By M. Bakri Musa

Chapter 9: Islam in Malay Life

Reform in Islam

Educating Ulamas on Modern Economics

By educating Muslims generally and the ulama in particular on such modern and useful concepts of economics, and replacing such loaded terms as interest and insurance with the morally neutral terms as rewards on savings and risk sharing, we would channel the natural propensity for Malays to save even more. This in turn would encourage other productivity-enhancing economic activities.

Western financial institutions have done a remarkably efficient job in contributing to the economy. It is difficult for a country to advance unless it has a well developed and sound banking system. Western financial institutions have done an equally credible job of democratizing financial services. When I started my practice over two decades ago, I could not get a line of credit, as that was available only for major corporations. Thus I had to borrow the whole lump sum right away and began paying interest on funds I did not need immediately. Today lines of credit are common even for ordinary retail customers. Similarly, new entities like money market and mutual funds enable average consumers to participate in more productive investments that were previously reserved for rich clients. Average Americans, thanks to such innovative financial instruments, can now invest their funds in foreign companies and other ventures besides the traditional stocks and bonds through the convenience of their unit trust and mutual funds.

Modern banks are by no means perfect. In times of crises, as documented by the Nobel laureate Joseph Stiglitz, banks can behave just as irrationally. Indeed the common wisdom that banks willingly lend money when you do not need it, and then quickly withdraw it when you really need the funds, is not without foundation. As an ancient Malay saying would have it, it is akin to lending someone an umbrella, but when it rains take it back! Banks are also not averse to shirking their community responsibilities. In the past it was common for bank to come to a community only to collect the deposits, and then invest the funds elsewhere. Today in America, with the Community Reinvestment Act, banks are required to invest a percentage of their deposits within the community. Banks have also been known to “redline” neighborhoods, and discriminating against poor and minority borrowers. Again with civil lawsuits and better auditing, banks are doing less of that now.

The rigid rules governing loan-loss provisions and the strict definition and enforcement of non-performing loans (NPLs) that are internationally accepted may be harsh. Indeed Malaysian leaders severely criticized the IMF for insisting that Asian banks use the widely accepted “non-activity-for-three-months” rule for NPLs while Malaysia has been using the more lax (kinder?) six-month rule. When banks classify loans as “non performing,” it means more than just calling in the loans and making the necessary “loan loss” provisions as mandated by law. It means that factories and companies are being shuttered and workers laid off. There are significant human and social costs associated. When Enron, the giant electricity company, was forced into bankruptcy, thousands of its workers were stranded and its hometown Houston was thrown into a tailspin. Cruel as that may seem, consider the alternative of keeping such companies alive. For one, its creditors and banks would have to continue to pour their precious depositors’ money to support the ailing company. Indeed had this continued, Enron would not only have driven itself into the ground but also would have taken along other healthy companies.

Thus while we may sympathize with Enron’s fate, we should also be considering the fate of the depositors who put their hard-earned cash into Enron’s banks. It is better that one company fails rather than a major bank. With the former only that company’s shareholders, employees, and other stakeholders are affected, but when a major bank fails, the ripple would be felt throughout the economy. Had Bank Bumiputra followed international guidelines and been aggressive with its delinquent borrowers in the very beginning, it would not have folded, taking with it billions in taxpayers’ precious funds and even more importantly, the people’s (especially Malays’) confidence in the system. Bank Bumiputra’s failure did all that and then some. It did untold damage to the Malay psyche by reinforcing ugly stereotypes about our talent (or lack of it) for commerce.

To reinforce my main points, yes, there are weaknesses in the present Western banking system. It is being continuously improved and strengthened. The present complex set of internationally-accepted banking rules and regulations have been fine-tuned over decades; Third World regulators ignore them only at their own peril. My biggest concern is that because of its novel business arrangements, these Islamic banks cannot be adequately scrutinized by present banking regulations.

The purported advantage, if not prime selling point, is that Islamic banks are not lending out their depositors’ funds, rather the customers and bank have a “profit and loss” partnership arrangement. This is ingenious if not specious at best. First, such “partnerships” are so lopsided that they cannot be fair to the customer. If a particular venture were to lose money, who is to check the bank’s accounting? Second, if the bank were to fail, who has first claim on the assets? The customer, who are theoretically part owner of the asset, or the shareholders or owners of the bank? Clearly there is a potential for a serious conflict of interest that has yet to be resolved.

