Profit and interest: a new old paradigm

Nihilism in commerce: causes, consequences and remedies

I am embroiled in the midst of a vicious legal battle in which scoundrels seek to create a mountain of complexity to extract money from me or, more likely, my fellow defendants who are well-healed where I am not.  To win the scoundrels need to damage me or, more precisely, further damage me as a precursor to victory.  The depravity of these unscrupulous people is deep and abiding.  They make a farce of commercial and financial laws.  Though I have been engaged in litigation for 25 years as an insolvency practitioner I am conflict averse.  Or it might be better to say I am conflict averse because I have been so engaged.  I do not need to solve the conundrum of chicken and egg to know my state of mind now.  What I do know is that there has to be a better way.  And to find that better way I need not start with a blank slate to formulate a solution.  Rather I reach into the past, the distant past maybe, where I believe I can find the answer.

Of all the words of the Qu’ran I find these words most evocative:

Trade is like usury, but Allah permits trade but forbids usury.

Qu’ran 2:275

There are many translations but I prefer this one to others because it has a poetic rhythm that the others don’t.  The trouble is that its poetry disguises its meaning.  The primary problem is with the word “usury”.  It is problematic for more than one reason.  One of the reasons is the semantic shift that the word has been subject to over the centuries.  But the serious difficulty lies in the Arabic analogue which is Riba.  My knowledge of Arabic is virtually non-existent.  Taking account of my ignorance, I will explain my understanding of the word Riba.

Originally, the word meant, simply, increment.   It has now taken on a pejorative taint because of its use in the sentence cited.  In the mind of many Muslims, it does mean what English speakers would refer to as usury.  The trouble is that interpretation does not convey the subtlety.  Usury now means lending at excessive interest.  But that was not always the way.  In the deep past it meant any lending at interest.  The word has narrowed as modern forms of capitalism became acceptable, displacing or side-stepping the Christian church’s prohibition on bank loans as a means of finance. To deploy “usury” as the English analogue in the modern age is to emasculate the message.  It is better if less euphonic to refer to lending at interest or, perhaps, financing by bank loan.

Without aligning Riba to the broader meaning the English reader may be misled into thinking that Islam condones lending that does not constitute, in the vernacular, “loan sharking”.  But even with a more accurate rendering the message is still cryptic.  In what way is trade like bank loans?  The secret is revealed from within the word increment.  The purpose of trade is for the trader to make a surplus or, the less neutral word, a profit.  Buy at one price sell at a higher price or intend to do so because trade does not invariably result in a profit.  A profit is an increment.  It is now possible to see why trade is like bank lending.  They both share the intention to secure an increment.  For one it is profit.  For the other it is interest.  But the similarity goes beyond a mere arithmetic procedure.  The one activity can be as tainted as the other in some circumstances.  Interest is always excessive, irredeemably depraved.  But there is also such a thing as profiteering which is trade in goods or services carried out as exploitation.  In short, Allah has no time for bank lending at all.  However, Allah knows that trade is essential to human life so permits it provided it is carried out fairly.  There rests the curious ambivalence in the comparison.

To understand why there is ambivalence is to begin to see the philosophical reasoning which underpins the view being expressed.  Before considering what that view might be, an insight can be gained from an Islamic commercial concept that sounds deeply alien to the foreign ear.  It is Murabaha.  Murabaha is a form of commercial transaction, simply an exchange of goods but with a profound difference from its Western counter-part. It is a contract in which the seller not only states the price of the goods to be conveyed but also the cost of those goods.  Other than the abolition of interest, I can think of no more preposterous idea to shock the Western sensibility.  Regrettably, the Murabaha contract has been deployed in the financial realm for nefarious purpose.  I will return to this travesty as it is illustrative of the corrupting Western influence.

To fully understand Murabaha it is necessary to speculate on the motives underpinning its existence.  A central even critical theme pervading Islam is the notion of the Ummah.  From my small window into the Arabic language, I can see that it is subtle and nuanced.  Most languages are it would seem but especially Arabic.  Ummah is translated variously.  The most likely meaning is community, and specifically the community of Muslims.  I think the narrowing of the concept unfortunate.  It applies to all peoples in the mind of Muhammad.  For example:

Humankind was one single Ummah.

Qu’ran 2:213

The use of the past tense might suggest a fragmentation had taken place and the remainder of the text in the verse suggests Muhammad’s purpose was to reunite humanity.  It follows that, in principle, the community being spoken of applies to all.  Leaving aside the debate as to who is and who is not included the pertinent point is that the integrity of the Ummah, the unity of the community, is Muhammad’s prime imperative.  I can illustrate his preoccupation by a digression.  Aisha was Muhammad’s favourite wife at least after the death of his first.  Aisha was the subject of rumours of adultery.  The rumour was addressed in the Qu’ran at the point where there is discussion of what we would now call standards of proof for forensic purpose.  Essentially, Aisha is absolved for want of meeting the requisite standard.  If truth be told the standard was impossible to meet and reflects the overwhelming influence of compassion in the Qu’ran.  The admonition is to invite the listeners to desist from rumour-mongering in the absence of definitive evidence or otherwise suffer a cruel fate. To my mind what Muhammad is doing is not worrying about Aisha’s conduct.  He is worried about the corrosive effect of gossip on the unity of the Muslims.  I sense that Muhammad had a premonition about the hairline fractures which became the great, gaping schism within Islam between Sunni and Shia.  The genesis of the schism can be traced to the conduct of Aisha and its aftermath.

