Chapter 9: Islam in Malay Life

Educating Ulamas on Modern Economics

By educating Muslims generally and the ulama in particular on such modern and useful concepts of economics, and replacing such loaded terms as interest and insurance with the morally neutral terms as rewards on savings and risk sharing, we would channel the natural propensity for Malays to save even more. This in turn would encourage other productivity-enhancing economic activities.

Western financial institutions have done a remarkably efficient job in contributing to the economy. It is difficult for a country to advance unless it has a well developed and sound banking system. Western financial institutions have done an equally credible job of democratizing financial services. When I started my practice over two decades ago, I could not get a line of credit, as that was available only for major corporations. Thus I had to borrow the whole lump sum right away and began paying interest on funds I did not need immediately. Today lines of credit are common even for ordinary retail customers. Similarly, new entities like money market and mutual funds enable average consumers to participate in more productive investments that were previously reserved for rich clients. Average Americans, thanks to such innovative financial instruments, can now invest their funds in foreign companies and other ventures besides the traditional stocks and bonds through the convenience of their unit trust and mutual funds.

Modern banks are by no means perfect. In times of crises, as documented by the Nobel laureate Joseph Stiglitz, banks can behave just as irrationally. Indeed the common wisdom that banks willingly lend money when you do not need it, and then quickly withdraw it when you really need the funds, is not without foundation. As an ancient Malay saying would have it, it is akin to lending someone an umbrella, but when it rains take it back! Banks are also not averse to shirking their community responsibilities. In the past it was common for bank to come to a community only to collect the deposits, and then invest the funds elsewhere. Today in America, with the Community Reinvestment Act, banks are required to invest a percentage of their deposits within the community. Banks have also been known to “redline” neighborhoods, and discriminating against poor and minority borrowers. Again with civil lawsuits and better auditing, banks are doing less of that now.

The rigid rules governing loan-loss provisions and the strict definition and enforcement of non-performing loans (NPLs) that are internationally accepted may be harsh. Indeed Malaysian leaders severely criticized the IMF for insisting that Asian banks use the widely accepted “non-activity-for-three-months” rule for NPLs while Malaysia has been using the more lax (kinder?) six-month rule. When banks classify loans as “non performing,” it means more than just calling in the loans and making the necessary “loan loss” provisions as mandated by law. It means that factories and companies are being shuttered and workers laid off. There are significant human and social costs associated. When Enron, the giant electricity company, was forced into bankruptcy, thousands of its workers were stranded and its hometown Houston was thrown into a tailspin. Cruel as that may seem, consider the alternative of keeping such companies alive. For one, its creditors and banks would have to continue to pour their precious depositors’ money to support the ailing company. Indeed had this continued, Enron would not only have driven itself into the ground but also would have taken along other healthy companies.

Thus while we may sympathize with Enron’s fate, we should also be considering the fate of the depositors who put their hard-earned cash into Enron’s banks. It is better that one company fails rather than a major bank. With the former only that company’s shareholders, employees, and other stakeholders are affected, but when a major bank fails, the ripple would be felt throughout the economy. Had Bank Bumiputra followed international guidelines and been aggressive with its delinquent borrowers in the very beginning, it would not have folded, taking with it billions in taxpayers’ precious funds and even more importantly, the people’s (especially Malays’) confidence in the system. Bank Bumiputra’s failure did all that and then some. It did untold damage to the Malay psyche by reinforcing ugly stereotypes about our talent (or lack of it) for commerce.

To reinforce my main points, yes, there are weaknesses in the present Western banking system. It is being continuously improved and strengthened. The present complex set of internationally-accepted banking rules and regulations have been fine-tuned over decades; Third World regulators ignore them only at their own peril. My biggest concern is that because of its novel business arrangements, these Islamic banks cannot be adequately scrutinized by present banking regulations.

The purported advantage, if not prime selling point, is that Islamic banks are not lending out their depositors’ funds, rather the customers and bank have a “profit and loss” partnership arrangement. This is ingenious if not specious at best. First, such “partnerships” are so lopsided that they cannot be fair to the customer. If a particular venture were to lose money, who is to check the bank’s accounting? Second, if the bank were to fail, who has first claim on the assets? The customer, who are theoretically part owner of the asset, or the shareholders or owners of the bank? Clearly there is a potential for a serious conflict of interest that has yet to be resolved.

