Islamonomics E-Book

Akhtar Mohammed

• Herausgeber: Garnet Publishing
• Kategorie: Fachliteratur
• Sprache: Englisch

Veröffentlichungsjahr: 2021

Beschreibung

Islamonomics is a concise, fast-paced guide to Islamic finance from its origins to its new frontiers. Accurate, instructive, accessible – Dr Benedikt Koehler, Economics of Religion Fellow at the Institute of Economic Affairs, London Islamonomics gives a whistle-stop tour of the history of the world through the lens of Islamic finance. Its focus on Asia is pertinent and important – Dr Sajjad Khoshroo, Islamic Finance Practitioner, Counsel at Allen & Overy LLP, London In global efforts to secure sustainable business ethics, this Islamic voice offers an important contribution --Dr Werner Menski, Emeritus Professor of South Asian Laws, SOAS, University of London The Islamic Finance industry is valued at US$3 trillion and finances deals in London, New York, Singapore, Shanghai, Dubai, Geneva, and Kuala Lumpur. Yet where does Islamic Finance come from? What has it accomplished? Why did it disappear? And why has it returned to prominence once again? In answering these questions, Mohammed illuminates the history of Islamic trade, from the shores of the Mediterranean to the strategic maritime choke points of South East Asia, spanning the 7th century to the present. Along the way, he demonstrates how the Islamic principles of interest-free lending, the use of commodity-based currencies, and investment into tangible economic activity have always been adapted to each society's circumstances. As we enter the Asian Century, how do the principles of Islamic Finance apply to a globalized financial system formed by three centuries of British–American dominance? Can the Islamic Finance industry attempt to remain competitive in an Eastern-shifting global economy without losing its soul?

Leseprobe

ISLAMONOMICS: ISLAMIC FINANCE, TRADE AND THE GLOBAL MUSLIM MARKET

Akhtar Ismail Mohammed

Islamonomics

Islamic Finance, Trade and the Global Muslim Market

Published by

Garnet Publishing Limited

8 Southern Court

South Street

Reading

RG1 4QS

UK

www.garnetpublishing.co.uk

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Copyright © Akhtar Ismail Mohammed, 2021

All rights reserved.

No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by a reviewer who may quote brief passages in a review.

First Edition 2021

ISBN: 9781902932613

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library

Typeset by: Samantha Barden

Jacket design by: Samantha Barden

Printed and bound in Lebanon by International Press: [email protected]

To: Greater Understanding

Contents

Introduction

Notes

Part 1: The Origins of Islamic Finance

1 Islam as an Abrahamic Faith

Notes

2 The Path of Islam: Shari‘ah

Notes

3 Principles of Islamic Finance

Notes

4 Islamic Finance as an Applied Theory

Notes

5 Islamic Finance Contracts

Notes

6 Higher Objectives of Islamic Law (Maqasid al-Shari‘ah)

Notes

Part 2: Pax Islamica: A Trading Civilization

7 Muslim Merchants

Note

8 The Silk Roads

Notes

9 The Rise of Pax Islamica

Notes

10 Islamic Trade in the Mediterranean

Notes

11 African Kingdoms

Notes

12 Trading with the ‘Celestial Empire’

Notes

13 The Gunpowder Empires

Notes

14 The Ottomans as Rivals

Notes

15 The Ottomans

Notes

16 Southeast Asian Spice Trade

Notes

17 Iberian Portuguese – Estado de India

Notes

18 Financial Innovation: English East India Company and the Dutch East India Company

Notes

19 Sultanate of Aceh

Notes

Part 3: The Anglo-American Era

20 The Advent of Capitalism

Notes

21 The Epoch of Modernity

Notes

22 Development of Modern Islamic Finance

Notes

23 Neoliberalism

Notes

Part 4: Islamic Finance in the 21st Century: Shift and Shocks

24 Islamic Bonds (Sukuk)

Notes

25 The Beijing Consensus and the AIIB

Notes

26 The China Model via Singapore Inc.

Notes

27 Islamic Venture Capitalism

Notes

28 Crisis of Value: Art, Real Estate, Football Clubs and Bitcoin

Part 5: The World in 2050: Islamic Finance in the Asian Century

29 Opportunities and Challenges

Notes

Glossary

Bibliography

Acknowledgements

Introduction

The Islamic Finance industry is valued at US$3 trillion and will continue to grow in importance as Muslim majority countries grow in wealth, and Western corporations seek to sell their goods with developing economies. The economic growth of six Muslim majority countries (Egypt, Iran, Bangladesh, Indonesia, Pakistan and Turkey) has been projected to reach the level of the Group of Seven nations by 2050, with the growth of Islamic Finance to parallel this growth. The role of Islamic Finance in the global economy has led to the participation in the industry by diverse global institutions such as Goldman Sachs, HSBC, the IMF (International Monetary Fund) and the Beijing-led Asia Infrastructure Investment Bank, among others. Even former British Prime Minister David Cameron emphatically proclaimed that ‘London will be the Western hub of Islamic Finance’. Furthermore, in the aftermath of the debt-fuelled 2008 global financial crisis, Islamic banks were more robust in their recovery compared to Western banks, as they did not participate in toxic financial instruments. This led to praise and admiration from leading economists to explore the potential benefits of Islamic Finance in an increasingly globalized world.

If you are like me, you probably had a few questions when you first heard of Islamic Finance. First, what is Islamic Finance? Simply, Islamic Finance is the practice of financial principles based on the Qur’an and other sources of Islam. This will be explained in detail in Part 1. Second, how come I’ve only heard the terms ‘Islamic terrorist’, ‘Islamic fundamentalist’ and ‘Jihadist’ along with a few others, but have never heard of the concept ‘Islamic Finance’? I will explain why and how this ‘single narrative’ about Islam is deeply problematic not just because it is offensive, but rather because it provides an incorrect understanding of the historic role of Islam in global trade and the future role of Islam in global trade.

Now let’s deal with the second question. The term ‘Islamic fundamentalism’ implies it is by practising the fundamentals of Islam that these individuals have acted in violence rather than some other reason. Such as young men without much of an education and prospects for work who are appropriating the religion and interpreting the acts from the lingering residue of revolutionary Marxism that had existed in their countries after decolonial movements in the 1950s and 1960s. An astute mind will find that this underlying problem, of men without hope of employment and a place in society who subsequently turn violent, also exists in countries that are not Islamic.

