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BookReview The Islamic Moral Economy:
A Study of Islamic Money and Financial Instruments by Karim, Shafiel.
Islamic banking and insurance products have received substantial attention by religious schol- ars, jurists and economists alike. Considering the prevalence of abstraction in the modern glo- bal economy that ultimately led to the so-called Great Recession, Islamic economics purports to be a religiously based, socially responsible sys- tem of society, polity and economy. In The Is- lamic Moral Economy, Karim explores the ques- tion of whether riba is truly absent from modern Islamic banking products, thereby making them soluble with Islam’s notion of justice and fair- ness. More specifically, Karim surveys the vari- ous definitions of riba, its application to existing money and banking systems, and myriad finan- cial instruments used by lenders and insurers.
Karim begins this brief book by contextualizing the “Islamic banking” sector within the broader economy, and examines the origins and cata- lysts leading to its creation. For example, Karim recites the theories of El-Gamal and Kuran, both of whom are highly critical of Islamic finance, and he frames Islamic banking within the moral economy, as originally presented by E.P. Thomp- son and James Scott. As such, Karim’s prob- lem is not whether Islamic financial products are more efficient from an economic vantage; instead, his primary interest is whether the ex- isting system of Islamic finance is predicated on the basic ideals of Islamic morals and ethics.
After examining the various definitions and comparisons of riba to other traditions, Karim applies this definition to modern money, bank- ing, and insurance. First, Karim argues that fiat money, which is a relatively recent phenomenon, intrinsically contains riba because the currency object gains value despite its inherent lack of value. Specifically, that paper money has value only because a hegemonic government body as- signs value to the paper; paper money has no intrinsic value or use. In furtherance of this ob- servation, Karim investigates the history of fiat money and various alternatives to fiat currency (e.g., asset-based money systems), and a brief analysis of endogenous and exogenous money systems. Finally, Karim also briefly surveys sei- gniorage, or the government’s ability to print its own money, which is also anathema to the pro- hibition of riba.
78 Global Islamic Finance October 2010
Similarly, Karim applies the riba-test to the mod- ern fractional reserve banking system, which artificially inflates the aggregate value of banks’ balance sheets when depositor funds are lent. This too, he argues, is an example of riba be- cause there is an artificial and illogical increase of value that takes place without any substantive or intrinsic asset to support the purported value increase. For example, if A deposits $100 with bank B, and B lends $90 of A’s original $100 to C, and C deposits his $90 to D, the banking system artificially created $90. Assuming the reserve ratio is ten percent, this hypothetical example yields an additional $900 in artificially created money. While Karim does not argue that one position is objectively right or wrong, he does apply the definition of riba and concludes that the fractional reserve banking system is in- soluble with the Islamic proscription of riba.
Karim concludes that riba-free money and bank- ing are essential components of an Islamic mor- al economy. However, in addition to this basic framework, an economy requires various com- plex financial instruments that assist transact- ing parties to engage in commerce. Here, Karim differs from the original model of applying the riba-test and conducts a broad survey of myriad financial instruments currently in use by mod- ern Islamic banks. This section is particularly useful for individuals wishing to gain a better understanding of the various financial instru- ments used by modern Islamic banks. Karim covers most of the major Islamic banking con- tracts including wakalah, ijarah, murabaha, and musharakah.
In addition to brief explanations, the book also includes illustrations and figures to assist the reader to understand how the respective con- tracts achieve their ultimate objective. For example, wakalah is analogous to modern-day powers of attorney. Similarly, ijarah contracts function as lease-to-own agreements, which can be used to finance both consumer and com- mercial credit needs. However, Karim not only provides a cursory description of the individual contract types, he also applies the riba-test and the elements of mutual risk and reward required by the Islamic moral economy, especially to the contracts that do not necessarily incorporate risk and reward reciprocity.
For example, the murabaha contract, which is a cost-plus instrument (i.e., the lender purchases the asset required by the borrower from a third- party and sells it back to the borrower for a higher price in an installment scheme), never takes physical possession of the asset financed, and thus does not really assume any ownership risk. The problem is further exacerbated when the profit margins are priced using interest rate benchmarks, effectively pricing the cost of capi- tal to the time-value of money, which is strikingly similar to usury, interest, and of course riba.
However, Karim also finds value in the Islamic banking products, especially in the mudarabah and musharakah contracts, which require lender and borrower to create partnerships for financ- ing. Instead of simply lending funds, the bank becomes an investor in various consumer and commercial transactions. For example, a bank can finance the purchase of a house where the occupant and the bank are both owners in the property. Moreover, the occupant-owner then leases the property from the occupant-bank partnership, and purchases fair-market-value units of ownership in the property over time using his/her share of the profits generated from the lease. This musharakah contract can also be used for commercial financing require- ments.
Finally, Karim adds that his observations and suggestions are not purported to be more effi- cient, or even feasible given the scale and com- plexity of the global interconnected economy. Instead, they are simply possible alternatives given the unanimously accepted restriction of riba, and its definition of both usury and in- terest, and illogical increase. As such, Karim summarizes and argues that the Islamic moral economy is actually a utopian system that is predicated on all market participants behaving rationally and morally.
Brown Walker Press: 2010, 158 pages Boca Raton, Florida - USA
www.brownwalker.com
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