another other way: islam and finance

As a follow-on to last week’s post, I’d like to talk about yet another alternate view of finance — this time, that held by Islam, as explained to me by a friend and colleague who is a practicing Muslim. This is for two reasons: one, because I personally am fascinated by Islam’s views of God and humanity, at once very similar and somewhat different from Christianity’s, and two, because we of the West know virtually nothing about Islam as it is practiced by the vast majority of its more than 1.5 billion adherents. I mean, have you ever asked a Muslim what jihad actually means? I’ll give you a hint: it’s not what you think.

So I’d like to talk about two areas of finance that work somewhat differently for Muslims than for the rest of us: charitable giving and banking.

Charitable Giving

Islam has a concept similar to Christianity’s “tithing”, which they refer to as zakat. My friend refers to it as “alms giving”. Here, all Muslims are required to give 2.5% (1/40th) of their excess wealth to charity. While that’s the simplified version, there are a few details worth noting.

First and foremost, the tithe is on excess wealth; that is, what is in excess of what is necessary to survive. As a practicing Christian, I’ve often been concerned by the fact that a tithe for someone who makes $30,000 a year is quite different from a tithe for someone who makes $300,000 a year. In my opinion, the zakat is an excellent progression: only those wealthy enough to have a surplus are required to give the tax. Of course, Muslim scholars differ as to what is “surplus”, and the devil is perhaps in the details, but the idea is sound.

Also, Islam stipulates that, rather than being given to the local mosque or spread thinly among various social service organizations, zakat is to be used to raised individuals from poverty. That is, if you are to give $1000 in zakat this year, you are encouraged to give it to a single person in poverty. The idea is that in this way the recipient of this year’s zakat may themselves be able to give zakat next year. Apparently this worked so well in the early days of Islam that poverty was eliminated entirely for a time; as there was no one in their country eligible to receive zakat, they had to go to neighboring countries and distribute it there!

Finally: zakat is not a minor footnote, as it often is in Christian denominations; rather, it is one of the Five Pillars of Islam.

I’m not saying that Christianity should adopt the zakat wholesale; however, those of us concerned with the role of social justice in Christianity should take note.

Banking

Islamic banking centers around the fact that riba — usury, interpreted by most scholars as charging interest on a loan — is forbidden. Islamic scholars see this as an issue of justice, as invariably, if I may paraphrase, someone is going to get screwed. We see this in the West all the time: the spread between what a bank charges for a loan and what a bank pays for a deposit is notorious for making a small percentage of the population ridiculously wealthy.

That isn’t to say that Islam does not believe in banking; rather, it believes that the bank should share the risk equally with those whom it does business with. Consider their equivalent of mortgages, for example. Say you have enough money for a 20% down payment on a house. You go to the Islamic bank, and they agree to pay for 80% of the house. You don’t pay interest; however, because they own 80% of the house that you live in, you agree to pay them rent for their 80%. Along with that rent, each month you buy a little bit more of the house, and the rent goes down accordingly, so in the end after 30 or 15 or however many years, you own the house entirely.

This may seem like a mortgage, and in practice it works in a similar fashion, but there’s a crucial difference: in a traditional mortgage, the loan itself is not tied to the house. If the house were to evaporate, you would still owe the mortgage. However, in the Islamic bank equivalent, if the house were to evaporate, you would owe the bank nothing! While on the surface, it looks like a mortgage, in reality, it’s more like a joint business venture.

Deposits work in a similar fashion: while current rates of return are advertised as they generally are in Western banks (check out Turkiye Finans‘s website), they are in no way guaranteed. Of course, the bank is still going to invest its deposits in short-term, low-risk vehicles, lest they lose all their customers at the first downturn. Here again, the concept is that of a joint business venture; whatever the profits happen to be, they are split between the bank and the consumer in an equitable fashion.

Fascinating, isn’t it? I wonder what 2008 would have looked like if the financial industry had been more like this?