The more knowledge we can learn about ‘interest’ payments, gold as money, fiat currency and the banking world…the better we are equipped for long term survival in today’s global financial climate. The world of Islamic banking seems to have changed or is now in the process of changing.  Today, many knowledgeable people have even shown how Islamic Commercial banking might just be morphing into a something remotely similar to Western Commercial Banking (‘usury and misrepresentation’). This is a fascinating topic of how modern Islamic banking integrates with Islamic Law.

Here at DGCmagazine, we don’t like the free and easy world of credit and high interest.  We are in agreement with the use of commodity money and precious metal backed currency. We vote for a return to money as it was in America during the early 1900′s.

In order to prevent modern day bankers from creating yet another unwitting society of lifelong financial slaves, paper money should be backed by something of value.   Build your house on gold and silver and it will last forever. The fantasy world of paper debt and high interest rates will eventually always fail.

Tarek El Diwany authored a great book entitled, The Problem With Interest, and operates the web site www.islamic-finance.com Below are some excerpts from a 2007 interview. Nadine Marroushi interviewed Tarek El Diwany in London during the summer of 2007.

Q. What are your reasons for thinking that “Islamic banking isn’t Islamic”?
A. “My point is a little more refined than that. I am saying that Islamic commercial banking is not Islamic, and this is because commercial banking is a combination of usury and misrepresentation. The practice of usury is obvious and involves the advancing of money now in return for more money later, while the misrepresentation is less obvious and involves the creation of money out of nothing. Most of the time, the money that commercial banks lend is money that they themselves have created. Since neither usury nor misrepresentation can be Islamised, and since the business model of commercial banking requires both, there cannot be such a thing as Islamic commercial banking. For the same reason, there cannot be such a thing as an Islamic central bank. Historically, the Muslim world has had neither commercial banks nor central banks, though of course it did have institutions that fulfilled permissible functions such as payment transfer. In our rush to create an Islamic banking and finance industry, we have forgotten to ensure that the money we are using is itself Islamic. Islamic finance cannot be practiced with money that is un-Islamic. We therefore need a very fundamental reform of the institutional framework in Islamic banking and finance, but unfortunately the industry is simply refusing to address the issue.”

Q. Why?
A. “Globally, the banking and finance sector is earning as much as two trillion dollars of gross profit a year. A lot of this profit arises from the receipt and payment of interest within the financial system. Since Islam is the only major ideology to challenge that practice in today’s world, the interest-based institutions face two basic choices. Either they openly oppose the Islamic banking and finance movement, or they try to neutralise it from within. I believe they have chosen to do the latter. This helps to explain why critical issues are being swept under the carpet, and why the core practices of Islamic banking and finance are beginning to look indistinguishable from interest. Then there are the financial realities of life to contend with. Graduates in London are more likely to choose to work for a major global financial institution on a starting salary of 60,000 pounds a year, than with Tarek El Diwany for 10,000 pounds a year. They’re not necessarily bad people, but money talks and can often change a person’s outlook on life. This is one reason that the modern system of usury is so difficult to overturn. Too many of the world’s most influential people are earning a good living out of it. So the issue remains that we need to reform the system, and we can’t rely on existing commercial forces to do that for us. Why would the dominant financial institutions of today want to change a system that has made them so profitable? Would institutions that depend upon interest for their continued success help to establish a paradigm that aims for the abolition of interest?”

Q. Is anyone listening, and doing anything about it?
A. “Many people, and a few institutions, are beginning to listen and campaign for financial reform in various ways. These include the members of other religions, for example the Christian Council for Monetary Justice in London, which has been campaigning for four decades against usury and the creation of money by the banking system. One also occasionally finds mainstream politicians supporting some key policies of monetary reform. American Congressman Dennis Kucinich has argued for the adoption of interest-free finance in public projects, and the former prime minister of Malaysia Dr. Mahathir Mohammed has promoted the use of gold in international monetary transactions. Vincent Cable, the Liberal Democrat Shadow Chancellor in the UK, has argued for controlling inflation by raising bank reserve ratios instead of raising interest rates. All of these are policies that I have argued for.”

Q. In practical terms, what is wrong with the product range of Islamic banking today?
A. “Two basic types of contract that can be used in trade and finance are contracts of investment and contracts of exchange. The current Islamic banking industry has based almost all of its products on contracts of exchange such as sale on a deferred payment basis, or the leasing of some kind of asset. These contracts are not controversial on their own, though their purpose is easily distorted when several of them are combined into a single transaction. For example, I might buy some metal from an Islamic bank for one hundred and ten pounds payable next year, and then sell it to someone else for one hundred pounds payable in cash now. If the bank organises these two transactions for me, then I am effectively borrowing cash at 10% interest. Reading through the detailed contractual documents for some of these products makes one wonder what connection they have with all the lofty talk of risk sharing that one hears on the conference circuit. In the event of a big recession, we’ll quickly see that the financiers are sharing little or no risk in most of these deals. The bottom line is that contracts of exchange are intended for use by traders of goods and services, not by banks. If a bank wishes to trade cars, let it become a car dealer. If it wishes to rent property, let it become a landlord. And if it wishes to lend money for a profit, let it not use the word ‘Islamic’ to describe the process.”

Q. Can you make a comment about what you think the role of banks, and the state, should be with the above idea in mind (no money creation by private enterprises)?
A. The money creation function should be returned to the system that worked so well in the era of commodity money. New money is pumped into circulation when the mining companies produce gold or silver (for example) and take it to the mint for conversion into coinage. If the amount of precious metal expended in paying the costs of mining exceeds the amount of metal so produced, then no new metal will enter circulation in the form of coinage. And vice versa. That is a truly fair, market-based mechanism for allowing changes in money supply to occur. It is not based upon interest or debt, and neither the state nor the banking system retain any power to arbitrarily change money supply. It is also the traditional monetary system of the Islamic world. Commercial banks can continue as providers of payment transmission services, they can become financial advisors and arrangers, and investment managers, but they must not retain the right to create money out of thin air. That is far too great a power to place into the hands of any profit-motivated company.

This interview was originally published in Islamic Finance Today March 2008

Tarek El Diwany was born in London in 1963. He graduated in Accounting and Finance from Lancaster University in the United Kingdom in 1985. Tarek has worked as an interest rate derivatives dealer in the government bond market, and as head of Islamic finance for a major financial institution based in London. In 1997, he completed the first edition of The Problem With Interest, and in the same year launched www.islamic-finance.com, where he is now the Editor. In addition to his work as a writer, Tarek is a partner at Zest Advisory LLP, a London-based firm providing consulting services in Islamic banking and finance, and is a frequent speaker on the topic of Islamic banking at conferences throughout the world. He can be contacted by e-mail on tarek@zestadvisory.com.