Malaysian-born Bakri Musa writes frequently on issues affecting his native land. His essays have appeared in the Far Eastern Economic Review, Asiaweek, International Herald Tribune, Education Quarterly, SIngapore's Straits Times, and The New Straits Times. His commentary has aired on National Public Radio's Marketplace. His regular column Seeing It My Way appears in Malaysiakini. Bakri is also a regular contributor to th eSun (Malaysia).
He has previously written "The Malay Dilemma Revisited: Race Dynamics in Modern Malaysia" as well as "Malaysia in the Era of Globalization," "An Education System Worthy of Malaysia," "Seeing Malaysia My Way," and "With Love, From Malaysia."
Bakri's day job (and frequently night time too!) is as a surgeon in private practice in Silicon Valley, California. He and his wife Karen live on a ranch in Morgan Hill.
This website is updated twice a week on Sundays and Wednesdays at 5 PM California time.
No person is perfect enough to be entrusted with the liberty and dignity of others. —Mahmoud Mohamed Taha (1909-1985) Sudanese Reformist, executed by his country’s military rulers.
I was visiting Malaysia after being away for many years. It was right after the race riot of 1969. The streets were still deserted, and I was driving with my father when we came upon a stop sign at an intersection. I duly stopped, looked around, and finding no oncoming traffic, proceeded.
My father asked why I stopped, and I responded that there was a stop sign. Startled by the unexpected question, I looked back to find him in a pensive mood, his face tilted, and his eyes looking far into the distance. After a long pause, he matter-of-factly murmured, “That is why the West is so advanced. People there obey the law even when no one is watching!”
Intuitively he had concluded that since my stopping at the stop sign was so natural, it must have been conditioned by my years of living abroad. He remembered only too well my driving habits at home a decade earlier!
While I was studying abroad, my father always encouraged me to venture beyond the campus and be involved in and observant of the community at large. Canada, he wisely observed, must be very advanced to be able to offer scholarships to foreigners, and he advised me to use the opportunity to learn everything about the country, and not just come home with a degree. Thus my summers were spent working at such places as a dairy farm and a summer resort, working and interacting with ordinary Canadians. I would write home frequently about my observations.
I described how efficient the modern dairy farms were, and of cows with humongous udders pouring out literally gallons of milk daily. Once I related how the farmer had unhesitatingly discarded a bucket of fresh milk, as he did not know whether it had been contaminated. That potentially spoilt milk, he noted, would be mixed with others, and thousands of customers would be sick. Besides, the reputation of his outfit could not be compromised or ruined for the sake of a few dollars worth of milk.
On another occasion, after a bus trip, I wrote of my wonderment at Canadian bus drivers; how professional and proud they were about their jobs. Indeed they were dressed like pilots, with their crisp light blue long-sleeved shirts neatly tucked inside their dark blue pants, complete with a bow tie and a captain’s cap. That bus driver had taken us through the neighborhood where he lived and proudly showed us, the tourists, his home. It was a neat, modest track bungalow in a clean pleasant suburb. I could not help but compare him with his Malaysian counterparts who for the most part had their shirts flying loosely untucked, with untied shoes or slippers, and generally looking disheveled.
Through such regular commentaries my father knew firsthand about life in Canada. He had the right impression that the West was indeed advanced and wondered why or how it got that way while countries like Malaysia were still struggling.
My father was on to something profound when he observed that obeying the law when no one is watching is a key ingredient to the West’s success. To many observers, a respect for the rule of law is a prerequisite for progress. A modern society is ruled by law, and not by men. Progress cannot take place when there is callous disregard for the law.
This respect for the law must be shown not only by ordinary citizens but also more importantly, the leaders. For when leaders abuse their privileges and flout the law, then there is little hope for the country. This abuse can come in many forms, from outright disregard of the law to more subtle forms as in selective prosecution and uneven applications of the law. When leaders and the elite do not respect the law, it sends a clear message to the masses to do likewise.
Similarly all laws must be respected, even the seemingly minor ones. The contemporary American political scientist James Q. Wilson first made the astute observation that when we ignore violations of minor laws, this would later encourage the breach of more serious ones. Law enforcement agencies are now familiar with the “broken window syndrome,” that is, when we ignore minor vandalisms like broken windows, we encourage others to commit even greater crimes, until the whole building is completely wrecked or burnt down by arson. New York police successfully reduced the rate of major crimes by first cracking down on such seemingly innocuous ones as loitering, jay walking, and littering. When ordinary citizens see that such minor laws are being strictly enforced, they rightly assume that other more serious infractions would also be vigorously pursued.