Central to the means by which harmony prevails in the community is fair dealing.  Islam does not seek to create a set of rules to determine exchange value in a transaction.  What it does do is assume that commerce is happening amongst the whole of the people and is not the preserve of the individual.  It attempts to solve the problem of curbing exploitative behaviour by means of transparency.  If the direct parties to a transaction can see all the elements of the sequence of events it is more likely to be fair than otherwise.  Those elements are purchase price, sale price and therefore increment or profit.  If any two people can see it then all can see it.  It might be said to be an extreme form of audit by the community.  As such the individualistically obsessed Western businessman would furiously recoil from the idea.  Business in the West tends towards the exploitative for which purpose secrecy is necessary.  It is left to the supposed magic of the invisible hand to bring discipline.  The magic is a fiction of course and leads to the sort of uncaring, nihilistic business model that is responsible for so much damage to our world.

Perhaps my implication that the Islamic system of fair dealing in pursuit of community wide harmony can substitute for what prevails in commerce in our age may be considered naïve.  The power of the fair dealing ideal is derived from a conviction amongst its adherents that it is divinely ordained.  My surmise is that Western law is so vastly over-complicated, prescriptive and unwieldy precisely because it lacks a transcendental foundation.  Perhaps my thesis is that there can be a sense of community, Ummah, which can develop from the ashes of our world as it recovers from the depredations inflicted upon it by, let’s be honest, the fossil fuelled voracious and selfish capitalism that predominates in the modern age.  The precursor to the rapacity I allude to is the disintegration of the by-gone era where harmony and honour were valued ahead of the emerging cult of the individual that is so prevalent now.  By saying that I may have invented a mythic golden age which exists only in my febrile imagination.  But the fond notion is not without some realistic foundation.  I refer to the business model called the commenda, an Italian word.  The commenda is almost certainly a derivation of the Islamic qirad. It is a method of pooling of capital without borrowing.  It is not dissimilar to the limited partnership which comprises a general partner with unlimited liability and limited partners.  The limitation is given effect simply by those dealing with the unlimited partner as a natural person and remaining unaware of the limited partners.

The commenda itself interests me less here than the reason for its structure which is to avoid financing by debt.  In the model the financier has a profit share and not a predetermined return as is the case with lending at interest.  Many years ago, I read an algebraic proof of the reasoning for why debt displaced equity investment.  The nub of the explanation was a matter of trust.  In the commenda model there are two participants – the merchant and the financier.  The financier’s return on their investment is set as a profit share, which was often 50%.  The finance was supplied.  The merchant would then acquire goods to trade or add to those already held.  They would embark on a journey by land or sea, my speculation is more by sea than by land.  At the destination or destinations, they would trade goods for other goods or for money of some description.  Eventually they would return to the home port with a vessel laden with valuable inventory.  The goods would be exchanged for money and the profits distributed.  Risks and rewards are shared between merchant and investor.  The two participants are harnessed together to pull in the same direction. The financier would not know, however, if the merchant had stopped at another port on the journey home and converted some of the cargo into gold which was not intended for sharing.  The financier then had the problem of audit.  How would they verify that the merchant had not cheated them?

The short answer is they couldn’t.  An Islamic investor in the heyday of Islam knew they could trust the Islamic merchant without reservation.  They knew the merchant would as soon cheat the divine as the financier because it was tantamount to the same thing.  As the confidence that comes from a shared religious faith was eroded the nagging doubt accumulated and an alternative was necessary.  The alternative was debt.  The financier became a moneylender whose name might have been Shylock.  Money lent is a sum certain to be repaid at a future date and it attracts a reward the mechanics of which are fixed in advance.  The reward is called interest or Riba.  It is detached from the fate of the business. No longer is the mind of the provider of capital plagued by a nagging doubt as to the honesty or otherwise of his client the merchant.  The avoidance of audit risk carries with it, of course, the divergence of common interest.  The moneylender is indifferent to the merchant cheating on the way home.  They are indifferent to the myriad misfortunes which may befall the merchant from changes in demand and price of the goods he transports, from storm or piracy as befell Antonio the debtor to Shylock.  It might be more accurate to say the moneylender is indifferent if they hold security which can be realised but the point is well understood.  Common purpose has evaporated.