The term ‘terrorism’ has been used to define a violent act perpetrated only by a Muslim. This discourse has been shaped in response to 9/11 (which has become shorthand for the events that occurred in New York on September 11, 2001) and, for others, it was developed by the Iranian Revolution of 1979. This negative interpretation of Islam then seeped into the popular consciousness that Islam has done nothing positive but solely eroded and undermined the values of the ‘West’ or ‘Judeo-Christian values’. Even if you were an innocent bystander in these discussions, you might have formed a negative opinion about Islam. While you may not agree that all Muslims are terrorists, you might wonder: ‘How come all the terrorists are Muslims?’ You may perhaps also have a follow-up question: ‘How come there is nothing positive that you hear about Islam or Muslims?’ The response by practising Muslims, self-identifying Muslims or those sympathetic to Islam (such as the late Professor Edward Said) to ‘Islamophobia’ has been to deconstruct the critique of Islam or to expose the hypocrisy of those who claim that Islam is the root of all evil.1

The argument follows as such: one person who wants to ridicule Muslims will say: ‘Islam is inherently violent.’ The Muslim or Muslim sympathizer will respond to undermine the initial argument by saying: ‘You know the American military has been in a state of perpetual war since the Second World War, so who is more violent?’ While the second statement is true, it only furthers the divide between the two sides and forces the first person to continue to ridicule Islam. Most often, these two people will be citizens of the same country and most likely live close to one another, thereby increasing the social tension in their community and furthering the divide that may already exist. Furthermore, neither of these two people will be actively working towards making their community or society a better place, since getting into a shouting match about who is right or wrong doesn’t allow either person to work towards the betterment of themselves or others.

The exchange between the two is entirely based on ethos, ‘emotions’, and has more to do with constructing one’s ‘false superiority’ by creating a ‘false negativity’ in the other person. The German philosopher Georg Wilhelm Friedrich Hegel (1770–1831) argued in The Phenomenology of Spirit that, ‘Self-consciousness is in and for itself, when, and by the fact that, it is in and for itself for another self-consciousness; that is, it is only as something recognized.’2 For example, when an individual recognizes you solely as a Muslim, then you become a Muslim, even though you are also a Canadian, a university student, or a soccer player. The perpetrator attempts to reduce another human being’s sense of self by not recognizing them for who they are, but by identifying them by negating who they are. And only by accepting the stereotype do you affirm their identity – this is the ‘struggle for recognition’.

For some, this reduces them to something they are not, and they do not respond since they realize the trick that is being played. Whenever someone has attempted to do this to me, they are never aware that my grandfather fought in the Second World War with the Fijian Regiment and spent his life working for Her Majesty’s Government in Colonial Fiji. Therefore, how can my personal experience with Islam be antithetical to freedom, democracy and the ‘West’ when my grandfather put his life on the line and fought for it – like millions of other Muslims? The fact that this doesn’t cross their mind reveals their ignorance rather than my shortcomings. As a result, it is best to simply walk away from such an exchange with one’s dignity and sense of self intact. For Hegel, this act was radical because it annihilated the power of the perpetrator. The perpetrator is dependent on the ‘other’ to construct their identity. To deny the other person this power is to gain one’s freedom. As Hegel observed, ‘It is solely by risking life – freedom is obtained.’3

For others though, they embrace the exchange and become the stereotype that is projected onto them because it feels empowering to be recognized rather than being ignored. This furthers the divide between the two supposed divergent sides. However, I argue that the purpose of the exchange is less to do with constructing an ‘other’; instead it is the need to construct the ‘other’ to uplift the person making the offensive statement in the first place. When the person makes the statement to ridicule Islam, they are in the process of constructing their own identity in what they believe is in a new and more positive light. They are no longer the struggling high school student or drop out from university; they are now the rational free-thinking atheist who is claiming they are the inheritor of the heights of Western civilization in opposition to the irrationality and failures of Islam. Ironically, they are never at the pinnacle of their society. And, because this person cannot merely differentiate themselves from others due to work ethic or meritocracy, they need to create an ‘other’ who they believe is less than them to feel better about their shortcomings.

Hence, engaging in an exchange with this type of person only reinforces their identity while creating a negative opportunity cost for both people. How can you be sure that there is an opportunity cost? I can highly guarantee that neither of the people in this exchange will develop the vaccine to COVID-19. How can I be so sure? People who are focused on solving complex problems that take decades to become an expert in have the mental discipline to not be distracted by something that doesn’t affect their life.

About this book

This book is divided into five parts. Part 1 focuses on the origins of Islamic Finance and its roots as an Abrahamic faith. This section explores how the principles of Islamic Finance and its economic motivations work as a system rather than as a simple set of legal rules. We will explore the common ground it has with Christianity and Judaism. This will be explored through the provocative claim that the rise of Islam in the 7th century, and the subsequent system of trade between North Africa and Italian city-states, provided the impetus for Europe to crawl out of the Dark Ages by re-introducing concepts of capitalism to the Europe ruled by Charlemagne. Furthermore, we will explore the understanding of the prohibition of interest in Christianity and Judaism, then take a look at how the Protestant Reformation became the catalyst for the modern banking system in the 16th century.

Part 2 examines the long history of Islamic trade, from the 7th to the 20th centuries, what I call Pax Islamica (the Islamic peace). It is intended to answer the question: ‘What has Islamic Finance contributed to civilization?’ This is a fascinating look at what happened when the nascent religion spread and the new adherents applied the principles of Islamic Finance to their societies to facilitate long-distance trade from the far distances of the world through Central Asia, into Europe, Africa and into East Asia. By tracing the history of Islamic trade, it will become evident that economically Islam is a liberal religion. As the religion spread from the Arabian peninsula to North Africa, Spain, Africa, Central Asia, the subcontinent and Southeast Asia, anyone who was Muslim and was held as the leader was able to lead their respective Islamic societies. This is a crucial point to understand the history of liberal economic thought. None of the new Islamic empire or sultanates ever had to seek guidance from a centralized authority. Whereas the doctrine of papal primacy in the Catholic Church enshrined that the Bishop of Rome, ‘the Pope’, has universal power over all Catholics, this was not the case with Islam. Islam was the Protestant Reformation before the Protestant Reformation. Whether it was Fatimid Egypt, Islamic Spain, Safavid Persia, the Ottomans, the Mughals or the Sultanate of Aceh, power and profits did not lead back to Mecca. Hence, the rapid spread of Islam around the world was facilitated by the comparative political and economic liberalism that Islam provided at the time.

