What Islamic Finance Can Teach the World

One needn’t be a devout Muslim, or a religious believer of any kind, to find value in the idea there is a higher good than profit, and there is a higher authority than the will of bankers and shareholders.

In today’s world, people are becoming more and more skeptical about capitalism. In the United States, just 49 percent of people under the age of 34 expressed a positive view of the economic system in a 2021 poll, down from 58 percent just two years prior. Elsewhere, the numbers are more dramatic. In 2020, a global survey of 34,000 people from 28 countries found that 56 percent believed “capitalism as it exists today does more harm than good in the world,” with higher rates of disapproval in countries like India (74 percent) and France (69 percent). It’s not hard to see why people might feel that way. In the 21st century, capitalism has already produced one of its periodic earth-shaking crises, casting around 100 million people into poverty during the Great Recession of 2008. As we speak, a global cost of living crisis is devastating communities from London to Bangkok. The mythology of an “invisible hand of the market” causing wealth to trickle down to everyone grows more and more threadbare by the day. 

In this climate, there’s been a great revival of interest in alternative economic systems. After the so-called “end of history” when neoliberalism briefly looked triumphant in the 1990s, socialism has come back in a big way, championed by political candidates like Bernie Sanders and Jeremy Corbyn (and, outside the Anglosphere, by movements like the Economic Freedom Fighters of South Africa). In Japan, a 2020 book about “degrowth communism” by philosopher Kohei Saito recently caught the imagination of the public, selling more than 500,000 copies. But there’s another alternative branch of economics that’s worthy of renewed attention, too. It’s called Islamic finance, and it has adherents in more than 80 countries today, both in the Middle East and far beyond. By considering its history and principles, we may be able to learn some valuable lessons for our troubled economic times. 

Although it has evolved over the centuries, Islamic finance is as old as Islam itself. Like most religious texts, the Quran contains moral teachings about the appropriate way to handle worldly wealth, and some of them diverge starkly from the free-market ideology that dominates the planet today. One of the most important is the prohibition of interest, or riba. In a similar vein to the warnings about interest found in the Christian Bible and the holy texts of Judaism, the Quran makes it clear that no believer may lend money and collect riba in return: 

You who believe, do not consume usurious interest, doubled and redoubled. Be mindful of God so that you may prosper—beware of the fire prepared for those who ignore [Him]. (Al-‘Imran, 130-131)((All quotes from the Quran are taken from M.A.S. Abdel Haleem’s English translation for Oxford World’s Classics.))

And, elsewhere: 

But those who take usury will rise up on the Day of Resurrection like someone tormented by Satan’s touch. That is because they say, ‘Trade and usury are the same,’ but God has allowed trade and forbidden usury. (Al-Baqara, 275-276)

As the late anthropologist David Graeber notes in his book Debt: The First 5,000 Years, many cultures and traditions associate lending at a rate of interest with intrinsic evil. From Shakespeare’s Merchant of Venice to Goethe’s Faust, “the very name, ‘usu­rer,’ evokes images of loan sharks, blood money, pounds of flesh, the selling of souls, and behind them all, the Devil, often represented as himself a kind of usurer, an evil accountant with his books and ledgers.” For a devout Muslim, simply the fact that the Quran condemns interest is enough to deem it haram, forbidden. But there are also clear sociological reasons for these images and taboos to emerge, both in Islam and elsewhere. Using many different sets of symbols and metaphors, the world’s cultures are all grasping at a basic economic truth—and even for a completely secular audience, the Islamic ban on interest has its merits. 

The key problem with interest is that it perpetuates economic inequality, since it affects different classes of people unequally. Interest allows the rich—who often got that way not by exceptional cleverness or hard work but by inheritance or the exploitation of others—to grow ever richer with little or no effort on their part, while siphoning wealth away from the poor and keeping them in penury. To consider a modern example, someone like Jeff Bezos could simply sit on his estimated $200 billion fortune and collect at least $2 billion a year at a 1 percent rate of interest—more than anyone could possibly spend. (And 1 percent is modest: currently, most high-yield savings accounts pay annual interest in the 4 to 5 percent range, to say nothing of CDs, index funds, etc.) Bezos never has to work another day in his life, and neither do any of his fellow billionaires or their heirs. They’re structurally encouraged to simply hoard. (And they say socialism encourages idleness!) 

