Malaysia in the Era of Globalization #80

Chapter 9: Islam in Malay Life

Reform in Islam

Islamic Financial Intermediaries

Trade had been flourishing for centuries in Arabia, immediately before and after the prophet’s time. All that buying and selling, together with the caravan expeditions, could not have taken place without there being a satisfactory financing mechanism. There must had been a system for connecting the owners of money (savers) and the users of cash (investors and traders). Yet despite that flourishing head start and seemingly workable system, Islamic finance later went into decline. It is instructive that the decline in Islamic economics parallels the decline in Islamic civilization.

Today Western financial institutions are preeminent. Western banks and other financial intermediaries did not develop overnight. They have been refined, modified, and strengthened over the centuries. The process continues to this day. Today’s banks are a far cry from what they were a century earlier. The essential ingredient to the success of banks is the faith people have in them. Absent that, not even the strongest institution could survive. All the regulations and innovations in banking serve only one purpose: to strengthen that faith and confidence.

Bank failures and runs on banks were common in America during the depression. Those events are thankfully rare today, in part due to the diligence of the Federal Reserve System and the Federal Depositors Insurance Corporation (FDIC), the regulatory agencies of the federal government, together with strengthened prudential rules on reserves, heightened fiduciary responsibilities, and improved auditing. These refinements have been incremental, each in response to specific problems and crises. Banks still fail today, but thanks to the FDIC, depositors (at least the retail consumers) simply transfer their accounts to another bank without any hitch. The system is by no means perfect, as was painfully demonstrated by the massive Savings and Loans scandal of the 1980s.

The spectacular economic achievements of modern societies are attributable to the efficacy and efficiency of their financial intermediaries. Countries that have efficient and stable financial systems advance; those that don’t, decline, as demonstrated by Thailand, Indonesia, and a host of Third World nations. To many thoughtful analysts, the Asian economic crisis of 1977 was in essence a crisis of the banking system.

Within the last few decades, Islamic-based financial institutions are trying a comeback. As with everything Islamic, the concept sells with Muslims. America now has mutual funds and mortgage companies run along Islamic principles. Even venerable Western banks like Citibank are entering the fray. Academic papers and conferences proliferate. Harvard’ Institute of Islamic Finance and Information Program (HIFIP), with intellectual contributions from its renowned business and law schools, has been organizing annual conferences for the last few years that brought in luminaries from all over.

Much has been said of Islamic banking in which supposedly no interest is charged. This is purely semantics. Sure these banks do not charge interest in the usual sense; instead they tack on “service” fees and points. In the final analysis there is still a cost for the loan. I can give someone a 0% percent loan but charge exorbitant points, commissions, or fees to recoup the cost (interest) of my capital. The end result is the same; the borrower pays a price and the lender gets a reward.

There are American finance companies that cater specifically to Muslim homebuyers who are squeamish about mortgage interest payments. To obviate this, the prospective homeowner goes into partnership with the company to buy the house. The homeowner pays 20 percent of the price and the company the other 80, as in a traditional mortgage. But instead of paying the mortgage as in a traditional loan, the homeowner pays a market rent to the company for use of the house, with 80 percent of the rent payment going to the company and 20 percent credited to the homeowner. Every few years the house is reappraised and when the total payments cover the cost of the house based on the latest appraisal, the house would then be transferred exclusively to the owner.

If the rental market declines, the homeowner will pay less every month, which would be to his or her advantage. But if the market appreciates, as it typically does, so will his rent, and he will end up paying more cumulatively. Not only that, the company gets to reap the bulk of the benefit (80percent) of the gains on the house’s price appreciation. So the consumer gets bilked twice, once in his higher monthly rent and second, in not getting the full benefit of the price appreciation. This is also an inherently a bad system as it creates a perverse economic incentive for the homeowner not to keep up or improve the house so its value would drop, and his payments would similarly fall. That is no way to run a modern economy! In addition, there are all those costs of the appraisals that are being borne by the homeowner.

In reality what these companies are doing is nothing than more an equity-sharing scheme. This has not caught on in America precisely because of the perverse economic incentive. A more popular variation of equity sharing is where the homeowner goes into partnership with a friend or family member to pay for the down payment and then together they would secure a traditional mortgage. When it is time to resell the house, the profit would be shared based on their contributions towards the down payment. With this scheme, there is still the issue of interest payments on the mortgage.

With a traditional mortgage in America, if the borrower is unable to keep up with the payments, he could sell the house and whatever is left after he paid off the loan balance is his to keep. But if the value of the house were less than the amount owed (as had happened in declining markets), and the bank forecloses on the home, the borrower would not be saddled with the outstanding balance. This is because all home mortgages have a “non recourse” clause. The borrower would lose only what he has paid into the house (his equity). So if the concern of the Islamic groups that borrowers would be saddled with debt payments forever, than there could be a similar “non recourse” clause in selected loans like study loans and loans for one’s primary residence.

Similarly if the borrower is unable to repay the loan because of a legitimate reason like illness or death, the loan contract could be designed to cover such eventualities. Many loans now have mandatory disability and life insurance policies attached to them to cover such calamities. But insurance too is anathema to traditionalist Muslims, but I will come to that shortly.

I have a traditional home mortgage and I am quite comfortable with paying the interest on it. I rationalize the interest I am paying as being the rent for the house, and the principal as the payment towards the house. Technically this is correct as the bank has priority over me to the title of my house.