Going back to my father, I should have given him an update on my driving habits now that I have lived in California for a while. Californians are among the worst drivers. They consider a stop sign only a suggestion; and a yellow traffic light a signal to step on the gas!
Apart from respect for the law, another feature of the West is the premium it places on individual and personal liberty. Americans do not appreciate this freedom as it is taken for granted. They are sensitized only when that freedom is threatened or breached. Notice the current uproar over the president’s proposal to detain potential terrorists without due process in response to the 9/11 tragedies. Americans become very much aware of their cherished freedom when they are abroad.
Once on a flight to Malaysia I came upon an article in a regional publication that was supportive of Malaysia but contained some mild but valid criticisms of the leadership. I related that article to my Malaysian friend, and he too was interested to read it. I rushed to the nearest bookstore to get a copy of the magazine. (Having been away from Malaysia for a long time I have not developed the habit of swiping the airline’s copy!) Imagine my horror when I could not find the article; the pages had been neatly excised! Some bureaucrats in the censors’ office had the audacity to decide what I can and cannot read. How insulting! I felt violated.
This blatant disregard for the rights and dignity of the individual is pervasive in the Third World. These poor societies fail to appreciate that in the final analysis it is individuals who effect changes, and thus progress. Western societies are more progressive because they place a premium on the individual. Eastern societies generally submerge the individual to the needs of the larger society. They emphasize society’s goals and stability over that of the individual, as encapsulated by the Japanese saying: the nail that sticks out gets hammered. At least that is the perceived wisdom.
I challenge that. Consider what the Sudanese reformist Ustaz Mahmoud Taha wrote in 1963, “Every individual is, authentically, an end in himself. He is not means to any other end. He – even if he is an imbecile – is a “God” in the making and must be given the full opportunity to develop as such. Liberty is the prerequisite need. Man must be free from all dehumanizing influences – poverty, ignorance, and fear.”
Fifteen years earlier, the United Nations, using far less elegant prose, said essentially the same thing in its Universal Declaration of Human Rights. In its preamble the document reaffirms the inherent dignity and the equal and inalienable rights of all humans as the foundation of freedom, justice, and peace. The document’s first article could easily have been taken from the Koran when it declares that all human beings are born free, with equal dignity and rights, and are endowed with reason and conscience.
Many outside the West would challenge the universality of this UN Declaration, especially its statement reaffirming the primacy of the individual. But as the Islamic scholar the late Fazlur Rahman wrote, “Whether ultimately it is the individual that is significant and society merely the necessary instrument for his creation or vice versa is academic, for individual and society appear to be correlates. There is no such thing as a societiless individual.”
A Whiff of His Father’s Leadership M. Bakri Musa (www.bakrimusa.com)
In announcing the repeal of the Internal Security Act and other repressive laws, Prime Minister Najib Razak secures for himself an enshrined spot in Malaysian history.
Of the many thoughtful comments on Najib’s historic announcement, the one that struck at the heart of the issue was that by former Mufti of Perlis, Dr. Asri Zainul Abidin. He declared, “The ISA is an un-Islamic law. It infringes [upon] individual rights and can be easily misused by leaders, so repealing it was a very Islamic move.” Amen!
“Najib’s announcement,” Asri continued, “is more valuable than any bonus payment or salary increase because repealing the ISA means the restoration of human rights … which is more valuable than money.” That is putting things in their proper perspective.
I disagree however, with the Mufti’s characterization of Najib’s move as a “gift” to the people. When someone robs you of something and then returns it, that is no gift, merely restoring what is rightly yours. The ISA and other restrictive laws rob us of our precious possession, our freedom. That is Allah’s gift to us, as enshrined in the Koran. It is not for mere mortals, no matter how exalted their earthly positions, to tamper.
Nonetheless I do hear the Mufti. Good Muslims ought to be grateful for their blessings, however small. I want to be a good Muslim, and Najib’s announcement is a huge blessing, so I am very grateful. Alham dulillah! Praise be to Allah!