Meanwhile, someone from the lower economic classes is confronted with precisely the opposite situation. Not making enough in wages, they’re forced to rely on loans of various kinds to pay for basic necessities: car loans, home loans, student loans, medical loans, credit cards, and so on. (In the United States, credit card debt alone recently reached a record $1.1 trillion.) Each comes with its own rate of interest, its riba, which compounds your debt over time—and the poorer you are, the higher the rate of interest you’re likely to face. Someone taking out a business loan might be charged anywhere from 6.13 to 12.36 percent interest at a typical bank, while someone buying gas or groceries on a credit card would see interest rates closer to ​​22.63 percent (as of February 2024). While people across the income spectrum use credit cards for routine expenses, the wealthy can pay off their balances each month; less well-off people tend to carry balances which continue to balloon due to high interest rates. The worst of the lot, of course, are the payday lenders, who can charge as much as 662 percent interest for short-term loans in some parts of the United States. (Thanks, deregulation!) Reading firsthand accounts from the victims of the payday loan industry, like this one from Minneapolis, is always disturbing:

I was lent $800.00 and I am now expected to pay, in 22 installments of $200.12 each paycheck, $4,400.00. That's 699.9856% interest and $400.00 per month. I don't understand how this is legal. Payments of $400.00 per month in addition to my medical bills which I'm paying, will very well bankrupt me.

This kind of exploitation is exactly what the Quran is warning against when it talks about “usurious interest, doubled and redoubled.” By anyone’s measure, being trapped in debt with little hope of redemption is a kind of hell. Meanwhile, to willingly cast someone into that condition for the sake of your own profit is to commit a grievous sin against them. You needn’t believe in literal deities and prophets to see that. 

To their credit, some people have been making efforts to combat the worst effects of interest in their communities. The testimonial above comes from a recent investigation by Minnesota Attorney General Keith Ellison, who ended up suing multiple “predatory” online lenders back in November 2023. And unlike some states (ahem, Texas), Minnesota has passed legislation limiting the interest rate companies are allowed to charge for short-term loans to 36 percent. That’s not nothing. But it’s also a very liberal solution. It seeks to regulate the amount of exploitation, not eliminate exploitation as such. As a financier, you can still basically conduct the same harmful lending practices, as long as you don’t become too excessive or too conspicuous. Islamic finance, with its hard prohibition on riba, offers a more radical solution—in the truest sense of the word “radical,” meaning “to get at the root.” It reminds us that if a thing is wrong, it’s wrong in all cases. It can’t be treated as acceptable if its extent or amount stays within some arbitrary limit. Or, as the Islamic charity group Zakat Foundation puts it: 

Islam outlaws riba in all its varieties because it is the principal mechanism that empowered human beings[...] to perpetually institutionalize their wealth—as individuals and as groups—in the form of a direct dividend paid to the wealthy on their wealth from the wealth of the disempowered, permanently impoverishing them.

Note: “all its varieties,” with no room for exceptions. In places like the United States and Europe, Islamic law and politics are often criticized as “illiberal.” In some cases, especially relating to gender roles and the rights of women, that’s a valid criticism. But when it comes to interest, it’s precisely because Islamic finance is illiberal that it’s superior to free-market capitalism. The free market says that you can do almost anything, no matter how harmful, if it leads to profit and growth. Islamic finance says you shall not exploit your fellow human beings. Politically and morally, the contrast couldn’t be more clear. 

Another, equally important prohibition falls on two closely related concepts: gharar (uncertainty) and maysir (gambling.) As defined by the Bangladeshi scholar Akther Uddin, the Arabic word gharar refers to “a fairly broad concept that literally means deceit, risk, fraud, uncertainty or hazard that might lead to destruction or loss” in transactions of any kind, while maysir “literally means gambling.” In both cases, the underlying principle is that it’s unethical to conduct a financial deal based on something which may or may not actually exist, be obtained, or have the characteristics that the buyer supposes it may. As Uddin puts it:1 

[O]ur beloved Prophet [peace be upon him] on many occasions forbade many transactions which included Gharar. For example, the Prophet [peace be upon him] has forbidden the purchase of the unborn animal in the mother’s womb, the sale of the milk in the udder without measurement, the purchase of spoils of war prior to distribution, the purchase of charities prior to their receipt, and the purchase of the catch of a diver. 