Most of the activities carried by Islamic “banks” are really not the proper purview of traditional banks. Thus leasing (Ijaara), another common service provided by Islamic banks, is done in America by finance companies or directly by the dealers and manufacturers. Islamic bankers also make a big deal on the supposed difference between leasing, which is halal because there is no interest, and traditional loans and mortgages, which are haram because of riba. But this is a meaningless difference. I could easily convert my mortgage into a long-term lease with the same terms, and at the end of the “lease” (mortgage) I would have an option to buy my property at an agreed upon nominal price. One could just as easily calculate the imputed interest rate on all leasing arrangements. Similarly, the profit sharing and “equity participation” lending that Islamic banks partake are properly the function of mutual funds and venture capital firms rather than banks.

By using the familiar term “bank” to describe activities that are properly the purview of other non-bank institutions, proponents of Islamic banking are misleading consumers. All these deferred sales, service charges, and lease payments are nothing but euphemisms for the cost of borrowed funds, more commonly referred to as interest. As Islamic banks do not function like a traditional bank, they should not use the label “bank.” Instead they should use the more generic term, Islamic Financial Institutions (IFI), so as not to mislead the public. I would not however, recommend the acronym “iffy!”


Next: Islamic Financial Intermediaries (Cont’d)

Religious Obstacles To Malay Economic Development

Religious Obstacles To Malay Economic Development

Ramadan is a month for reflection. As we reflect we cannot avoid the depressing reality that the Muslim world is overrepresented in all categories of underdevelopment. The pat and often cited reason is the inherent incompatibility of Islam to modern development. When such an explanation is offered by non-Muslims, they can barely conceal their smugness. When asserted by a Muslim, he or she would immediately be dismissed as not fully comprehending the faith, or worse, condemned as an apostate.

Such an “explanation,” its certitude not withstanding, is about as useful as someone telling you, when asked why he is in the hospital, “I am sick.” And if you are still not convinced or betray any doubts, would quickly add, “Very sick!” Not very helpful! If however, the answer were to be, “My bowels are not working,” or, “I have difficulty breathing,” we would then be that much closer to identifying the problem, and thus its remedy.

This Islam-is-the-problem explanation does not even describe the symptom, much less the disease. If indeed there is something inherently deficient with Islam, it still would not explain why the faith thrived during its first four centuries, or why its adherents are increasing and becoming more devout today. And if Islamic practices are deficient, then what and where exactly are those deficiencies so we could address them.

It is here, specifically in response to the second query, that Timur Kuran’s book, The Long Divergence: How Islamic Laws Held Back the Middle East outshines the rest. Kuran’s insights came from his studies of the Middle East and Turkey, a sub-segment and a minority one at that of the vast Muslim world; nonetheless they apply to Malays in Malaysia.

Kuran enumerated four problematic areas: institutional development; the concept of riba (interest); Islamic inheritance; and waqaf (trusts). I will add a fifth, zakat (tithe), to parallel the five tenets of our faith.


The Stark Statistics

First, the stark statistics: There are more Muslims living under authoritarian regimes today than there are people ruled by communism. As for economic development, Muslim contribution to global economic activities is less than 5 percent, disproportionately way below our share of the population. If Allah had not blessed us with oil, that figure would be negligible. As for social development, the number of books translated into Arabic during the last 1,000 years is less than those translated into Spanish in one year.

A more nuanced understanding, as expressed by James Lacey, is that it is the Arab, not Muslim civilization that is collapsing. Many miss that as most Arabs are Muslims. We would not attribute the fall of the Western Roman Empire to a crisis of Christianity; it was that of Western Europe.

There is no comparable statistics to relate the equally stark contrast between Muslims (essentially Malays) and non-Muslims in the Malaysian context. Nonetheless, stroll down Main Street, Any Town, Malaysia, and the paucity of Malay establishments is not hard to miss, while Prime Minister Mahathir once asserted that non-Malays pay most of the taxes.

Islam is an integral part of Malay life. Unfortunately when confronted with “Islam is the problem” assertion, Malays like most Muslims would simply recoil and retreat to the comfort of our familiar assumptions. The angry few, unable to rebut the statistics, would simply lash out.

To break from that set pattern we must first liberate our minds so we could critically examine those assumptions. Fear not, for if our faith is strong, such an exercise would not weaken it; on the contrary, it would strengthen it.


Obstacles to Malay Entrepreneurialism

Involvement in trade and commerce opens up one’s mind; apart from improving one’s economic and other well being. It also enhances one’s piety, as with the saying, Kemiskinan mendakati kefukuran (Poverty invites impiety). Anyone doubting that wisdom need only visit neighboring Indonesia. It also reflected Allah’s esteem of the vocation that He had chosen a trader to be His Last Messenger.

Successful traders have to understand their clients and customers, anticipate their needs and wants, and see the world from their perspective. The very act of putting ourselves in their place, or as our Native American Indians would put it, to walk in their moccasins, is a mind-liberating exercise. For example, now that we are trading with China and it is our biggest purchaser of palm oil, previously ultra FELDA Malays have a decidedly different view of the Chinese, at least the mainland variety. That is what trade, and a liberated mind, does to you.

The barriers to Malay participation in business are not the often cited “hard” ones like lack of human or financial capital, rather the less recognized “soft” obstacle imposed by our inflexible and unimaginative interpretations of our faith.

