..:: Kellog ::..


Thursday, April 14, 2005

The A-Religious Banker

I researched about a new deal we may do in Dubai yesterday and opened up for myself a new interesting branch of finance and economics to learn, the comparison of Islamic financing to the West's (or ours for that matter). I wish I had taken a course in Berkeley about Religion and Economics. I wasn't even quite aware, other than concepts of the Protestant Ethic.

Islam prohibits interest, but there's nothing wrong with sharing profit/risk. It's rather Marxist, in its talk about damn the lazy capitalist that just gives money and reaps the returns without a sweat shed. About Musharaka:
In a capitalist system, capital and entrepreneurs are treated as two separate factors of production. The return on capital is interest, whereas the entrepreneur, who risks losing money, earns a profit. While interest is a fixed return for providing capital, profit can only be earned after distributing the fixed return to land, labor and capital (in the form of rent, wage and interest). Thus, the capitalist system seems to favor those who lend capital to entrepreneurs by providing them a secure return, entrepreneurs bear the risks of incurring losses and still making interest payments on borrowed capital.

In comparison, Islamic economic system does not consider providers of capital and entrepreneurship as separate factors of production. It believes that every person who contributes capital in the form of money to a business venture assumes the risk of loss and therefore is entitled to a proportional share in the actual profit (Siddiqui 1994, p.99). The system is protective of the entrepreneur, who in a capitalist economy would have to make fixed interest repayments even when the venture is losing money. (Usmani, M.I. 2002, p.13). Capital has an intrinsic element of entrepreneurship, so far as the risk of the business is concerned and, therefore, instead of a fixed return as interest, it derives profit...The system ensures that profits generated by commercial activities in the society are distributed equally amongst those who have contributed capital to the enterprise.
Such an interesting concept. The Economist, while stating that Islamic economics ain't all that different...
In the general outlines of what they want, most Islamic economists say things quite similar to the sort of thing that is starting to be said by the people building a post-Marxist left in the West. The basic organisation of an economy should be left to the market. Both the Koran and Muhammad himself assumed a system based on individual enterprise and individual reward (the command economy, after all, was not going to be intended for another dozen centuries); the Prophet has nothing against profit.
...does recognize the fundamental difference:
The one possible exception, the area where Islam may have something distinctively useful to offer, is in the monetary system. This arises from the Koran's prohibition of riba, generally translated as "interest"...(A) way of using the fact that risk-sharing is acceptable, though interest is not, comes in the practice known (confusingly) as mudaraba, and its variant musharaka. The bank, instead of lending money at interest to an entrepreneur, as it does in the West, in effect buys shares in his enterprise. If he does well, the bank gets an agreed share of his profits. If he flops, it shares the pain. The bank is an investor, not a lender.
I'm up in the air about the argument. I wish once again that I had taken a course in Berkeley that would elucidate the intertwining of Economics and Religion (fascinating!). Is the ol' addage true then, that banks are evil, that they give you an umbrella when sunny and take it away when it rains? In defense, how about the rights of banks to engage as well as possible in its business of lending money? Just as every other business that safeguards itself, why is it wrong that banks would impose covenants, require collateral, and charge interest when it hands out money to people that sign a contract that states they would abide by the repayment rules? There are other instruments out there in the financial markets to raise funds, like bonds, stocks, that require an investor to share the risk. But you'd have to pay them a higher return than getting it from the bank.

My argument and thoughts are random and loose right now. Busy being an evil a-religious banker (albeit a hippie capitalist!) at work. But something interesting I learnt to share.
kellykelly, 4/14/2005 01:10:00 pm


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Blogger lori, at 4/14/2005 01:48:00 pm  
There's an Islamic Financing seminar being conducted by Bloomberg on Wednesday, Apr 20th, from 11.30 am to 2 pm. I'm interested in going as I wasn't in Singapore when my bank's Islamic Financing expert came to give us a seminar on how it works. If you're interested, shall we both sign up?

Bloomberg has an awesome pantry which every person working in financial services should see at least once.
Anonymous Dominique, at 4/15/2005 12:13:00 am  
well, as usual the devil's in the details. western-style capitalist loans stop at dollar value. You are responsible for your loan and the banks don't really care about how you achieve that. ethics and practices are ignored, whether or not that's a good thing.

In muslim-style banking, in order to carry out the "profit/risk-sharing" tenet, it's necessary for an escalation of involvement on the bank's part in the borrower's business. At its best, the bank becomes a synergistic partner. At worst, the bank, not really understanding the business, becomes a nuisance/hindrance.

"Understanding the loan receipient's business" is also a major limiting factor for muslim banks. You can imagine that if a bank were service all industries in a given economy, its knowledge costs would already approach that of an investment bank. And if that affects the selection criteria, mom n pop businesses don't really get much of a chance on getting any of the dough, do they?

Every Malaysian bank has an Islamic banking arm, as far as I know. For all its noble intentions, the failings are quite apparent. Banks loan out to receipients while not really understanding their businesses and if/when it fails, they conveniently fall back on the tried and tested modern capitalist concept of a lawsuit to get its money back.
Blogger Fei Ci Pet, at 4/15/2005 02:50:00 am  
Dominique: argh! the seminar's full. Tried signing up for me and my boss (he was interested too), but no luck. You know of any loopholes that I could squeeze myself in?

FCP: nicely put. Good point. That summed up one of my hesitation about that. One collegue of mine mentioned that to be a banker, ya gotta be a jack of all trades, to have a 'feel' of all the businesses, but to be a specialist in none (but banking of cos). When I'm reviewing a credit, I try as much as possible to UNDERSTAND the business, but I'd be in no position to DO the business myself, if I did...I wouldn't be working for a bank.

I have a believe in a banking system tho', despite the bad rep it gets, being the freshie in the industry as I am. In short, it lubricates the capitalist system.
Blogger kellykelly, at 4/15/2005 11:40:00 pm  
something different
i likee
Blogger pmckcon, at 4/26/2005 08:40:00 pm  

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