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Allah Economics

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Some things are definitely meant not to be, like the Prophet Mohammed teaching capitalism to the West.

One great confusion in the otherwise already greatly confused societies of Islam is the combination and interaction of spiritual and temporal powers. Unlike the West where Church and State are separate, independent and each sovereign, Islam unites State and Religion together with less than auspicious results. Because State and Religion are one and only, for centuries Muslims have developed ways to integrate religious beliefs with the external economic realities of the nations they lived in. This has had varying degrees of compatibility with the empires and customs they encountered. For example, commerce has adapted to "al-urf", the custom. But to adapt merchantism is one thing, to build a national financial structure with which to supervise and monitor all economic aspects of a country is quite another. The West has done it, sure ... after two-thousand years of history, trial and errors. How can Islam even remotely hope to do it in twenty years?

Since the mid 80s Muslim bankers and religious leaders have tried to develop ways to integrate Islamic Law on usage of money with modern concepts of ethical investing. By carbon-copying western financial systems and adapting them to the religious tenets of the Quran, the idea was to reinvent the wheel. But the result is a hybrid of Capitalism mixed with Socialism and sprinkled with a heavy dose of politicism so characteristic of Islamic leaders – a kind of Frankenstein with a wicked soul, so to speak. Unfortunately this notion of Islamic economics and finance bound by religious tenets is a dysfunction of economic realities and an inhibition on the development of the regions of the world where Islam is most influential, and where traditional Islamic Law remains a factor in the Middle East ongoing economic disappointments. The weakness of the region's private economic sectors and its human capital deficiency stand among the lasting consequences of the application of traditional Islamic Law to commerce and finance.

The pivotal point upon which this entire Islamic financial system is based, is that it operates on the basis of 'zero interest' in accordance with Qu’ran teachings. Because the Quran spoke against usury in the context of early Muslim society, it generally entails trying to remove or redefine interest rates from financial institutions. In doing so, Islamic economists hope to produce a more 'Islamic society'. The new Islamic economic theory postulates that in Islam, much like the West, central banks would be the sole issuer of credit and money and this for very telling reasons: Islamic central banks should be moved by public interest and their very existence should be considered a social prerogative, so that the power to create money should be vested in them exclusively. In a 'zero interest' society, of course, manipulation of interest rates cannot exist. Therefore the tool of Islamic monetary policy is to be found in the expansion and shrinkage of base money supply, which would be allotted by central banks to individual banks to be administered. It is further postulated as obvious, that the larger the money supply, the more productivity it generates and the more spending it spurs. This idea, for now, does not seem to have worked well.

Clearly, the first problem – and perhaps the biggest - arises in trying to model the Islamic system to the West, where fluctuations in cost of lending are paramount to monetary policies enacted pretty much everywhere. Monetary policies, as it is widely known, are technically demand-side macroeconomic policies that work by stimulating or discouraging spending on goods and services. Economy-wide recessions and booms reflect fluctuations in aggregate demand rather than in the economy's productive capacity. Above all monetary policy is not a supply-side instrument. Central banks have no handle on productivity and real economic growth. Under Islam, banks would be in competition with one another, but they would be coordinated in effect via a central bank under the patronage of an Islamic State dedicated to the people. The essence of this idea is that the State determines the policy of the central bank. Furthermore, under Islam the central bank together with the State would guard against tendencies of concentration of wealth and power, and would take suitable steps to maintain the equilibrium of wealth for the sake of the public interest, welfare and fraternal living.

To have the State telling central banks what to do brings us all the way back to the times of Leon Trotsky and the Bolshevik Revolution. In its early times, in fact, and prior to the break-up with Stalin, Leon Trotsky advocated a 'permanent Leninist revolution' in which the State would control all aspects of life including, of course, the economy. The State would dictate production and supply and direct monetary quotas to be used by the citizenry to purchase the available inputs. During the First and, most notably, the Second World War approximately fifty-million Christians perished fighting over the truthfulness, fairness and applicability of this idea. And whereas in fact the death of all those many people could not solve the mystery, it ultimately was the peaceful collapse of the former Union Of The Soviet Socialist Republics that revealed the ephemeral nature of the State-controlled economy.

Additionally, as Islamic countries may or may not have noticed, the United States is the single biggest importer of Islam's number one product – oil (not explosives, like I am sure some bad mouth out there is muttering out aloud) – and the single largest payer of Petrodollars, the lifeline of economic longevity for many Islamic nations. I am willing to bet that it would be somewhat problematic, to say the least, to convince the Americans – especially the Bush Administration – that a centralized economic system based upon a Trotskyst Bolshevik-style, Marxist – Leninist State-run model is the best alternative and most viable option to capitalism available anywhere in the Universe. Not even Vladimir Putin, the current president of the Russian Federation and former KGB officer and FSB boss, talks about State-centralized economy anymore. This new idea sounds too much like a very old one or, to use one of America's favorite expressions, 'different day, same s..t'.

The second problem created by the 'zero interest' society is that the fundamental characteristic of charging interest, i.e. charging a premium, on the principal amount of a loan for the time value of the loaned money, is not truly eliminated in Islamic banking. Rather, the interest is merely hidden and re-labeled. A fact this, all and by itself, which goes against Qu’ran teachings in the matter of not deceiving your fellow Muslims.

Usually, time value of money is compensated to the lender by the lender charging the borrower interest on the principal amount of the loan. In the case of Islamic banking, the lost time value is compensated by charging a mark-up on the product that the client might be seeking to purchase by way of a loan. The ownership of the product, whether a real capital asset or personal property, remains in the name of the bank until the principal loan including the mark-up has been paid. In the case of a business loan, instead of charging interest over the time that the principal amount is loaned out, an Islamic bank will demand a certain percentage of the borrower's business profits for an indefinite period of time. Furthermore, under a conventional interest-based loan it is possible to 'call' the loan if the interest rate drops and the borrower discovers that he can find cheaper financing. However, there is no way to call a loan issued by an Islamic bank. Thus, while the borrower from an Islamic bank is protected against interest rate increases, the borrower cannot benefit from interest rate drops.

All this, coupled by less than efficient social structures and political systems in many Islamic states, contributes to the existence of quasi-feudal living standards for the vast majority of Muslim individuals and businessmen alike. Ironically, in the few areas where this new Islamic economic reality has been and is now being tried and tested, rather than finding the much coveted equilibrium the 'Islamic initiative', as it has come to be known, seems to have exacerbated the polarization of wealth.

Certainly it does not appear that Allah can be either proud of or happy, at least for the time being, for the financial under-achievements of Her devout followers.

Luigi Frascati
Luigi Frascati - EzineArticles Expert Author

Luigi Frascati is a Real Estate Agent based in Vancouver, British Columbia. He holds a Bachelor Degree in Economics and maintains a weblog entitled the Real Estate Chronicle at http://www.realestatechronicle.blogspot.com where you can find the full collection of his articles. Luigi is associated with the Sutton Group, the largest real estate organization in Canada, and is based with Sutton-Centre Realty in Burnaby, BC.

Article Source: http://EzineArticles.com/?expert=Luigi_Frascati


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Categories: economics, islam, Church and State

posted by lecentre @ 10:10 a.m.