A particular problem is our treatment of interest, which we simplistically equate to riba. Credit, the flip side of interest, is the lifeline of business. Grameen Bank’s Muhammad Yunus goes further, he asserts that access to credit is a basic human rights.

Interest is premised on that rare universal truth in economics: time value of money. That is, a dollar (or dinar) at hand is worth two promised in the future. The ancient Arabs were adept at business; they must have had to come to terms with the concept of interest. They did not quantify it or termed it as such, nonetheless when a borrower returned the money or goods, he would have thrown in something extra as goodwill if for no other reason than to encourage the lender to continue lending.

Charging of interests also factors in that universal human trait; we do sometimes renege on our promises, like not repaying our loans.

I have yet to read a cogent explanation on the meaning of riba, and whether it is equivalent to the interest of the many innovative financial instruments that we have today. Many of them were not even thought of during the prophet’s time. It is like discussing transportation; we are still trapped in the warped time zone of the camel caravans when the world is into container ships, jumbo jets, and long-haul trucks. Yes, they re all transportation, but the commonality ends there.

We go to great length quoting various hadith on the evil of interest income. One equates 1/70th of the sin of riba to be equivalent to the sin of having sex with your mother. How offensive an imagery and metaphor! If interest is really that grave a sin, I would have expected other hadith condemning in even harsher tones those who would renege on their loans. I am yet to hear one.

Current Muslim attitude towards interest is similar to those of medieval Christians. The only difference is that they had come to terms with it (undoubtedly fed up with all the wealth from money lending going to the Jews) and with that came Western economic development. Meanwhile the words in the bible condemning usury have not changed.

If today’s Muslims have qualms about learning from or adopting Christian ways with regards to interests, then go back to the early Muslims. They thrived on trading; learn how they adapted to the concept. In many ways that is exactly what we have done today; hence “Islamic bank,” which is oxymoronic.

Just as the West did, we must continually built on and improve these new Islamic financial institutions, tweaking and innovating along the way to meet changing times and circumstances, just as western banking has evolved over the centuries and continue to do so.

This brings me to Kuran’s observation on the lack of institutional development in the Muslim world. It is not enough to rely on the admonishments of hadith and Koranic verses; there must be a workable mechanism to resolve the inevitable disputes, as when someone reneges on his loans, with or without interests. The West has bankruptcy laws and wage garnishing; Islamic institutions too should have similar mechanisms. This lack of institutional development is the most glaring and consequential deficiency of the Islamic world.


Waqaf, Inheritance Laws, and Economic Development

Muslim inheritance laws as currently interpreted may be more just (all children getting a share, albeit the son getting twice that of the daughter) than that of the Europeans (where the entire estate goes to the eldest son), but they are bad for economic growth. One consequence is the fragmentation of the estate on the death of its owner. This is not only disruptive but also prevents a business from growing beyond a generation.

That is also bad social policy even if, as some proclaimed, proscribed in the Koran. Muslims accept the Koran as a document for public and individual good. So if our current interpretation results in otherwise, as with our inheritance practices, then those differences are not real but only apparent. Thus we must re-examine our interpretations. This does not mean disbelieving the Koran. In fact the Koran is silent on when exactly the children would get their share, nor does the Koran specify that the asset itself has to be divided. This paves the way for designing a novel vehicle of issuing shares on the family asset. Then only the shares would be inherited while the asset itself remains intact, thus satisfying the edicts of the Koran and be good economic policy at the same time. Indeed the Western concept of a corporation achieves precisely this objective.

Today we have many large successful Malay enterprises. It saddens me to read of the all-too-frequent ensuing family squabbles upon the death of their owners. The problem is compounded by our tradition of not having wills.

Inheritance practices are what stymied the development of Kampung Baru and Malay Reservations land generally. Unless addressed, those settlements will remain undeveloped no matter how much physical resources we pour into it. The one resource needed is intellectual; for us to re-read and re-interpret those ancient edicts.

Tun Razak anticipated this with his FELDA program; thus the stipulation that the owner specifies only one of his children to inherit the property. This is clearly not in accordance with Islamic inheritance laws. Yet I am yet to hear Muslim scholars challenging the stipulation; likewise the matrilineal inheritance of the Minangkabaus. Perhaps this unique tweaking of the inheritance laws explains why the Minangs are the most economically developed of the Malays.

What we desperately need is the equivalent of the Minangkabua wisdom, adat menurun agama mendadaki (Tradition descends, Faith ascends) synthesis of modern economic insights with our religious precepts.

Landowners of yore recognized this quandary; thus they resorted to bequeathing their properties to waqaf, community trust. The primary motive was undoubtedly charity, but it was also to avoid confiscatory inheritance taxes and fragmentation of their assets.

As noble as the waqaf is, it too needs refinement. As Kuran noted, current interpretation requires that the words of the trust be observed literally. A land bequeathed for a school has to remain so, never mind that it is now in the middle of an industrial area.

For growth to occur there must be capital formation. A common assumption is that Malays have low capital formation; hence our less-than-robust economy.

Zakat is community saving mandated by the Koran. In Malaysia, this is reinforced by favorable secular laws where your zakat is considered tax credit. Annually the sums collected are in the hundreds of millions, if not billions. Yet its management remains rigidly tied to some ossified interpretations of ancient texts. Creatively managed zakat could be construed as the community’s capital formation to boost Malay economy.

