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Chapter 7 Islam, Interest, and Microlending Microfinance is an idea whose time has come. —Kofi Annan, 2003 Developments in finance were centered mostly in New York and London after World War II. New financial theories, products, and practices developed at a torrid pace, beginning in the 1950s, and by the 2000s most of the developed world had adopted them in one form or other. But in the developing world, and in the Islamic world in particular, not much had changed for centuries. Banking was relatively primitive by Western standards and religious prohibitions held great sway over financial practices, much as they had in the West centuries before. By the late 1970s, usury prohibitions still were a problem in the United States but could be avoided by regulatory arbitrage. If a jurisdiction prohibited high interest rates, lenders could simply find others in which to base their lending activities. Attitudes toward usury varied. In some locales it was taken seriously while in others it was nothing more than an outdated nuisance law that needed repeal. And new financial products were making usury laws a paper tiger, long since having lost their teeth in the face of complicated financial innovation. In more traditional societies, the opposite was true. Usury laws were taken very seriously. In many Islamic societies, religious law—sharia—was taken literally. Usury was prohibited by the Koran and many sacred texts in the Muslim world, and time had not changed attitudes toward it. Ironically, as in the West, banks charged interest but when disputes arose between borrowers and lenders, religious courts normally held for borrowers. As in the West eight hundred years before, the debate over usury took on an academic , almost casuistical tone. As discussions about riba (interest) and dif- Islam 273 ferent forms of financial products offered in Islamic countries became more sophisticated, it became clear that Islamic thought about usury owed much to the practices of pre-Islamic Arabs, Aristotle, Justinian, and the Scholastics . Many of the ancient and medieval ideas about usury were preserved in the Islamic tradition, making them difficult to understand in the modern world. Prohibitions against interest were based upon a notion of social equity . Business practices had to benefit the parties involved and risk had to be shared equally. Any hint of riba was put to the religious acid test and invariably found failing. The Koran and the sacred texts simply did not allow interest, presenting an enormous problem to modern Islamic bankers. Modern Islamic finance attempted to accommodate both sides of the issue , although not all agreed on its success. The Islamic ban on riba did not mean that charging and paying interest was not practiced in most of the Muslim world. But the tension between religious doctrine and banking practice created a moral rift that persisted for centuries. The lack of economic development in many parts of the Islamic and Arab worlds in particular has been attributed to this tension. The logical outcome of many arguments about riba was that anyone who practiced it was acting in a manner banned by scripture. Therefore, economic development was antithetical to the word of God. As long as that attitude prevailed, capital investment and fixed return on investment operated under a cloud dominated by the spirit of Aristotle rather than Adam Smith. Financial modernity finally invaded the Islamic world in the early 1970s. The economic turmoil of the 1970s and 1980s created a new economic balance of power. Many of the oil producers found themselves in the position of having immeasurable wealth flowing into their economies while possessing banking systems unable to cope with the vast inflow of funds. At the same time, many of the non-oil-producing LDCs in the Islamic world and elsewhere still were mired in poverty, unable to participate in the new gold rush caused by higher oil prices. Initially, the two worlds used the Western banking system as an intermediary of funds between rich and poor. But the results were clearly unsatisfactory as volatile interest rates impoverished many LDCS during the 1980s. The same economic phenomena that caused widespread misery among the LDCs and their bankers in Europe and the United States also caused severe tensions between business practices and religious law. Practically, many businessmen had to deal with international banks in their daily business affairs while turning a blind eye toward usury if they held Islamic religious beliefs. Oil revenues created tensions in many of these traditional 8.146] Project MUSE (2024-04-26 16...

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