Comment by tareqak | Hacker News Reader

Comment by tareqak | Hacker News Reader

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I agree that your experience is exactly what sounds like: taking a conventional financial instrument, replacing all mention of the word “interest” with something way more complicated, and adding rules that seem difficult to always stay on the right side of. That happens to be exactly what Tarek El Diwany (mentioned in the second last paragraph of article) is saying.

Shariah banks have to operate in a world that has completely accepted conventional banking. As a result, it is in a constant state of playing catch up in terms of fitting in (e.g. having to implement a software interface in which you reject some central tenets of the interface).

I don’t know the answer one way or another. What I do know is that conventional banking remains imperfect in spite of it being totally dominant: the boom-and-bust economic cycles have grown more catastrophic, and we are still grappling with accurately adding phenomena like health and pollution into our financial models.

I applaud you for trying to understand how conventional and sharia financial products fit together. I don’t find your reaction offensive: it just means we aren’t done trying find a good solution that makes both technical and moral sense.

There’s a really long Wikipedia article here about profit-loss sharing, which central concept of how sharia banking is meant to work: https://en.wikipedia.org/wiki/Profit_and_loss_sharing

N.B. I apologize for any typos since I typed/tapped this out on my phone.

>> the boom-and-bust economic cycles have grown more catastrophic

While agreeing with your post more generally, this one statement seems a bit off the mark. Shouldn't the Great Recession should fairly be compared with Great Depression? So far, at least, the Great Depression was far more catastrophic, as was for that matter the Long Depression starting in 1873. All three of these were real financial sector collapses, not simple recessions. Independent central banking seems to have done great good, generally, despite of course being imperfect.

That's a fair point. I was including the smaller recessions as well: there is a boom and a bust within a ten year span.

That the IMF changed the definition of a global recession is a little weird, but they know better than I do.

From wikipedia:

According to the International Monetary Fund (IMF), "Global recessions seem to occur over a cycle lasting between eight and 10 years."[48] The IMF takes many factors into account when defining a global recession. Until April 2009, IMF several times communicated to the press, that a global annual real GDP growth of 3.0 percent or less in their view was "...equivalent to a global recession."[49][50] By this measure, six periods since 1970 qualify: 1974–1975,[51] 1980–1983,[51] 1990–1993,[51][52] 1998,[51][52] 2001–2002,[51][52] and 2008–2009.[53] During what IMF in April 2002 termed the past three global recessions of the last three decades, global per capita output growth was zero or negative, and IMF argued—at that time—that because of the opposite being found for 2001, the economic state in this year by itself did not qualify as a global recession.[48]

In April 2009, IMF had changed their Global recession definition to:

    A decline in annual per‑capita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per‑capita investment, and per‑capita consumption.[54][55]

By this new definition, a total of four global recessions took place since World War II: 1975, 1982, 1991 and 2009. All of them only lasted one year, although the third would have lasted three years (1991–93) if IMF as criteria had used the normal exchange rate weighted per‑capita real World GDP rather than the purchase power parity weighted per‑capita real World GDP.[54][55]

[0] https://en.wikipedia.org/wiki/Recession#Global

I’m under the impression that the boom and bust cycles of the late 1800s were far more extreme than anything we’ve seen in our lifetime.

The boom and bust cycle has been driven primarily by land speculation since classical antiquity. The ability of banks to use their credit creation powers to fuel real estate bubbles through mortgage lending can be halted using a frequently reassessed land value tax and land value increment tax. In the early 1900s Germany completely eliminated land speculation in the colony of Kiautschou using a 6% annual tax on assessed unimproved value of land, of what lots would sell for if cleared of improvements, and a 33% land value increment tax on increases in assessed land value. This allowed the colony to develop rapidly and continuously without any period of recession while running a budget surplus.

What's stopping people from doing that?

I imagine that would be because it takes land prices and shoots them through the floor. This is rather unpopular among people who own land, which in the US is a large portion of the population.

Also if you do that the prices of houses go down so if people can’t pay their mortgage and the house is foreclosed on the bank doesn’t get their money, which can easily go out of control and cause a crisis.

> profit-loss sharing

We have a term for this, it is called “equity financing.” The alternative is called “debt financing.” Islamic orthodoxy effectively banishes debt financing (unless done at zero interest), while offering equity financing as the solution. But it is not a solution at all.

Suppose that I need to purchase a vehicle, in order to drive to work every day (let’s say I live in a country where public transportation is non-existent, e.g. Saudi Arabia). Without a vehicle, I cannot earn a living. However, to purchase a car I need a large amount of cash, which most people don’t have. The normal solution is debt, i.e. borrow money to finance the purchase of a vehicle, and pay back the lender over time with interest. Everyone wins.

But ... Islam forbids such a transaction. Under true Sharia law, I need to either find a lender who is willing to offer me a zero interest loan so I can buy a car, or I need to find someone who is willing to enter into a “profit/loss sharing” arrangement (whatever that means).

Now nobody is willing to lend money for free (especially not oil rich Islamists who oppose non-Sharia Finance). There are a couple reasons why nobody lends money for free (time value of money, credit risk), but it should be quite obvious that no one will lend me money at zero interest to buy a car.

What about “profit/loss sharing?” Well, I do use the car to earn money (by driving to work). It would be wonderful if we could all pay x% of my monthly salary as a car payment. That means if I earn less, I pay less for my car. If I lose my job, I don’t have to pay anything. If I earn more, I pay more for car payments (for the same car). This has some very obvious problems. It might be good for some consumers who have a modest income, but wealthy consumers would not like this. Moreover, no lender would ever be willing to enter into such an arrangement. It’s completely unworkable. You can say the same for other personal loans, like mortgages and student loans.

So what actually happens in “Sharia Compliant Banking” is that Islamic banks lend money at a fixed rate of interest (just like conventional banks) but they disguise the interest using combinations of legal instruments. Christians in medieval Europe did something very similar (see https://en.m.wikipedia.org/wiki/Contractum_trinius). One consequence of this legal gymnastics is that Islamic bank consumers have fewer legal protections. For example, an “Islamic mortgage” requires you to hand over title of your house to the Islamic bank. This is different and less advantageous to a conventional mortgage where you retain the title to your property.

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