Consider zakat’s disbursement; it is still with cold cash that could easily be siphoned off by less-than-trustworthy functionaries. Why not vouchers or direct deposits, as with Mexico’s Progressa program. That would be one way to introduce the poor to the banking system; it would also lead to better bookkeeping.

On a policy level, it would be better if the money were to be invested in a local enterprise that would then employ the poor, combining charity with dignity, and at the same time generating jobs and economic growth. Again we are prevented from such innovations because we have unnecessarily tied ourselves to some old rigid interpretations that have remained unchanged literally over the millennium.

Today there is no transparent accounting of these massive zakat funds. As the Islamic establishment considers interest haram, somebody must be enjoying the benefits accruing from those idle funds. All I know is that the Islamic establishment has some of the most ornate offices, our religious functionaries have luxurious government-issued bungalows and cars, and the religious police and establishment have expanded exponentially. Meanwhile our poor have to seek help elsewhere, as at churches. Bless those generous Christians!

Our trapped minds prevent us from seeing these realities. This Ramadan let us resolve to liberate our entrapped minds so we get a more accurate view of reality. Let us creatively use the provisions of the Koran not to trap us mentally or economically but to liberate us.


Adapted from my forthcoming book, Liberating The Malay Mind, to be published by ZI Publications.

Malaysia in the Era of Globalization #79

Chapter 9: Islam in Malay Life

Reform in Islam

Islamic Economics
Dealing With the Concept of Interest

As alluded to earlier, the biggest stumbling block to Islamic economics is the concept of interest. Stripped of its complexities, the issue can be simply reduced thus. When B borrows money ($X) from A, there is a cost involved. Regardless of the terminology, someone has to bear that cost. If at the end of the year B returns to A the same amount of money he borrowed the year earlier, that is $X, he claims to have satisfied the Koranic admonition that he repays his loan at its original amount, nothing more and nothing less. But has B done that?

Consider two facts. First is what economists refer to as the opportunity cost for A; he could use that money for something else that would give him profit or pleasure, instead of lending it to B. Assume the monetary value of that opportunity cost incurred by A to be $Y. The second factor is inflation. Inflation can be simply defined as the diminishing purchasing power of a given nominal sum of money. That is to say, an $X today does not buy quite the same amount of goods and services as a year earlier, or stated in another way, an $X today is not the same (“real”) value as the $X of a few years ago. It is only nominally the same. In actuality X is valued less now than in the past because of inflation. If B were to repay A fully a year later, B should also include the amount lost due to inflation. Had inflation rate been 10 percent, then B should return to A $X plus that 10 percent more. If B only repaid the original $X, then he has only nominally paid the whole sum. In actual practical value, B has only partially repaid in the amount of only $(X minus 10 percent).

Then there is the opportunity costs incurred by A in lending the money to B; that is the $Y discussed above. Thus to fully repay A, B would not only have to repay the 10 percent inflation rate but also the additional $Y opportunity cost incurred. Thus to really fulfill the Koranic requirement of equivalency, the $X of a year ago is now in reality $X plus Y plus 10 percent for inflation. Note that there is no interest at all involved here; these are all real, tangible costs.

My essential point is this: when things are nominally (seen to be) the same, it may not be so in reality. Money was invented in part to put a quantitative value on a transaction so as to make it easier to compare the various costs. If economic transactions were accounted in terms of commodities, for example the number of durians, there will be the added issue of the quality of the fruit, size, and whether it is ripe, unripe or rotten and good only for making tompoyak and not for eating.

Ancient Arabs chose precious metals like gold and silver. Those can be standardized by weight and their quality cannot be adulterated.

Today money is merely paper or beeps of “on” or “off” signs on the digital highway. It is backed not by precious metals but by the people’s faith in the underlying supporting economy. Inflation apart, money may loose its value though formal devaluation or changes in the foreign exchange market. To take an extreme example, a ringgit immediately before September 1, 1998 (the date Malaysia imposed capital control and devalued the rinngit) was not the same value immediately afterward; it had lost 40 percent of its value with respect to the dollar. Thus if you borrowed one ringgit the day before the devaluation and then returned that same ringgit the next day, you have not returned the original loan even though nominally you have returned exactly what you borrowed.

I can further simplify my argument, this time by not using money but a concrete example. Suppose last year my friend “borrowed” a she-camel from me. A year later he returned the same camel to me. Many would consider such a transaction halal (not sinful) as no riba (interest) was incurred; he returned what he borrowed, nothing more and nothing less. But is that true? Imagine my camel was in heat at the time he borrowed it and was later “serviced” in the pasture by some loose bull. After a year (and a few weeks before he was to return my camel), she delivered a baby. Of course that baby camel would belong to my friend, but two questions would immediately arise. One, is the camel he returned a year later the same one (in monetary value as well with common sense assessment) he borrowed? Obviously not; not only is my camel now “worn out” (depreciated, to use a business term) but also I cannot immediately breed her as she had just delivered a baby. That baby camel may be my friend’s gain but it is definitely my “opportunity cost” loss. Had I not lend him the beast I would have a baby camel.

Another is a real life example. During the Japanese occupation a neighbor back in my old village borrowed some money for a short term to buy land. The working currency then was the Japanese “banana” notes. A few months later, as promised, he repaid the loan in full. But by this time there were rumors of the Japanese defeat, and although the currency was still accepted officially, in the marketplace it was rapidly becoming worthless. The crux of the issue: Has the man repaid his creditor in full? Nominally and technically he had; in practical and real terms he had not. This is a very dramatic example, much more than the ringgit depreciation case noted earlier.