Missing the Islamic Visuals
Najib and his policymakers must have deliberated for some time. Perhaps it was not a coincidence that only a week earlier Najib’s younger brother, the head of a GLC bank, intimated the need for Malaysia to change lest it risks a Middle East type of upheaval. Significantly, he made it at the Malaysia-China Trade Investment Conference, but more on China shortly.
Pursuing the religious theme, I was surprised that Najib and his advisors did not choose an occasion with some Islamic symbolism to make his momentous announcement.
Not that there was anything wrong with choosing Malaysia Day. However, we just completed Ramadan only a fortnight ago. Surely Najib had decided then. Imagine if he had announced it on Hari Raya, which also coincided (more or less) with Merdeka Day. What better way to demonstrate and acknowledge the special blessings of Ramadan and live its spirit, as well as fulfill the aspirations of merdeka – freedom! Ramadan is after all about remembrance and return – remembrance on the origin of Islam and return to its essence, in Eboo Patel’s pithy phrase.
When Islam was revealed, it emancipated the Arabs from their Age of Jahiliyiah (ignorance); likewise, getting rid of the ISA would emancipate Malaysians, lifting us from our Age of Fear. As for the essence of Islam, our faith commands us to do good and forbid evil. Getting rid of ISA is getting rid of evil; it cannot be more Islamic than that!
Imagine the powerful symbolic impact globally had Najib made the announcement at the end of Ramadan, coming as it was only a few days before the tenth anniversary of the horrible 9-11, and with it the inevitable hysteria of Islamophobia. Imagine the good that would do to the cause as well as image of Islam! One Muslim country bravely discarding its antiquated repressive laws, and doing so not in response to mass demonstrations or civil disobediences but as a normal turn of events. The contrast with America’s renewed commitment to its Patriot Act and the Guantanamo detention camp could not be starker.
Speaking of image, had I been the administration’s public relations consultant, I would have arranged with the announcement a simultaneous release of some ISA prisoners. I would have alerted the news media so they could station their journalists and cameras outside the gate of Kamunting prison.
Imagine the stunning and symbolic visuals! While Najib was making his announcement, the prisoners would emerge one by one into the arms of their eagerly awaiting loved ones. If there were to be a mosque nearby, I would superimpose the call of Azzan to the visuals. I would also have the producer put on a split screen; on one side would be the Prime Minister making his solemn announcement; on the other, the prisoners with their families joyously celebrating their freedom, with the takbir (affirmation to the greatness of Allah) superimposed as the background soundtrack.
I cannot imagine a more powerful symbolism. Those tapes would also be great campaign materials!
The Najib Administration forks out tens of millions to foreign consultants in an effort to spruce up its image. Alas those “documentaries” that supposedly portrayed Malaysia in good light, as well as the many “interviews” Najib landed on the international media, all turned out to be unmitigated fiascos. Those “journalists” and “interviewers” were nothing more than hired hacks.
Yet when a rare and splendid opportunity arose as with the recent announcement, those highly paid public relations pros missed it! Perhaps that should not be a surprise. After all they are all foreigners and non-Muslims to boot; they could not possibly pick up on the Islamic nuances I alluded to earlier. However, their fumbling on the international stage where they are supposedly the experts cannot be readily excused. There is no justification for their lack of professionalism, if not downright unethical behaviors there.
As can be seen, a good policy is the best PR. Notice the favorable comments locally as well as in respected foreign media to Najib’s latest initiative, and it did not cost the government a ringgit to get them! Focus on crafting enlightened policies, and the favorable publicity would ensue. Even if you do not get any, a good policy is reward in itself. Your people will be grateful for it.
A Whiff Of His Father
In committing to repeal the ISA, Najib did something no other prime ministers before him had dared even to contemplate. And Najib had some mighty impressive predecessors. In so doing, Najib also demonstrated a whiff of his late father’s great leadership qualities.
The late Tun Razak did not hesitate to suspend parliament following the May 1969 race riots. Despite the howling protests at home and abroad, Razak was undeterred for he had a crucial job to do; restore peace and stability to a nation shocked by the horrors of that tragedy. And may Allah bless his soul, he accomplished his mission in short order.
To those who would belittle that achievement, let me remind them that the 1969 riot coincided with the flare ups of sectarian violence in Northern Ireland. While Malaysians have been enjoying peace for the past four decades, those folks in Northern Ireland are still busy settling their deadly scores.
