Jan Aldert Bergstra
Informatics Institute, Faculty of Science, University of Amsterdam, The Netherlands
It seems obvious at first sight that the principles of Islamic finance imply a dichotomy between money and other goods. While buying goods for money is free, buying money for money in any non-trivial way is forbidden. Buying goods for goods is not buying but if the good is gold then spot sales must be trivial in the sense that equal amounts are traded. This suggests that the quantities traded may only differ in their composition: 10 blocks gold of 1 kilogram may rightfully be traded for 5 blocks of gold of 2 kilogram and so on.
In our paper on "Reduced Product Set Finance" (http://arXiv.org/abs/1012.4291) we analyze the consequences of an asymmetry between money and goods which can be thought of as a limitation of the class of admissible financial products. Very different viewpoints on these matters are possible, however.
In several contributions posted on NewHorizon Azeemudin Subhani challenges this view. (See http://www.newhorizon-islamicbanking.com July-September 2008, "Interview: a new take on riba" and January 2011 "Whither Islamic finance"). Professor Subhani asserts that the forbidden phenomenon is creation of a good (be it money or not) from itself. This is a matter of theology, completely unrelated to any justification derived from an unfairness that may result from requiring interest or imposing usury to borrowing persons. Professor Subhani provides quite a number of arguments for his proposition and his arguments can be split in two groups:
A) (Im)plausibility arguments indicating the inconsistency or implausibility of common viewpoints depending on an asymmetry between money and other goods.
B) Text analysis arguments regarding the occurrence of riba and bay in Qu'ran and Hadith which are supposed to imply that self-generation is always at stake when the prohibition is argued which has been massively construed against interests in Islamic finance.
I will further reflect on the issue of self-creation or self-reproduction as it has been termed in computing
In computing a computer virus is a program that can generate multiple copies of itself. Can one infer that the "use" of a computer virus is forbidden for this very reason, also in cases where it does no intended or unintended harm to somebody else. In biotechnology certain powerful cells can be made to self-reproduce to good use. If the entire community is viewed as an entity it seems to be amenable to growth. So it seems that self-reproduction is acceptable from some level of complexity onwards. In that case is the basic commodity nature of money which induces the prohibition of its autonomous growth. A clear discrepancy between classical commodity money (gold coins) and modern fiat money emerges: unlike commodity money fiat money utterly fails to feature basic commodity nature as its value primarily derives from macroscopic (that is macro-economic) events.
Nevertheless the anti-selfreproduction argument is definitely meaningful and it can be adequately formulated in terms of gold. Here is an extended version of it:
- assume that P lends a weight W of gold to Q with the agreement that Q will return W+w in one year,
- assume that there is no risk at all that Q cannot comply with this promise,
- then Q must be planning to create gold by means of alchemy, or theft,
- alchemy is unethical (representing an impersonation of God),
- theft is forbidden,
- if P borrows Q his gold P must know what Q plans to do with this "capital" (as P takes on some responsibility for Q's actions for some time).
For these reasons P must not engage in a contract that formalizes the agreement mentioned in the first line. Interestingly this argument fails if Q possess a gold mine or if Q avails of a very non-trivial (and thus far quite uneconomic) nuclear technology capability.
Indeed at closer inspection there seems to be a weakness in the argument against self-reproduction for gold because we may assume that gold mines exist. Let us assume that:
- P knows that Q is in the possession of a gold mine,
- but Q cannot pay the work force to exploit it,
- and Q knows of the presence of the gold,
- Q has informed P about the presence of gold in the mine (and P believes Q),
- Q cannot exploit the mine without support by a well-trained work-force,
- none of those who Q will engage for exploiting the mine believe his claim about the gold in the mine,
- the members of the prospective work force don't want to gamble that the mine will reveal gold,
- by initially working without being paid workers are making a gamble,
- thus Q needs to pay the members of his prospective workforce in advance,
- and P can borrow Q the golden coins for doing so,
then why would it be wrong for P to lend his gold coins to Q and to ask a larger value in return after the mine has been successfully brought to exploitation, knowing that all agents involved (including members of the very sceptic workforce) will profit from this. If Q has no mine then Q might know R who is in the situation just specified about Q and Q could act as an intermediate agent which borrows P's coins and then lends them to R and so on.
One might hold that the gold is not really self-creating in the mining example, thus allowing this contract by way of exception. What can be concluded is that in the absence of gold mines a contract which asks an agent to return more gold than initially received at a latter moment in time may be considered problematic by anyone, not merely by muslims, while in the presence of gold mines the rule against self-reproduction cannot simply be formulated in contractual terms.
Although these arguments about P and Q and their transactions as mentioned above may be deeply flawed from the perspective of the Islamic philosophical tradition at large, as it stands the arguments put forward by professor Subhani against the legality of self-reproduction in defense of some fundamental principles of Islamic finance seem to have the peculiar property of being valid for non-Islamic finance just as well. After the extension to the prohibition of self-reproduction in general (as proposed by professor Subhani), these principles are simply not about restrictions on financial transactions but are reflecting universally valid economic boundaries, which only seemingly impact on the financial system due to a confusion between money and the mechanics of its underlying commodity.
I conclude that Islamic finance is best seen in political terms (that is in terms of Jihad understood as a fundamentally non-violent endeavor) which is compatible with the perspective of RPSF (Reduced Product Set Finance). Using the arguments presented above I hold that the RPSF perspective is not critically undermined by professor Subhani's critique against prohibition of interest as an asymmetric (money only) prohibition of self-reproduction.