In both examples there was no interest calculation to complicate the issue. Yet even without interest involved, defining whether one has actually repaid in full what one has borrowed can be problematic. There is a difference between nominal and real values. Most of the time the difference is small or very subtle, but there are times when it can be very dramatic. When the Koran says you must repay in full, it means to my common sense thinking to repay the real original value. Modern economists differentiate between real and nominal interest rates. If a bank charges an (nominal) interest rate of 15 percent per year but during that time the inflation rate is 10 percent, then the real interest is only 5 percent (15-10). Had the bank charged a rate of 10 percent, then the real interest rate would have been zero, that is, no interest, technically as well as in reality. Looked at another way, the interest rates charged by banks are not interests at all, rather the anticipated inflation rates.

Again this concept can be readily adapted to tangible the items of life. Suppose last year there was a drought and the rice fields were damaged. The price of rice jumped because of the shortage. I borrowed ten pounds of rice from my neighbor. Two years later, the rains came and the harvest was bountiful and the price of rice dropped. At this time I repaid my neighbor with exactly ten pounds of rice. Have I returned exactly what I borrowed? Common sense says no. Two years ago during the drought, ten pounds of rice was worth $20, but with the glut it dropped to $5. To fully repay my neighbor, I should have given him 40 pounds ($20 worth), not 10. And that extra 30 pounds would not be riba.

A comparable episode occurred during the prophet’s time. One of his companions had borrowed a sac of dates. They were the premium first pick of the season: thick, sweet, and luscious. A few months later he repaid with an equal sac of dates, but this was at the end of the harvest season and the nuts were dried up, less sweet, and plentiful. The lender rightly asked for more. The companion asked the prophet whether the added amount demanded was not riba. The prophet emphatically replied that it was not, and indeed asked the companion to go back to the marketplace to ascertain the price differential between the premium first-pick dates versus the season’s leftovers, and make up the difference.

Two important points arise here. One is the concept of nominal versus real. The two sacs of dates may be nominally the same, but in reality they are worth a quite a bit different. Two, the prophet (pbuh) trusted the marketplace to determine what the true value of the two sets of dates. I will return to this second point later in Chapter 11 when I discuss free enterprise as an Islamic tradition.

Modern Islamic bankers have learned well from their predecessors in trying to circumvent the prohibition on riba by resorting to service charges, commissions, and other charges. Those ancient Muslims also published their bag of “tricks” in a book they blatantly titled The Book of Escapes and Ruses! It was these novel interpretations of traditional teachings that enabled the Muslim economic empire to expand. At least those ancient Arabs traders were honest enough to admit that they were circumventing the system. And being honest is the first precept in any religion.

My central thesis is this: money, deprived of its mystique, is like any other commodity and property. I can rent my house and rightly claim rental income. I could similarly “rent” out my capital (money) to someone and collect rental income (return on investment). This rental on my capital can be collected in a variety of forms: interests as in simple lending; dividends with bond investments; company shares with stock market (equity) investment; or co-ownership as with venture capital investments. The differences are only matters of degree and not in kind, quantitative not qualitative. They reflect gradations in magnitude of the risk/benefit ratio. The simple interest with bank deposits represents the lowest risk and also correspondingly the lowest returns. Venture capital investments represent the biggest potential for profits but also the greatest risks. It is an investment axiom that high rewards come only with high risks.

Enthusiasts of Islamic banking go through contorted reasoning in trying to differentiate between riba and other forms of returns on investments that are deemed religiously acceptable—halal. Techniques like cost-plus sales (Murabaha), deferred payment sales (Bay Mu’ajjal), deferred delivery sales (Bay’ Salam), and credit sales (Bay Bi-Thaman ‘Ajil) all carry hidden costs that, as El-Gamal rightly observes, any high school student could easily calculate their imputed interest rates. All these Islamic bankers have achieved is simply to complicate an ordinary and simple traditional credit transaction in an effort to camouflage the cost of the funds (interest) by calling it some other fancy name. In the process it makes “comparison shopping” difficult for the consumers.

The beauty of modern credit sales is that they reduced the costs of the credit to a simplified figure that can be used for easy comparison. Credit, which is a manifestation of lending, is a modern fact of life. If everything had to be done on a cash basis, the economy would be crawling. We use credit to build hospitals, schools, and hosts of other activities that benefit society.

Grameen Bank’s Muhammad Yunus asserts that credit is a basic human right. Everyone is entitled to it, especially the poor. Grameen Bank has improved immensely the livelihood of many Bangladesh peasants with its micro credit lending programs. In any religion, that would be considered a praiseworthy deed.

Credit is a matter of faith, and not repaying a loan would be a breach of faith. And breach of faith is not only a sin, it is also a crime, and rightly so. Today we have some Muslim zealots who rationalize that they can borrow money but need not repay it, claiming that interest is haram, and therefore the loan itself is haram. They suddenly discover religion when it comes time to repay the loan. How convenient!

If they feel that way, then they should not have borrowed the money in the first place. To me the greater sin is to borrow with no intention of repaying.

