My teacher and I had another interesting chat today. The concept of interest came up for some reason and I asked him how Islamic banks get around the prohibition on usury. Turns out that is a sore subject with him. The way he explained it, if you give the bank money and you earn a certain percent interest on it, that is harram (forbidden). But if you give the money to the bank and they agree to give you a certain amount more back after they complete a transaction, that is OK by Islamic bank standards because it is directly tied to another transaction. My teacher feels (quite correctly I think) that it doesn’t matter, the bank customer is earning interest in both cases and so it should be harram in both cases.
We then started talking about banks in the US. He was blown away by the idea that I rarely handled actual cash back home. I had direct deposit and I used an ATM card for most transactions. “But it’s just numbers, how do you know that you have the money?” That sounds like a strange question, but coming from someone in a cash economy, it’s a logical one. “If you wanted a million dollars in cash, could you get it from your bank?” Needless to say, the concept of fractional reserve banking was incomprehensible to him. To be fair, a lot of Americans have never heard of this and get a little nervous when they find out that the bank doesn’t actually have all of it’s money in cash. It was a challenge trying to differentiate between M1 and M2 in Arabic, I’m not sure if I suceeded… The concept of bank runs came up and so I tried to explain the great depression, bank runs, the FDIC, etc. All in all, it was quite a work out for my Arabic, and I was told a fair number of new words.
The upshot of all of this is that not so many people keep their money, or at least a large part of their money in a bank here. Either they worry about religious obligations, or they just do not trust the banks. There is no insurance here, and without earning interest, it doesn’t make a lot of sense to put their money in a bank. People that have a lot of money and are worried about the prohibition on earning interest simply invest their money in land and businesses. I get the feeling that a lot of the people with money aren’t so worried about religious problems with earning interest, maybe that’s why they are rich, and the rest of the country is pretty poor. If there isn’t a good reason to save your money (i.e. making money off of it) then there is a powerful incentive to simply spend it all. It’s almost impossible to create any wealth at all if there isn’t much saving going on. The straightforward prohibition helps explain a lot of the poverty in this part of the world. Money should be able to work for you without you having to monitor every single aspect of your investments. But what can they do? It’s a very explicit command, there isn’t any wiggle room. It sucks that they have to choose between adhering to their religion and following a sound method of wealth creation.