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December 5, 2009 Leave a comment Go to comments

“And what you give in interest [riba in Arabic] that it may increase on (other) people’s wealth, increases not with Allah (God)…(Koran 30:39).”

Μετά την πρόσφατη κρίση στα λογιστήρια του Ντουμπάι, μιας κρίσης που οφείλεται αφενός στην σπέκουλα της γης και τον ανεξέλεγχτο οικοδομικό οργασμό που στηρίχθηκε εν πολλοίς στό παγκόσμιο μοντέλο της τραπεζικά χρηματοδοτούμενης κατασκευαστικής φούσκας,και αφ’ετέρου στο απότομο “φρενάρισμα” και συρρίκνωση της παγκόσμιας οικονομικής δραστηριότητας με το σκάσιμο της στεγαστικής φούσκας, προβλήματα φαίνονται να αποκαλύπτονται και στο γειτονικό Αμπου Ντάμπι. Προσφέροντας κερδοσκοπική στήριξη στην γνωστή μας Citibank την ώρα της μεγάλης καταστροφής, τώρα ενδέχεται αντι να κερδίσει κάποιους “τόκους”, να βγεί και χαμένο. Ξένα ήθη, ξένα έθιμα , που να προλάβoυν οι εμιρατιανοί τα γεράκια της Wall Sreet.
Μόλις πενήντα χρόνια πριν οι εμιρατιανοί ζούσαν σύμφωνα με παραδόσεις αιώνων και τον κώδικα του Προφήτη που αντιμετωπίζει τον τόκο σαν μία απο τις μεγαλύτερες αμαρτίες του ανθρώπου και απαγορεύει ρητά στους μουσουλμάνους να εμπλέκονται σε τέτοιες συναλλαγές…

Διαβάσαμε απο το μπλόγκ naked capitalism (στα λίνκς)

Every Dog Has Its Day, Even Citigroup

Reader Steve sent this tidbit from the Australian. Sovereign wealth funds not all that long ago were generally seen as sophisticated to at least competent. But so were university endowments, and in many cases, “sophisticated” turned out to be tantamount to “has a higher appetite for risk than most” which in a bull market can look very clever.
In this case, Citigroup looks to be the clear winner in a deal with Abu Dhabi’s SWF. Unless the bank’s stock rallies massively, the fund will convert preferred stock paying rich dividends into common at a conversion price of $31, on a stock now trading in the neighborhood of $4. Moral of the story: if you have a deal with an embedded bet (in this case, that the stock would appreciate) you need to ponder whether that bet will pan out. I would have held onto the fat dividend for as long as possible (and I suspect it could have been longer than two years).

From the Australian:

The terms of the Citigroup deal looked lucrative for Abu Dhabi back in November 2007, when it raced to Citi’s rescue as the New York bank crumbled under soaring investment losses tied to the depressed US mortgage and housing markets. Abu Dhabi wrote a check for $US7.5 billion in exchange for an 11 per cent annual dividend.
The bad news for Abu Dhabi is it only demanded such dividend payments for a little more than two years — until March 15, 2010. Afterwards, Abu Dhabi would in essence exchange its original investment in four instalments for Citigroup common stock, which was then worth nearly $US31.
To pull off that exchange, Citigroup on Wednesday announced a coming public bond offer that will pay a much smaller yield of slightly more than 6 per cent. The proceeds will go to Abu Dhabi, which is required to use the cash in March for its expensive purchase of Citigroup stock.Abu Dhabi, by agreeing ahead of time to exchange cash for stock at a price of $US31.83, figured to make money under the assumption that Citigroup’s shares would rise modestly over more than 27 months. “This investment reflects our confidence in Citi’s potential to build shareholder value,” Sheikh Ahmed Bin Zayed Al Nahyan, Abu Dhabi’s managing director, said at the time.
But now it is Citi, not Abu Dhabi, that is seeing prospects for a winning deal. If Citi’s stock price holds steady through March, the beleaguered New York bank will basically be able to raise new capital by selling stock at more than seven times its market price. The deal will also boost Citi’s Tier 1 common equity and tangible common equity by $US1.875 billion, according to Wednesday’s statement.

δημοσιευμένο με λίνκς εδω

σχετικά με Ισλάμ και τοκογλυφία, υπερβολικά επιτόκια εδω

In the name of God, Most Gracious, Most Merciful

Usury & Interest

[2:275] Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, GOD permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with GOD. As for those who persist in usury, they incur Hell, wherein they abide forever.
The Quran forbids usury, not interest. Quite a few states in USA have laws against usury. Usury is defined as excessive interest. A Dictionary defines usury as “an excessive or inordinate premium for the use of money borrowed”, “extortionate interest”, or “the practice of taking exorbitant or excessive interest.” The Arabic language also makes distinction between interest (Fa’eda) and usury (Reba). The Quran forbids Reba or usury.