To this day, Tun Razak remained unique in being the only leader in the world who grabbed power during a national emergency to pursue a much needed critical goal, and then willingly gave that power up once he completed his mission. No other leader could claim that. On the contrary, history is filled with leaders who had to be pushed or dragged out, or worse. Libya’s Gaddafi and Syria’s Assad are only the latest examples.
I am not concerned with how Najib arrived at his decision; I am focused only on the decision. There is no shortage of skeptics out there, and they are not without their reasons. After all Najib’s flip-flopping rivals that of his immediate predecessor.
Even if those skeptics were to be proven right later, there would be no turning back. Najib has clearly declared his niat (intention) to repeal the ISA. In Islam, niat is what counts. We declare our niat before we pray, fast, give zakat or undertake the Hajj. If Najib fails to live up to his Nawaitu, then he has to answer not only to his Maker on the Day of Judgment but also more practically, to his political makers – the voters – right here on earth and now, as in the next election.
Najib’s Nixon-in-China Moment
Najib’s declaration last Wednesday reminded me of Nixon’s pioneering 1972 trip to China. It took another seven years before America would send its first Ambassador to Beijing. Today, over 30 years later, we wondered why on earth it took America so long to recognize the obvious reality of this most populous nation. Regardless, America, China, and the world are now better for it.
Nixon basked on the glory of his China trip and went on to win a landslide for his second term. Alas that triumph proved short-lived, for he was soon forced out of his presidency in shame on matters unrelated to his China initiative. Nonetheless his trailblazing China moment retained its luster in an otherwise blemished legacy.
If Najib’s Malaysia Day niat proves to be just that and nothing more, well, like Nixon, at least he will have that as his legacy, and only that. However, if it proves to be ikhlas (sincere) and only his first step, with many more courageous moves ahead, then greatness awaits him, as well as Malaysia.
By educating Muslims generally and the ulama in particular on such modern and useful concepts of economics, and replacing such loaded terms as interest and insurance with the morally neutral terms as rewards on savings and risk sharing, we would channel the natural propensity for Malays to save even more. This in turn would encourage other productivity-enhancing economic activities.
Western financial institutions have done a remarkably efficient job in contributing to the economy. It is difficult for a country to advance unless it has a well developed and sound banking system. Western financial institutions have done an equally credible job of democratizing financial services. When I started my practice over two decades ago, I could not get a line of credit, as that was available only for major corporations. Thus I had to borrow the whole lump sum right away and began paying interest on funds I did not need immediately. Today lines of credit are common even for ordinary retail customers. Similarly, new entities like money market and mutual funds enable average consumers to participate in more productive investments that were previously reserved for rich clients. Average Americans, thanks to such innovative financial instruments, can now invest their funds in foreign companies and other ventures besides the traditional stocks and bonds through the convenience of their unit trust and mutual funds.
Modern banks are by no means perfect. In times of crises, as documented by the Nobel laureate Joseph Stiglitz, banks can behave just as irrationally. Indeed the common wisdom that banks willingly lend money when you do not need it, and then quickly withdraw it when you really need the funds, is not without foundation. As an ancient Malay saying would have it, it is akin to lending someone an umbrella, but when it rains take it back! Banks are also not averse to shirking their community responsibilities. In the past it was common for bank to come to a community only to collect the deposits, and then invest the funds elsewhere. Today in America, with the Community Reinvestment Act, banks are required to invest a percentage of their deposits within the community. Banks have also been known to “redline” neighborhoods, and discriminating against poor and minority borrowers. Again with civil lawsuits and better auditing, banks are doing less of that now.
The rigid rules governing loan-loss provisions and the strict definition and enforcement of non-performing loans (NPLs) that are internationally accepted may be harsh. Indeed Malaysian leaders severely criticized the IMF for insisting that Asian banks use the widely accepted “non-activity-for-three-months” rule for NPLs while Malaysia has been using the more lax (kinder?) six-month rule. When banks classify loans as “non performing,” it means more than just calling in the loans and making the necessary “loan loss” provisions as mandated by law. It means that factories and companies are being shuttered and workers laid off. There are significant human and social costs associated. When Enron, the giant electricity company, was forced into bankruptcy, thousands of its workers were stranded and its hometown Houston was thrown into a tailspin. Cruel as that may seem, consider the alternative of keeping such companies alive. For one, its creditors and banks would have to continue to pour their precious depositors’ money to support the ailing company. Indeed had this continued, Enron would not only have driven itself into the ground but also would have taken along other healthy companies.
