The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.
From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.
During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.
Of course, those exhortations often fell on deaf ears. However, until well after the start of the Industrial Revolution few Muslims or Christians would have argued with the notions that trade should be just and finance should serve the common good.
Indeed, much of the Western world’s financial system looked more Islamic than hard-edged capitalist until about 30 years ago. The vast majority of banking assets in Europe and a substantial minority in the United States were held by institutions which did not have profit-seeking shareholders. Rather, these mutuals, thrifts, savings banks, French caisses, co-operative banks, church banks and credit unions aimed first of all to serve their members and their communities. Insurance was also largely a mutual business.
Then came the era of demutualisation, when selfish profit-seeking became the norm. In the new era, the worst possible aspects of a financial system – greed, exploitation of the ignorant and excessive risk-taking – were allowed to run wild. Bankers became ridiculously rich while debts expanded at an unsustainable pace.