Sharia Compliant Finance

Long before the founding of Islam, the charging of interest on loans had been broadly forbidden. Early encounters with interest bearing loans had often led to impoverishment and in response community by community condemned the instrument. Beginning with England under Henry VIII, many non-Islāmic countries began recognizing the value brought to the borrower in a loan’s temporal empowerment.

Countries with Sharia rule.

Sharian Rule by Degree

It is human nature to bring substance to what appears to be a causal relationship; the notion that money had absolutely no time value filled that bill. I propose that this rational has always been commentary piled on and concealing a more intuitive, simple decision: no usury—period. Yes, interest bearing loans were and still are undermining the financial health of many borrowers. They can cause impoverishment but for a very real aspect of interest not the one historically alleged.

I am a mathematician and banking systems abound in my sort. Applied once, interest is simple but the dynamics of its expansive compounding must slip past many borrowers. I suggest that the aforementioned decision had been intuitive and as such aroused rather by a sense that payment responsibility was being obscured in usury’s compounding. If so then our financial system and I as a mathematician might look at today’s recession and wonder how we had somehow missed such vague feelings.

Rubáiyát of Omar Khayyám, illustrated by Arthu...

Image via Wikipedia

Years ago I pondered why the Persian poet-mathematician, Omar Khayyám (1070), had been so transfixed by the problem of binomial expansion. Now I realize that before calculators, before the logarithms of John Napier (1614), such expansions had been the very best method of calculating forbidden usury and engendering it as a typical usury-free Sharian contract that would avoid the opacity of compound interest. So that, since Khayyám, the financing intermediaries of a Sharian compliant loan (for a purchase, project or rental) have had a handle on how extensive were their risks. Put otherwise, there has been only comparative loaning, not the comparative borrowing available to those who are charged interest.

In place of the lost prerogatives of shopping around for loans and receiving compensation from a loan’s early completion, Sharian compliant finance has tossed out the adversarial aspects of both compound interest and a repayment schedule fixed in stone. Left in their stead is a simple contract that does not dangle borrower ownership ahead of its own fulfillment nor obscure what it claims to be.

With intermediaries, Sharian finance has an absolute veto on a loan’s purpose. This veto is used to exclude from such contracts those loans directed toward usages forbidden by Sharia or toward prospects of uncertain value. Uncertain value . . . ? Life abounds in such, even beyond the tangible. The risks are there both in their taking or being left alone; in our learning from them, mislearning, or allowing them be shuffled under a single “No!” Even in the placing at risk of the fruits of one’s own mind and effort, when the nature of that risk is itself devoid of mind or effort, I oppose its being taken. I don’t know what other people call it but I call it gambling. If we are on the same wave length, Sharian law strongly forbids just such risk. However, Sharian finance seems to expand its denial to prospects of uncertain value, insisting that they are between oneself and one’s own resources (including judgment).

I suggest a merger between the comparability found in interest and the self-evidence denied by usury. I call it a loan’s doubling life: the time it would take for that loan, absent of fees and repayments, to reach out and double its burden. This measure could be paired with the contract terms of a Sharian loan to allow its comparison with other loans, or with the interest of a common loan for clarity as to a borrower’s responsibility. Which obligation is more easily grasped the interest 18% per annum compounded variously (here daily) or the doubling life of 46 months (3.85 years)? The latter cuts through all kinds of compounding but doesn’t really need them or interest period. It can exist as its own measure of the reach of a contract’s terms without presuming that a borrower, satisfied with a competitive loan, really knows what he or she is getting into.

The notion that a loan’s temporal empowerment brought nothing of value to a borrower had been bouncing around for centuries before it bounced into Islam. Perhaps it is time to let it bounce on out. It would be ironic if Sharia excluded this measure of a loan’s reach since Sharia’s prohibition of usury and Islāmic finance’s adaptation to that prohibition together set the cross hairs on what seems to have been that basic, early concern. Arabic word (تكريم)

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