Thus while we may sympathize with Enron’s fate, we should also be considering the fate of the depositors who put their hard-earned cash into Enron’s banks. It is better that one company fails rather than a major bank. With the former only that company’s shareholders, employees, and other stakeholders are affected, but when a major bank fails, the ripple would be felt throughout the economy. Had Bank Bumiputra followed international guidelines and been aggressive with its delinquent borrowers in the very beginning, it would not have folded, taking with it billions in taxpayers’ precious funds and even more importantly, the people’s (especially Malays’) confidence in the system. Bank Bumiputra’s failure did all that and then some. It did untold damage to the Malay psyche by reinforcing ugly stereotypes about our talent (or lack of it) for commerce.
To reinforce my main points, yes, there are weaknesses in the present Western banking system. It is being continuously improved and strengthened. The present complex set of internationally-accepted banking rules and regulations have been fine-tuned over decades; Third World regulators ignore them only at their own peril. My biggest concern is that because of its novel business arrangements, these Islamic banks cannot be adequately scrutinized by present banking regulations.
The purported advantage, if not prime selling point, is that Islamic banks are not lending out their depositors’ funds, rather the customers and bank have a “profit and loss” partnership arrangement. This is ingenious if not specious at best. First, such “partnerships” are so lopsided that they cannot be fair to the customer. If a particular venture were to lose money, who is to check the bank’s accounting? Second, if the bank were to fail, who has first claim on the assets? The customer, who are theoretically part owner of the asset, or the shareholders or owners of the bank? Clearly there is a potential for a serious conflict of interest that has yet to be resolved.
I consider myself a sophisticated consumer of financial services yet I find it difficult to evaluate and compare the costs and risks of the various products and services offered by Islamic banks. Hence I have not used them. My late sister had a home “mortgage” with an Islamic bank that supposedly charged no interest. But when I compare the actual “costs” of her mortgage and calculated the imputed interest rate, hers was at least two hundred basis points above that offered by conventional banks. Worse, when interest rates rose, her payments went up with them and there was no limit to the increase. America has variable mortgage rates too, but those loans have caps to protect consumers. No such protections exist with Islamic banks. The end result is that Islamic banks are taking advantage of their customers. No wonder there is a headlong rush by Western banks to enter the Islamic market. They have successfully transferred all the risks to the customers while raking in all the rewards! A rip off, even if done in the name of Islam, is still a rip off. Sadly, many consumers in Malaysia and other Muslim countries are woefully uninformed in economic and business matters and are easily swayed by the Islamic label.
In the final analysis credit, which is the flip side of lending, is like any other modern instrument. Used properly and it would bring untold benefits to individuals as well as society; abused and it will exact a stiff price. To a skillful surgeon, a scalpel is a lifesaving tool; to an idiot, a killing kit. To Muhamamd Yunus, the founder of Grameen Bank and who has done so much to uplift the lives of millions of Bangladeshi peasants, credit is an effective instrument to reduce poverty. To him, access to credit is basic human rights.
Nations are like individuals. If they borrow millions to build palatial mansions for their leaders and fancy headquarters for their civil servants, it is the equivalent of my earlier example of borrowing money to buy a Mercedes just to show off. But if nations borrow to invest in their schools and infrastructures, then it is like my buying my own taxi. I fear that the current obsession with whether certain forms of “returns on investments” (interests) are halal or haram is counterproductive. They discourage Muslims from productively managing their idle funds. Savings and borrowings (or credit) are vital ingredients for economic development. No country can progress unless its people save (capital formation) and credit readily available to its entrepreneurs and producers. Credit made possible the spanking new North-South freeway and the new Kuala Lumpur International Airport. Credit enables Americans to have the highest standard of living and helps push Japan, Taiwan, and South Korea into the First World. At the same time, credit (or more accurately, excessive and imprudent borrowings) was the downfall of Argentina and hosts of Third World countries.
Through practical experience economists and bankers have come up with useful guidelines on the prudent use of credit. The priority should be to educate the masses on these guidelines so they can become better informed and therefore safer and more prudent users of credits. Today I have more debt than I ever had but I do not feel overwhelmed or threatened. For one I have put my credit to productive use by buying appreciable and revenue-producing assets, and not to finance my vacations or daughter’s wedding (the equivalent of buying taxis instead of limousines). Two, my debt payments are comfortable relative to my income and other assets. Should my income drop I would of course have to dispose some of those debts, but since I have used them to buy productive or at least appreciating assets, I do hope to come out ahead.
