Dreaming of a World without Interest

by Ali-Asad

When historians sit down to write the history of this decade, they will pay great attention to the global financial crisis of 2008. The prosperity of the preceding decades came to naught. Fuelled by debt, excess risk-taking and greed, unfettered global capitalism died the day Lehman Brothers fell and we all came to bear the immense burden of over-borrowing and greedy risk-taking. However, one aspect of finance stands alone claiming victory amidst the rubble. Based on the now saintly principles of shared risk and avoiding debt, Islamic finance is now yelling ‘I told you so!’, to all those left to listen. But Islamic finance seeks a fundamental shift in the way we do business; it wants to make banking and finance interest-free.

The Abrahamic religions hold usury as immoral and as an especially heinous kind of sin. While usury is usually defined as excessive interest, Islamic finance seeks to completely eradicate the concept of interest from finance. In this effort, religious scholars have compiled a set of compelling arguments that appeal to both disillusioned financiers and anti-corporatism intellectuals. According to Paul Mills, author of Islamic Finance: Theory & Practice, Islamic theorists have attacked interest-rate theory from legal, ethical and economic standpoints.

Line of Attack

Ethically, Islamic writers argued that interest inherently favors those who have already have more money and allows the more well off to increase their wealth at the expense of interest-paying borrowers who tend to be poorer and more in need of financing. In economic terms, interest is the price of money. But Islamic writers find it paradoxical for money to have a price of its own. If money primarily serves to facilitate the exchange of goods & services, how can it have its own price? Would that not harm its ability to be a reliable facilitator of exchange?


But perhaps the most potent line of argument Islamic thinkers make is their attack on the liquidity preference theory. Liquidity preference holds that people will always prefer to hold and use money now rather than in the future. And so, if someone lends their money for some time, they deserve to be compensated for abstaining from consumption, and hence they get interest. So, preferring to hold and consume money right now (i.e. positive liquidity preference) underpins the entire interest-rate theory – like a huge gigantic skyscraper supported by one single solitary pillar. And we do not even question how strong that pillar is. As Mills notes,

"…the generalized preference for present, as opposed to future satisfaction [liquidity preference theory] is attacked for universalizing a preference that does not apply to all people in all circumstances: positive time preference is neither a principle of rationality nor an empirically established predominant tendency among consumers. It is simply one of three patterns of intertemporal choice (the other two being zero and negative time preference), each of which is rational and observable under its own conditions."

This last section is key. If we do not prefer consuming in the present, than the whole system of interest rates falls apart. Interest rewards you for not consuming in the present, but why need that be the case?

And so Islamic writers conclude that interest-rate theory is simply just baseless; that shiny skyscraper supported with a pillar that is really a mirage.

"Interest exists because it is there; it is still held up by its own theoretical bootstraps. The failure of mainstream economics to explain adequately the existence of interest betrays the fact that it is merely a theoretical concept with no true basis in reality. It is a figment of our collective imaginations."

However, Islamic finance has been more successful at critiquing modern interest-rate theory than in practically applying its principles.

In Practice Fail

Islamic finance is philosophically based on two ideas: money serves as a means to consume not hoard, and those with a surplus of wealth are obligated to help those with lesser means. In practice, these principles involved the concept of shared risk taking by means of common insurance (takaful) where banks and financial institutions put some money away in a pot, which will then be accessed when one of the members in trouble. Additionally, and importantly, Islamic finance shuns the use of debt. So, Islamic finance has come up with various instruments that avoid debt and interest. These instruments include bank loans to entrepreneurs and businesses where the bank becomes part (sleeping) owner in a company (musharaka), and the bank will profit if the company succeeds and lose if the company fails. Also, car leases are financed with the (ijara) facility, where the leaser is has to pay a fee above the principal instead of interest.