This part will reveal that trade between the East into Europe along the Silk Road and the Maritime route was well known among those who had an interest in it. This begs the question how come so few people today understand how vital this 1300-year-old system of trade is to the world? A statement by the 16th century Portuguese traveller to Southeast Asia, Tom Pires, best sums up the importance of the system of trade when he stated: ‘Whoever is lord of Malacca has his hand on the throat of Venice.’ A reflection of how vital the supply chain of spices from Southeast Asia was to the riches of Venetian traders.

Before you read Part 2, I will provide a typical disclaimer that is given by financial advisors to investors: past performance is not an indicator of future outcomes. In other words, the explanation about the historical benefits of Islamic Finance to facilitating trade and development of Islamic civilizations is not arguing that Islamic civilizations will once again reach such heights by merely trying to recreate the past. As Sir Karl Popper explains in his book The Poverty of Historicism, this is when the glories of the past are used to predict the future achievements of civilization, typically by romanticizing a previous ‘Golden Age’.4

Part 3 looks at why Islamic Finance disappeared in the early 20th century and how it is re-emerging in the modern global financial system. Regarding the question of disappearance, the first thought that comes to mind is European colonization. However, from the moment the Portuguese sailor Vasco da Gama sailed around the Cape of Good Hope in 1498 to establish trading posts in Goa (India), to almost 1820, European merchant companies were not at a technological advantage compared to their Eastern counterparts. It is essential to understand that colonization did not happen in one instance at the snap of fingers. Neither was colonization an experience that benefited every single person from a European background. Instead, it was supported by the monarchs of Europe to allow merchant companies to trade in Africa, North America and the Far East. One of the significant factors was the rise of the Industrial Revolution (beginning in 1760) in England, which tipped the balance of power in favour of the British over other Western European powers, which led to an asymmetry of power that resulted in the gradual colonization of Islamic powers and almost everyone else. Another factor was the lack of initiative of these once-wealthy empires to modernize their economies and technologies to keep up with the advances made in Western Europe. It was both internal and external forces over a 200-year process that slowly eroded the last Islamic powers.

Interestingly, after the collapse of the Ottoman Empire at the end of the First World War, the Dutch became the rulers of the largest Muslim population through their colony of Indonesia. To facilitate the holy pilgrimage from Indonesia to Mecca of its Muslim subjects, the Netherlands Trading Society opened a branch in Jeddah in 1926 to organize the financing of the pilgrimage. This act would eventually lead to the Netherlands Trading Society acting as the de facto Central Bank of the Kingdom of Saudi Arabia from 1926 to the 1960s, as it was the only bank in operation in the Kingdom. This unique arrangement ensured that the practice of Islamic Finance continued even after the collapse of the Ottoman Empire. Another interesting point that will be explored is how OPEC (the Organization of the Petroleum Exporting Countries) unintentionally forced the creation of currency risk and hedge funds when it forced the United States of America off the Gold Standard after the 1973 oil crisis – a critical moment that ushered in an era of neoliberal economic policies.

Parts 4 and 5 of this book examine the potential of Islamic Finance in the 21st century, in an age of the re-emergence of East Asian and South Asian economies. It is predicted that by 2050 Indonesia will be the fourth largest economy in the world by purchasing power parity while also being the country with the largest Muslim population. Yet Indonesia does not come to mind as an economic power; nor is it often mentioned as a part of the Muslim world. However, from reading Part 2, you will see how Indonesia was incredibly valuable in the spice trade that attracted the Portuguese, Dutch, French, English and Americans to the region. It was so vital to wealth creation in 19th-century Salem, Massachusetts, that the city’s seal features an image of a ‘Javanese’ man. As we look to the future, we anticipate the effect of the rise of Indonesia as a regional power shapes how we understand the development of Islamic Finance.

Nonetheless, it is not simply a triumphant return of Eastern powers in opposition to the West; rather, the question will remain whether or not Islamic Finance can be implemented to reduce income inequality, curb the effects of climate change, and to produce societies that do not merely copy the failures and excesses of an unregulated capitalist system. This part of the 2050 vision is hard work. It will take policy experts, civil society and responsible governance to develop a society that can reflect the ethos of Islamic Finance. This burden is placed on those who reap the benefits of the boom of Islamic Finance. It is also an opportunity to set an example for others for how the world can develop.

And one final disclaimer before we begin our journey exploring this topic: this book is not a polemic nor apologetics about the morality of Islam, nor the claim that Islamic Finance is a panacea, a totalitarian divine solution for the world. In particular, in the aftermath of the calamities of the debt-fuelled 2008 global financial crisis, it is not a discussion about the more delicate intricacies of Islamic commercial law about what is or is not halal (permissible) in a purely legal sense. Nor does it intend to ignite those debates. Instead, this book provides historical, political and economic context to explain Islamic Finance as a social phenomenon. The purpose of such an analysis is to understand, then, how these principles apply today to adequately address the needs of society. A strict legal adherence of law without understanding that law is meant to minimize the misery of society will eventually render law null and void of any authority.

Now let’s look first at the common features between Islamic Finance and the Abrahamic faiths to understand the similarities in their understanding of the ban on interest-based lending. Then we turn to understanding how Martin Luther’s nailing of his Ninety-five Theses, which ignited the Protestant Reformation and the split of the stranglehold of power with the Catholic Church, eventually led to Protestants allowing for interest-based lending, ushering in the modern era of banking.

Notes

1 Late Professor Edward Said was a Palestinian American born in Mandatory Palestine in 1935 who became a Professor of Literature at Columbia University, a public intellectual and a founder of the academic field of postcolonial studies. Although not a Muslim, Said understood that for many in the West, ‘Islam’ and ‘Arab’ were synonymous. As a result he wrote a number of books to counter negative stereotypes of both. In his 1981 book Covering Islam: How the Media and Experts Determine How We See the Rest of the World, Said deals with issues during and after the Iranian hostage crisis, and how Western media has speculated on the realities of Islamic life. Said questions the objectivity of the media, and discusses the relation between knowledge, power and Western media.

