the nature of Money and How it is used,
todays fractional reserve system does not need to exist.

[Steeler [Crawler2]]

I disagree. The Reserve System allows enough slack in the system for government to intervene and have an effect on inflation. They can put the breaks on an economy running too hot, or put some gas into a system running too cold. The current system works - global economy has been more stable now than ever. There is certainly no reason to think that doing something radical, like eliminating interest, would have a positive effect, and there are reasons to believe that it would have a very negative effect. On top of that, there is no logical reason to make such a shift. In short, I have never heard a serious economic scholar advocate such a thing. The only reason you even bring it up is because of the Islamic issue of Riba. Hey, if Muslims don't want to engage in interest, then don't keep your money in a savings or interest earnign account. Leave it in checking.

[gurey25]

Yes thats according to what is thaught in high school economics,
and is drummed into people day in day out.
What if interest was the main cause of inflation?
What if interest is responsible for cyclical unemployment and the boom bust cycle?

There is an alternative to the fractional reserve system,
the government it self could take back the right to issue currency, instead
of the central bank.

Ill give you one modern day example.
The Island of guernsey one of the channel islands of Britian, has had
interest free money issued by the government since 1815, and now has better living standards for its 60,000 people than switzerland, where once it was the poorest part of britian.

Ironically one can argue that Guernsey has the only "Islamic"
financial system in the world.
that should ruffle some saudi feathers.



Economists who have been advocating this are starting from Proudhorn in 19th century france to Argentine/German Silvio gesell and American Irving Fisher of the 1920's.
John Maynard keynes lent support to Gessel in his works and Keynes is as mainstream as you get.

The best example though is from the belgian economist and one of the architects of the Euro, Bernad Lietaer. check out his book "Beyond Scarcity".

[Steeler [Crawler2]]

I have never heard any Keynsian argument that proposes interest free banking.

Even if there were, how would you get to it? Think it through. Banking is private buisiness. There are certainly government owned banks, but at it's heart it is a private industry. Are you going to pass a law that says accruing interest is illegal? Think of the dangers inherent in tampering with our current banking system in a major way. And why would you do that? The Islamic argument is invalid in the West.

If Muslims are concerned about this issue, then they should keep their money in non-interest earning accounts. But don't expect the rest of us to do that. Not going to happen.

[gurey25]

[quote]I have never heard any Keynsian argument that proposes interest free banking[/quote]
I was surprised as well, i had to look it up my self.
Keynes devoted a whole chapter in his book "General theory of Employment Money and Interest" chapter 27 and 6, to gesells thoeries and practicaly endorses them.

[quote]Even if there were, how would you get to it? Think it through. Banking is private buisiness. There are certainly government owned banks, but at it's heart it is a private industry. Are you going to pass a law that says accruing interest is illegal? Think of the dangers inherent in tampering with our current banking system in a major way. And why would you do that? The Islamic argument is invalid in the West.
[/quote]

this has more relevance to developing countries espacially africa where the banking system is practicaly non existant or grossly corrupt.
Over there any drastic changes will not be noticed as thier economies are already in crisis.

The model of "Credit unions" and micro credit instead of western style private banks is more usefull in this case.


There is a quite but growing movement for change in western economies,
and its still in its embryonic stage.
the best example is the LETS (Local exchange Trading systems) which are expanding through out North America and Europe, and the rest of the world.

The Japanese have something similiar the "Hureai Kippu" or Health care currency an unusual but suscesfull aproach to health care.
"As they have the fastest aging populations this is one wierd idea that is very sucessfull.

New Zealand government found LETS systems reduced inflation and are the Western country with the strongest support for this.

No one is advocating the imediet banning of intrest in the west,
but for developing countries it is an excellent Idea.