An important aspect of Islamic finance includes the Islamic bond (sukuk). Bonds are debt instruments and while Islamic finance avoids debt, it recognizes the possible necessity of relying on debt. But in keeping with the principal of risk sharing, and differentiating itself from conventional bonds, sukuks pay out a ‘profit’ rate, which corresponds to the profitability of the assets that were obtained from the money borrowed. So, if you issued a bond to set up a lemonade stands, you’d pay me back a variable ‘profit’ rate, depending on how successful your lemonade stand is, rather than a fixed interest rate as do conventional bonds. And, if your lemonade stand fails, I have a claim on your lemonade stand.

But with all these advantages, the world of Islamic finance has still suffered considerable losses and slow-downs in business. The reason for this is simple and saddening; in practice, Islamic finance has evolved into a mirror image of modern banking with Arabic names affixed. Dr. El-Gamel , author of Islamic Finance: Law, Economics & Practice, describes Islamic finance practitioners as having mimicked modern finance by using a “form above substance juristic approach”. He describes how finance professionals and lawyers join forces with religious scholars in order to Islamicize modern financial methods, with the scholars providing the necessary ‘Islamic’ certification and the financiers and lawyers doing the necessary legwork, along with Islamic governments who directly promote Islamic finance as the moral way to go. Dr. el-Gamal advocates reconstructing Islamic finance based on community development, social and ethical responsible investing and microfinance, which would embody the Islamic principles of risk sharing and reducing wealth inequality.

Dr. Tariq Yousef, former World Bank and IMF economist and current Dean of the Dubai School of Government echoes this sentiment - “Unfortunately, what we see in most Islamic banking practices at present is a reliance on instruments and modes of financing that resemble debt”.

In Sentences, Two

Islamic finance provides compelling critiques of modern interest rate theory and presents an alternate finance structure. But in practice, Islamic finance has failed to live up to its principles.

And that's jus' the tip.

Grad School: Lessons Learned

by Anna-Marie Mansour



I've always been a nerd.

But grad school has been an incredible experience, exceeding even my expectations. My first year in the Human Computer Interaction master's program at Georgia Tech introduced me to great people and interesting research. Over the past year, I've grown and changed a great deal and now I want to share what I've learned. A grad school guide, if you will, in no particular order:

Industry vs PhD

You'll find yourself confronted with a question of your goals. What do you want to do when you graduate? Do you want to prepare for a PhD or to go straight into industrial/corporate world? These choices will affect how you develop your portfolio, the contacts you seek out, and the kinds of projects you choose to pursue. For the PhD route, you want to show that you can think like a researcher. So, prepare to write many fellowship applications for grants. Research programs will expect you to write and convey your research aspirations clearly, especially to get funding. Also, there's the constant struggle to define yourself - indeed, you will market yourself whether you go into industry or research.

Who are you? You are your own marketer

You are always pitching yourself to others. Whether in poster sessions, after class, in random encounters in the bathroom, you're always demonstrating if you can think, develop goals, and whether you can follow through. You could be the most brilliant, talented student, but no one will see that if you don't present yourself well - and why should they? People are confronted with mounds of information every single day. They've got their own stuff to deal with while suffering from information overload. You must define in a nutshell who you are, even if you're still not completely sure. This inner reflection will actually help you figure it out for yourself. Nail down a 30 second pitch.

There is no fail

But also walk the walk. Show that you can do as well. Everyone has ideas. It's what you do, even the small things, that makes an impression. People talk about something they can see; make a prototype, write a paper - try it out. Perceptions will change when you hold something tangible - you go from wannabe to accomplisher. Also, just doing something you will help you, even if the end product is not perfect.

Networking

I've always found the vagueness of the term distasteful. However, networking is extraordinarily crucial wherever you're bound post-grad. In grad school it can mean internal networking in your department, external networking with partners or business, and then the close encounters of the random kind. I have learned so much and been so inspired by haphazard conversations. Rule of thumb: never reject an opportunity to talk, especially if it's someone you don't usually talk to - a fellow student, professor, janitor, anyone.Take advantage of people's energy and enthusiasm! They'll give you a totally new perspective on something you've been thinking about and the opportunity to verbalize previously unformed thoughts. You never know the random things you will learn, and I highly recommend always having a pen and paper (or iPhone) handy - or even better a small notebook devoted to your volatile musings. I personally enjoy the graph paper Moleskine notebooks.