I consider myself a sophisticated consumer of financial services yet I find it difficult to evaluate and compare the costs and risks of the various products and services offered by Islamic banks. Hence I have not used them. My late sister had a home “mortgage” with an Islamic bank that supposedly charged no interest. But when I compare the actual “costs” of her mortgage and calculated the imputed interest rate, hers was at least two hundred basis points above that offered by conventional banks. Worse, when interest rates rose, her payments went up with them and there was no limit to the increase. America has variable mortgage rates too, but those loans have caps to protect consumers. No such protections exist with Islamic banks. The end result is that Islamic banks are taking advantage of their customers. No wonder there is a headlong rush by Western banks to enter the Islamic market. They have successfully transferred all the risks to the customers while raking in all the rewards! A rip off, even if done in the name of Islam, is still a rip off. Sadly, many consumers in Malaysia and other Muslim countries are woefully uninformed in economic and business matters and are easily swayed by the Islamic label.

In the final analysis credit, which is the flip side of lending, is like any other modern instrument. Used properly and it would bring untold benefits to individuals as well as society; abused and it will exact a stiff price. To a skillful surgeon, a scalpel is a lifesaving tool; to an idiot, a killing kit. To Muhamamd Yunus, the founder of Grameen Bank and who has done so much to uplift the lives of millions of Bangladeshi peasants, credit is an effective instrument to reduce poverty. To him, access to credit is basic human rights.

Nations are like individuals. If they borrow millions to build palatial mansions for their leaders and fancy headquarters for their civil servants, it is the equivalent of my earlier example of borrowing money to buy a Mercedes just to show off. But if nations borrow to invest in their schools and infrastructures, then it is like my buying my own taxi. I fear that the current obsession with whether certain forms of “returns on investments” (interests) are halal or haram is counterproductive. They discourage Muslims from productively managing their idle funds. Savings and borrowings (or credit) are vital ingredients for economic development. No country can progress unless its people save (capital formation) and credit readily available to its entrepreneurs and producers. Credit made possible the spanking new North-South freeway and the new Kuala Lumpur International Airport. Credit enables Americans to have the highest standard of living and helps push Japan, Taiwan, and South Korea into the First World. At the same time, credit (or more accurately, excessive and imprudent borrowings) was the downfall of Argentina and hosts of Third World countries.

Through practical experience economists and bankers have come up with useful guidelines on the prudent use of credit. The priority should be to educate the masses on these guidelines so they can become better informed and therefore safer and more prudent users of credits. Today I have more debt than I ever had but I do not feel overwhelmed or threatened. For one I have put my credit to productive use by buying appreciable and revenue-producing assets, and not to finance my vacations or daughter’s wedding (the equivalent of buying taxis instead of limousines). Two, my debt payments are comfortable relative to my income and other assets. Should my income drop I would of course have to dispose some of those debts, but since I have used them to buy productive or at least appreciating assets, I do hope to come out ahead.

Muslim theologians and economists should quit quibbling over what some ancient Arabic texts may or may not mean in the context of the 21st Century, but instead educate the ummah on the prudent and productive use of credit. Perhaps they can find in their study of those same ancient texts something to support the contention that there are indeed qualitative differences between productive and consumptive loans. But before they can find those theological justifications, these scholars must first understand and be convinced that there are indeed real and significant differences between the two and that they are not merely involved in semantic gymnastics. It is difficult to find or discern something if one does not know what one is looking for. Even if we do not find that theological basis, we still must train Muslims to use credit wisely.

To revert to my earlier analogy of the knife, the objective is to train Muslims to use that instrument to good purpose like sculpturing and surgery, and not to use it for evil deeds like killing. Muslims must stop this endless puerile argument on whether the knife is intrinsically a halal or haram implement.

Many Muslim are sincerely trying to lead a pious life and are susceptible to the Islamic cachet. They implicitly trust everything that has an Islamic label and those who proclaim their Islamic credentials and trust in Allah. Thus they readily suspend their critical faculties when evaluating Islamic products and services. We should teach our fellow Muslims not to do that. We should use President Reagan’s notorious phrase to express his opinion of the Russians – trust but verify – into its comparable Muslim version. Yes, trust in Allah, but we must verify everyone else, even if they swear by the Almighty!

As an aside, in content as well as sequence, this chapter should rightly be a subsection of the previous chapter on culture. But because of its length and unity of thought, I have made it into a separate chapter. After examining culture generally and of Islam in some depth, I will now examine in the next chapter the role of the other social institutions in Malaysia, primarily the judicial system and the laws.