2 G. W. F. Hegel, Hegel: The Phenomenology of Spirit, Oxford: Oxford University Press, 2018, p. 76.

3 Ibid., p. 78.

4 Karl Popper, The Poverty of Historicism, Boston: Beacon Press, 1957.

Part 1: The Origins of Islamic Finance

Top five economies in 1 ce by GDP purchasing power parity in 1990 US dollars

1 India – $33.75 billion

2 China – $26.82 billion

3 Western Europe – $14.43 billion

4 West Asia – $10.12 billion

5 Africa – $8.03 billion

‘A principle that goes back at least, I know, as far as the 14th century, when a Muslim philosopher named Ibn Khaldun said, “In the beginning of the dynasty, great tax revenues were gained from small assessments. At the end of the dynasty, small tax revenues were gained from large assessments.” ’

1 October 1981

US President Ronald Reagan

Washington, DC, United States of America

1 Islam as an Abrahamic Faith

‘So, that is all very interesting, but what is the difference between Islamic Finance and conventional finance, and why?’ I’ve been asked this question more than a thousand times in different ways. Depending on who asks, the question often reveals the assumptions and curiosity that most people have towards the topic. The question is difficult to answer for several reasons. We begin with the initial problem of how we understand history and cultures (or civilizations, as the late Professor Samuel Huntington categorized it); is it static or is it an evolving process? By explaining what is different between Islamic Finance and conventional finance, it assumes that these differences began in the 7th century with the creation of Islam and continued until its present form today. For example, the Civilizations theory presumes that understanding a verse in the Qur’an revealed in the 7th century is enough to understand how and why the UK government issued Islamic Bonds in 2015 without an investigation into everything that occurred between those two points in time. It is the Civilizations theory that has several shortcomings.

First, to approach it in this way does not consider the theological lineages between Islam and the other Abrahamic faiths. Islam considers itself as a continuation of the message of Judaism and Christianity, even if Judaism and Christianity do not. Second, the Civilizations theory does not consider factors that explain how Islamic Finance developed. For example, the society that existed during the fruition of Islam in 7th century Arabia was influenced by pre-Islamic practices, the culture of the dominant neighbouring Roman Empire and shaped by the rise of the Tang Dynasty in China, which centralized power to usher in a new wave of Silk Road trade. Yet the Civilizations theory has found an audience among Muslims and non-Muslims.

Professor Huntington crystallized this theory in his influential book The Clash of Civilizations. He argues that there are several static civilizations that have existed in world history, and these civilizations have specific characteristics that force them to collide with one another. In particular, he argues that Islam and Christianity being evangelizing religions will clash by their cosmic claims of holiness.1 Some Muslims also follow in a similar trap, although through a different argument. Their position is that the current manifestation of Islam is corrupt and unholy. Therefore, we must return to a ‘Golden Era’ of Islamic practice to reclaim the spiritual and consequently material heights of Islamic culture. At the core of this claim is that there was once a static Golden Age that was uniquely Islamic. Both forms of the Civilizations theory quickly run into trouble when explaining how and why Islamic Finance has developed the way it did since the 7th century and in how it might develop in a multi-polar world in the 21st century.

With this understanding, we begin with an exploration of how the Abrahamic faiths shaped Islamic Finance – in particular, the Islamic prohibition on interest. And, how Christian interpretations of the permissibility of interest during the Protestant Reformation led to the development of our modern banking system. Once these are understood, it will become much easier to understand what is then uniquely ‘Islamic’ to Islamic Finance. Islam as an Abrahamic religion, along with Christianity and Judaism, claims Prophet Abraham as a common tribal patriarch. From the perspective of the Islamic faith, the Prophet Muhammad is considered the last Messenger among the line of Messengers, which includes Adam, Noah, Moses and Jesus. This book cannot adequately address the nuances of each faith; nonetheless, a basic understanding of the origins of Abrahamic religions provides sturdier grounding to understand Islamic Finance.2

Judaism

Similar to the misperception between the evolution of Islam and the Civilizations theory, there is a significant misperception about the theological connection between Islam and Judaism. The problem is a result of looking at theology through the lens of modern politics. The ongoing political crisis between Israel and Palestine (along with the Arab League, an organization founded after the Second World War focusing on integration of Arab countries), makes it seem as though the divide between the two religions is equally as stark as the present-day political divide between the two factions.3 However, there is significant common ground between the two, in particular on the permissibility of interest-free lending.

Judaism is the oldest of the three Abrahamic faiths, beginning in 1812 bce through the Prophetic message of Abraham. The Prophet Abraham represents the patriarch of the three religions whose children, Isaac and Ishmael, share the same heritage between Islam and Judaism. Ishmael is the ancestor of the Ishmaelites/Arabians, whereas Isaac and his son Jacob, also named Israel, are the ancestors of the Israelites. Prophet Moses is considered the most important prophet in Judaism and is even a revered prophet in Islam. He revealed the Torah (Old Testament) to the Jewish people in 600 bce. The Torah is considered the central religious text for the Jewish faith, proscribing the fundamental elements of religion and the legal requirements for its believers. Prophet Moses is infamous for freeing the Jewish people from slavery by splitting the Red Sea and gaining settlement at Mount Sinai. The Qur’an mentions Moses as a Prophet of Islam and the Torah as a sacred text.4

There are many shared religious principles between Islam and Judaism. Islam re-affirms many of the tenets of Judaism and makes it acceptable for Muslims to follow particular Jewish laws. The most prominent example of this is permission to eat kosher meat, since the process of slaughter is similar to Islamic practice. If a Muslim is travelling on a long-haul flight without the option of a halal meal, they can easily opt for the kosher meal without any issue. It is the same principle when it comes to the Jewish ban on interest-based lending.

