Islamic loans allowed

Press, 6 October 1989, Page 14

Islamic loans allowed

From a correspondent in Cairo for the “Economist”

“ALLAH hath blighted usury.” The Holy Koran is explicit on that score. But what exactly is usury? Who defines it? Since the seventh century the debate has rolled on, testing Muslim ingenuity in devising ruses to evade the ban.

In modern times conventional Islamic wisdom has taken usury to mean fixed interest in any form. Depositors, investors and entrepreneurs in an Islamic system are meant to be partners who share risk as well as profit. It is therefore impossible to predetermine rates of return. Allah alone decides.

But now, in Egypt at least, he is getting some advice. The country’s highest religious authority, the Grand Mufti, has issued a fatwa — an Islamic legal opinion — that condones certain forms of fixed interest.

Not all modern banking practices are wrong, he says. In many cases no party is exploited and everyone benefits. So long as the rate of interest is agreed on in advance, there is nothing against it in the Koran. Specifically, the mufti endorses high-yielding Government investment bonds and interestbearing savings accounts. This should come as a relief for Egypt, where an excess of liquidity and religious zeal led in recent years to the mushrooming of dozens of pyramid investment schemes whose main attraction was their supposed adherence to “Islamic” principles. Most of them collapsed last year in the wake of belatedly introduced government controls, leaving thousands of small investors destitute. More respectable Islamic insti-

tutions should be pleased with the ruling. Islamic banks that sailed on a tide of petrodollars and pious sentiments in the late 1970 s have lately hit the doldrums. Islamic-style operations are management-heavy. The restriction of activity to trade and project investment means a chronic lack of facilities for short-term investment. Gaining access to a bond market may provide some relief. But already the liberal-minded mufti has come under attack from conservatives, who accuse him of basing his judgments on his own opinion, and what the Government wants, rather than Islamic tradition. Other Egyptians wonder why there should be such a debate at all. Copyright — The Economist