Marco appears to have made the assumption in our discussion of a hypothetical future caliphate that such a state would be economically uncompetitive compared to states organised economically along Western lines. I don’t know that this would neccessarily be the case. It was manifestly not true twelve-hundred years ago, before Dar al-Islam broke up into feuding states. The trade of China and of West Africa was handled by merchants based in the caliphate. The hoards of silver that they keep digging up in Scandinavia are all Arab coins. Is there anything intrinsically inferior about an ‘Islamic’ economic system, or has it merely stagnated while continual developments have been made in the West?
Let us consider the options open to me with my superannuation fund. I can put my money in a low-risk, low-return fund based on usurious principles of traditional Western banking, or I can put it in a high-risk, high-return fund based on the principle of shared risk- that is, the provision of capital for entrepreneurial activities-much like the mudaraba contract of a traditional Islamic bank. Surely the fund with the higher rate of return is ensuring the more efficient use of capital? A modern banking system organised along Islamic lines should encourage the use of capital in productive ways, rather than for the purchase of static assets in the hope that they will appreciate in value. I have just been reading a book- “Islamic vs. Traditional Banking: Financial Innovation in Egypt”, by an economist with an armenian name based in Sweden- which is why I know that mudaraba word, which says there are clear theoretical advantages of Islamic banking, especially in developing countries:
(1) Riskier, longer-term investments are promoted, providing a greater incentive to adopt new technologies.
(2) The absence of a requirement for collateral increases the demand for investment capital.
Practically, the book concludes that Islamic banks in Egypt have performed poorly, but largely because they have not exercised their mandate to invest in long-term, higher-risk projects. In fact, they have not even been particularly Islamic in their investments, depositing most of their funds in traditional banks overseas.