ISLAM AND ECONOMICS
August 12, 2004
In "Islam and Mammon: The Economic Predicaments of Islamism" (Princeton University Press), Timur Kuran, professor of economics and law, and the King Faisal professor of Islamic thought and culture, at the University of Southern California, examines Islamic economics.
This concept, he notes, is a 20th-century one; historically, Muslims did not have distinctive economic practices. It has come to mean a ban on interest, a wealth tax known as zakat, and honesty and altruism in commercial dealings. But these practices have been modified in reality, especially in countries with weak civil societies and legal systems. For instance:
- Islamic banks are supposed to share profits and losses with the enterprises they finance -- like venture capitalists -- instead of charging interest.
- But they learned that risk sharing is impractible when businesses keep false accounting records and so started charging "murabaha," where the bank buys a capital good for a client who agrees to buy it back at a particular time in the future, at a markup -- in effect, charging interest.
- Islamic banks also invest in debt securities and pay depositors returns that fluctuate with prevailing interest rates -- like money market funds.
- Well under 5 percent of the assets of Islamic banks consist of loans based on genuine profit and loss sharing, writes Professor Kuran.
He argues that the Koran's famous ban on "riba" is not a ban on ordinary interest, which moneylenders have charged throughout Islamic history. Riba was a pre-Islamic practice in which debts doubled or redoubled following defaults, leaving borrowers enslaved. As with modern bankruptcy law, banning riba limited the penalties for default.
The notion of Islamic economics, however, he writes, "has promoted the spread of antimodern, and in some respects deliberately anti-Western, currents of thought all across the Islamic world."
Source: Virginia Postrel, "Economics and Islam," Economic Scene, New York Times, August 12, 2004.
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