The greatest obstacle to the economic growth of Malays and Muslims generally is that we have denigrated the rewards of savings by labeling them as interest and thus haram. Thus I purposely choose the neutral term “rewards on investments.” We can encourage Malays to save even more if we can dispense with the theologically loaded term “interest” and substitute my “rewards on savings” instead. This is more than just a semantic change or an attempt at “spinning,” rather it represents a qualitative change in concept. It recognizes that lending is a legitimate human activity – a valid service – and therefore profits on it are as valid as in with other economic activities. I will elaborate on this point in the following section on Islamic banks.


Next: Islamic Financial Intermediaries

Malayisa in the Era of Globalization #78

Chapter 9: Islam in Malay Life

Reform in Islam

Next: Islamic Economics

The success and vitality of the modern economy is based on the availability of credit. It is credit that makes the economic world spin smoothly. “Credit is the vital air of the system of modern commerce,” observed Daniel Webster. “It has done more, a thousand times, to enrich nations, than all the mines of all the world.” A plaque on Wall Street, the heart of American capitalism, declares, “Credit: Man’s Faith in Man.” Credit is predicated on the promise that it will be repaid.

Shakespeare’s words in Hamlet, “Neither a borrower, nor a lender be: For loan oft loses both itself and friend….” is only true if we do not repay our loans and the gratitude that goes with them. Indeed not repaying our debts can give rise to even worse consequences, as victims of the mafia and triads will testify. Even threats of defaulting can be devastating, as Argentina is now discovering.

Ancient Muslim traders must have had a system of credit and promissory notes; they could not be hauling their gold and silver bullions on their caravans, risking robbery. The hang-up today’s Muslims (and also others) have on the issue of credit rests on the related question of interest (riba) and usury.

The usual argument that interest is sinful arises because of the connotation of extortion. If a father needs money to buy food or medicine for his children, yes it is indeed sinful to charge him any interest at all for the money. If the recipient is truly needy, then simply donate the money. That is the basis of zakat or tithe, one of Islam’s five pillars. If I charge the poor soul an exorbitant interest rate (usury) and if he fails to repay me (as he surely would), do I then break his leg, mafia style? That would not only be sinful but also criminal. You need not wait till Judgment Day to be punished; you go to jail right here on earth, and deservedly so. Nor can I make him my slave to pay off his debt. Slavery and indentured labor have long been banned.

On the other hand, if I have some spare funds that I do not need right away (for example, savings for my children’s education) and an entrepreneur could use that capital to start his business, I see no reason why I cannot be rewarded for letting him use my idle money. After all my money is like any other property I own. If he uses my car, for example, I can charge him a rental fee, so why cannot I charge him a similar “rent” (which is what interest is) for the use of my money?

Another way of looking at it, my lending him money is comparable to my providing him a service. Therefore I should be suitably compensated for that, just as surely as had I repaired his hernia. Besides, my lending serves the greater society, not just the two of us. His company would employ workers and produce useful goods. Had I kept my money under my mattress, nobody would benefit.

There is no question that riba is prohibited in Islam. It says so clearly in the Qur’an as well as in the various ahadith. The crux of the issue is to the actual meaning and intent of that ancient Arabic word. Words have a way of acquiring different meanings with time. Earlier I alluded to the term “poet,” which was highly pejorative during the prophet’s time. Likewise, what riba meant to the ancient Bedouins cannot be simplistically and literally be transferred to all forms of costs of capital in modern economics. One simple reason is that many of these modern financial instruments were non-existent in the prophet’s time. There was no such thing as venture capital or corporate bonds in ancient times.

Another reason for the prohibition of riba is that Islam prohibits “making money on money,” which interests and other forms of the costs of capital imply. One can, however, make money by trading on goods and services, and Islam encourages this. The distinction between money and tangible goods is that the former has no “intrinsic value,” thus trading on it is equivalent to gambling. The value of money is what society puts on it. While this is true for paper money, it is not necessarily so for gold and silver, Islam’s ancient currencies. Those precious commodities do have intrinsic industrial values quite apart from their aesthetic (thus acquired) ones. Silver for example is an important ingredient in film imaging. And gold is useful in certain precision engineering as well as in pharmaceuticals.

For modern Islamic scholars to simply equate riba to all forms of interests is unwarranted. As I will show shortly, there are conceptual differences in the various forms of costs of capital (interest) and that, stripped of its mystery, trading on capital (money) is no different from trading in other goods and services.

Going to my earlier example, how I charge that entrepreneur for the cost of renting my property (capital) is a separate issue. I could for example, share in the risk, that is, seek part control of his company. This is the basis of modern venture capital. When his company is successful, I would sell my shares and recoup my principle plus the “rent” or profit of my money, thus rewarding me for my earlier savings. If I do not want to take the risk of losing my principle, I could pre-sell my shares for a preset price to another willing individual. In this way if the company becomes very successful he gets a bigger reward, if it fails then he takes the risk. This after all is the basis of share options. These are all manifestations of the costs of my money, that is, interest. Or to use my preferred term, reward on savings and investments.

Alternatively I could claim a percentage of the final product. This is common in rural Malaysia where farmers would “rent” their idle rice fields in return for a portion of the harvest. The landowner may decide not to get the harvest and would prefer to sell his share back to the farmer and merely collect the cash. Whatever it is, there is a cost for the use of capital, in this case, his land. You may label this cost in whichever way: interest, stock options, dividends, part ownership, share of harvest, or whatever.

