We believe that interest is the root cause of most of the world's problems.
If we did not have compound interest, we would not need compound growth. And if we did not need compound growth, we would not have most of the debt-induced poverty, resource-hungry wars, and runaway climate change we now see. Experts say that even our present pandemic is the result of declining biodiversity, largely driven by a rapacious growth mindset. All interest — whether simple interest or compound interest, whether at very low rates or very high rates — grows so fast that we simply cannot keep up.
Need an example? Brazil is home to the beautiful Amazon rainforest. This lush wonder supplies us with a quarter of the world's oxygen. Unfortunately, this forest will vanish in our lifetimes. Why? So Brazil can pay off $200 billion of debt. How? With lumber.
Or take an example closer to home. Are you or someone you know crushed under growing personal debt? 43% of all American families now spend more than they earn each year. And this problem gets worse each year for millions of families around the world.
We believe there is a connection between interest and many of the world's problems. And we believe that Islamic finance can help solve some of these problems.
But for this to happen we need two things: the letter of the law and the spirit of the law. For the letter of the law to work, Islamic finance needs to follow some basic minimum standards. Standards that won't be taken seriously unless central banks start pulling some licenses.
The best standard in the industry – de facto in over 90% of the world's Islamic finance jurisdictions – is AAOIFI (pronounced "a-o-fee"), which stands for the Accounting and Auditing Organization for Islamic Financial Institutions. AAOIFI brings together scholars from all over the world who agree on Shariah standards. And because AAOIFI provides minimum standards, if it isn't AAOIFI-compliant, it probably isn't Shariah-compliant. As one scholar put it, "The closest thing we have to ijma (scholarly consensus) in Islamic finance is AAOIFI." Ijma, as you know, is the highest evidentiary source after the Quran and hadith in traditional Islamic jurisprudence. We believe that following AAOIFI Shariah Standards – and questioning whether your bank, scholar, or trainer is following them – is a good starting point for following the letter of the law.
But we can't stop there. Islamic finance needs to follow the spirit of the law as well.
We need to promote equity-based structures like Musharakah and Mudarabah and reduce our dependence on expedient structures like Murabaha. We need to eliminate Tawarruq. And at a broader level, we need to address the larger problem of fractional debt-reserve banking. Why do banks get to lend money they don't have? And make money on money that doesn't exist? Does this make sense?
While the reality is that banks aren't going away anytime soon, a first step to challenging fractional debt-reserve banking is establishing a globally recognized gold-based currency. This immediately forces the market to tie transactions to assets rather than base them on mere numbers inside computers.
So where do we start with promoting the law in letter and spirit?
We believe it starts with you and me.
If you have an account in a conventional bank, move your money to an Islamic bank. If there are no Islamic banks in your country, open an overseas account in a country that does.
If you're a banker, you can start doing two things at your bank: 1) check that your bank's products comply with AAOIFI. The latest standards are available at www.aaoifi.com; and 2) start switching to Musharakah and Mudarabah for a variety of activities ranging from liquidity management to trade finance. And if your bank doesn't offer Islamic finance, start asking why.
If you're a regulator and Islamic finance is already practiced in your jurisdiction, pressure banks to follow AAOIFI or risk having their licenses suspended. At a broader level, support the Islamic microfinance industry. If Islamic finance hasn't yet reached your jurisdiction, promote awareness with training and educational initiatives.
If you're an entrepreneur, you probably have a skill the Islamic finance industry could use. Dream big: create a company, a community-based institution, a local currency, an ecologically-minded village, or an innovative product. In most countries, people still lack interest-free alternatives to home, education, and healthcare financing. Why is it easier to issue a billion-dollar Sukuk than it is to raise a single penny for a Shariah-compliant education financing? How can we better operationalize Zakah? How do we build Waqf-based community-owned trust models?
If you're a student, learn Islamic finance. Think beyond the standard career path and seriously consider starting something on your own. Do what you love and success will follow.
And if you're an educator trying – like us - to change Islamic finance for the better, be patient. Lasting change takes years, often decades. Resist the temptation to "throw the baby out with the bathwater" and reject all Islamic finance. The industry is still a work in progress with a long way to go. Be part of this progress rather than embarking on a dazzling new theory of economics that leaves the average customer scratching his head wondering how to finance a small house for his family. Just promote Diminishing Musharakah instead, for instance. The deeper, structural environment that Islamic finance inherits - fractional debt-reserve banking, fiat currency - are not solved by replacing products. They are solved by replacing systems: gold-based currencies issued by Islamic central banks.
We believe this century – indeed, the coming years – will be like nothing before. Global heating will mean less food and water. Peak oil will mean less energy. And repeated financial crises will mean less certainty. We can throw our hands up and walk away in resignation. Or we can identify the root problems and do something about it. God only makes us responsible for our actions. He takes care of outcomes.
We believe that it's time to openly question the interest-based paradigm and promote interest-free finance as the proven alternative. The time has come. But the first step to questioning a paradigm and offering an alternative is to educate oneself.
Only then will you believe. Because if you believe, then so will everyone else.