Muslim theologians and economists should quit quibbling over what some ancient Arabic texts may or may not mean in the context of the 21st Century, but instead educate the ummah on the prudent and productive use of credit. Perhaps they can find in their study of those same ancient texts something to support the contention that there are indeed qualitative differences between productive and consumptive loans. But before they can find those theological justifications, these scholars must first understand and be convinced that there are indeed real and significant differences between the two and that they are not merely involved in semantic gymnastics. It is difficult to find or discern something if one does not know what one is looking for. Even if we do not find that theological basis, we still must train Muslims to use credit wisely.
To revert to my earlier analogy of the knife, the objective is to train Muslims to use that instrument to good purpose like sculpturing and surgery, and not to use it for evil deeds like killing. Muslims must stop this endless puerile argument on whether the knife is intrinsically a halal or haram implement.
Many Muslim are sincerely trying to lead a pious life and are susceptible to the Islamic cachet. They implicitly trust everything that has an Islamic label and those who proclaim their Islamic credentials and trust in Allah. Thus they readily suspend their critical faculties when evaluating Islamic products and services. We should teach our fellow Muslims not to do that. We should use President Reagan’s notorious phrase to express his opinion of the Russians – trust but verify – into its comparable Muslim version. Yes, trust in Allah, but we must verify everyone else, even if they swear by the Almighty!
As an aside, in content as well as sequence, this chapter should rightly be a subsection of the previous chapter on culture. But because of its length and unity of thought, I have made it into a separate chapter. After examining culture generally and of Islam in some depth, I will now examine in the next chapter the role of the other social institutions in Malaysia, primarily the judicial system and the laws.
IFIs thrived in the first few centuries of Islam not because those early Islamic thinkers had found a magic way to dispense with the cost of funds and returns on investments, rather they used different terms (or more crudely said, put a different spin on the issue) to circumvent interests payments and earnings.
The modern version of Islamic banks was resurrected only in the last few decades. Despite its recent rebirth, its popularity has soared both in Islamic and non-Islamic countries. This recent history should serve as a ready caution. The system has not been tested. The system of auditing, accounting, and regulating has not been standardized. What I fear most is that should Islamic banks fail in an economic crisis, it would not only aggravate the situation but also set back people’s trust in them. That in turn would severely shake Muslim’s trust in their religion.
A senior official of the Federal Reserve Bank of New York, which supervises the world’s largest and most sophisticated banks, voiced his concern about this in his address to a meeting of Islamic bankers who were eager on introducing the concept to America. Through bitter experience America has wisely separated commercial banking from insurance and investment banking, and also banking from commerce.
A century ago American banks were deeply involved with commercial enterprises much along the lines currently advocated by proponents of Islamic banking. The 1930 depression was blamed in part because banks were deeply involved in speculative share trading activities of companies they owned. Further, such co-mingling of banking and other commercial activities could lead to an unhealthy concentration of economic power. Banks would then cease from becoming an impartial arbiter of credit worthiness.
Modern Western banking has been continuously refined over the past centuries. Banks today (at least in Western countries) are safer and offer better services. They have also contributed immensely to economic development. The challenge for IFIs is not simply to say that Western banks are un-Islamic but to offer comparable services to customers and thus serve the economic needs of society.
Instead of trying to parse non-existent differences between interest and other costs of funds, modern Islamic bankers and economists should more productively focus their intellectual resources to differentiating the various kinds of lending. Islam rightly prohibits “making money on money,” which I interpret as gambling and speculating, but encourages trade, which is taking risks in productive investments.
There are certainly significant differences between my borrowing money to buy a Mercedes limousine to show off to my colleagues and neighbors, or to use it as a taxi. The economic multiplier effect of the purchase, for example in creating jobs at the factory as well as the car repair shops, is the same in both cases – the direct effects of consumer spending. From there the economically meaningful differences emerge.
With the first instance I am using borrowed funds for consumption; the second for production or investment. With the latter I, as a borrower, would actually earn money (passenger revenues) as a consequent of the loan. And if I share my taxi with another driver, that would create yet another job (making a total of two taxi drivers). No such additional incomes or job creations would result with the first type of borrowing. Additionally, my taxi would provide a much-needed transportation service to the community. My private limousine would only create more pollution and envy from my neighbors. But the most important difference is that with the first borrowing, only the lender (bank) makes money out of the borrower; with the second, both lender and borrower make money.
