Rebel Economy spoke to Timur Kuran, a Turkish economist and professor of Islamic studies at Duke University, on the role of Sharia law in the Middle East and North Africa. He is the author of The Long Divergence: How Islamic Law Held Back the Middle East.
- 1. Egypt’s new government is dominated by the Muslim Brotherhood, who have suggested an increased use of Islamic finance and Islamic economic principles as one of their solutions to the country’s economic woes. Considering what you know of the state of Islamic finance in the world today, do you think this is a valuable option? What could be gained from such a shift?
Timur Kuran: What are now known as “Islamic economic principles” were first articulated in the 1940s by Indian Muslims trying to define a unique Indo-Muslim identity. It is then that the absence of interest came to be viewed, through the writings of Islamists, as the sine qua non of a properly Islamic economy. Within a generation there emerged banks meant to accept deposits and make loans on an interest-free basis. These banks were to make funds available to cash-starved small businesses that lack political connections and to promising entrepreneurs without a track record. They were also to serve as instruments of economic Islamization.
Whether the Qur’an bans all forms of interest, or specifically its exploitative forms, was a matter of controversy in the early decades of Islam. It still remains in doubt. What is crystal clear is that what passes as Islamic finance is anything but interest-free. Almost all of the Islamic banks in existence, including those in Egypt, charge their borrowers what any economist would call interest; they also pay their depositors interest as a matter of course. This is not surprising, for interest continues to provide tangible benefits to both lenders and depositors.
For these reasons, I would not expect the spread of Islamic finance in Egypt to have significant economic consequences. Tripling the share of deposits in Islamic banks would not change how Egyptian entrepreneurs finance their activities. Those without connections would continue to find it enormously difficult to obtain capital. The main effect of giving priority to Islamic finance would be to polarize Egyptian society further. Secular and non-Muslim Egyptians, including those who realize that the differences between conventional and Islamic banks are symbolic, would view the growing emphasis on Islamic finance as a sign of creeping Islamization.
Having suggested that in its present form Islamic banking would not solve any of Egypt’s pressing economic problems, let me acknowledge that Islamic banks might bring benefits by abiding by their stated mode of operation. The charters of Islamic banks instruct them to lend on the basis of “profit and loss sharing” rather than for a fixed return. They are to operate like the venture capital companies that have financed the global high-tech industry. Venture capital firms lend to promising entrepreneurs, for a share of any profits, without regard to collateral, track record, or connections. They take genuine risks, losing money when investments that they finance fail.
With its young population and high unemployment, Egypt desperately needs more venture capital. That is why genuine Islamic finance could bring major benefits to Egypt. Alas, there are no signs that the Muslim Brotherhood intends to establish banks prepared to engage in profit and loss sharing. It will probably promote more interest-based banking in Islamic garb. Interest-based banking does not do harm. But giving it an Islamic veneer will not improve the Egyptian economy in any measurable way.
A better alternative to more Islamic finance would be to improve the rule of law and open Egypt up to global venture capital industry.
- 2. The Long Divergence, your recent book, goes into a lot of the historical detail of how the countries of the Middle East and North Africa failed to keep up with the innovations in finance and business over the centuries. What is your assessment of the situation in modern times? Have these structural issues related to Sharia’s lack of modernization abated at all or are they still a major obstacle to economic growth?
Timur Kuran: By the 1850s, leaders of the Middle East and North Africa realized that the region’s traditional commercial and financial institutions had become a handicap in the rapidly evolving global economy. It was not possible to form large and perpetual companies through Islamic partnerships that had not changed form since the Middle Ages. Accordingly, the region’s peoples could not take part in the emerging industrial sectors, or in the modern financial sector, except by operating under the legal system of a European power. Another serious problem is that public services were provided through the traditional waqf, which was meant to be an inflexible organization. The vast resources of established waqfs could not be used to provide modern municipal services.
The response, beginning in Egypt and Turkey, was to adopt French commercial law, to establish secular commercial courts, and to start providing public services primarily through European-style municipalities established as corporations. These reforms drew only the mildest objections at the time; no one made it an issue that the corporation, which is absent from Islamic law, became a key element of Muslim economic life. To this day not even Salafists object to the Western-inspired organizational forms introduced the region since the 19th century.
The Middle East and North Africa has thus managed, quite smoothly, to overcome the organizational disadvantages that left the region behind. Hence, there remain no legal obstacles to forming a giant firm in Egypt, or to supplying water to Egyptian cities through the latest technologies. The Sharia no longer keeps the region behind directly, for the simple reason that in the present, economic life is regulated by laws developed outside the restrictive framework of the Sharia.
However, it matters enormously that the Egyptian economy was governed, until recently, under the Sharia. This history delayed Egypt’s transition to democracy by keeping its civil society chronically weak. Democracy is a system that involves more than fair elections held periodically. It involves limits on the governing coalition. The powers of government are limited partly through private organizations, including unions, professional associations, independent media, and political advocacy groups. Together, such private organizations form civil society. A strong civil society emerges under a market economy served by perpetual autonomous organizations. Hence, the long delay in the Middle East’s economic modernization set back its political development. This delay allowed autocratic leaders to gain power and then rule for decades on end. These leaders used their powers partly to keep civil society from developing.
If Egypt remains politically unstable in spite of having a democratically chosen government, a key reason is that its civil society remains weak. Precisely because of this weakness, Egyptians fear a return to autocracy. This situation is among the delayed consequences of the Sharia.
- 3. In all countries of the Arab Spring, there is talk of a “renaissance” founded in Islamic principles. Do you believe that such a renaissance is possible? Where do Islamist thinkers, including Islamic economists, need to focus their efforts to bring Sharia up to date?
Timur Kuran: Although a renaissance is possible, it is unlikely to be founded on Islamic principles. On the contrary, it is likely to arrive when a critical mass of Muslims recognize that to make the Arab world and the wider Muslim world economically competitive, intellectually vibrant, and well governed, it is necessary to abandon the fixation of looking for all answers within the confines of the Sharia.
It has been almost two centuries since the Sharia played an important role in any major economic system. It was out of date, then. That is why, outside a few domains involving family matters, it was effectively abandoned in country after country, with general agreement. To make the Sharia useful in economic and political life of the twenty-first century, it would have to be altered so extensively that it would cease to be recognizable as such.
Sooner or later Islamists will start debating, in earnest, the limits of the Sharia. Intellectual life in the Middle East and North Africa will then start flourishing once again. Solutions to many economic and political problems will emerge through free discourse, as opposed to discourse sterilized by concerns of what is properly Islamic.