Interest

Judaism is perhaps best known for its legal rules on interest-based lending due to the historic role it has played in European banking. The Torah is the source of Judaism’s legal principles, and it guides the Jewish community on interest-based lending. The defining legal principle on interest is from Deuteronomy 23:20 where it states: ‘Unto a stranger thou mayest lend upon usury, but onto thy brother, thou shall not lend upon usury.’5 This verse means that lending within members of the Jewish community is prohibited while lending outside of the Jewish community is permissible. Furthermore, the Book of Ezekiel holds that charging interest is among one of its worst sins.6

Once Catholic Christendom banned the lending on interest, this verse eventually was interpreted to mean that Christians in Europe were able to use Jewish moneylenders to provide interest-bearing loans. The interpretation of the permissibility of interest-based lending between Christians and Jews over the past 1500 years has evolved to be the foundation of our modern banking system. The practice of non-interest-based lending among the Jewish community has taken place for millennia and provides a model for Muslims on how to structure similar financial institutions in the present day. Christianity also has principles on the prohibition of interest; however, this changed during the Protestant Reformation in the 17th century.7

Christianity

Christianity is the second Abrahamic faith, and it began with the life of Jesus around 4 bce. Jesus was born as a Jew and his mission was to reform the Jewish faith. At the time of his mission, he believed Judaism was being practised to the letter of the law, yet ignoring the spirit of the law. In Luke 6:34–35 in the New Testament, there is a clear example of the spirit of the law that was at the core of Jesus’ mission, where it is stated:

And if you lend to those from whom you expect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be children of the most high, because he is kind to the ungrateful and wicked.

The Catholic Church upheld this principle from the 7th century onwards – Christians were not allowed to participate in interest-based lending among one another. As a result of this restriction as well as the rule that allowed members of the Jewish faith to lend outside of their faith on interest, many Christians could participate in interest-based lending with members of the Jewish faithful – a significant loophole to this rule. The prohibition on interest-based lending for Christians changed during the Protestant Reformation in the 16th century. This was a response to the disastrous policies of Charlemagne, the first emperor of the Holy Roman Empire.

Charlemagne

In the medieval era, the Catholic Church held that interest-based lending was not permissible among Christians. In 538 ce, a meeting of thirteen Catholic bishops at the ‘Third Council of Orléans’ banned all clergy from lending money at interest, or to trade ‘as professional merchants’ or ‘out of abject greed for filthy lucre’. This ban led to the uncertain situation between the Christian and Jewish faithful, whereby the Christians would partake in interest-based loans granted by the Jewish congregation. The rule of Charlemagne as the first ‘Holy Roman Emperor’ began on 25 December 800 ce and entrenched not only the ban on interest-based lending but went even further and considered profit as a sin for Christians.

The consequence of Charlemagne’s rule led to the Catholic Church focusing on the ‘redeeming merits of poverty for the masses to the enhancement of its [own] coffers’.8 Yet, the dominant theory of the catalyst for the Dark Ages in Europe was due to the rise of Islam in the 7th century. This theory believes that Islam created new economic competition between the Middle East and Europe, which led to the Dark Ages. Instead, the cause of the Dark Ages was a result of unsound economic policy. In the 19th century, Belgian historian Henri Pirenne (1862–1935) famously wrote, ‘Without Islam, the Frankish Empire would probably have never existed, and Charlemagne, without Muhammad, would be inconceivable.’9

Historians have not universally accepted this theory. The contrary seems to be the consensus among modern scholars of the medieval era. It was trading between Italian city-states and North African Islamic societies that introduced the financial products that broke through the anti-profit position of the Catholic Church. Author, and adjunct Professor at the University of Maryland, Gene Heck, in his book Charlemagne, Muhammad, and the Arab Roots of Capitalism, provides primary evidence to further this position. He also claims:

[I]t was largely a predominant indigenous institution, the Church, that destroyed the professional merchant class of Europe through its rigorous insistence on the desirability of poverty for the middle classes; on enforcing its rigid total ecclesiastical ban on capital interest as an economic policy of the State – and thereby, on denying ‘profit motivation’ and all other financial incentives to produce would-be local entrepreneurs.10

More than five centuries later, the most prominent Catholic theologian to take a stance against interest was the 13th century Italian Thomas Aquinas. In his seminal text, Summa Theologica,Aquinas argued his position on interest after reading Latin translations of Aristotle from Arabic by Abu Walid Mohammad Ibn Rushd.11

Aquinas developed his view of interest on the position Aristotle takes against interest, principled on an understanding of property. He viewed money as a medium of exchange rather than an item that carried value in itself. In essence, it was a barter economy, whereby one would trade one thing for another depending on their needs. The advent of money created a medium of exchange that carried the value of the items and not hold value in and of itself. Aquinas asserted, ‘To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality contrary to justice.’12

He provides the analogy that an object – for example, bread or wine – exists for its use and consumption. The purpose of the object and its consumption defines the property of the object. However, if a person were to sell bread or wine separately from the use of bread or wine, that person would be selling something that did not exist. Aquinas defined this as usury: the lending of money with the repayment of extra money, without any use of the original capital. The position of Aquinas and the Catholic Church’s stranglehold on power over Europe began to erode when the Ottoman Empire conquered the Eastern Holy Roman Empire in Constantinople in 1453. It forced all European powers to begin paying taxes on goods travelling along the Silk Road through the Strait of Bosporus to a Muslim Sultan. In 1517, these failures of the Catholic Church (among others) led the German monk Martin Luther to write his Ninety-five Theses refuting the practices of the Catholic Church. He posted it on the door of the Castle Church in Wittenberg, Germany, which ushered the beginning of the Protestant Reformation.

Protestant Reformation

The Protestant Reformation began a violent period of revolt in Europe during the 16th and 17th centuries – a movement that would reshape Christianity forever and provide a schism that created the roots of our modern banking system. The focus on the political and theological effects of the Reformation has often overlooked its economic impact on financial lending practices in Christendom. Martin Luther, who ignited the Reformation, was a strong advocate for continuing the ban on interest (also known as usury). Writing in 1540, twenty-three years after posting his theses, he stated:

Usury is a great huge monster, like a werewolf who lays waste all, more than any Cacus, Gerion or Antus. And since we break on the wheel and behead highwaymen, murderers, and housebreakers, how much more ought we break on the wheel and kill, hunt down, curse and behead all usurers.13

These were strong words by Luther, who still supported the prohibition on usury that the Catholic Church had fervently kept. However, this position was overturned by French theologian John Calvin who was also a Protestant reformer.