Muslim theologians have no difficulty grasping and agreeing to this concept of borrowing as the lender shares the risks with the borrower. This in contrast, in their view, of putting money is a simple savings account where the depositor bears no risks of losing his money (capital). That is only a matter of degree. There is a small risk, but thanks to modern safeguards banks today are very safe. But back in the early 20th Century in the West and in many Third World countries today, you risk losing your precious money should the bank goes belly up. Indeed many Third World citizens today (including many Malaysians) see an unacceptable risk in their local banks and thus put their money in foreign banks. Similarly, many an investor had lost their capital investing in Third World Railroad bonds.

Thus when an investor seems to invest his funds “passively,” in reality it is far from that. He has to be prudent and investigate the risks and balance the rewards. Even in choosing a bank, not only has he to be careful to choose one that gives the best returns (interests) but also one that is safe, convenient, an offers superior services. All these require diligent evaluations. There is no such being as a passive investor. Thus we could look upon interest as rewards for the diligence of the investor.

Viewed another way, interest or costs of capital may be considered as profits on the trading of that capital which happens in this case to be money, instead of land or rice.

In the ordinary trading of goods and services, there is a fair and right price, determined by the free market of willing buyers and sellers. But if one party monopolizes a commodity and starts hoarding it in order to exact an exorbitant price to rake in the maximum profit, than that is rightly considered illegal (and sinful). America has elaborate antitrust and other laws to prevent business collusion and other anti-competitive behaviors.

Similarly in the trading of capital (money), there is a legitimate cost beyond which it becomes not only exorbitant but creates other serious consequences. Usurious (excessively high) interest rates are bad not only for individuals but also for society. They will extinguish all economic and business activities. There is no redeeming social or economic value in that. The economy would simply collapse.

Malaysia was smart enough not to heed the advice of the IMF during its recent [1997] economic crisis to jack up interest rates to levels that would cripple an already ailing economy, just to support the currency and satisfy the IMF bureaucrats. The bane of many Latin American countries is that their interest rates are so high that they choke off all economic activities.

It is interesting that in the current economic crisis in America triggered by the bust in the housing market, its central bank has purposely kept the interest rate very low.

The voluminous Islamic literature on interests and credits can be divided into two categories: one, usually written by religious scholars who are well versed in Islamic literature but woefully ignorant of modern economics; two, works of competent economists but whose knowledge of Islam consists of selective quotations of the Qur’an and hadith to support their positions. Rare indeed is an exposition that compares and contrasts accepted and well-tested concepts and principles of modern economics and banking with traditional Islamic understanding of the subject. The reason for this is that few economists are well grounded in Islamic learning, and fewer still are religious scholars who also understand modern economics. The ulama’s versions are long on erudite recitations of the Qur’an, hadith, and traditions. They strain to create qualitative differences between various terms which, stripped of their semantic gymnastics, are nothing more than a continuum on the risk-versus-returns spectrum.

The few notable exceptions to this sorry state of affairs are the contributions of Rice University’s economist Mahmoud El-Gamal. He readily admits to not being an Islamic scholar but he has the advantage of at least being a native-born Arabic speaker and thus can read the original Islamic texts and relate those terms and practices into their modern counterparts.

Next: Dealing With the Concept of Interest

Malaysia in the Era of Globalization #77

Chapter 9: Islam in Malay Life

Reform in Islam

Islamization of Education

There was a time when religion did not have any role in the Malaysian education system. Public schools were completely secular. There were some Christian missionary schools during colonial times, but they did not attract many Malay pupils. Malay parents were fearful that their children would be converted, a not unreasonable anxiety given the proselytizing fervor of those early missionaries. Following independence, religion was still kept out of the schools. There were Islamic schools but these were private, small, and mainly in rural areas. They catered exclusively to children of poor villagers. Their mission too was equally modest: teaching the basic rituals of Islam. Typically they were the one-teacher schools, the madrasah. Not much was expected and not much was delivered. I briefly attended one of them.

In light of the 9-11 attacks, there is much attention paid to the goings-on in these madrasah. They are less educational institutions and more indoctrination centers. They breed the kind of fanatical adherents to the faith – rigid and intolerant – that are the bane of so many Muslim societies.

Sometime in the 1980s Islam began creeping into the formal school system, at first imperceptibly but later accelerated under the tenure of Anwar Ibrahim as Education Minister. Today, Islamic Studies is a core subject for all Muslims students. There was an arrogant attempt by Anwar at making it mandatory to all at the university level, but that was quickly withdrawn amidst intense opposition from non-Muslims.

The government also set up a system of public religious schools where the entire curriculum is consumed with Islamic Studies. The physical facilities of these schools are far superior to the madrasah but the intellectual climate is only marginally better. Universities that are supposedly geared for science and technology also have large Islamic Studies departments. The International Islamic University only very recently established engineering and medical faculties. Thus while the nation is in desperate need of scientists and IT graduates, Malaysian universities still churn out Islamic Studies graduates by the thousands. Their only avenue of employment is public service; they are useless in the private sector because of their narrow education.

At the time of independence in 1957, Malaysia had a substantial cadre of well-trained English teachers but none or very few in Islamic Studies. It amazes me that forty years later Malaysia is chronically short of English teachers but has a glut of religious teachers. Why this is so reflects the emphasis of the educational establishment.

Examine the typical school day. There are only so many hours, thus time devoted to the study of prophetic traditions and Qur’an must come at the expense of other subjects. It is not surprising then that Malay students do not excel in English, science, or mathematics. Too much is expected of them.

