Islamic Finance
Why would anyone, aware of the diverse investment opportunities available in today’s financial services space opt to salt his/her savings away in a non-interest bearing facility?
Anyway you choose to phrase this enquiry, there’s only one legit answer. Religion! The belief in the ethically suspect nature of interest bearing financial instruments. In spite of the toll that some inevitable amount of inflation takes on financial assets, and the protection offered deposits by positive real interest rates, usury (we only added the “exorbitant” qualification to it, recently) has been frowned upon since man found religion. “Ribbit” is the Hebrew name for it. The Arabs call it “Riba”. Whatever the name, it would appear that it took a 1545 act under King Henry VIII of England to legitimise a charge on the use of money. Ignoring the latter fact, this connect with religion is perhaps the one reason why the Central Bank of Nigeria’s (CBN) decision to license non-interest banking in Nigeria has generated so much hot air.
Post-modern, post-industrial, post-Christian, post-Islam, etc. a major number of us may have liberated ourselves from an impost that constrained the creation of additional financial values from an underlying financial asset. It is a different order though to deny to those who retain an interest in pursuing an article of their faith useful avenues for doing so. For this reason, if an entry in Wikipedia is to be believed, “Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth”. Islamic financial services are not just to be met with in the capitals of global finance, but “The Economist” estimates assets under management in 2005 for this class of financial services at well “over US$822 billion worldwide”. This is equivalent to about 0.5% of the global total.
The point of the transactions underlying this segment of the market is that depositors forego a fixed return on their deposits in favour of a share of the profits from the business of the bank lender. The borrower is thus spared the short-term concerns that arise from servicing a loan on a regular basis, or of having the unpaid interest capitalised, increasing the debt burden in the process. Were the business in which such monies are invested to fail, then the depositor whose money is involved loses value the same way as an equity holder would.
Does this type of financial activity promote a different business ethic? It sure does not remove any of the risks with which traditional banking has to contend. It salves the conscience of the true believer (to the extent that his/her confession forbids certain activity). It may make life a lot easier for the borrower who no longer has to contend with the pressure of servicing loans the traditional style. However, in the event that the business to which monies were lent turns out very well, the share of the ensuing profit to which the lender is entitled under the many forms of non-interest banking may indeed exceed what would have accrued from earning interest on the loan.
None of this, though, justifies the furore that the prospect of having non-interest banks has raised in Nigeria.
So you’re saying, on the borrower’s side:
“The point of the transactions underlying this segment of the market is
that depositors forego a fixed return on their deposits in favour of a
share of the profits from the business of the bank lender. The borrower
is thus spared the short-term concerns that arise from servicing a loan
on a regular basis, or of having the unpaid interest capitalised,
increasing the debt burden in the process.”
And on the lender’s side:
“It may make life a lot easier for the borrower who no longer has to
contend with the pressure of servicing loans the traditional style.
However, in the event that the business to which monies were lent turns
out very well, the share of the ensuing profit to which the lender is
entitled under the many forms of non-interest banking may indeed exceed
what would have accrued from earning interest on the loan.”
From what you said above, I can see the draw to IB. Perhaps some people see it as a straightforward, almost over-the-counter-type of business transaction. The bank buys, then sells, like any other business. Rather than, say, speculation and stocks and all that obscure stuff investment bankers do. I’m reminded of the big market crash in 2008 when nobody knew what the heck was going on with the banks and all the shares and speculation, how incomprehensible it was to most people. IB isn’t incomprehensible. It makes sense to the consumer, thus its appeal. And IB folks can make a lot of money off it as well, so it’s not exactly a non-profit type of thing. It’s a business, like any other.
Taking all this together, then, I think your initial answer to the question you posed in the beginning
“Why would anyone, aware of the diverse investment opportunities
available in today’s financial services space opt to salt his/her
savings away in a non-interest bearing facility?”
…is a bit facetious. Sure, for some people it may be about religion, but I think that’s a less complete answer. I think it is also about being risk-averse enough to forego what would probably be a more profitable transaction for something you more readily understand.
Risk aversion? Okay, so there’s more than one reason why I’d place my money in a non-interest banking vehicle. You do make this point pretty strongly though.