The Butler Project

Lately I’ve been doing some reading about the financial tenets of different organized religions. It’s interesting to see that all of the religions I’ve researched so far (Buddhism, Hinduism, and Islam) have specific instructions for their believers on the relationship between their soul and their wallet.

For me one of the most interesting discoveries so far is the Muslim view of debt. Although I had heard faithful Muslims are forbidden from paying or charging interest on loans, I had mistakenly taken this to mean that they couldn’t borrow or invest money. That’s really not the case.

I found a report written by a couple of Muslim scholars about how different the world would be if the wealthy nations of the world were to abide by the teachings of Islam, and cancelled debt owed them by the poorest of the world’s nations. I’d encourage any of you to go and read the report in its entirety. Just Google “does Islam fobid debt” and you should find the pdf.
I’m going to publish several excerpts from the report. I can’t say I agree with every aspect of Islamic finance as I understand it from this report, but think about how different our country’s collective financial situation would be if we employed these practices.

Islamic commands to refrain from charging interest and to share financial risk seek to avoid the concentration of wealth and the economic exploitation of the weak and thereby prevent situations such as the current debt crisis from arising in the first place.

The core belief in Islamic finance is that money should not in itself be an earning asset; therefore Islam prohibits any and all forms of interest. There are several passages in the Qur’an which clearly condemn the practice of interest…

Interest is considered an unjust and exploitative instrument of financing since the lender is assured a return without doing any work or sharing in the risk, while the borrower in spite of hard work, is not assured of a positive return. Furthermore, if the borrower’s investment is unsuccessful through no ault of his or her own, it is unfair for the lender to demand repayment. The prohibition of interest is therefore a mechanism to establish justice between the lender and borrower.

For westerners (or for me, anyway), it’s hard to think of interest as an unjust and exploitative instrument. Islam is not opposed to wise investing, but it advocates equity financing as opposed to debt financing. In other words the person who would ‘lend’ the money instead shares in the risk of the venture.

“Islam encourages legitimate commerce, trade and wealth creation but only on the basis of equitable risk sharing. Importantly, Islam does not allow gain from an economic activity unless the financial capital is also exposed to the risk of potential loss. Therefore, Islamic finance promotes investment on the basis of profit and loss sharing between the lender and the borrower10. Financing methods that share risk encourage more responsible lending since both parties share in the reward or failure of the investment and have, therefore, an interest in ensuring that funds are invested wisely and productively.”

Islam discourages heavy debt as much as possible – indeed it is something that is considered to have a serious and direct effect on a Muslim’s belief or conviction because it can lead to harmful consequences. The Prophet Muhammad (peace be upon him) used to regularly supplicate “Allah, I seek refuge with You from sin and heavy debt”. When someone remarked, “how often you seek refuge from heavy debt”, he replied, “when a man gets into debt, he speaks and tells lies, and he makes a promise and breaks it” (reported by Bukhari and Muslim). The Prophet Muhammad (Peace be upon him) also said, “Whoever dies free from three things – arrogance, cheating and debt – will enter Paradise” (reported by Tirmidhi), and “The soul of a believer is held hostage by his debt in his grave until it is paid off” (reported by Tirmidhi). Clearly, from an Islamic point of view, accruing debt is a serious matter and should not be undertaken except in cases of real necessity. Importantly, it is incumbent upon on those providing finance to do so in a responsible manner and to not overburden borrowers.

It is worth emphasising that incurring debt to fund luxury and extravagance is contrary to core Islamic values that condemn excess and waste. The Qur’an has in very strong words condemned and prohibited extravagance and prodigality:

“Eat and drink, but waste not by excess, for God loveth not the prodigals”. (7:31)

“Squander not wastefully, surely the squanderers are the devil’s brethren.” (17:26-27)

I had my sister read a draft of this post and she said “Seems a little too socialist for me.” I agree. For me this philosophy puts and undue burden on the lender to try to evaluate the borrower’s ability to repay. Any responsible lender should be able to perform that evaluation, but for me it goes too far to cancel the debts of a borrower when they can’t make their payments.

While I find this ideology interesting, and think it would have merit on an individual case by case basis, enforcing it on the entire financial system could cripple us. After all, our economy, and the economies of the many nations we trade with, depend in large part on the fact that money on its own IS an earning asset.