In writing about how John Calvin eventually argued in favour of the use of usury, it has been claimed that ‘the distinctive feature of Luther’s understanding of usury and his ethical critique lies in his concentration upon the factor of risk and his utter contempt for those who become rich without any effort of their own’.14 There is another element to add to the understanding of the argument against the use of usury. The rise of anti-usury Christians who held strong positions against usury was often seen as anti-Semitic, as many of the interest-based money lenders were Jewish. The Reformers, including Martin Luther, were said to be inciting anti-Semitism in holding this position.

Calvin articulated a position to allow for interest-based lending among Christians as a means of gaining access to credit and breaking from the financial monopoly that was held by the Catholic Church. In his text De Usuris Responsum, Calvin begins by providing a warning about the dangers of the practice of usury and its effects on society. Citing Leviticus 25:35–7, Calvin argues:

We see that the end for which the law was framed was that men should not cruelly oppress the poor, who ought rather to receive sympathy and compassion. This was, indeed, a part of the judicial law which God appointed for the Jews in particular, but it is a common principle of justice which extends to all nations and to all ages, that we should keep ourselves from plundering and devouring the poor who are in distress and want. Whence it follows that the gain which he who lends his money upon interest acquires, without doing injury to anyone, is not to be included under the head of unlawful usury.15

Calvin moves forward with his argument in favour of the practice of interest-based lending where he states, ‘I now conclude that one must not judge according to some certain and particular pronouncement of God [rather] only according to the rule of equity’, meaning, he felt it was necessary for the Protestant faithful to practise interest-based lending for pragmatic and policy reasons.16 His discussion goes deeper into the definition of money and the societal benefits of interest-based lending. Calvin is considered the first Christian theologian to argue in favour of interest-bearing loans and is regarded as the theologian who ushered in capitalism, where the teachings of Calvinism were readily accepted. However, the pastor Dr Andre Bieler felt it was unfair to ascribe the complete justification of liberal capitalism to Calvin. He found that ‘[Calvin’s] views on riches and their social end led him to insist upon a very strict control over lending at interest; he had prophetically sensed the social ravages to which pure liberalism would lead’.17

The socio-political environment of the time has shaped the debate among Christian scholars regarding the true meaning of usury. From Charlemagne ushering in the Dark Ages with his ban on profit to John Calvin establishing the modern Swiss banking system by making usury permissible, there has always been interest in interest. The debate on the morality of interest is not exclusive to Abrahamic faiths, as the debate on the ethics of interest-based lending/usury had occurred even with Greek philosophers.

Islamic Finance is best known for its ban on interest, seen as a unique feature and exclusive to Islam. But as explained earlier, Islam views itself as an Abrahamic faith, and therefore it reaffirms the cautionary principles from Judaism and Christianity against indebtedness in society. It is of note that the laws on usury are not unique or exclusive to Abrahamic faiths. Aquinas, Luther and Calvin knew of Aristotle’s philosophical text The Politics in which he argued against the practice of usury and interest-based lending. Written in the 3rd century bce, Aristotle addresses two ways of creating wealth: the first is trade; the other,

[u]sury is most reasonably hated, because one’s possessions derive from money itself and not from that for which it was supplied. For it came into being for the sake of exchange, but interest actually creates more of it. And it is from this that it gets its name: offspring are similar to those who give to them, and interest is born out of money. So of the sorts of good-getting that is the most contrary to nature.18

Aristotle’s critique of interest is based on how unnatural it is for money to earn more money without producing any product. The benefit of trade is the use of currency as a medium of exchange for products.

The historical discourse on usury reveals that the ban on forms of interest is not unique to Islam; instead, it reaffirms the teachings of Jesus and Moses and recognises the influence of Aristotle’s philosophical arguments. The ban on interest is just one principle within the corpus of Islamic commercial law; others provide obligations on Muslims to pursue profit, protect private property rights and to establish a standardized coin with few or no impurities to facilitate trade. These principles and prohibitions are a bundle of legal and moral requirements. They shape the many contracts developed by Islamic scholars and Muslim merchants over time. These were then used to facilitate trade at a time when the Islamic world was a more prominent player in global trade.

Notes

1 Samuel P. Huntington, The Clash of Civilizations and the Remaking of the World Order, New York, 1997.

2 Karen Armstrong, A History of God: The 4000-year Quest of Judaism, Christianity, and Islam, New York: Ballantine Books, 1994.

3 Jon D. Levenson, Inheriting Abraham: The Legacy of the Patriarch in Judaism, Christianity and Islam, Princeton: Princeton University Press, 2012. (Levenson argues a contrary position, that while Islam and Christianity claim Abraham as the patriarch of their religions, verses in the Qur’an and Bible provide sources for discrimination.)

4 Qur’an 5:44.

5 Exodus 22:25–27, Leviticus 25:36–37 and Deuteronomy 23:20.

6 Ezekiel 18:13, 18:17.

7 David Graeber, Debt: The First 5,000 Years, New York: Melville House, 2011.

8 Gene William Heck, Charlemagne, Muhammad, and the Arab Roots of Capitalism, Berlin: de Gruyter, 2006, p. 24.

9 Henri Pirenne, Medieval Cities: Their Origins and the Revival of Trade, Princeton: Princeton University Press, 1956, p. 27.

10 Heck, Charlemagne, Muhammad, and the Arab Roots of Capitalism, p. 33.

11 Ibn Rushd, more commonly known by his Latin name, Averroes, is considered one of the greatest thinkers and scientists of history; in particular, he studied Aristotelian philosophy to find where it converged with Islamic thought.

12 Thomas Aquinas, Summa Theologica, IIa–IIae q. 78 a. 1 co.

13 Martin Luther, ‘Admonition to the Clergy to Preach against Usury’, written and published in Wittenberg 1540, where he also wrote his theses.

14 Michael Wykes, ‘Devaluing the Scholastics: Calvin’s Ethics on Usury’, Calvin Theological Journal, vol. 38, 2003, 25–51, 13.