The more active kind of networking involves searching through professsors' websites to find the ones who you think might share your interest. Email them to meet up and chat about their work - people love to talk about themselves. Also take risks and email people whose work you're interested in.Try to set up a meeting. Sometimes you'll get into awkward conversations, or you'll feel rejected by an email - but remember that profs are busy and human too..

Making connections is also valuable from a monetary point of view. If you work with a prof - even pro bono for a semester - they are far more likely to fund you the following semester. Or, if you keep in touch you may find that something comes up later down the line and they hit you up to work on an awesome project or a different opportunity. So ALWAYS follow up and never burn bridges. I cannot emphasize that enough.

Respect

Show respect for people's time and work. Professors are crazy busy. So are PhD students. So are you. And you're all busy doing something. Try not to barge into your prof's office unless you know them well or if you're desperate - email first and be flexible.

Also, respect the work. Don't make assumptions about someone's research even if it seems boring or dumb - take the opportunity to ask about it. You never know what you'll learn from them. As a humble inexperienced student, trust that they know a lot and that they've put a lot of time and hard thought into their work or research. If you show interest in someone else, they generally respond better to you and will be open to hearing about you and offer you advice. You also may form connections that could prove valuable at unexpected times, as noted before.

At the same time, respect yourself. Although you're still learning the tricks of the trade, know that you are smart and have the self-confidence to pursue your own goals. Often I hear fellow students feel pressured to do what their professor wants. Many have fallen victim...

You sit in your prof's office as they invite you to explain your interests. They nod emphatically and offer "That sounds great! Here's a project you could work on..." ...that has nothing to do with your interests.

If you find yourself in this situation, be strong. Respect your goals. It's okay to say no, or to give yourself time to think about what they're suggesting, and it's okay to negotiate. But it can be valuable to give a little ground in order to obtain their trust, and so establish more leeway for yourself later on. Working on a professor's research can actually be a great way to learn about how research is done and what you like or dislike about it, as well as influence your own goals. But always remember to do what feels right to you.

Personal Agency: When you respect yourself, you become more self-sufficient. Learn to take care of your own business. Ask questions and seek advice. But respect time. Research what you want to know before asking others. Figure out who is the right person to talk to without wasting others' time. Be your own person, and don't make excuses.

Know your field

Whether you're industry or PhD bound, its your responsibility to know everything about your field. Start following blogs and other websites, find out who's who in your domain - follow them on twitter, read their stuff. Especially if you're applying for a job you need to demonstrate your comprehensive knowledge of the field, and have an opinion on current developments and the field's future direction.

Write!

Keep track of all this learning and discovery. Having the best conversations won't matter if you completey forget about it while trying to make another deadline. I like to keep a document of research ideas that I continually expand as I think about them. You never know when an idea will come to you and categorizing them and having easy access to them in one place is invaluable. Sometimes you'll look back at some old thoughts and have a completely different perspective, make new connections or remember some obscure thought.

Take care of yourself and have fun

If you are reading this, you probably enjoy research and learning. Dont forget the normal kind of fun. It's easy to get lost in the work and pressure to do well, but keep your social life active. It's also valuable to do that from a networking perspective. Socializing with your peers is not only good for your mental health and general sanity, but it will help to know the next leaders in your field, and its important to know each other well and bounce ideas off each other. Blow off some steam, get fresh ideas. Share your experiences and knowledge, teach each other, vent! Doing this will help guard against burning out. If you feel like you're on the edge, take some time for yourself.

* Anna-Marie Mansour is pursuing a Masters in Human-Computer Interaction at Georgia Tech and is currently preparing to work abroad in Spain. And background comic image provided by http://www.qwantz.com/.

And that's jus' the tip.