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Economic Systems

August 31, 2009 | APPEARED IN VOLUME 87, ISSUE 35

In his letter responding to Rudy Baum's editorial, Robert P. Lattimer twice suggests that "there are only two socioeconomic systems: capitalism and socialism" (C&EN, Feb. 23, page 3; and June 1, page 2). Which one is China using?

There are many other options. Any number of blends of "the two" would seem to improve both systems. And there are plenty of issues in each that are great starting points for negotiations. Dynamic systems that try to care about everyone seem the most logical.

K. C. Martin
Trinidad, Calif.

Lattimer states that "when it gets down to basics, there are only two types of socioeconomic systems: capitalism and socialism." There is a viable third socioeconomic system known as Islamic banking. The theological basis of Islamic banking is enunciated in the Qura'n, which declares that the collection of interest is a form of usury, which is forbidden in Islam.

The soundness of Islamic banking and the reason it can be employed as a replacement for the current systems is that you only promise what you own. Islamic banks, like all others, are subject to economic downturns, but the borrower does not suffer a crushing blow, and the banks do not fail. Unfortunately, Islamic banks are not immune from the corruption that has plagued financial institutions worldwide.

Muslim scriptures forbid making money off money. According to Amr al-Faisal, a board member of Dar Al-Mal Al-Islami (the DMI Group), a holding company that owns many Islamic banks, "All dealings have to be tied to actual economic activity" (Washington Post, Oct. 30, 2008, page A16). He further explains that one must have a tangible asset, such as a dwelling, that is actually purchased, a service actually provided, or goods that are actually sold. Moreover, speculations and trading in derivatives are not permitted.

Islamic banks consider depositors to be partners. Their money is invested only in lawful transactions, and both banks and depositors share in the profits as well as in the losses. Instead of lending money to a home buyer and then collecting interest or charging late penalties, an Islamic bank purchases the property and then leases it to the buyer for a fixed time period. The buyer pays a fixed amount each month to the bank and then, at the end, obtains full ownership. The payments include the cost of the building, plus an agreed-upon profit margin for the bank.

Islamic banks offer loans only to people with good credit ratings, and consequently, foreclosures are extremely rare. Some Islamic banks offer credit cards, but since they are not allowed to charge interest, banks demand that the full balance be paid off by the end of each month. Even if the credit-card holder is late in paying, he or she will not have to pay cumulative interest. Thus, credit-card holders are prompted to pay off what they owe and are spared the accumulation of debt and late fees.

While the biggest Islamic banks are in Saudi Arabia and in the Persian Gulf nations of Dubai, Bahrain, and Kuwait, the Islamic banking system is also in the U.S. C&EN readers who would like to learn more about Islamic banking and how Islamic bank are able to finance big projects will find numerous articles on the Internet.

Sami A. Ibrahim
Los Altos, Calif.



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