Malaysia is forever lamenting the shortage of Malays in the sciences. Look at the facts. One third of Malay students opt for religious schools, where there is little science taught. Of the remaining who chose national schools, more than half pursue the non-science stream. Thus only a third of Malay students are channeled into the science stream. Non-Malays have no religious or ethnic studies to distract them.

In the religious schools it is, as expected, all religion. Thus if their graduates do not get accepted into Islamic Studies at local or Arab universities, they are stuck. There is little transferability. Every year thousands of these students are stranded, unemployed or simply unemployable. These are the youngsters who have plenty of time to demonstrate on the streets. The system has failed them and they have every right to be angry.

Clearly, the religious schools must be revamped. I would broaden their curriculum to include English, science, and mathematics. Religion should only be one subject, not the all-consuming curriculum. Likewise secular schools should relegate Islamic Studies as an elective or at least de-emphasize it. The manner in which religion is taught too should also be changed, away from rote memory and emphasis on rituals and catechisms, to understanding the underlying concepts and essence of the faith. Use the vast literature and scholarship in Islam to develop critical thinking among the students. They should be exposed to the rich and diverse viewpoints within Islam so as to broaden their intellectual horizon.

Religious schools are popular with Malays because of the Islamic cachet. Unlike secular schools, they have low dropout rates. Malays value education when wrapped in Islamic garment. Because of this natural affinity it is all the more important that the government should not fail them.

In the decade following independence, at the height of nationalism and resurgent pride in Malay language and culture, a generation of precious young Malay minds was wasted in the relentless pursuit of the national language policy. The dreams and hopes of thousands of promising youngsters were crushed when they discovered that their hard-earned certificates and diplomas were worthless. Today Malaysia is repeating the same mistake with its zeal and emphasis on Islamic Studies. Sadly like before, the victims are again all young Malays.

The cause of Islam is enhanced greatly if future ulama have a broad-based liberal education. It would also give them a wider and better perspective. If nothing else, it would disabuse them of their arrogant certitude. They would then be less likely to resort to simplistic recitations of the hadith or the Qur’an when confronted with complex problems. Perhaps then they would make real and meaningful contributions to their ummah.

I am equally alarmed at the current intellectual fad of “Islamization” of knowledge, that is, the attempt to put an Islamic imprint on all disciplines, especially the natural sciences. Invariably it means the adulteration of science. Thus we have Islamic “scientists” who have never seen, let alone used, a test tube! Yet another absurd example: Malaysian Islamic scholars trying to blame the jinn (devil) for the recent onslaught of computer viruses! Such incidents only expose their woeful ignorance of science. The insight and wisdom of science are also ultimately derived from God and we should respect that without having to dilute or spin it into one’s preconceived ideas of what is Islamic. Science is science; there is no such thing as Islamic science just as there is no such thing as Western science. Hydrogen combines with oxygen to produce water, in Islamic Saudi Arabia as well as in atheistic Russia. Likewise, two plus two equals four, whether in Islamic mathematics or Greek numerology.

Science and religion are complementary, not adversarial. Science attempts to explain the physical world around and within us, while religion answers man’s basic spiritual needs. Advancements in science has benefited mankind immensely, we should not belittle those. But no matter how well off man is materially, there will always be the spiritual void that needs to be filled with religion. The seminal difference between science and religion is this. In science you have to see in order to believe. With religion, first you believe, then you see.

In trying to discern differences where none exists, Muslim intellectuals and scientists are wasting their energy. They would be better off trying to elucidate the secrets of nature. That after all is the essence of science. Such activities as “Islamizing” this and that simply mask their dearth of intellectual ingenuity and curiosity. They cannot discover anything original in their own discipline and thus spend their time concocting schemes at such puerile intellectual pursuits as “Islamizing” established principles.

A more sinister aspect to the activities of these Islamic “scholars” is that they are hiding behind their Islamic credentials as a back door to success. Unable to advance on the usual merit, they put on the Islamic garment. Religion has always been the refuge of scoundrels, including academic ones. With the emphasis on Islam in Malaysia today, nobody dares call these academics to the carpet. Instead they are being rewarded with promotions and honors for “uplifting” the image of Islam. In truth, scientists like Abdus Salam (1979 Nobel laureate in Physics), Ahmad Zewail (Chemistry-1999) and thousands of others quietly toiling in their laboratories to uncover Allah’s secrets, do more to enhance the image of Islam than third-rate Muslim scientists cloaking themselves in the veneer of the faith.

In many ways the Islamization of Malaysia generally and of the government specifically, is reminiscent of the communist ways in the old Soviet empire. Then young Russians knew that the way to the top was not by excelling in their own field but by the back door—through the party. Thus unable to be productive as scientists or engineers, they found it much easier to be promoted by displaying their party credentials. Likewise Malay scholars and professionals today, unable to shine on their own merit, found it easier and more rewarding to embellish their Islamic credentials. Malay civil servants, lacking in executive ability and innovative ideas, exuberantly display their ardor for Islam (at least superficially), so their own incompetence could be easily overlooked.

I see only continued and increasing influence of these Islamists on Malaysia’s educational and other institutions; Malaysia risks degenerating into an Ireland of the 1920s. If this trend is not reversed, the nation and Malays specifically will continue to be mired in mediocrity.


Next: Islamic Economics