Wednesday, January 30, 2008

"Islamic Financing Is A Con Job"

So I had decided to leave the blogosphere, only for Tarek Fatah (of all people) to bring me back!

I was listening to John Moore of the CFRB yesterday evening and he had Tarek Fatah on for a few minutes. Fatah was criticizing "Islamic Banking", calling it a "con job and scam" by the Imams. John Moore agreed with him, terming it as "religious foofery at it's finest".

Now John is a great talk show host, but I wish he had spent a little more time on this topic than he did (after all he had just spent 20 minutes on the ethics of an office pool). Fatah was on for about 5 minutes, and then John just had 3 callers before he moved on to another topic. The first caller was sounded obviously angry, foaming-at-the-mouth-mullah kind of guy, the second caller seemed to be the apologist Irshad Manji kind of person, while the third caller was the best. He actually, for the very first time ever that I can remember, gave a reasonable answer as to how his house was Islamically financed. However time was short, and John, usually such an open minded fellow, seemed to have made up his mind, Islamic banking was just an accounting trick, and that was that.

Now I don't know much about the details of "Islamic financing" (and yes there is a reason why I put it in quotes), but whenever I have asked someone about this they have launched into such a complex explanation, full of terms like mudarabah, muajjal, Ijarah and Sukuk - that soon I got lost. Excuse me, but shouldn't there be a SIMPLE explanation?

Last year at RIS, I actually asked a couple of the merchants in the bazaar section, who were hawking "Islamic Finance Bonds" (now there's an oxymoron if there was one) as to how it exactly worked. They started to speak, and soon I was left thinking, "Boy, this is just one big scam! They are not dealing with interest, but they just take it and call it something else!"

Obviously, there is legitimate Islamic Banking and there are the con artists. Shariah-compliant banking is the fastest growing segment of the financial services industry and millions of Muslims can't be wrong, but what exactly is Islamic financing and how does it work? Please, someone tell me in simple words.

I am not going to go into this whole debate of usury vs interest. Rather, I need simple answers to these THREE questions.

1) I want to lend Mira $5,000 (in 2008), and Mira has promised to pay me back $5,000 in five years (in 2013). Now we know inflation is a fact, value of money decreases every year. So $5,000 in 2008 is actually worth more than $5,000 in 2008 than 2013. So why should Mira not pay me more than $5,000?

2 a) I have $100,000 to lend to Mira. What is my incentive for doing so, if I cannot earn anything back in interest (and, given the example in (1), actually lose money)?

2 b) I want to borrow $100,000 to start a business. I don't want to make anyone partners in my business, I just want to borrow the money and return it after so many years when my business is up and running. What incentives can I offer the lender if I am not paying them interest?

3) If I am lending someone money, I am losing the opportunity cost of that money. If I lend Mira $100 for 1 week, I can't use that $100 for 1 week. How will Mira compensate me for that 1 week?