These are 7th-century examples, all of them fairly straightforward. In more recent eras, Islamic finance has also applied the concepts of gharar and maysir to modern financial instruments. As the Saudi Arabian economist Faleel Jamaldeen writes, there is some controversy among experts about the precise boundaries, but “the majority of Islamic scholars” believe that things like margin trading, day trading, options, and futures are inherently forbidden because they involve “speculation and excessive risk.” 

Like with interest, the Islamic economists have a point about gharar and maysir. Really, the entire concept of a speculative market—which underpins so much of the global economy today—can be considered a form of gambling, with Wall Street and the City of London as the world’s biggest casinos. After all, there’s no fundamental difference between betting on a stock, derivative, or commodities future and betting on a horse or a roll of the dice. Only habit and ideology cause us to think of one as a legitimate basis for an economy, and the other as a vice. Most people would recoil in horror if they heard that their political leaders were planning to introduce an entirely poker-based economic model, but somehow the idea that millions of people’s jobs, retirements, and livelihoods depend on the arbitrary ups and downs of the NASDAQ doesn’t provoke the same response. To return for a moment to 2008, the root of the entire crisis was the notorious “credit-default swaps,” the “subprime mortgages,” and the various futures and derivatives that arose from them. These were inherently unstable financial instruments, ones laden with gharar. But thanks to decades of “financialization” and deregulation, the global economy came to rely more and more on these ephemeral products. They bore little or no resemblance to actual items anyone could lay hands on, and they were being swapped around at lightning speed by the various banks and hedge funds. It was inevitable that this behavior would, sooner or later, lead to a catastrophic collapse—and as mentioned before, something like 100 million people around the world paid the price when the whole house of cards fell apart. If the United States had an economy based on Islamic, rather than free-market, principles, the whole thing might never have happened. 

So far, this only tells us what Islamic finance forbids. It’s important to also consider what it mandates, and by far the most important principle here is that of zakat. One of the five Pillars of Islam, zakat is a mechanism for the redistribution of wealth, akin to both a tax and a tithe. In his book Islam and Mammon, Timur Kuran describes the institution as “an annual tax on wealth and income” which is “earmarked mostly for assistance to specific categories of impoverished and disadvantaged individuals.” Translated as “alms,” zakat appears as a direct injunction in the Quran:

Keep up the prayer and pay the prescribed alms. Whatever good you store up for yourselves, you will find it with God; He sees everything you do. (Al-Baqara, 110)

Elsewhere, the appropriate beneficiaries are specified:

Alms are meant only for the poor, the needy, those who administer them, those whose hearts need winning over, to free slaves and help those in debt, for God’s cause, and for travelers in need. This is ordained by God; God has the knowledge to decide. (Al-Tawba, 60)

The references to “God’s cause” and “those whose hearts need winning over” are generally understood to mean that zakat funds can be used for things like Islamic education and ritual trips to Mecca. Otherwise, the focus is all on the economically disadvantaged (with, notably, another mention of debt as something people ought to be freed from).

In different eras and locations, zakat has been treated both as a voluntary matter (albeit one strongly encouraged), and as a compulsory one administered by the state. There is some room for disagreement on the precise amount to be paid; as Kuran points out, the Quran “provides only the broadest guidelines on zakat’s coverage, and it leaves open the issue of rates.” Historically, rates of anywhere from 2.5 to 20 percent have been established, depending on the type of wealth being taxed. There is also some debate about the precise way to calculate the niṣâb, the threshold amount of wealth one must possess in order to owe zakat. More recently, reformers have advocated for adjusting the categories of beneficiary, deemphasizing the importance of payments “to free slaves” since chattel slavery is less common than it was when the Quran was written (although other types of slavery are still a global scourge). They’ve also expanded the scope of zakat collection, with both Pakistan and Saudi Arabia ruling that corporations are “juristic persons” who must pay. Across the board, though, the fundamental logic remains: in order to be a Muslim in good standing, you must have a portion of your wealth redistributed to the poor through zakat.

