Tuesday, December 16, 2008

Is Islamic banking coming?

More than a year ago, I blogged about Sharia Banking.

That blog was in response to a Globe and Mail poll which asked readers the question.

Do you think Ottawa should approve applications it has received from Muslim groups looking to set up so-called Sharia banks that would operate within the structures of Islamic law?


The response was a resounding 82% no.

It bothered me how negative the reaction was.

Today the United States took a huge step toward Sharia banking principles. In the article, Fed chops rate to record low, the article says.

"The U.S. Federal Reserve Board on Tuesday aggressively cut its target for overnight interest rates to a record low zero to 0.25 per cent, and said it would employ “all available tools” to dispel a year-long recession."


That, my 82% Globe Reader majority, is Sharia banking at its finest. But if anyone wishes to pay higher interest rates in the spirit of being anti-Islamic, then feel free to shop for banks charging the highest interest.

On a related note:

In watching the movie, "Merchant of Venice," Al Pacino plays a Jewish money-lender. According to the Shakespearian tale, it was illegal for Christians to charge each other interest at that time. One might surmise that at some point in Christian history, charging interest was not allowed. This tidbit led me to further research, and I came up with this website.

A quote of a quote.

Throughout church history, Christian teachers have taken a strong position against exacting usury on a loan in order to make personal profit. Whereas usury is thought of today as charging excess interest, the word actually meant charging any interest. Ambrose said, "If anyone commits usury, he commits robbery and no longer has life." Calvin declared that the professional money lender should be banned from the church. Luther commented, "After the devil there is no greater human enemy on earth than a miser and usurer, for he desires to be above everyone." 1


The website also mentions Jews were not supposed to charge other Jews interest.

Interesting!

I'd like to admit that there are economic principles at work here that I struggle to understand. It is said that lowering interest rates stokes inflation. I'm not 100% sure why.

Such an environment would encourage people to borrow US dollars, invest the money in another currency, then repay the loan in the future when the dollar has fallen in value. This is the reason it didn't immediately make sense to me. It's a recipe for disaster and an easy money making scheme.

So I thought about it.

The only reason I can surmise inflation would run up is that it is related to debt.

The United States National debt sits at over ten trillion dollars. At the rate of return of 0%, who is going to want to keep their investments in US bonds? Therefore the sell off begins, right?

The US government has to buy back their low-interest-yielding bonds. They have two ways to do this. Print money or raise taxes. Raising taxes hurts the economy. Printing money stokes inflation.

The government is likely to do a bit of both. But I see a storm brewing that could send the US dollar crashing.

Therefore borrow dollars, change them to Euros, get some interest, and pay off your low interest loan gradually as the dollar crashes.

To test my theory, I'm borrowing an imaginary $100,000 US dollars right now and converting it to imaginary Canadian dollars. At todays rate, that gives me $120,000 Canadian dollars. Investing that in a Canadian Savings Bond for 5 years, with yields around 2%. At end, I'll have around $135,000 Canadian.

Assuming I won't be able to get a great interest rate as low as 0%, I'll pay 2%. So in five years, I'll owe US$110,500

We'll see how much my gamble is worth in dollars in five years.


Footnote:
1. Christian History Magazine (Worcester, PA: Christian History Institute, 1987), 7(2):18.

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