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The Islamic Banking System

Reader comment on item: Islamic Economics: What Does It Mean?

Submitted by Homefront (Australia), Sep 30, 2007 at 03:28

Dr Pipes,

My experience of finance over the past year has taught me that the cardinal rule that banks follow is maximising their own profit whilst minimising their risk. If a bank as in the instance of an Islamic loan enters into a profits sharing arrangement (i.e. becomes a partner) in a business then this has the unfortunate consequence of maximising the banks exposure relative to the more western form of loan where the assets of the business exist as surety and can be seized against the balance of the loan should the need arise.

Since risk is higher in the Islamic banking system this is likely to lead to a set of circumstances in which there is a relative undersupply of finance depressing in turn the capacity for people to start new businesses and by logical extension the level of overall economic activity in the economy.

Rather than directing their attention towards profit the Islamic banking system appears to be dedicated to achieving social and political goals - much like the faith itself - which perhaps reflects the intentions of its founder. It goes a long way towards explaining the relatively impoverished nature of Islamic societies. Liberals however are likely to look past this and concoct some way of blaming the United States.



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