Islam and banking

The Koran—which is supposed to be the literal word of God as dictated to Mohamet by the Archangel Gabriel — bans the taking of interest. Or at least that is how it is being interpreted by the Ayatollah Khomeini in Persia and by the Moslem fundamentalists who advise the military dictator of Pakistan, General Zia.

The trick of course is in the definition of interest. It can be admitted that, from the point of view of economic theory, there are two kinds of interest, depending on what the loan is granted for: consumption or production. Before capitalism most loans were not investments in production but were to people to spend on consumption, the luxuries of the rich or the necessities of the poor as the case may be. When such loans are made to the poor the moneylender can exploit his client’s dire need to extract a very high rate of interest and can eventually reduce him to a state of virtual slavery, as occurred on numerous occasions in pre-capitalist times. Mohamet wrote the Koran, of course, well before capitalism evolved, about 1300 years ago in what is now Saudi Arabia and its ban on interest was designed to prevent the social structure of the then tribal society being undermined by debt-slavery.

Interest under capitalism is something different. It is a share in the profits extracted from the exploitation of wage-labour. The lender loans his money to an entrepreneur who invests it in production and who pays the interest out of the profits he makes. This means that under capitalism there is a limit to the rate of interest: it cannot be greater than the rate of profit.

Banks are specialised financial institutions which gather together money which people want to lend and pass it on to capitalists to invest in production. They realise their profits out of the difference between the rates of interest they pay their depositors and the rates of interest they charge their customers. Banks play an important intermediary role under capitalism and without them the accumulation of capital out of profits — which is the be-all and end-all of capitalism — would proceed, and would have proceeded, at a much slower pace.

Capitalism has only been going for about two hundred or so years but it has now spread all over the world, including Moslem countries. In such countries too it finds banks essential as financial intermediaries channelling money for productive investment; and of course banks, charging and taking interest, exist in all Moslem countries including both Khomeini’s Persia and Zia’s Pakistan.

Moslem theologians have overcome this problem by interpreting the Koran’s ban on interest to apply only to the taking and paying of amounts of interest fixed in advance. From here on it is easy: the interest, both that paid to depositors and that charged to borrowers, comes to be called “a share in profits”. This is how the Amman correspondent of the Financial Times (21/3/79) describes the operation of the Jordan Islamic Bank:

“A depositor places his money in a savings account in an Islamic bank without being guaranteed any fixed return every year. Instead he is promised a share of the profits of the projects the bank is financing. When the bank lends money to finance a new industrial plant, the borrower does not pay a fixed interest rate every year, but rather promises to give the bank a share of the profits the plant generates after it starts production. If the plant makes a quick and large profit, the bank and the depositors share in the bonanza. If the plant makes only a small profit, they get less. The bank always maintains a reserve fund from which it will pay its depositors and shareholders a dividend during any particularly unprofitable years.”

Another way out is, instead of demanding a share of the borrower’s profits, to charge him a “commission” or “fee” for arranging the loan.

Actually, this solution — of calling “interest” a “share in profits”— conforms very well with the nature of interest under capitalism which, as we saw, is precisely a share of profits — though it is another matter whether the foregoing of the administrative convenience of paying fixed interest just to respect the letter of the Koran is a rational banking practice.

What is interesting in this is the confirmation it brings of the materialist conception of history that the ideology of a particular society its morality, its religion,—is a reflection of its economic basis and changes as that basis does. As capitalism has come to Moslem countries so the Koran’s ban on interest has been re-interpreted so as to fit in with the system’s need for the financial intermediaries that are banks.

There is a precedent for this. The Bible too used to ban interest and this had to be changed when capitalism evolved in Christian countries. It seems, according to R.H.Tawney in his Religion and the Rise of Capitalism, that by the end of the Middle Ages the Christian theologians had reached exactly the same conclusions as today’s Moslem theologians — that anything goes except the giving and taking of payments fixed in advance (indeed there would seem to be one or two subtleties here that may not yet have occurred to the Ayatollah Khomeini):

“No man, again, may charge money for a loan. He may, of course, take the profits of partnership, provided that he takes the partner’s risks. He may buy a rent-charge; for the fruits of the earth are produced by nature, not wrung from man. He may demand compensation — interesse — if he is not repaid the principal at a time stipulated. He may ask payment corresponding to any loss he incurs or gain he foregoes. He may purchase an annuity, for the payment is contingent and speculative, not certain . . .What remained to the end unlawful was that which appears in modern economic text-books as ‘pure interest’ — interest as a fixed payment stipulated in advance for a loan of money or wares without risk to the lender. . .The essence of usury was that it was certain, and that, whether the borrower gained or lost, the usurer took his pound of flesh. Medieval opinion, which has no objection to rent or profits, provided that they are reasonable — for is not everyone in a small way a profit-maker? — has no mercy for the debenture holder. His crime is that he takes a payment for money which is fixed and certain, and such a payment is usury.” (Pelican edition, pp 54-5).

How long will it be before the Archangel Gabriel appears again to dictate an amendment to the Koran permitting fixed interest payments?

ALB