Asymmetrical Information

"...HSBC became the first big bank to offer a mortgage that complies with Islamic law..."

How does it work?

Basically instead of paying interest on the loan, the purchaser pays the bank 'rent' for living in the property until the loan is paid off.

Semantics maybe but seems harmless enough.

or its done through fees...

bank buys goods that it is loaning you money for at x... charges you x + y, where y is the same amount that would be paid if they were charging you interest.. which they aren't (wink wink wink)

just semantics and a little bit of procedural sand in the gears

now if they can build an islamic money market account, i'll be impressed

Richard Posner offers an economic explanation of the existence of noninterest-bearing loans in primitive societies, arguing that such loans or gifts are rather forms of primitive insurance. Trade did not offer the benefits it does today and storing extra food at that time was also extremely impractical, if not impossible. I'll allow him to explain:

"[...] some primitive societies do not allow interest to be charged on a loan. A "loan" in primitive society often corresponds to the payment of an insurance claim in modern society; it is the insurer's fulfillment of his contractual undertaking, and allowing interest would change the nature of the transaction. A related custom is that a man may be required to make a loan when asked. The involuntary loan is another dimension of the duty of generosity [...]. Since in my model a mans' surplus is assumed to be have relatively little value to him (because of storage problems and a lack of goods for which to exchange a surplus), the ordinary resistance that rich people would feel at being required to make loans is attenuated.

"The insurance function of loans is especially pronounced in the cattle lending which is so prominent a feature of African tribal society. The main purpose of such loans is not to earn interest but to disperse one's cattle geographically so as to reduce the risk of catastrophic loss from disease.

"A loan without interest resembles a gift, especially if (as is common) the society does not provide remedies for default. Yet the moral duty to repay a loan is recognized in primitive societies and is enforced in various ways. Similarly, gifts in primitive society are explicitly reciprocal: a man is under a strong moral duty to repay a gift with a gift of equivalent value. In these circumstances the term "gift" is a misnomer. Gifts, noninterest-bearing loans (sometimes involuntary), feasts, generosity and the other "redistributive" mechanisms of primitive society are not the product of altruism; at least, it is not necessary to assume altruism in order to explain them. THey are insurance payments. The principle of reciprocity that commands a man to repay a loan or a gift when he can or to feast his benefactors when he can provides some protection against the free-riding or moral-hazard problems that would otherwise be created by so inclusive and informal a system of insurance as is found in primitive societies.

"[...] Its purpose is to even out consumption over time rather than to exploit the division of labor and would be utterly defeated if the gifts were exchanged simultaneously.

So the bottom line is Muslims are trying to make money in the twenty-first century using principles suitable to the seventh century. Gee, how do you take the opposite positions to theirs across the board? Now there's a profitable strategy!

In general, I'm skeptical of people who say that this or that facet of liberty or modernity can't be imported into Islamic societies. No one factor worries me more, as far as intractable problems in pulling the Muslim world into our century, than the religious prohibition on interest.

Don't forget that Islamic banking is quite strong in the West amongst the Muslim communities. I forget the figures but I think the USA was the 4th largest market for Islamic banking in the world and the UK was 7th.

There is also the wierd and convoluted world of takaful - Islamic insurance. Try www.islamic-banking.com for cultural difference and more info.

Perhaps we could pause and imagine the tone of a BBC story about, say, an evangelical Christian brokerage that opened in, say, Texas. Or a Jewish brokerage firm that guided its clients toward Jewish investments in, say, New York.

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