Next: Chapter 10: Freedom, Justice, and the Law

Chapter 9: Islam in Malay Life

Islamic Financial Intermediaries (Cont’d)

IFIs thrived in the first few centuries of Islam not because those early Islamic thinkers had found a magic way to dispense with the cost of funds and returns on investments, rather they used different terms (or more crudely said, put a different spin on the issue) to circumvent interests payments and earnings.

The modern version of Islamic banks was resurrected only in the last few decades. Despite its recent rebirth, its popularity has soared both in Islamic and non-Islamic countries. This recent history should serve as a ready caution. The system has not been tested. The system of auditing, accounting, and regulating has not been standardized. What I fear most is that should Islamic banks fail in an economic crisis, it would not only aggravate the situation but also set back people’s trust in them. That in turn would severely shake Muslim’s trust in their religion.

A senior official of the Federal Reserve Bank of New York, which supervises the world’s largest and most sophisticated banks, voiced his concern about this in his address to a meeting of Islamic bankers who were eager on introducing the concept to America. Through bitter experience America has wisely separated commercial banking from insurance and investment banking, and also banking from commerce.

A century ago American banks were deeply involved with commercial enterprises much along the lines currently advocated by proponents of Islamic banking. The 1930 depression was blamed in part because banks were deeply involved in speculative share trading activities of companies they owned. Further, such co-mingling of banking and other commercial activities could lead to an unhealthy concentration of economic power. Banks would then cease from becoming an impartial arbiter of credit worthiness.

Modern Western banking has been continuously refined over the past centuries. Banks today (at least in Western countries) are safer and offer better services. They have also contributed immensely to economic development. The challenge for IFIs is not simply to say that Western banks are un-Islamic but to offer comparable services to customers and thus serve the economic needs of society.

Instead of trying to parse non-existent differences between interest and other costs of funds, modern Islamic bankers and economists should more productively focus their intellectual resources to differentiating the various kinds of lending. Islam rightly prohibits “making money on money,” which I interpret as gambling and speculating, but encourages trade, which is taking risks in productive investments.

There are certainly significant differences between my borrowing money to buy a Mercedes limousine to show off to my colleagues and neighbors, or to use it as a taxi. The economic multiplier effect of the purchase, for example in creating jobs at the factory as well as the car repair shops, is the same in both cases – the direct effects of consumer spending. From there the economically meaningful differences emerge.

With the first instance I am using borrowed funds for consumption; the second for production or investment. With the latter I, as a borrower, would actually earn money (passenger revenues) as a consequent of the loan. And if I share my taxi with another driver, that would create yet another job (making a total of two taxi drivers). No such additional incomes or job creations would result with the first type of borrowing. Additionally, my taxi would provide a much-needed transportation service to the community. My private limousine would only create more pollution and envy from my neighbors. But the most important difference is that with the first borrowing, only the lender (bank) makes money out of the borrower; with the second, both lender and borrower make money.

In either case money is being borrowed and interest (cost of funds) incurred. But with the second case the borrowing serves a useful societal purpose; it is in fact a form of trading. I trade my service or expertise as a taxi driver for the bank’s capital. The first borrowing on the other hand, is purely for consumption. One can be easily persuaded that borrowing in the second instance should be encouraged as society as a whole would benefit from such activities. No such societal benefits would accrue from the first borrowing. Thus we could properly differentiate, as many recent scholars have suggested, between the costs of capital in the first type of lending as interest, riba; the costs in the second instance should be more accurately called profit on the trading of capital, which in this case is money instead of the usual assets such as goods and real estate.

Muslims must remind ourselves that current accepted interpretations of terms such as riba and gharar (risky sale, speculation) are just that: interpretations. Indeed there are some scholars who interpret riba to mean excessive interest. Just as excessive profit is bad (and often illegal as they are usually obtained through such means as market manipulation, monopoly, or plain hoarding) so too are excessive interest rates. Likewise there is a conceptual difference between interests on “productive” versus “consumptive” loans. The latter would more likely fit the description of riba while the former as profit on the trading of capital.

There is a comparable controversy on whether insurance, specifically life insurance, is halal or haram. Islam has its own version of managing risks, Takaful. (mutual aid). Again here it is the duty of its proponents to clearly differentiate their product, especially with respect to safety, security, and rate of returns from traditional insurance so consumers could be better informed and be able to “comparison shop” intelligently.