Earning interest and paying interest is perfectly acceptable, as the Quran has not prohibited interest. Interest is an essential component of the financial aspect of an individual or an organization. Individuals may need to save money in a bank, may carry a credit card for convenience, or may borrow and pay interest for an automobile or to own a house. Borrowing money and thus paying interest for business loans is an essential component for business and organizations. Thus paying interest, as long as it is not considered excessive by the standard of the day and community, to a credit card company, to a financial institution for a loan of any kind (business, car, house mortgage) is allowed and perfectly legal from a Quranic point of view. Also earning interest from a financial institution like a bank or bonds or mutual fund is also fine.

As defined above usury is excessive interest. Unlicensed or illegal moneylenders (mafia as a well known example) charge usury, excessive interest. Such unlicensed or illegal moneylenders are all over the world and can easily be accessed by a few inquiries. For those who live in USA, any individual can find out about these moneylenders by asking about them within their ethnic business community. These illegal moneylenders have entirely separate standards for making loans – they charge excessive interest (usury) and usually rely on someone’s life (guarantor) as collateral. The Quran forbids in dealing with usury – borrowing money and paying usury or earning money by charging usury. The Quran specifically states that usury cannot be equated to commerce or taken as a normal business practice. The practice of usury, unfortunately, is prevalent all over the world with individuals and business engaged in this practice.

In practical terms as long as we are dealing with any state-licensed institution like a bank, Mortgage Company, Credit Card Company, etc., we are not violating any Quranic commandment as these institutions usually follow the law of the land and do not charge excessive interest. They calculate their interest rate on daily basis considering the status of the economy and the need of the society. However, if we deal with the illegal moneylenders who practice usury, we are in violation of clear Quranic commandments. This is not to say that one may not borrow or lend money to a friend or relative and even charge interest. Such transaction must be in writing as the Quran cleary commands in verse 2:282 and may involve interest, to at least pay for the cost of the loan to the lender if any, and compensate for any change in the value of the currency over the time of the loan, but should not involve usury.

[2:282] O you who believe, when you transact a loan for any period, you shall write it down. An impartial scribe shall do the writing. No scribe shall refuse to perform this service, according to GOD’s teachings. He shall write, while the debtor dictates the terms. He shall observe GOD his Lord and never cheat. If the debtor is mentally incapable, or helpless, or cannot dictate, his guardian shall dictate equitably. Two men shall serve as witnesses; if not two men, then a man and two women whose testimony is acceptable to all. Thus, if one woman becomes biased, the other will remind her. It is the obligation of the witnesses to testify when called upon to do so. Do not tire of writing the details, no matter how long, including the time of repayment. This is equitable in the sight of GOD, assures better witnessing, and eliminates any doubts you may have. Business transactions that you execute on the spot need not be recorded, but have them witnessed. No scribe or witness shall be harmed on account of his services. If you harm them, it would be wickedness on your part. You shall observe GOD, and GOD will teach you. GOD is Omniscient.

A note should be made that the Quran, which spells out religious laws for our great religion, removes the shackles and burdens imposed on us by the ignorant scholars and religious leaders. Most of the “Muslim” countries have various laws against interest and have sham “interest-free banking” reflecting their ignorance of this simple Quranic truth. Unfortunately, quite a few of those who call themselves Muslims fall victims to the falsehood spread by these religious leaders.

[2:276-280] GOD condemns usury, and blesses charities. GOD dislikes every disbeliever, guilty. O you who believe, you shall observe GOD and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from GOD and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew.

[3:130] O you who believe, you shall not take usury, compounded over and over. Observe GOD, that you may succeed.

[4:161] And for practicing usury, which was forbidden, and for consuming the people’s money illicitly. We have prepared for the disbelievers among them painful retribution.

[30:39] The usury that is practiced to increase some people’s wealth, does not gain anything at GOD. But if you give to charity, seeking GOD’s pleasure, these are the ones who receive their reward manifold.

[7:157] “(4) follow the messenger, the gentile prophet (Muhammad), whom they find written in their Torah and Gospel. He exhorts them to be righteous, enjoins them from evil, allows for them all good food, and prohibits that which is bad, and unloads the burdens and the shackles imposed upon them. Those who believe in him, respect him, support him, and follow the light that came with him are the successful ones.”

Στην συνέχεια σχετικό άρθρο με θέμα τις σχέσεις του Ισλάμ απέναντι στο σύγχρονο τραπεζικό σύστημα και τις δαιδαλώδεις διαδρομές της παγκόσμιας τοκογλυφίας.

