Fitch says that shariah compliant banking in Bangladesh is doing OK, not great, but fine. So, that's OK then, we can go onto other things. However, it is possible to think a little about this. For there are those who try to insist that shariah -- or other Islamic constraints upon the form of contract -- mean that the varied forms of capitalism and free markets are now possible. Or, we can run the complaints the other way around, as some do, and insist that as interest is the foundation of all capitalism then shariah provides an alternative.
It is true, as Fitch tells us, that the shariah-compliant banks suffer a little from liquidity constraints. But that's a minor problem and one that can be solved easily enough by the legalization of new contract forms. For here's the big secret: Yes, we know about the prohibition on usury -- which is normally taken to mean upon interest. But rather the point of mudarabah and wadiah contract forms is that we get to the same place even if we're not using interest.
The larger point here is that the economic form of an arrangement is what matters. The legal form, as long as it includes that economic structure, doesn't matter.
Of course, the legal form matters for social, cultural, and religious reasons, and that's all fine. But what we find out is that those contract forms -- which encapsulate those economic truths -- survive, those which don't get put by the side and ignored.
Both mediaeval Christianity (Thomas Aquinas was very hot on this) and Islam have declared that interest is an abomination, a sin. Yet, it is still true that Tk1,000 is worth more today than the same amount in one year's time. The difference between those two values is the interest rate. That difference will vary depending upon the inflation rate, the risk of actually getting the Tk1,000 back and so on. But even if it's 100% risk-free and no inflation at all, a pizza today is still worth more than one in a year. So, therefore, the money for a pizza is worth more.
Interest is simply something that exists -- that price difference between now and then. Christianity largely dealt with this by giving up. So, interest is allowed, banking systems use it, consumer credit, and so on. Well, that's one solution. Islam kept the restriction -- well, that's another solution. But Islam ended up with contract forms that still deal with the base fact of the existence of an interest rate. Those two contract forms, plus things like sukuk bonds and so on.
I am not a scholar of religious systems but I do know quite a bit about how economies work, and they work by acknowledging reality -- human beings do some things, and don’t do other things. It's even possible that an ethical or religious theory wishes to demand that humans not do those things. But the system that works is going to be one that accommodates those realities -- those things that humans do and don't do -- however the contractual forms are set up to do so.
Islam and Islamic economies have survived some 1,400 to 1,500 years now. Clearly they've adapted to those realities -- the contractual forms above that produce the effect, not the formal reality, of the time value of money. That they do is why the economic system has survived.
Of course the real underlying point here isn't about sukuk bonds or anything like it. It's about the ethical and moral dreams of others out there about how economies work. Take the communists for example -- everyone will work for the benefit of the society as a whole, thinking nothing of their own work load nor return. Well, no, they won't actually. Soviet society didn't, in fact, work but even they had to have different rewards for different jobs -- they came in what you were allowed to buy or were allocated instead of what you earned. Socialists are a milder form of the same delusion, that all will work for the smaller community in the same way. No, among humans at a scale larger than families that doesn't work.
Any economic system that accepts those basics about our own species will work better than one that doesn't. Which is why the ivory tower dreams of so many don't work, they have not encapsulated reality within them. This is also why economic systems that have survived, do. Sure, Islam doesn't allow usury, but it still has contract forms that accept the time value of money.
It doesn't, in fact, matter what we call these things. We do, though, need to organize the economy for those people who inhabit it and include the things that we do into how it's organized.
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
