Should we apply Sharia law principles to our unprincipled financial system?
When we hear about sharia law it is typically about religious extremism, of stoning to death of people in the street, of restricting freedoms and imposing extreme views on the population on fear of death. Of course, such reactionary beliefs are mostly developed through the fear of other cultures. There are plenty of examples religious believers and atheists with extreme perspectives. But that’s not the issue I want to raise. Like any perspective on the world, there are some good points that should be taken into account about sharia law – notably the financial principles of this belief system that I wish to raise briefly. It should also be noted that in such a brief article many other merits and demerits cannot be raised sufficiently.
Western approaches to finanace are flawed. Through the Glass-Steagall Act and other legislation repealed throughout the West in the 1980s and 1990s it is evident that our regulation and laws are temporary and often done away with for short-termism and greed. There is no holy cow to sacrifice – anything goes if it is seen as in the way of ‘progress’. The criticisms of immoral bankers and soulless banks across the West are still rife, even from those within the system. It is evident a fresh perspective is needed when it comes to drawing up the principles of our financial services, of which our economy is so dependent upon. Some of the principles of sharia law make for attractive propositions with future reform necessary.
Of course, sharia law’s financial area isn’t unquestionable or based upon pure conformity; there are different forms across different countries, as one would expect. However, there are some fundamental principles of all sharia-based financial systems that should be mooted, such as those of Riba (the sin of interest), Gharar and Maysir (the sin of risk and speculation) and Zakāt (a tax directed at those who can afford it, with the aim of reducing social injustice).
Riba and Gharar, are both completely banned in Islamic finance as major sins. Instead, money must be made through entrepreneurial work and real investment rather than throughgreed and speculation. The profits of the company are shared at an agreed ratio with the bank and investors, encouraging successful and sensible business decisions. Linking actual success to earnings is not a new idea, especially in the wake of such criticism of undue bonuses surrounding collapsing banks. However, if we can’t successfully restrict bonuses in fear of driving away talent. then maybe further reform to the nature of the business of banks is the way forward.
With the number of complaints about high-interest pay-day loan companies and repeated calls for and attempts at greater regulation and crackdowns on exploitative companies, it would make sense to revert to a system whereby profit can be made not through exploitation of the already-vulnerable in an age of austerity. Of course, such propositions would receive strong criticism from any banking group as something that would discourage banks from lending. But we have to remember that this is at a time when the banks are reluctant to lend anyway – even with government and central bank intervention.
There are few who would disagree about the risks the bank took. Sure, major profit does come from risky speculation, but a much more stable economy is probably desired – from the general populace at least. It was investment banks and dangerous credit that led the recession, and where the majority of our losses laid. The separation of investment and commercial banks or the total removal of speculation from the system makes principles such as the banning of Gharar and Maysir equally attractive.
I am not calling for sharia law in the UK, but a greater observation of the merits and principles of sharia law in regards to a financial system that goes beyond the single-mindedness of money alone and further deregulation. If we are to leave the unprincipled state of our financial services, of which we are so dependent upon, then we must look to areas where principles actually exist – especially where stable success abounds.
Even at the height of the financial crisis in 2008, the sector of sharia banking continued to grow by 15%. The success in Malaysia of the system there should be observed and noted, in particular. It is an option that we should consider more and as part of our globalised world, it would make sense to start to take a stronger comparative view of the principles of other systems, religious or non-religious.
Written by Michael Higgs