In such important matters we must go beyond simplistic and legalistic changes of specific words but instead concentrate on deciphering the meanings and intent of such terms.

Indeed Muslim shippers in Spain first started the very concept of takaful or insurance. They would collect levies on each shipper so they would have funds to support the unfortunate shipper who would meet untimely calamity along the way. Of course the concept has since developed a long way from there.

When one traces the development of insurance from a mutual aid society, the ulama can easily understand and readily agree to the concept. I once explained to an alim who vehemently opposed life insurance, the concept of risk sharing. I described a community where when someone dies, the rest of the community would contribute some money to take care of the deceased’s family. He readily agreed to the benefits of such deeds and went on to quote eloquently some holy passages to buttress his agreement. Then I suggested that instead of collecting the money only when someone dies, we would collect it regularly and put that cash in a pool ready to be distributed at the time of need, that is, the death of a member. Again, he readily concurred.

Then I moved on and suggested that instead of giving the same amount of money for each family, we use our judgment and give more to those who die leaving behind young children as opposed to those whose children have grown up. Again, he readily agreed to the rationale that the expenses of a family with dependent children would certainly greater and therefore they should get more. Then I made the leap forward by suggesting that instead of us or the village committee deciding how much money the deceased family would get, we let individual members decide how much to leave to their family when they die. Surely the individual is the best judge on the needs of his or her family. Those who want to leave more would of course have to contribute more; those who want to leave less would contribute less. Again he saw no problem with that. Then I surprised him by saying that is in essence the concept of life insurance. You decide how much your family would get when you die and you make your contributions (that is, pay your premiums) accordingly.

Today, life insurance is much more complex as other risk factors like age and family history are considered. And instead of a village committee we have a team of professional actuaries who assess and price risks as well as invest the premiums. But cut to its core, life insurance is essentially a commercialized mutual aid society. The money contributed (premiums), instead of being left underneath the village headman’s mattress, is being invested and thus further contributes directly to the economy.

The ulama’s prohibition on insurance, specifically life insurance, is simply based on their lack of understanding of the concept of risk sharing. They have this simplistic notion of life insurance as a bounty to invite some mischief on the part of the beneficiary in order to collect the cash. Well, such a scheme is a crime. One would be punished right here in this world for fraud and murder.

Life insurance, like other forms of insurances, is merely a form of mutual sharing of risks. Nothing prevents a community, co-operative, or a “mutual” company from offering such investments. Indeed such co-ops and mutual insurance companies are among the biggest issuers of insurances in America. The Mormon Church has a similar insurance-like scheme by levying charges (tithes) on its members to take care of the sick and disabled amongst them.

Next: Educating Ulamas on Modern Economics

Chapter 9: Islam in Malay Life

Islamic Financial Intermediaries

Trade had been flourishing for centuries in Arabia, immediately before and after the prophet’s time. All that buying and selling, together with the caravan expeditions, could not have taken place without there being a satisfactory financing mechanism. There must had been a system for connecting the owners of money (savers) and the users of cash (investors and traders). Yet despite that flourishing head start and seemingly workable system, Islamic finance later went into decline. It is instructive that the decline in Islamic economics parallels the decline in Islamic civilization.

Today Western financial institutions are preeminent. Western banks and other financial intermediaries did not develop overnight. They have been refined, modified, and strengthened over the centuries. The process continues to this day. Today’s banks are a far cry from what they were a century earlier. The essential ingredient to the success of banks is the faith people have in them. Absent that, not even the strongest institution could survive. All the regulations and innovations in banking serve only one purpose: to strengthen that faith and confidence.

Bank failures and runs on banks were common in America during the depression. Those events are thankfully rare today, in part due to the diligence of the Federal Reserve System and the Federal Depositors Insurance Corporation (FDIC), the regulatory agencies of the federal government, together with strengthened prudential rules on reserves, heightened fiduciary responsibilities, and improved auditing. These refinements have been incremental, each in response to specific problems and crises. Banks still fail today, but thanks to the FDIC, depositors (at least the retail consumers) simply transfer their accounts to another bank without any hitch. The system is by no means perfect, as was painfully demonstrated by the massive Savings and Loans scandal of the 1980s.

The spectacular economic achievements of modern societies are attributable to the efficacy and efficiency of their financial intermediaries. Countries that have efficient and stable financial systems advance; those that don’t, decline, as demonstrated by Thailand, Indonesia, and a host of Third World nations. To many thoughtful analysts, the Asian economic crisis of 1977 was in essence a crisis of the banking system.