15 John Calvin, Commentaries on the Book of Psalms, vol. 1., Edinburgh: Edinburgh Printing Company, 1845, p. 212.

16 Ibid., p. 212.

17 Andre Bieler, Calvin’s Economic and Social Thought, Geneva: World Council of Churches, 2006, p. 168.

18 Aristotle, The Politics, Chicago: The University of Chicago Press, 2013, Book 1, Chapter 10, nos. 4–5.

2 The Path of Islam: Shari‘ah

When the word Shari‘ah is spoken, it currently conjures images of hands being chopped off, an angry bearded man with an AK-47 speaking in Arabic who eventually blows himself up in the name of God, or a women in a burqa fleeing across borders while surrounded by swirling sand with her impoverished child on her back. However, if you were to speak to a commercial lawyer in the City of London, Singapore, New York or Dubai about Shari‘ah, they would immediately think of the rapidly growing US$3 trillion Islamic Finance industry. Quite obviously, there are differences in the narratives that different segments of society are receiving about Islam. The late Professor of Literature at Columbia University, Edward Said (pronounced SaEed, not Said), addresses this issue in his book Covering Islam, and I implore you to read it if you have the time.1 For now, though, let’s delve into the aspects of Shari‘ah that had once facilitated trade along the Silk Roads and merchants routes from the 7th to 18th centuries and that now shape the modern Islamic Finance industry.

The literal definition of Shari‘ah is ‘a path’, understood as a system of law and ethics that broadly covers the religious, moral, social, economic, political and legal duties, without a distinction between the ethical and legal. In other words, ‘the [Islamic] cosmology is itself part of an enveloping moral system that transcends the categories of theology, theosophy, and metaphysics’.2 It is understood, in a general religious sense, to refer to the Muslim way of life.3 It is a simple system: if the legal principle undermines the underlying ethics of the law, then the act is not in line with Shari‘ah. For example, if a man were to believe that he could be a suicide bomber because he found a legal ruling within the past 1400 years of Islamic legal rules, yet this rule violates the fundamental principle that it is not within the hands of human beings to determine when they can die because that is up to God – in essence, the act violates the underlying purpose of the law and is not permitted.4

The authoritative text of Islam is the Qur’an, revealed to the Prophet Muhammad at the age of 40, beginning in 610 ce and ending at his death at age 62/63 in the year 632 ce.5 The authority of the Prophet Muhammad is proclaimed in verse 33:31 of the Qur’an, ‘And whoever of you devoutly obeys Allah and His Messenger and does righteousness – We will give her reward twice, and We have prepared for her a noble provision.’ The life and daily practices of the Prophet Muhammad are the living interpretation of the verses in the Qur’an. The Prophet Muhammad, being the vessel of the Message, is the best example to understand how to apply the laws of the Qur’an. His Companions and their companions organized the sayings and the daily practices of the Prophet (known as the Sunnah), into what is known as hadith literature. These were further organized by his followers and collected into six trustworthy (Sahih) books. The interpretation and application of these legal and non-legal principles are then left in the hands of human beings to interpret and apply to the needs of their particular society. When Islam spread through Arabia, North Africa and Central Asia, it led to the challenge of adopting legal rulings to different cultures.

The result of this was the development of four primary schools of Islamic jurisprudence among the Sunnis, who are the largest denomination of Islam followed by approximately 90% of Muslims: Malaki, Hanafi, Shafi and Hanbali, respectively. Shi‘a Islam, is the second largest denomination representing approximately 10% of Muslims, has one central school of jurisprudence, the Ja‘fari or Imami School, divided into two small groups, the Usuli and Akhbari. The differences between these schools are essential to the development of Islamic legal thought; however, it is beyond the scope of this book.6

Also, it will become apparent at a later point in this book that among the Islamic Finance lawyers there is an impetus to ensure there is common ground between the Islamic schools of jurisprudence to facilitate trade. This point is essential; the end goal of facilitating trade makes different groups accommodate one another’s differences to benefit from business mutually. Another element of Shari‘ah that is often conveniently overlooked is the concept of Maqasid al-Shari‘a (the higher objectives of the law). It is an ethical principle that aids the entire process of legal interpretation. It is meant to ensure that the application of legal principles is to achieve their purpose and is equivalent to ensuring that laws uphold equity in society and achieve positive public policy outcomes.

The exact meaning of Shari‘ah has been up for debate, even prior to the attacks in the USA on 11 September 2001. There has been an ongoing debate between Orientalist legal scholars, such as Joseph Schacht and Noel Coulson, and those grounded in the Islamic intellectual tradition, such as Wael Hallaq and Mohammad Hashim Kamali, over the definition of Shari‘ah and the meaning of Islamic law. This divergence shapes how we view Islam: Orientalist scholars consider that ‘Shari‘ah’ is a strict legal observance without consideration of the outcomes; therefore, it is entirely the ‘divine’ message of Islam that can be applied anywhere. Interestingly, so-called ‘Islamic fundamentalists’ understand Shari‘ah through a similar lens. To both groups a verse from the Qur’an or a selected hadith is read without any context to its intended purpose or desired outcome; therefore it can simply be read out of context and applied literally. Uniquely these two groups need one another to validate their opposing views, and to reaffirm their common approach – Shari‘ah is strict legal observance.7

Orientalist perspective

The use of Orientalist/Orientalism in this context describes academic orientalism rather than a historic/material meaning. An academic orientalist is anyone who ‘teaches, writes about, or researches the Orient – and this applies whether the person is an anthropologist, sociologist, historian, or philologist – either in its specific or its general aspects, is an Orientalist, and what he or she does is Orientalism.’8 An academic Orientalist is knowledgeable in the language of the Eastern culture that they are studying, and can view the culture with either apparent objectivity or with the purpose of ‘othering’ the culture and people. I don’t use the term as inherently offensive, since the Orientalist academic has taken the effort to learn the language and the texts of their study. Rather, the point of contention will be on whether or not the Orientalist had the stronger argument or was factually correct.

Joseph Schacht, one of the foremost Orientalist Islamic scholars of the 20th century, described Islamic law as ‘part of a system of religious duties, blended with non-legal elements’.9 Schacht falls into the trap of defining Shari‘ah as synonymous with Islamic law, whereby the Qur’an is the unquestionable letter of Islamic law – that is, the law is the command of the sovereign and when infringed, consequences are given by that sovereign power, usually the state. Therefore, he believed that if Shari‘ah is not state law, it is not a legal code. At the time Schacht was writing, there was a Pan-Arab independence movement in North Africa and the Levant. It was organized around the cultural unity of Arabic speaking people and held Islam as a common heritage, similar to Christianity in secular Europe. However, the political structure of these newly formed nations dismissed Islam’s role in the Constitution and often actively worked to remove the role of Islam from political institutions. Therefore, he was writing at a time when there was a fear of Islamic law being legitimized to become an integral part of state governance so the position was to claim that Islamic law was not actually law.