Muslims and Modern Banking: A Rejoinder
M Asadi
Tags: Koran , Quran , interest , banking , economics

The real breakthrough for modern banking was in 1453 after the fall of Constantinople. The rich Jews fled being suspicious of the new conquerors, first to Italy and then to London carrying with them their vast wealth. According to one perspective, the word “Bank” originated from the Italian word for “Bench”, as these Jews carried on their business of money lending and money changing on benches. They were called Lombards as they carried on their business in Lombardy. The Lombard Street in present day London, England is named after them. The most famous of these Italian bankers were the Medici Family (Meyer, Duesenberry, Aliber 36)
An alternative perspective as to the origin of banking is a German one. In 1401 formal banking started in Germany as partnership institutions. According to this theory, the word “Bank” originated from the German word “Bach” which means a partnership firm with a number of partners.
Modern, present day banking operates mainly by giving interest to people from whom it has borrowed money, and after keeping a small percentage of it [people’s wealth or money] as reserves and vault cash, lending or investing the same money [people’s wealth] at a higher rate of interest or return and keeping the difference as profit [The major source of revenue for banks]. This is in addition to the profit made by banks on the various bank services provided.

The Koran, over 1400 years back condemned today’s modern banking concepts before they were put into wide scale practice: “And what you give in interest [riba in Arabic] that it may increase on (other) people’s wealth, increases not with Allah (God)…(Koran 30:39).”
The Koran states explicitly that trade is not the same as interest:
Those who consume interest shall not rise,except as he rises whom Satan by his touchprostrates [i.e one who is misled];
that is because they say:”Trade is like interest”; whereas, Allah [God] has permitted trading but forbidden [Haraam in Arabic] interest. Whosoever receives a warning from his/her Lord, he shall have his past gains and his affair is committed to Allah (God); but whosoever reverts (to devouring interest) those, they are the inhabitants of the fire, therein dwelling forever. (Koran 2:275)
According to the above Koranic verse, trade is not the same as interest. Interest that banks give to us on our money lent is not trade. Trade involves the profit/loss made by the exchange of goods and services mostly involving some medium of exchange (eg. money) while Interest is the cost of borrowing money (the medium of exchange) and does not involve goods and services primarily.
Buying shares in companies is trading [for example] as you become a co-owner of the company to the extent of the face value of your share and as such share in its trading profits. If a person is a Muslim, he/she should have no part of their interest profit. Likewise, debentures issued by companies, pay interest and as such are forbidden to Muslims.
A bank is not just another business like a furniture store or a lumberyard. The decisions made by bankers quite literally permeate the entire economy,
affecting the decisions made by other business people, housewives, and government officials. In fact, reduced to its simplest terms, the whole idea behind central banking and monetary policy is that if we can somehow influence the decisions made by bankers, then these decisions, in turn, will influence the decisions made by everyone else and in this indirect fashion we can control the overall functioning of the economy.(Luckett 142)

The Koran talks about inflation [over 1400 years back!] and adjusting the money you lent for inflation [but not charging interest]: “…but if you repent (from devouring interest), you will have your principal, un wronging and un wronged (Koran 2:279).”
If I do not adjust my principal for inflation while receiving the money that I lent someone earlier, I will be “wronged” as that amount, which I receive now [unadjusted] will buy fewer goods than it would have when I lent it. The Koran says that you will have your principal, “un wronging (i.e you wont charge interest) and un wronged (i.e you will adjust for inflation).” Such a conclusion is implicitly suggested by the above verse.
The functions of modern day commercial banks, primarily built upon borrowing and lending for interest, has wide scale effects on the economy [as is suggested by Luckett’s quote above].

II) Interest & Investment

Interest plays a big role in reducing capital investment and hence development:
Investment is spending on addition to capital stock [machinery, structures, inventories etc]. Such investment is undertaken with the aim of making profits in the future by operating machines and factories. Suppose firms borrow to buy capital that they use. Then the higher the rate of interest, the more firms have to pay out in interest each year from their investment. Thus the higher the rate of interest, the less they will want to invest. Conversely, a low rate of interest makes investment spending more profitable, therefore reflected in a higher level of planned investment. (Dornbusch, Fischer 115)
If a person borrows to invest, then the higher the rate of interest, the less profitable his investment would be, so he would invest less. Investment would be the most profitable [and hence the highest] if there was no interest in the economy and lent money was only adjusted for inflation at payback time.
Even if a person does not borrow but finances the purchase of capital with the money that he/she possesses, even then a higher rate of interest would reduce investment and if interest did not exist in the economy, investment would be the most profitable and the highest [because of opportunity cost, the cost of the next best alternative that is foregone]: “A decision to increase the amount of capital available usually entails a present sacrifice and a future gain (Lipsey 392).” When there is no interest in the economy, theoretically speaking, it would always pay to purchase a further unit of capital and investment and development would occur till the marginal efficiency of capital got equal to zero: “It always pays to purchase a further unit of capital whenever its marginal efficiency- the monetary return on $1 more spent on purchasing capital- exceeds the rate of interest (Lipsey 399).” Imagine a society like that!

