Is Islamic finance the solution to casino capitalism?

The latest tidal wave in the parallel universe of cryptocurrencies has dragged more than 800,000 financial brokers to the dry dock, whose accounts have been cancelled as they have lost liquidity due to the 40% drop in Bitcoin's value in a matter of hours. This bonfire of greed, which has occurred at the same time as the trend towards the "financialisation" of agri-food products, energy, real estate, and natural resources such as drinking water, is increasingly leading to the profit from certain activities being made from their speculation as capital assets in the financial derivatives markets, rather than from the activity itself, thus inducing price volatility that distorts the functioning of supply and demand mechanisms. 

In exactly the same way as in a betting shop, operations based on selling "short" overvalued assets, and speculating on financial derivatives, with the aim of increasing the value of the underlying asset as the maturity date of the "future" (a contract to buy a certain asset in advance at a pre-fixed price) approaches, are perfectly legal.  

The difference between the two activities is that while a gambler puts his own fortune at stake, a speculator in financial derivatives, such as agricultural and livestock products or energy, puts the welfare of society as a whole at risk by artificially creating shortages in order to increase their price.  It is interesting to note that the word "risk", which came to us via the Italian merchants of the Middle Ages, comes from the Arabic "rizk", which denotes that which is obtained by chance, without effort or merit. 

Perhaps as a result of this awareness of the inherent arbitrariness of casino capitalism, today's Islamic world has developed an alternative, risk-averse financial model that puts ethical criteria before speculative profit, a financial modality based on a set of rules known as "Fiqh al-muamalat", which has proved remarkably resilient during the pandemic. Unlike the Western financial system, which is essentially amoral, accepting the subordination of production processes to the accumulation of monetary profit, without any social responsibility, Islamic finance is not conceived as an end in itself, but as a means of exchange of financial assets in accordance with the precepts of Islamic jurisprudence, which in this context is governed by the concept of "amanah", meaning trust, both in the moral and legal sense, and which can be translated as trust.

In its simplest expression, under Islamic law, "riba" - the payment or charging of interest - is "haram"; it is proscribed, because under this criterion, conventional lending places the burden of risk on the borrower, not the lender, and, from the Islamic point of view, no transaction is ethical unless the risk is shared equitably between the parties. For this reason, "takaful" - Islamic financial institutions - have developed mortgage products based on a contract called "musharaka", whereby the property is recorded in an amanah as a jointly owned asset, with the seller's share decreasing over an agreed period as the buyer makes regular payments. In this formulation, the buyer agrees to buy the financial institution's share, and the financial institution agrees to sell it to the buyer. 

Thus, the property is conceived as a set of units, with the payments divided into two parts; a rent, which gives the right to live in the property, and a pro-rata purchase of units. The amanah manages the decreasing redistribution of the financial institution's and client's shares until, upon completion of the agreed terms, the property becomes the property of the client and the trust is dissolved. During this period, no interest is charged, although the rent payments are subject to review, depending on annual inflation and other cyclical factors.

Another difference between the two systems is the preference for using a mutuality called "takaful" - which originated in the ancient Arab marine mutuals - to jointly and severally cover potential property damage on the principle of "hisbah", or collective liability, rather than taking out ordinary insurance, precisely because an insurance policy is ultimately nothing more than a risk that has been purchased by a third party on the basis of a probability calculation, and is, in that sense, "maisir"; a gamble; something strictly forbidden by Koranic law.

Of course, Islamic finance is not limited to real estate transactions. On the contrary, they have a number of financial instruments including bonds, known as "sukuk", which is a financial certificate sold to an investment group, the payment for which is used to purchase an asset in which the investors have a direct stake, secured by a legal commitment that the issuer will repurchase the bond at a given date, for its face value. This instrument enjoys excellent health in Malaysia, but also occupies a not insignificant space in non-Muslim-majority countries, the most notable case being the Dow Jones Islamic Market, which has been in operation since 1999, and has hundreds of stock market indices.

As far as Islamic retail banking is concerned, it operates by earning profits through equity participation, which means that the borrower gives the bank a part of his profits as a dividend instead of paying interest. This line of business moves around $3.5 billion globally, in a network of more than 300 banks and 250 mutual funds, with the particularity of operating not only under the imperative of risk-sharing, but also filtering the companies in which they invest so that they are unambiguously "halal" - acceptable, in terms of Koranic law. This, for example, leaves out of their portfolios those businesses whose debt is more than a third of their market capitalisation.

The very ethical nature of Islamic finance makes both short selling and the futures transactions referred to above difficult, because the principle of "gharar" - uncertainty - contravenes Islamic precepts, which stipulate that you cannot sell something you do not yet own, and that short selling is a form of gambling. This makes unfeasible, for example, the trading of toxic mortgage debts aggregated as financial assets, in short, the buying and selling of contracts that do not refer to something tangible, but to other contracts, a transaction that is "gharar" by definition. While it is true that this limits the level of profit that is available to Islamic financial institutions, it is no less true that had there been a comparable degree of scrupulousness in the Western financial system, prior to the collapse of Lehman Brothers in 2008, the world would undoubtedly be a better place today.