Toby Birch

Articles:

Interest-free Finance for All

By Toby Birch October 2008 EUBankers

The first article summarised the cause of the credit crisis while the second examined an historical calamity resolved with a local solution. In this final piece we hope to answer the trillion dollar question: what do we do now?

The current assumption is that all financial institutions must be saved whatever the cost. While we still need banking we could do without its recent business models. Their role of orchestrating savers and borrowers has never been in doubt but there remain two intertwined conflicts of interest at the core of this collapse. The first is the temptation of excess credit creation; the second is that of interest. It begs the question of how savers are to be rewarded and banks paid for their labours which is the aim of this article.

Considering the design of a new financial system is not one of escapism but of forward thinking as economic turbulence is the usual pre-cursor to political turmoil. Human history is blighted by extremes of Left and Right and big government versus market forces which all end in tears. True cohesion seems only to occur in wartime when we cherry pick the best people and plans to unite against an external enemy. We need an economy that combines positive elements of capitalism and communism and a banking system that is symbiotic and not self-seeking. Fairness, balance and altruism in finance may sound Utopian or old-fashioned but we are in desperate need of ancient acumen. If only we could abide by the Quaker maxim ‘my word is my bond’, transactions would then be typified by transparency, honesty and the avoidance of uncertainty.

Some might consider these thoughts to be fanciful but this system already exists and is called Islamic Finance. Had this article been entitled ‘Islamic Finance for all’ it is unlikely that many readers would have got this far. It is human nature to distrust what we don’t understand and for some westerners a phrase that combines Islam and Finance inevitably carries conations of terrorist funding. Many are familiar with Islam’s prescriptive rules but are often unaware of its attractive aspects. So why should principles established by desert-dwelling Bedouins be relevant today? Wisdom is timeless and in small communities with minimal resources, the actions of hoarding, selfishness and deceit were naturally abhorrent. Charging interest was anathema because it took advantage of people in need or hampered communal projects requiring liquidity. As the Prophet Mohammed was an orphan great emphasis is placed on philanthropy so charitable donations form an intrinsic element of Islamic business. Other surprising themes include respect for nature, stewardship and continuity for the next generation. Perhaps its flaw is that the mechanism depends on mutual trust and co-operation, requiring a common religion or philosophy. While westerners are proudly ‘anti’ many things we seem unsure of what we really stand for, other than credence in consumption.

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