The message in The Merchant of Venice is multi-layered.  It might be antisemitic but that is less important than the fractiousness inherent in the debtor / creditor relationship.  The tension lies latent so long as the ships sail home but if they do not, scrambling to gain best advantage ensues.  Portia is not a sympathetic character.  She is a cheat hiding behind masks to gain advantage when debts remain unsatisfied.  Cracks in societal bonds begin to appear.  Insolvency of one begets insolvency of another begets insolvency of many.  Unsatisfied debt becomes the author of the wedge that is thrust into widening cracks smashing the community asunder.  Insolvency is an ugly word that should arouse fear in the heart.  As the philosopher might say debt is the sufficient condition for insolvency.  Put more simply if debt doesn’t exist insolvency cannot happen for the reason that insolvency means unsatisfied debt.  I am certain that Muhammad’s revulsion at the thought of lending at interest is precisely because he knew it was a threat to the well-being of the community.   

Whether lending at interest is cause or effect, symptom or disease is difficult to say.  What is clear is that the Church’s prohibition on the practice began to weaken at the dawn on the modern age.  It began first with the early Protestants but gradually took hold across the whole of the Western world.  It was a time when the West began to be the powerhouse of economic activity, displacing Islam especially but also other civilisations such as the Chinese.  There can be no doubt that the pre-eminence of the West and its economic power took hold and expanded with the advent of modern banking.  It is not a coincidence.  The one is pivotal in the unfolding of the other.  The age of exploration and conquest gave way to the age of empire.  The countries that mastered financial technique mastered industrial prowess.  The 19^th century saw an astounding increase in the scale of economic activity.  It became the age of corporations, of large banking empires, of the cult of the individual, of industrial power fuelled by coal and cotton and chattel slavery for that matter. 

Throughout my increasingly long life I, as a Westerner, have been filled with pride for the achievements of my culture.  Until recently it seemed that its supremacy would never end.  It is a rough and tumble, dog eat dog world where the adventurous risk taker, the Randian sociopath was the hero to whom we should all bow our heads and give thanks for the economic locomotive that such heroes are.  Now, of course, the folly becomes all too evident.  The individual prevails at the expense of the community.  The soulless irresponsible corporation, with the corporate moneylender as the first amongst equals, has in its ruthlessness unleashed a looming horror on the world.  Now, Westerners need to accept the pernicious illusion of superiority and look back to a more benign age, the age of Islam.  Its business methods were effective yet based on individual commitment to the whole.  Muhammad was no fool.  He was after all an experienced merchant whose career as a trader was longer than his career as a prophet and military leader.  He knew business was essential to human prosperity but it carried seeds of destruction which had to be understood and met head on.  Our present circumstances vindicate him.  He was right.  The placement of the individual above the collective results inevitably into the fragmentation of the community and eventually to its failure.  If it was not climate degradation it would have been something else.  The question is can we replicate the moral society Muhammad envisaged without the divine at is centre? I think we can. I think we must.

I shall finish with two notes, one sweet and one sour. 

It would be naïve for me to suggest that interest was not deeply embedded into the global economic structure.  In some ways it is the global financial system.  In the heliocentric universe of the financial marketeer interest is unarguably at its centre.  Its gravitational pull is strong, perhaps irresistible.  An example of its power can be seen in the latest iteration of Murabaha.  Islamic financiers offer a product which has the appearance of Murahaba.  A person may wish to buy a house at a cost of $100,000.  They have no money to do so.  The Islamic financier makes this offer.  They will buy the house for the sum required which purchase price will be known to the would-be homeowner.  The financier will then sell the house to the aspirant homeowner for $121,000 to be settled two years hence.  It has or appears to have all the elements of the virtuous contract but it is a sham.  What has really happened is that the financier is a moneylender in disguise.  The moneylender is offering a two-year term loan with interest compounding annually.  The effective interest rate is 10%.  The siren call of interest has seduced the virtuous arrangement into a corruption of itself.  The travesty becomes stark when it is appreciated that interest is gross revenue which delivers a profit after deduction of the cost of funding.

When Westerners are asked how it is that Java and the Malayan peninsula are Islamic their immediate reaction is to state that it had never occurred to them to ask but that the question is intriguing.  Perhaps some, with the weight of prejudice bearing down upon them, might fleetingly think of an Arab fanatic, sword unsheathed, in the saddle of his mighty steed bearing down upon the heathen to coerce them into Islam.  But the thought is instantly dismissed as they realise that Java is an island.  The true answer surprises.  Millenia before the Portuguese entered the Indian Ocean with conquest on their minds, Arab merchants had plied the blue waters with trade not conquest on theirs.  On the coast of Java, the Arab merchants would meet their Chinese equivalents, the land masses on or near the Malaccan Strait being the entrepot for thriving international trade.  What distinguished the men who sailed from the West was that they carried within themselves a perfectly formed and complete ethical system which caused them to be both honourable and honest.  It was not difficult for the locals to see the source and they were keen to emulate.  They became Muslim.  The adoption of the honourable persona happened before. It could happen again.  The existence of humanity may well depend upon it.  

The Qu’ran is not alone in its message which is universal amongst sages.  The final word might be left to Lao Tzu who said not just once but twice:

When there is a lack of faith, there is a lack of good faith.

Tao Te Ching chapters 17 and 23

Robert B Walker

24 March 2024