Banking: Islam Awaits ... But Like the Rest of Us, Won't get Very Far

Okay so I have read this article in Canadian Business (http://www.canadianbusiness.com/managing/strategy/article.jsp?content=20090616_10007_10007) twice now entitled "Banking:Islam Awaits". The author speaks to an issue in finance that is growing in importance in the West, but has unknowingly touched so many issues in regards to Canadian banking laws, that I am not even sure where to begin. So I guess I will have to get down to the basics first.

What is Islamic banking (or in other words, Sharia compliant banking)? While I am no theological expert, from what I understand, interest payments on borrowed money are considered Haram (sin) because it is believed that profiting by lending to someone is evil. Of course, this idea comes from the times of Abraham and I guess it caught on for Muhammed and all his followers, but regardless, its in the Quran and Muslims are influencing its modern growth. What's more, an elaborate banking system has evolved around the issue, to make lending "holy". Essentially, Islamic compliant banks adopt a cooperative model whereby the borrower and lender are in some kind of equity agreement. For example, if you are buying a house and need to borrow money, the bank outright buys the house, and you pay them back in rents until sufficient profit is made on the bank's end, and the title to the house will transfer to you.

I have certainly muddled that explanation, but that is the gist of it!

The article takes a stand against the delays that our beauracracy (surprise!) has created for those trying to setup up Sharia financial products. For instance, where do Middle Eastern banks fit on our "ingenious" tiered banking system. The author goes on to argue that the Canadian financial industry is lagging against internationl competitors (i.e. Britain, US) in enabling such banking products, and it will hurt the profits of our banks down the road. In the comments section of the article, some spectators also noted that we are missing out on a 100+ billion$ industry.

Several questions arise from all this chatter about Islamic banking in Canada. Should this be allowed in the Canadian banking system? (From the article's subject line), is our society hurt by delays in legislation and policy for this type of banking? Does any of this matter or make sense?

First, its the right of free citizens (who happen to believe in Islam, or any other kind of religion) to voluntarily enter into banking agreements of their choosing. Though I personally feel this idea is simply equity-sharing under a more maniacal name, well hey, whatever floats your boat right?! The state has no place telling people (households and firms alike) that they cannot buy certain financial products. And frankly, I think the real story underlying this article is the red tape that encircles the Canadian banking industry, for all financial products and firms!

This brings us to the second question. Of course, opportunities lost on any kind of hot business prospect come at a cost for those firms that would have pursued them. And I think we need to break this national shield we have around our banking industry, so that all banks with an interest in our market can setup shop without adhereing to all kinds of governement restrictions. (Note: At this time I would like to mention however, that sovereign wealth funds should NOT be welcome anywhere near us. That is, these large pools of stolen government money from the Middle East and beyond, should not be allowed to offer products in Canada. But more on that another time).

In response to that one guy's comment in the CB article about the HUGE market ... globally its is likely that this market will reach into the hunderds of billions, but from a Canadian perspective, which is the line this article takes, the math doesn't nearly add up. There are roughly 1 million Muslims in Canada, and even if they all switched their savings accounts and mortgages to an Islamic bank (which I doubt), there is hardly 100 billion dollars between them all.

To answer the third and final question, Canadians should not fear this type of product due to its religious undertones - though I would agree with anyone who says its stupid - because naturally all citizens should be free to enter into voluntary contracts of their choosing. However, I might point out that all this noise that is being generated about Islamic banks, stems from a simple misunderstaning about the nature of interest rates (and payments) on the part of Muslims (no surprise there).

What is interest? Is it evil? Is it one man profiteering from the sorrow and misery of another? NO!!! Interest is simply another way of saying the price of money! Bananas have a price, coal has a price, shoes have a price, shouldn't money have a price? To break it down, we all have consumption demands. If I want to buy something that is beyond my cash reserves in the present, then my demand for present consumption is very high and I "buy" more money so that I can meet my needs. By doing this of course, I must naturally forgoe some future consumption since my demand then will be relatively lower (this is what paying back interest and a principal on a loan equates to). There is nothing evil, sinful, or cruel about this transaction. I simply want to buy present consumption, in expense for future consumption. When I save (the opposite of borrowing), I am giving the bank money (for their present consumption), and in return I will have great future consumption (interest payments to my savings account).