I consider myself a sophisticated consumer of financial services yet I find it difficult to evaluate and compare the costs and risks of the various products and services offered by Islamic banks. Hence I have not used them. My late sister had a home “mortgage” with an Islamic bank that supposedly charged no interest. But when I compare the actual “costs” of her mortgage and calculated the imputed interest rate, hers was at least two hundred basis points above that offered by conventional banks. Worse, when interest rates rose, her payments went up with them and there was no limit to the increase. America has variable mortgage rates too, but those loans have caps to protect consumers. No such protections exist with Islamic banks. The end result is that Islamic banks are taking advantage of their customers. No wonder there is a headlong rush by Western banks to enter the Islamic market. They have successfully transferred all the risks to the customers while raking in all the rewards! A rip off, even if done in the name of Islam, is still a rip off. Sadly, many consumers in Malaysia and other Muslim countries are woefully uninformed in economic and business matters and are easily swayed by the Islamic label.

In the final analysis credit, which is the flip side of lending, is like any other modern instrument. Used properly and it would bring untold benefits to individuals as well as society; abused and it will exact a stiff price. To a skillful surgeon, a scalpel is a lifesaving tool; to an idiot, a killing kit. To Muhamamd Yunus, the founder of Grameen Bank and who has done so much to uplift the lives of millions of Bangladeshi peasants, credit is an effective instrument to reduce poverty. To him, access to credit is basic human rights.

Nations are like individuals. If they borrow millions to build palatial mansions for their leaders and fancy headquarters for their civil servants, it is the equivalent of my earlier example of borrowing money to buy a Mercedes just to show off. But if nations borrow to invest in their schools and infrastructures, then it is like my buying my own taxi. I fear that the current obsession with whether certain forms of “returns on investments” (interests) are halal or haram is counterproductive. They discourage Muslims from productively managing their idle funds. Savings and borrowings (or credit) are vital ingredients for economic development. No country can progress unless its people save (capital formation) and credit readily available to its entrepreneurs and producers. Credit made possible the spanking new North-South freeway and the new Kuala Lumpur International Airport. Credit enables Americans to have the highest standard of living and helps push Japan, Taiwan, and South Korea into the First World. At the same time, credit (or more accurately, excessive and imprudent borrowings) was the downfall of Argentina and hosts of Third World countries.

Through practical experience economists and bankers have come up with useful guidelines on the prudent use of credit. The priority should be to educate the masses on these guidelines so they can become better informed and therefore safer and more prudent users of credits. Today I have more debt than I ever had but I do not feel overwhelmed or threatened. For one I have put my credit to productive use by buying appreciable and revenue-producing assets, and not to finance my vacations or daughter’s wedding (the equivalent of buying taxis instead of limousines). Two, my debt payments are comfortable relative to my income and other assets. Should my income drop I would of course have to dispose some of those debts, but since I have used them to buy productive or at least appreciating assets, I do hope to come out ahead.

Muslim theologians and economists should quit quibbling over what some ancient Arabic texts may or may not mean in the context of the 21st Century, but instead educate the ummah on the prudent and productive use of credit. Perhaps they can find in their study of those same ancient texts something to support the contention that there are indeed qualitative differences between productive and consumptive loans. But before they can find those theological justifications, these scholars must first understand and be convinced that there are indeed real and significant differences between the two and that they are not merely involved in semantic gymnastics. It is difficult to find or discern something if one does not know what one is looking for. Even if we do not find that theological basis, we still must train Muslims to use credit wisely.

To revert to my earlier analogy of the knife, the objective is to train Muslims to use that instrument to good purpose like sculpturing and surgery, and not to use it for evil deeds like killing. Muslims must stop this endless puerile argument on whether the knife is intrinsically a halal or haram implement.

Many Muslim are sincerely trying to lead a pious life and are susceptible to the Islamic cachet. They implicitly trust everything that has an Islamic label and those who proclaim their Islamic credentials and trust in Allah. Thus they readily suspend their critical faculties when evaluating Islamic products and services. We should teach our fellow Muslims not to do that. We should use President Reagan’s notorious phrase to express his opinion of the Russians – trust but verify – into its comparable Muslim version. Yes, trust in Allah, but we must verify everyone else, even if they swear by the Almighty!

As an aside, in content as well as sequence, this chapter should rightly be a subsection of the previous chapter on culture. But because of its length and unity of thought, I have made it into a separate chapter. After examining culture generally and of Islam in some depth, I will now examine in the next chapter the role of the other social institutions in Malaysia, primarily the judicial system and the laws.

Next: Chapter 10: Freedom, Justice, and the Law