III) Interest & Savings

Raising the rate of interest does not increase savings:
But should we really expect an increase in the interest rate to increase savings? It is true that when the interest rate rises, saving is made more attractive. But it is also made less necessary. Consider someone who has decided to save an amount that will ensure that $10,000 per year is available for retirement. Suppose that the interest rate now is 5% and the person is saving $1,000 per year. Now let the interest rate rise to 10%. With such a high interest rate, the individual needs to save less now to provide the given 10,000 per year during retirement. It may be possible to provide the same retirement income by saving only about $650 a year. Thus an increase in the interest rate might reduce saving. (Dornbusch, Fischer 278)

The Koran condemns interest [simple & compound]:

“O you who believe! Devour not interest, doubled and redoubled, and be careful of Allah (God); haply so you will prosper.” (Koran 3:130)
Devouring interest, according to common sense would be charging interest on the money you lend out whether it be lent out to a bank or another person. The Koran (30:39-quoted earlier) also condemns giving in interest so that further interest can be consumed (“so that it increases on people’s wealth”).

The Koran condemns consuming interest in strong words:

“O you who believe be careful of Allah (God) and give up the interest that is outstanding. And if you do not then be warned of war from Allah (God) and His messenger..” (Koran 2:278-279)

Note: The above verse refers to believers: “O you who believe..”

According to Koran 2:275 that was quoted earlier, a person when he receives God’s warning i.e words of the Koran, can keep the past gains but give up, according to this verse the present and the future claims to interest.
The Koran does allow for a stewardship concept of banking in which you get all of the banks services excluding consuming interest. The banks can make a profit by charging you a fee. If you borrow from a bank or anyone else and if the bank or the person from whom money is borrowed, charges interest from you, it is not your fault- the Koran only condemns charging or consuming interest], or giving interest so that that interest is further increased (on people’s wealth).

IV) Charity, The Koran & Economics

The Arabic word “Zakah”,translated into English means ’purity’. As used in the Koran (believed by Muslims to be God’s word) it signifies the “purity” a person achieves through giving in charity in God’s way. It’s principle is discussed in Koran 9:103 & 92:18. It is enjoined on believers according to Koran 9:60 (this verse also narrates the categories of people to whom charity is applicable). The amount due according to the Koran (though Muslim tradition states a different percentage) is 50% of savings beyond a persons legitimate needs ( see Koran 17:29 & 25:67).

Is Zakah (obligatory charity) good for the economy?

Zakah is due out of savings according to the Koran (whether the savings (those that are beyond a persons legitimate needs) be small or large,it does not matter). Out of the amount saved 50% has to be given (spent) in God’s way, according to the Koran by those who claim to be Muslims.

“The alms are only for the poor and the needy, and those who collect them (for distribution), and those whose hearts are to be reconciled (resettlement of families, refugees etc), to free captives (slaves etc) and the debtors in need, and for the cause of Allah (God) and the needy travellers; a duty imposed by God. God is Knower, Wise” (Koran 9:60).

What are savings?

“Saving is income that households receive but do not spend on buying goods and services. ” (See any introductory Economics text)
The Koran asks men (women) who are believers to spend on fulfilling their legitimate needs as they wish, keeping within the boundaries set by God, in the Koran and says at the same time, “..but waste not by excesses” (Koran 7:31)
Therefore, what is not spent out of a person’s income on fulfilling his (her) legitimate needs should ’Islamically’ be saved. And out of what is saved (and what is beyond a person’s legitimate needs) 50 % should be given in charity in God’s way.
The categories of people mentioned in Koran 9:60 to whom Zakah (charity) is due are all “needy” in some way or the other. By giving your savings to such people, all or at least a major part of it will be spent immediately on consumption. Note that savings are a “withdrawal” from the circular flow of income while consumption is an “injection” into the circular flow of income in the economy. This injection results in an increase in the Real National Income (i.e National Income adjusted for changes in the price level). The economy is given a positive boost, under- consumption is reduced, a more equitable distribution of income is achieved and an economy in depression can well be on its way to recovery.

