Artifice, Islamic Banks, and the Economic Rationality of the Devout Muslim Consumer
Having just read Ali Allawi's most recent work entitled The Crisis of Islamic Civilization (a review will appear later on), I reflected again on the nature of Islamic banks, and wonder whether or not their artifice is really exclusively because of some dominant Western paradigm imposed on Islamic banks, or whether or not the nature of the Muslim consumer has something to do with it as well.
Allawi, who has a number of unconventional and refreshing ideas in his book, sort of repeats the mantra of orthodox Islamic economists when it comes to Islamic banking and finance. Basically, that interest was prevented from the time the angel Gabriel descended unto the Prophet Muhammad in Hira, that it is one of the few absolutely reprehensible acts condemned in the Qur'an, that Islamic civilization lived without it for centuries, and that Islamic banks are just doing a dance around this grand central prohibition because the global financial market won't actually let them do anything else if they want to survive, and so they aren't really a reflection of true Islamic civilization, but an Islamic veneer on Western civilization which values selfishness and greed as the foundation of economic activity rather than God. Now much of this (in terms of historicity, and in terms of classical interpretations of sacred text) is reductive or just wrong, but that will be in the review. It's the last piece I want to examine here--is it really the global financial world alone that is the problem if Islamic banks wanted to be more "risk sharing" as per what Dr. Allawi claims is characteristic of "genuine" Islamic civilization. I am not suggesting Dr. Allawi blames the West alone but that is the conventional view, we'd all be fine if the West just let us do our thing.
Influence of Western institutions on Islamic finance cannot really be denied. They are told they can't take interest, so they seek ways to avoid it but basically do what it is that they have been doing in conventional finance. They aren't interested in whatever a "genuine" Islamic civilization is, they are only interested in making money, that's what banks do, and so sure the spread of Islamic finance on the backs of such institutions and individuals isn't just Western influenced, it's West driven, with the Islamic part just the approval at the end by a board. That's clear enough.
But the question would still arise "fine, they can do that, but why can't a "genuine" Islamic institution nonetheless develop?" The bankers will do what they do, but if Muslims want a truly "risk sharing" enterprise, well it's not hard to do, just make one. And then you might have two parallel tracks, the banks that risk share, and those that don't and if Muslims generally looked at the latter as the trick that Dr. Allawi does, they'll just shun them and eventually they'll go the way of the 8 track. Citibank will realize there's no profit in it, and drop it, and what will exist instead are these small financial institutions that do nothing but truly share risk among depositor and bank alike.
Why that doesn't work is obvious enough as well. First you need a Fed to insure the bank or there will be runs, but let's leave that aside for a moment. It's what's going to cause the run that's the more central problem. A central issue (one issue of many) is, if you risk share, then sometimes you make money, and sometimes you lose it. And usually you lose it when times are bad. And so you have to be willing to leave your money when you're not doing so well on all accounts. You just lost your job, AND your bank account savings are dropping.
But that doesn't describe any Muslim consumer I know. The Muslim consumer doesn't want a lower rate of return in good times, though maybe they could tolerate that, but they certainly don't want to be losing money from their bank account in bad times. If one wants that kind of risk, they just go buy stock or funds, bank money isn't for that, it isn't something you want to lose when you actually need it. If you tell the Muslim consumer she's going to lose money from her bank account in the recession, well the obvious thing to do is to liquidate and stick the money in a mattress until things get better for her to use to weather the storm. But you can't have that or the bank will suffer a run. The Muslims all have to keep their money in, and keep losing money from a bank account. If people willing to do such a thing existed, it might work, but I don't know them, so it won't.
You could say it is because the Muslim consumer has been afflicted by Western greed, or you could say she is just acting rationally as any economic actor does. But however you phrase it, the reality is that there are as many bottom up reasons that a real risk sharing institution could never work as an Islamic bank as there are top down ones.
HAH
Allawi, who has a number of unconventional and refreshing ideas in his book, sort of repeats the mantra of orthodox Islamic economists when it comes to Islamic banking and finance. Basically, that interest was prevented from the time the angel Gabriel descended unto the Prophet Muhammad in Hira, that it is one of the few absolutely reprehensible acts condemned in the Qur'an, that Islamic civilization lived without it for centuries, and that Islamic banks are just doing a dance around this grand central prohibition because the global financial market won't actually let them do anything else if they want to survive, and so they aren't really a reflection of true Islamic civilization, but an Islamic veneer on Western civilization which values selfishness and greed as the foundation of economic activity rather than God. Now much of this (in terms of historicity, and in terms of classical interpretations of sacred text) is reductive or just wrong, but that will be in the review. It's the last piece I want to examine here--is it really the global financial world alone that is the problem if Islamic banks wanted to be more "risk sharing" as per what Dr. Allawi claims is characteristic of "genuine" Islamic civilization. I am not suggesting Dr. Allawi blames the West alone but that is the conventional view, we'd all be fine if the West just let us do our thing.
Influence of Western institutions on Islamic finance cannot really be denied. They are told they can't take interest, so they seek ways to avoid it but basically do what it is that they have been doing in conventional finance. They aren't interested in whatever a "genuine" Islamic civilization is, they are only interested in making money, that's what banks do, and so sure the spread of Islamic finance on the backs of such institutions and individuals isn't just Western influenced, it's West driven, with the Islamic part just the approval at the end by a board. That's clear enough.
But the question would still arise "fine, they can do that, but why can't a "genuine" Islamic institution nonetheless develop?" The bankers will do what they do, but if Muslims want a truly "risk sharing" enterprise, well it's not hard to do, just make one. And then you might have two parallel tracks, the banks that risk share, and those that don't and if Muslims generally looked at the latter as the trick that Dr. Allawi does, they'll just shun them and eventually they'll go the way of the 8 track. Citibank will realize there's no profit in it, and drop it, and what will exist instead are these small financial institutions that do nothing but truly share risk among depositor and bank alike.
Why that doesn't work is obvious enough as well. First you need a Fed to insure the bank or there will be runs, but let's leave that aside for a moment. It's what's going to cause the run that's the more central problem. A central issue (one issue of many) is, if you risk share, then sometimes you make money, and sometimes you lose it. And usually you lose it when times are bad. And so you have to be willing to leave your money when you're not doing so well on all accounts. You just lost your job, AND your bank account savings are dropping.
But that doesn't describe any Muslim consumer I know. The Muslim consumer doesn't want a lower rate of return in good times, though maybe they could tolerate that, but they certainly don't want to be losing money from their bank account in bad times. If one wants that kind of risk, they just go buy stock or funds, bank money isn't for that, it isn't something you want to lose when you actually need it. If you tell the Muslim consumer she's going to lose money from her bank account in the recession, well the obvious thing to do is to liquidate and stick the money in a mattress until things get better for her to use to weather the storm. But you can't have that or the bank will suffer a run. The Muslims all have to keep their money in, and keep losing money from a bank account. If people willing to do such a thing existed, it might work, but I don't know them, so it won't.
You could say it is because the Muslim consumer has been afflicted by Western greed, or you could say she is just acting rationally as any economic actor does. But however you phrase it, the reality is that there are as many bottom up reasons that a real risk sharing institution could never work as an Islamic bank as there are top down ones.
HAH
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