Toby Birch

Articles:

The Ironies of Islamic Finance

By Toby Birch October 2007 Guernsey & Jersey Press

There is a growing and tangible sense of tension between Islam and the West. At the risk of generalising, many westerners fear the violent images of Islamic countries that are so often portrayed on our television screens and worry about the repression of women. Some have fallen into the easy trap of associating extremists with an entire religion, much like people confused the IRA with Catholicism in the past. Many Muslims view the West with incredulity in terms of social behaviour and they may have a point. For Anglo-Saxon economies that have experienced a property bubble there appears to be little left by way of a shared philosophy, let alone a common belief system. It seems that consumption has replaced religion as the new ‘opium of the masses’ as Karl Marx once described it.

Extremists on both sides are fanning such cultural tensions of liberalism versus fundamentalism and delight in the polarising effect that they are propagating. It is the duty of those in the middle ground to look for commonality and it might just be the case – bizarre as it may seem – that finance could unite us.

Irony 1 – History holds the key
We frequently see from the past how competition for natural resources draws empires into conflict. In Ancient Rome Julius Caesar grabbed Gaul while Trajan was later drawn to Dacia as both emperors raided the goldmines in those respective regions. While America’s involvement in the Middle East is partly driven by the modern (black) gold it also shares something in common with the Crusades, as religious undertones are evident among neoconservative leaders. As the USA is drawn deeper into conflict - worsening its deficits in the process - the long-term future of the dollar as a reserve currency may come under threat. The consequences of such devaluation would be devastating for the US housing market as bond yields would soar and many homeowners would default on their repayments.

This kind of currency degradation has of course happened before. When the likes of Richard the Lionheart sought glory against the Saracens he raided the English Treasury to fund the conflict. As a direct consequence the supply of precious metals dried up and the quality of coinage deteriorated as base metals were used as a shiny substitute for silver, (hence the term debasement came into being). Not surprisingly, inflation took hold as more coins and hence higher prices were required to receive the same amount of silver. Such shortages were hardly the fault of the Mint workers who produced the coins but they were made scapegoats and mutilated in the process: with the punishment of castration for those accused of coin-clipping. The ensuing slump and subsequent austerity was blamed on the so-called Bad King John of Robin Hood fame. Today a similar dilution effect is apparent as central banks allow the money supply to grow in double

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