God’s wisdom or the words of a man living in the Arabian desert 1400 years back ?

“Whatever God has given to His messenger from the people of the cities belongs to God, His messenger, your near kinsmen (who are needy), orphans, the needy and the travellers, SO THAT IT DOES NOT MAKE A CIRCUIT AMONG THE RICH OF YOU.” (Koran 59:7)

The paragraph that follows shows the wisdom of this ’ancient’ book (the Koran), which skeptics claim was written by a man who had absolutely no formal schooling and lived in the Arabian wilderness:
The onset and severity of the great depression (1929-1941) can also be attributed to under consumption; production had outstripped consumption.

Under consumption also resulted from the unequal distribution of income. Between 1920 and 1929 per capita income rose about 9% but the income of the wealthiest 1% rose about 75%, accounting for most of the increase. Much of this increase was put into luxuries , savings, stock market investments, instead of being spent on consumer goods. (Chapter 23 page 426. A People & a Nation: U.S History since 1865).


An unexpected deflation [going down of prices] causes a redistribution of income from debtors [the one who has borrowed money] to creditors [those who have lent money]….This redistribution reduces aggregate demand [AD], since creditors tend to spend only a relatively small share of their added income, while debtors [just like the needy people I mentioned above] have nothing to fall back on and are forced to reduce their consumption to meet their higher real interest payments [this worsens a depression]. (Gordon, Macroeconomics, 6th ed, Prentice Hall, page 169)

An opposite redistribution to the one above, would be caused by Zakat (charity), increasing AD and diminishing the effects of a recession.

What does the Koran say ?

“That which you give in interest that it may increase on people’s wealth increases not with God but that which you give in charity ,seeking God’s will (and not selfish interest), has increase manifold” (Koran 30:39).
Injections into the circular flow of income in the economy,like the ones caused by charity to the needy, which is immediately spent on consumption, do cause “manifold increase” in GNP via the multiplier. The Charity, however, is not to be coerced out of the person concerned as according to Islam (based on the Koran): “There is no compulsion in religion..” (Koran 2:256). & ” You are in no way a compeller over them..” (Koran 50:45)

V) The Koran & Pareto Optimality:

“O believers, consume not your goods between you in falsehood, instead let there be trading by mutual consent..” Koran 4:29

A pareto optimal position is reached when the condition of a particular person cannot be made better off without making the other person worse off. Therefore mutual benefit is optimized at a pareto optimal position. The Koran knew about this much before economists.
If the exchange between two individuals is voluntary, the strong presumption is that both individuals gain from the exchange. Indifference curve analysis can be used to determine that only through voluntary exchange which the Koran recommends, can a pareto optimal position be reached. The Edgeworth Box diagram analyses that [ see Microeconomics by Salvatore page 122-123].

VI) Conclusion

By lending and borrowing for interest like banks do, the result is decreased investment (due to profits from investment being made less attractive i.e a higher opportunity cost of investing, or a higher interest cost of investing by borrowing funds), they also cause inflation without a corresponding increase in production and decrease in unemployment by speculative investment rather than productive investment.

Further, interest does not necessarily make savings more attractive because an increase in the rate of interest can make savings less necessary also (to reach a given goal, when interest rate rises you now have to save less per period of time to reach that goal and so have to sacrifice less present consumption for future consumption). Therefore the presence of interest doesn’t increase society’s well being at all.

On the contrary, charity and its consequences will according to the above exposition, increase investment by increasing demand through a more equitable distribution of income. The system of trade encouraged by the Koran, that which involves “Mutual Consent” would lead to societal well being, being maximized.

We can therefore safely conclude:

“Indeed! this Koran guides towards that which is the straightest…” (Koran 17:9)

Works Cited

The Koran. Translation

Asadi, Muhammed A. Koran: A Scientific Analysis. Lahore. IPU. 1992.

Dornbusch, Rudgier. Fischer, Stanley. Macroeconomics. 4th ed. McGraw Hill International editions.

Katzman, Norton, Escott, Chaudoff, Peterson, Tuttle Jr, Brophy. U.S History Since 1865. A People & A Nation. 3rd ed. Boston. Houohton Mifflin Co.

Gordon. Robert S. Macroeconomics. 6th edition. Prentice Hall.

Lipsey, Richard G. An Introduction to Positive Economics. 6th ed. George Weidenfield & Nicholson Ltd.

Luckett, Dudley G. Money & Banking. Mc Graw Hill Book Co Inc. 1976.

Thomas, Meyer. Duesenberry, James S. Aliber, Robert Z. Money Banking & the Economy. London, NY. W. W Norton & Co 1981.

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