This Is Guernsey

In the last of three articles, Toby Birch (pictured), who, under the pseudonym Hugo Bouleau, wrote The Final Crash: Addictive Debt and the Deformation of the World Economy, suggests a serious shake-up of what we do with our money.

MY FIRST article summarised the cause of the credit crisis and the second examined a historical calamity resolved with a local solution.

In this final piece, we hope to answer the trillion-dollar question – what do we do now?  The current assumption is that all financial institutions must be saved, whatever the cost.

While we still need banking, we could do without its recent business models. Their role of orchestrating savers and borrowers has never been in doubt, but there remain two intertwined conflicts of interest at the core of this collapse. The first is the temptation of excess credit creation and the second is that of interest. It begs the question of how savers are to be rewarded and banks paid for their labours, which is the aim of this article.

Considering the design of a new financial system is not one of escapism but of forward thinking as economic turbulence is the usual precursor to political turmoil. Human history is blighted by extremes of Left and Right and big government versus market forces, which always end in tears.

True cohesion seems to occur only in wartime, when we cherry-pick the best people and plan to unite against an external enemy.

We need an economy that combines positive elements of capitalism and communism and a banking system that is symbiotic and not self-seeking.

Fairness, balance and altruism in finance may sound Utopian or old-fashioned, but we are in desperate need of ancient acumen. If only we could abide by the Quaker maxim, ‘my word is my bond’, transactions would then be typified by transparency, honesty and the avoidance of uncertainty.

Some might consider these thoughts to be fanciful, but this system already exists and is called Islamic finance.

Had this article been entitled ‘Islamic finance for all’, it is unlikely that many readers would have got this far. It is human nature to distrust what we don’t understand and for some Westerners a phrase that combines Islam and finance inevitably carries connotations of terrorist funding.

Many are familiar with Islam’s prescriptive rules, but are often unaware of its attractive aspects. So why should principles established by desert-dwelling Bedouin be relevant today?

Wisdom is timeless and in small communities with minimal resources, the actions of hoarding, selfishness and deceit were naturally abhorrent.

Charging interest was anathema because it took advantage of people in need or hampered communal projects requiring liquidity.

Because the prophet Muhammad was an orphan, great emphasis is placed on philanthropy so charitable donations form an intrinsic element of Islamic business. Other surprising themes include respect for nature, stewardship and continuity for the next generation.

Perhaps its flaw is that the mechanism depends on mutual trust and cooperation, requiring a common religion or philosophy. While Westerners are proudly ‘anti’ many things, we seem unsure of what we really stand for – other than credence in consumption.

Muslims invest heavily in real estate and tangible assets.

Joint ventures and private equity (without enormous leverage) also appeal with their partnership approach, which shares risk and reward.

Islamic mortgage holders pay rent rather than interest and banks match loans with deposits, charging fees rather than an interest margin to pay for their services.

The method may sound like semantics, but there is a crucial difference: it avoids the creation of credit, which is inflationary for the economy and ultimately self-destructive for the bank.

In this grown-up form of finance, there are no guarantees or deposit protection schemes but lending is far more responsible. Islamic banks are, by default, small, well capitalised and conservative.

For many, a safe bank paying no interest may well be better than a bust one which offered 7%. To receive a return, savers might pool their money and participate in low-risk schemes investing in communal projects.

As with The Guernsey Experiment, we could show leadership by providing liquidity and interest-free financing as a role model, with the motto ‘legacies, not liabilities’. Guernsey has an admirable record for chameleon-like adaptation to new business opportunities. Finance need not fold but can, with a little training and flexibility, evolve.

Jersey and Cayman are already ahead of the game in Islamic finance – it’s time for us to wake up and catch up before they corner the market.

Article posted on 21st October, 2008 - 2.30pm