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Can Islamic Banking Be a Solution for the Economic Crisis?

(Video Series with Prof. Abbas Mirakhor)

There is a concept in economics that says basically your returns are only valuable in terms of what it can buy.

What it can buy is measured by something called inflation: inflation is rising prices.

So, I was just using the example, the best example to use is in Malaysia.

Right now, anybody who saves money in the banking system gets an order of something like 2%, but then inflation is around 3% or 4%.

So you have a $100 right now that may buy $100 worth of goods and services.

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But if you put it in the bank in your savings account at the end of the year that’s not worth a $100, it’s worth less than that.

If you have 4% inflation, then what your money could buy is now $96 worth.

Now if you have 2% return, then your actual return is only 2% because 4% is the price inflation and 2% you’re getting the difference of 2% you’re losing.

The Islamic Finance Alternative

If, however, you take your money and say:

“Well, I have $100 and you have a young man who is a very good driver, you and 10 other people say why don’t we all get together and buy a car or taxi… and at the end of the year, we share the profit?”

We know what the rate of profit in Malaysia is. It’s at the minimum of 15 or 16% in real terms.

So at the minimum, your hundred dollars at the end of the year is going to be worth hundred and fifteen dollars.

And even if you say that the inflation is 4% you still gain 11 dollars on top.

So you compare 11 dollars with 2 dollars.

Any rational person would want to do it that way.

In other words, you and other people who invest in this project are sharing the risk with this young man who’s going to have a taxi.

So his earnings will of course help him and his family… you have actually made somebody reasonably independent.

That’s the difference between Islamic banking finance and the conventional finance.

This was sharing the risk of society among the members of the society, the other one basically has a class that has money and lends it and then makes money.

And so you have a huge problem with income distribution.

You end up with a lot of poor people and very few rich people.

(This video is highlighted with the speaker’s kind permission and was transcribed by the Reading Islam team)