Interest charges are a disruptive element in today’s financial sector, but there are banks that charge zero percent interest.
In the 1970s one multinational gave its department heads a gift of underpants with the words ’20% ROI’ printed on them. The intention was to remind them each time they stepped into their drawers that their target was a return on investment of at least one fifth.
This article of clothing aptly summed up the essence of the financial world. All the money currently in circulation, including the cash in our wallets, bears the burden of delivering a 20% ROI. This stems from the fact that 95% of the money in industrialised countries is generated by banks and not by governments. And that money has to be repaid, plus a little extra.
Interest is an important cog in today’s financial system. Thanks to interest, many people are ensured of a pension in their later years. But for investors, interest is a burden. They have to do better than just recover their costs if they are to beat the banks’ ‘automatic profit’ system. Another criticism of the interest concept is that it concentrates funds in the hands of the rich. Logically, only those who have money can permit themselves the luxury of lending it out to those in need.
One of the fastest growing areas in the financial services sector is based on the concept that charging interest is not a good thing, in fact it’s sinful. The Islamic banking sector is reporting 15% annual growth, according to Green Futures (November/December 2002). In the Middle East alone there are over 200 Islamic financial institutions with combined assets of some US$200 billion.
One of the main differentiators between Islamic banks and their Western counterparts is that Islamic banks operate in the ‘real’ economy: money doesn’t grow by itself, but by making or growing something else. They take a share in the company, which means a portion of the profits also go to the bank. Another difference is that their financial principles are based on a religious text. Of course ‘even good Muslims are tempted by the devil,’ says Saiful Azhu Rosly, an economics professor at the international Islamic University in Malaysia. He recently told the business magazine Fortune: ‘Just because someone patronises an Islamic bank doesn’t mean the individual is by definition morally correct.’
But as is the case with ethic investments, Islamic banking is based on another perception of the world that is not simply about accumulating the largest possible amount of capital. Nearly 30 years after the first Islamic bank was set up, there is now a Dow Jones Islamic Index, international banks such as HSBC and Citibank have Islamic offices in the Gulf, and HSBC even extends Islamic mortgage loans in New York.
A bank granting an Islamic mortgage may, for example, take a 90% stake in the house to be purchased, with the owner holding the remaining 10%. The homeowner borrows nothing, but pays the bank a kind of rent that goes towards lowering the bank’s share. The bank makes its profit by keeping a small amount of the rental fee. When homeowners cannot pay the rent, Islamic banks are not as quick to sell the house at a price below its market value, as are their traditional western counterparts. Instead, because they are part owners they take a more flexible approach.
There are also European banks that charge no interest. Yes! (autumn 2002) cites several examples in Scandinavia. These include the JAK bank in Sweden, whose initials stand for ‘Country, Work and Capital’ in Swedish. The JAK bank, with 24,000 accountholders and US$50 million in circulation, is mainly geared towards small businesses which, according to chairman Oscar Kjellberg, are often refused credit by mainstream banks.
Ordinary banks use the funds from their customers’ savings accounts to lend money to other banks, who in turn use the funds to issue their own loans. This cycle creates an unstable economic system, according to Richard Douthwaite, author of books such as The Ecology of Money and The Growth Illusion. The JAK bank breaks with this ‘debt pyramid’ by never lending more money than the total of its savings deposits. The bank derives its income from the service charges for telephone and Internet banking. As a result, overhead costs are low.
The JAK bank was founded in Denmark in the 1930s. As a child, Kristian Englebrecht Kristiansen had seen how his farmer parents, were financially crippled by the huge bank loan they took out to make the soil on their barren land fertile. While his parents struggled to keep their heads above water, the bank profited while having done nothing other than issue the funds. Kristiansen felt that money alone should not generate profit and founded his bank, which was to be succeeded by some 10 other small, interest-free banks.
‘Interest leads to unemployment, inflation and the destruction of the environment,’ Kjellberg believes. ‘Every interest rate hike means a company has to pay more in order to repay its loan. As a result, companies are forced to cut costs. That leads to labour cost cuts, which means people get fired. Or they raise their prices, which creates inflation. Or they increase their output, which exhausts natural resources.’
David Boyle, affiliated with the British New Economics Foundation and author of the recently released book The Money Changers, takes a more balanced approach. In Green Futures, he argues that it is not yet clear whether interest is always a bad thing. Boyle appeals for further discussion of the issue as there are indications that a decline in the use of interest charges would bring a sustainable world one step closer.
By linking interest to sustainable development, Boyle touches on a trendy but sensitive subject. He presents an provocative calculation: if someone had put one penny in the bank when Jesus was born 2,000 years ago, by 1750 his descendants would have accrued the value of a golden ball as heavy as the earth. By now, they would have amassed the equivalent of 20,000 balls. Nature cannot sustain such growth, Boyle asserts. Which is why part of the solution may well be found in the vision of the Islamic economists.