In this way, zakat is both like and unlike the tax system familiar to modern capitalist economies. It’s similar to paying tax in the most obvious ways: percentages are calculated, funds are collected, and they’re shifted around by whoever happens to be in power at the time. But it’s also distinct in more basic ways, because the aim of all this is not to fund the operations of the state. When people in the United States pay tax, great chunks of their money go to wage wars overseas or fill the streets of their cities with more and more police. When someone in an Islamic country pays zakat, the understanding is that it will be used for peaceful purposes and primarily to benefit those who truly need it. Historically, this had led to both direct redistribution and some truly remarkable public works projects. For instance, Kuran notes in Islam and Mammon that the Zakat Administration of Pakistan was actively building 75,000 houses for poor Pakistanis at his time of writing in 2004. Today, the Administration’s website lists “provincial level hospitals,” “education stipends,” and other public services, each receiving amounts of Pakistani rupees in the millions.

In the past, the United States had a much higher marginal tax rate for the wealthy than it does today—as high as 92 percent in the early 1950s!—and pursued an ambitious public works agenda of its own. Over time, that’s been lost, as physical U.S. infrastructure crumbles from neglect and Americans live with record levels of homelessness, hunger, and healthcare costs, due in no small part to government refusal to levy taxes to pay for these things. Even so-called “entitlement” programs like Medicaid and the Supplemental Nutrition Assistance Program, which aim to help the poor, are funded begrudgingly by both political parties. And when some financial or political crisis happens, these programs end up on the chopping block in the name of austerity. But zakat provides a thought-provoking alternative model for how we might totally reconceive our duty to those in need. If non-Islamic countries today completely reworked their tax codes to deemphasize things like the military and policing, boost spending on public goods, and eliminate the nonsense of “tax breaks” for wealthy individuals and corporations, the progressive tax system that emerged might look a lot more like the Islamic one. 

As we’ve seen, there is an enormous gulf between the ethos of Islamic finance and that of capitalism. It’s not simply a technical difference in the mechanisms for rearranging wealth. Rather, it’s a difference between two philosophies of life. Capitalism holds that life is all about competition, that individual selfishness and greed are perfectly acceptable, even good. It’s an ugly, barbaric philosophy, always putting people at each other’s throats. As expressed by Margaret Thatcher, it tells us that “there is no such thing as society,” only “individual men and women” in endless conflict. By contrast, one of the core principles of Islamic thought is the ummah, the global community of believers. There is always a society, and a bedrock assumption that the members of that society will care for each other. The idea that you might take advantage of someone through riba, gharar, or maysir, or refuse to pay zakat to support someone, is heavily stigmatized; the ethic is one of solidarity. It’s a set of values that people everywhere ought to embrace. Why shouldn’t people of every faith, and none at all, build a universal ummah—a community that includes and cares for the needs of all? 

There are, of course, criticisms to be made. Some are valid, others less so. In Islam and Mammon, Timur Kuran is actually quite critical of the whole concept of Islamic finance, endlessly pointing out cases where its institutions fall short of their stated goals. “Nowhere,” he reminds us, “has interest been purged from economic transactions” altogether. Nor has the institution of compulsory zakat succeeded in eliminating poverty in the countries that practice it. In some cases, it hasn’t even made a noticeable dent, and corruption and mismanagement are just as common in Islamic finance as any other kind. These are familiar objections. Similar ones are used about socialism, with critics pointing out the obvious shortcomings of countries like Venezuela or the former Soviet Union in an attempt to discredit the entire concept of a non-capitalistic economy. But of course, failure to live up to an ideal does not discredit the ideal itself. (Strangely, people making this type of argument never seem to say that the U.S. Declaration of Independence is illegitimate because the Founding Fathers didn’t actually deliver “life, liberty, and the pursuit of happiness” to anyone besides property-owning white men.) The more salient objection would be that Islamic finance doesn’t go far enough: it sets moral strictures only on the distribution of already-existing wealth, not the original production of the wealth. It does not, in the last analysis, ensure that workers will control their workplaces and receive the full value of their labor. We have to turn toward other political traditions, like Marxism and anarchism, for that. 

Still, there’s a lot the wider world can learn from Islamic finance. One needn’t be a devout Muslim, or a religious believer of any kind, to find something of value in its lessons. In a time of growing economic crisis, it teaches us that there is a higher good than profit, and there is a higher authority than the will of bankers and shareholders. It tells us to care for the well-being of our fellow humans as a sacred duty. In many religious traditions, there is a version of the idea that one cannot serve both God and Mammon. In the secular world, we might interpret this through another lens and say that you must choose between capital and humanity. In the great struggle between the two, which side will you be on?


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