Even if the trading of debt and other financial activities were not prohibited in the Qu'uran and Islam, I get the impression that if the 'Western' world had the values associated Islamic culture, the constant desire to "spend, spend, spend" would not be present. Thus, the bubble would not have been there to be burst.

 

Christopher Hutchison

Many thanks Christopher and Yaso for your responses to my original blog.

Christopher raises an important issue with regard to the spend culture we hear about. Under Islam, an important consideration when trading with someone is to consider their ability to take part in the transaction i.e. not to entice someone into trade who really can’t afford it. This seems to put the responsibility on the seller not to let the consumer spend beyond their means. Perhaps, if we looked back to western values in the earlier part of the twentieth century, we would see the same principles applied.
 
The collapse of the sub-prime market was in part due to the markets desire to sell to anyone, irrespective of their ability to repay, based on the unfounded belief that house property values would continue to rise and repossession, if necessary, would recoup any outstanding amounts. What really goes against Islamic principles in this case is the separation of the debt holders from the properties secured under the debt.

Under Islamic finance the debt owing in the sub-prime market was “owned” by third parties with no direct ties to the actual properties which had been sold. If they had been part to the original property sale they might have questioned the ability of the buyer to repay and at least taken that on board as a risk. Instead the owners of the debt bought it blind, simply as an investment with no understanding of what it really comprised. As home owners defaulted it became apparent that the debt holders had no actual recourse to the properties in question. The debt in effect became toxic or irrecoverable.

This brings us back to another consideration under Islamic finance i.e. that of uncertainty. In any Islamic finance transaction risk is acceptable, but not uncertainty. Uncertainty cannot exist in relation to the constituent parts to the transaction i.e. the parties to the transaction, the nature of the goods/services, the time of delivery, the price to be paid etc. Due to the fact that the holders of the sub-prime debt were many transactions away from the original properties and parties to which the debt related, uncertainty existed in most parts of the later transactions.

To a certain extent Yaso hits the nail on the head when he talks about the complexity of relationships which exist in the twenty first century. Following Islamic finance to the letter would result in trading only taking place between first parties to any transaction i.e. those who have a direct relationship with the actual transaction. Any debt would simply be held by the seller.

Under Islamic finance, debt should not be traded so the original debt holder would only see the debt extinguished when the customer paid. Such a simple position would result in trade in general slowing down. Under conventional finance many businesses sell their debt to free-up cash in order to buy new goods to sell. This may prove to be part of the circle which will be difficult to square in relation to the growth of Islamic finance as an alternative to conventional finance.