Wednesday, May 30, 2007

Banking on sharia

It's encouraging to see so honest a look at so-called "Islamic banking" appear in, of all places, a Pakistani newspaper. Note that a lender's assumption of risk, even when it cannot be reflected by "un-Islamic" interest rates, is not going to be motivated by altruism but instead will end up being built into higher up-front costs. In other words, you can drive out the laws of economics with a pitchfork, but they will always find their way back.

1 comment:

Rajeev said...

This could explain the massive liquidity gap that exists in Middle Eastern countries. Their financial systems simply aren't efficient enough to provide much needed capital for businesses to grow or even form. I would hazard a guess that Islamic banking lies at the heart of this as risk is not rewarded without some bizarre distortions.