Similarly, the late Professor of Islamic Law from the School of Oriental and African Studies, Noel J. Coulson, also states, ‘[T]hough the verses of the Qur’an are legislative in nature, it does not attempt to deal with any general topic comprehensively.’10 In other words, because these verses command a duty or obligation without providing a sanction backed by a nation-state, Coulson does not consider them to be legally binding. Interestingly, both Coulson and Schacht’s position are in opposition to those who currently claim that Shari‘ah is in fact a valid legal system and as such it must be curtailed. In the past the problem was that Shari‘ah was not a valid legal system, whereas now it is a valid legal system and therefore this is also a problem. Nonetheless, Coulson does agree with Islamic scholars that, ‘the ideal code of behaviour which is the Shari‘ah has in fact a much wider scope and purpose than a simple legal system in the Western sense of the term’.11

The current view of Shari‘ah principles as a legitimate legal system is more accepted even among modern Western commercial lawyers and academics. The legal code of the modern Islamic Finance industry has been developed by commercial lawyers who are seeking to find common ground between Shari‘ah and other Western legal systems to facilitate trade.

Rebuttal to Orientalists

The Orientalist and ‘Fundamentalist’ view of Shari‘ah typically led to failure in its implementation. The Orientalists reject the legal validity of Shari‘ah, thereby ending the conversation about how culturally diverse Muslims around the world should negotiate the principles of Islam with their particular cultural environment – as Muslims have been for more than a thousand years. The ‘Fundamentalist’, on the other hand, wholeheartedly believes in the validity of Shari‘ah, but sees it as a static bloc of law that must be implemented entirely without any room for change. Islamic scholars who are aware of the historical development of Islamic law, from its inception in 7th century Arabia to its acceptance in Southeast Asia by merchants, are aware that the religion has always been capable of adapting and evolving to widen the circle of believers.

Scholars who are grounded within the Islamic intellectual tradition – for example, Mashood Baderin and Wael Hallaq – believe that the Shari‘ah, strictly speaking, ‘refers to the fundamental sources of Islam, that is the Qur’an and the authenticated Traditions (Sunnah) of the Prophet Muhammad and it is from these sources from which Islamic religious, moral, social economic, political and legal norms are derived’.12 This definition has been expanded to include the ‘commands, prohibitions, guidance and principles that God has addressed to mankind about their conduct in this world and salvation in the next’.13 Shari‘ah means the pathway – ‘the path to be followed or clearway to be followed’.14

Though Islamic Law, meaning the legal duties of Muslims that can be applied judicially, is derived from the Shari‘ah, it encompasses far more than legal obligations and state-backed sanctions. The Shari‘ah encompasses all aspects of human life without placing a dichotomy between law and ethics. This interpretation of Shari‘ah shapes how Islamic Finance functions; the prism of ethics developed by legal codes guides to create positive social outcomes, which may differ from society to society. And if those legal codes are ignored, there is no grounding with which to build a financial system. At the same time, strict adherence to the Shari‘ah leads to the inability to successfully apply the legal principles. It is this position that tends to upset those parties who see Islamic law as inherently problematic, both Islamic fundamentalists and Orientalists who see Shari‘ah as non-judiciable.

Shari‘ah and ethics

Shari‘ah is Islam’s legal system and provides a comprehensive code that Muslims adhere to with the understanding that humanity is interconnected with the Oneness of Allah (tawhid). Muslims believe that God (not understood as a personified man, but rather an inanimate force) created the universe, and every part of it reflects the unity of God. Former Professor at the Islamic Institute of Malaysia Mohammad Hashim Kamali explains that tawhid‘manifests itself into ritual devotion and personal piety, in theology and law, in politics and economics, in faith and deeds, all of which are manifestations of the same all-pervasive principle’.15 By connecting the outcome of the legal act to the underlying ethical purpose of the law, ethics can function as a restraint on the irrational outcomes of law.

Another key concept that informs the application of Shari‘ah is salihat (good deeds). Professor Wael Hallaq argues that the Islamic concept of salihat is integral to iman (belief); it is an overreaching principle to inform Muslims that when conducting their daily lives, whether it is a legal duty or social act, it must be done in good faith in ways that are ethical, moral and just. Hallaq summarizes this as ‘to speak kindly to people, to greet them, and to show them human compassion are attributes that have the same level of importance as those we come to call “strictly legal” conduct’.16 The Shari‘ah is a system underpinned by a code of ethics and works in a symbiotic relationship to guide the actions of adherents. This approach is fundamental to ensuring Islamic Finance law fulfils its ethical underpinning with ethical outcomes.

Usul-al-Fiqh

Usul-al-Fiqh is known as the root or principle of Islamic jurisprudence and describes the process with which jurists derive legal principles from the Qur’an and Sunnah to apply to practical and theoretical issues of the Muslim community. Muslim jurists within each of the four Sunni schools of Islamic jurisprudence, known in Arabic as madhahib (ways to act) have a hierarchy of legal tools they apply to derive the hikmah (wisdom) of the law. This process is known as fiqh – which involves the understanding of how to interpret Shari‘ah – and is derived from the Qur’an and Sunnah. It is also referred to as usul (the roots). There are four primary tools of usul al-fiqh: (1) the extraction of Quranic injunctions and principles based on interpretations of it; (2) the application of the principles reflected through the hadith of Muhammad; (3) the consensus from the Companions of Muhammad or the learned scholars (ijma); and (4) analogical deduction (qiyas).17

Islamic scholars have categorized legal rulings into two categories of ibadat (religious matters) and mu‘amalat (commercial transactions). There is a distinction between religious matters and commercial transactions. The former deals with the relationship between people and God; therefore, they should fall outside the court’s jurisdiction. The latter is concerned with the relationship between humans. These rules are enforceable by law.18 The nature of these two categories of fiqh demonstrates how the Shari‘ah encompassed religious, social, moral and legal aspects. Our attention will focus on mu‘amalat (commercial transactions) as it shapes the entire Islamic Finance industry.