Risk sharing

Virginia Postrel on Timur Kuran's Islam and Mammon: The Economic Predicaments of Islamism (Princeton University Press):

In the 1940's, he said, nobody really knew what Islamic economics was. Historically, Muslims did not have distinctive economic practices.

In recent decades, Islamic economics has come to mean three things, all supposedly rooted in the "golden age" of seventh-century Arabia...

If you read an Islamic bank's charter, Professor Kuran said, "you will say, 'What a magnificent institution this is -- exactly what the Middle East needs.'" Islamic banks are supposed to act like venture capital funds, investing in good ideas from people who do not have the connections or collateral to get loans from conventional banks.

But Islamic banks learned the hard way that risk sharing does not work in countries where businesses keep false accounting records. "Many people came to borrow money with wonderful ideas, and they just walked away with the money," Professor Kuran said. The banks could not reliably audit the books, and if they took a client to court, the business would just claim a loss.

Consequently, the banks all started charging what amounted to interest for loans.

The most common way around the interest ban is known as murabaha. The bank buys a capital good, a computer, say, for a client, who agrees to buy it back, with a markup, at a particular time in the future. In effect, the markup represents interest.

Islamic economics, he writes, "has promoted the spread of antimodern, and in some respects deliberately anti-Western, currents of thought all across the Islamic world."

Strangely, the Islamist version of history eliminates everything from the mid-seventh century to the colonial period. Islamists ignore the many examples of advanced Muslim societies.