In either case money is being borrowed and interest (cost of funds) incurred. But with the second case the borrowing serves a useful societal purpose; it is in fact a form of trading. I trade my service or expertise as a taxi driver for the bank’s capital. The first borrowing on the other hand, is purely for consumption. One can be easily persuaded that borrowing in the second instance should be encouraged as society as a whole would benefit from such activities. No such societal benefits would accrue from the first borrowing. Thus we could properly differentiate, as many recent scholars have suggested, between the costs of capital in the first type of lending as interest, riba; the costs in the second instance should be more accurately called profit on the trading of capital, which in this case is money instead of the usual assets such as goods and real estate.
Muslims must remind ourselves that current accepted interpretations of terms such as riba and gharar (risky sale, speculation) are just that: interpretations. Indeed there are some scholars who interpret riba to mean excessive interest. Just as excessive profit is bad (and often illegal as they are usually obtained through such means as market manipulation, monopoly, or plain hoarding) so too are excessive interest rates. Likewise there is a conceptual difference between interests on “productive” versus “consumptive” loans. The latter would more likely fit the description of riba while the former as profit on the trading of capital.
There is a comparable controversy on whether insurance, specifically life insurance, is halal or haram. Islam has its own version of managing risks, Takaful. (mutual aid). Again here it is the duty of its proponents to clearly differentiate their product, especially with respect to safety, security, and rate of returns from traditional insurance so consumers could be better informed and be able to “comparison shop” intelligently.
In such important matters we must go beyond simplistic and legalistic changes of specific words but instead concentrate on deciphering the meanings and intent of such terms.
Indeed Muslim shippers in Spain first started the very concept of takaful or insurance. They would collect levies on each shipper so they would have funds to support the unfortunate shipper who would meet untimely calamity along the way. Of course the concept has since developed a long way from there.
When one traces the development of insurance from a mutual aid society, the ulama can easily understand and readily agree to the concept. I once explained to an alim who vehemently opposed life insurance, the concept of risk sharing. I described a community where when someone dies, the rest of the community would contribute some money to take care of the deceased’s family. He readily agreed to the benefits of such deeds and went on to quote eloquently some holy passages to buttress his agreement. Then I suggested that instead of collecting the money only when someone dies, we would collect it regularly and put that cash in a pool ready to be distributed at the time of need, that is, the death of a member. Again, he readily concurred.
Then I moved on and suggested that instead of giving the same amount of money for each family, we use our judgment and give more to those who die leaving behind young children as opposed to those whose children have grown up. Again, he readily agreed to the rationale that the expenses of a family with dependent children would certainly greater and therefore they should get more. Then I made the leap forward by suggesting that instead of us or the village committee deciding how much money the deceased family would get, we let individual members decide how much to leave to their family when they die. Surely the individual is the best judge on the needs of his or her family. Those who want to leave more would of course have to contribute more; those who want to leave less would contribute less. Again he saw no problem with that. Then I surprised him by saying that is in essence the concept of life insurance. You decide how much your family would get when you die and you make your contributions (that is, pay your premiums) accordingly.
Today, life insurance is much more complex as other risk factors like age and family history are considered. And instead of a village committee we have a team of professional actuaries who assess and price risks as well as invest the premiums. But cut to its core, life insurance is essentially a commercialized mutual aid society. The money contributed (premiums), instead of being left underneath the village headman’s mattress, is being invested and thus further contributes directly to the economy.
The ulama’s prohibition on insurance, specifically life insurance, is simply based on their lack of understanding of the concept of risk sharing. They have this simplistic notion of life insurance as a bounty to invite some mischief on the part of the beneficiary in order to collect the cash. Well, such a scheme is a crime. One would be punished right here in this world for fraud and murder.
Life insurance, like other forms of insurances, is merely a form of mutual sharing of risks. Nothing prevents a community, co-operative, or a “mutual” company from offering such investments. Indeed such co-ops and mutual insurance companies are among the biggest issuers of insurances in America. The Mormon Church has a similar insurance-like scheme by levying charges (tithes) on its members to take care of the sick and disabled amongst them.