Within the last few decades, Islamic-based financial institutions are trying a comeback. As with everything Islamic, the concept sells with Muslims. America now has mutual funds and mortgage companies run along Islamic principles. Even venerable Western banks like Citibank are entering the fray. Academic papers and conferences proliferate. Harvard’ Institute of Islamic Finance and Information Program (HIFIP), with intellectual contributions from its renowned business and law schools, has been organizing annual conferences for the last few years that brought in luminaries from all over.

Much has been said of Islamic banking in which supposedly no interest is charged. This is purely semantics. Sure these banks do not charge interest in the usual sense; instead they tack on “service” fees and points. In the final analysis there is still a cost for the loan. I can give someone a 0% percent loan but charge exorbitant points, commissions, or fees to recoup the cost (interest) of my capital. The end result is the same; the borrower pays a price and the lender gets a reward.

There are American finance companies that cater specifically to Muslim homebuyers who are squeamish about mortgage interest payments. To obviate this, the prospective homeowner goes into partnership with the company to buy the house. The homeowner pays 20 percent of the price and the company the other 80, as in a traditional mortgage. But instead of paying the mortgage as in a traditional loan, the homeowner pays a market rent to the company for use of the house, with 80 percent of the rent payment going to the company and 20 percent credited to the homeowner. Every few years the house is reappraised and when the total payments cover the cost of the house based on the latest appraisal, the house would then be transferred exclusively to the owner.

If the rental market declines, the homeowner will pay less every month, which would be to his or her advantage. But if the market appreciates, as it typically does, so will his rent, and he will end up paying more cumulatively. Not only that, the company gets to reap the bulk of the benefit (80percent) of the gains on the house’s price appreciation. So the consumer gets bilked twice, once in his higher monthly rent and second, in not getting the full benefit of the price appreciation. This is also an inherently a bad system as it creates a perverse economic incentive for the homeowner not to keep up or improve the house so its value would drop, and his payments would similarly fall. That is no way to run a modern economy! In addition, there are all those costs of the appraisals that are being borne by the homeowner.

In reality what these companies are doing is nothing than more an equity-sharing scheme. This has not caught on in America precisely because of the perverse economic incentive. A more popular variation of equity sharing is where the homeowner goes into partnership with a friend or family member to pay for the down payment and then together they would secure a traditional mortgage. When it is time to resell the house, the profit would be shared based on their contributions towards the down payment. With this scheme, there is still the issue of interest payments on the mortgage.

With a traditional mortgage in America, if the borrower is unable to keep up with the payments, he could sell the house and whatever is left after he paid off the loan balance is his to keep. But if the value of the house were less than the amount owed (as had happened in declining markets), and the bank forecloses on the home, the borrower would not be saddled with the outstanding balance. This is because all home mortgages have a “non recourse” clause. The borrower would lose only what he has paid into the house (his equity). So if the concern of the Islamic groups that borrowers would be saddled with debt payments forever, than there could be a similar “non recourse” clause in selected loans like study loans and loans for one’s primary residence.

Similarly if the borrower is unable to repay the loan because of a legitimate reason like illness or death, the loan contract could be designed to cover such eventualities. Many loans now have mandatory disability and life insurance policies attached to them to cover such calamities. But insurance too is anathema to traditionalist Muslims, but I will come to that shortly.

I have a traditional home mortgage and I am quite comfortable with paying the interest on it. I rationalize the interest I am paying as being the rent for the house, and the principal as the payment towards the house. Technically this is correct as the bank has priority over me to the title of my house.

Most of the activities carried by Islamic “banks” are really not the proper purview of traditional banks. Thus leasing (Ijaara), another common service provided by Islamic banks, is done in America by finance companies or directly by the dealers and manufacturers. Islamic bankers also make a big deal on the supposed difference between leasing, which is halal because there is no interest, and traditional loans and mortgages, which are haram because of riba. But this is a meaningless difference. I could easily convert my mortgage into a long-term lease with the same terms, and at the end of the “lease” (mortgage) I would have an option to buy my property at an agreed upon nominal price. One could just as easily calculate the imputed interest rate on all leasing arrangements. Similarly, the profit sharing and “equity participation” lending that Islamic banks partake are properly the function of mutual funds and venture capital firms rather than banks.

By using the familiar term “bank” to describe activities that are properly the purview of other non-bank institutions, proponents of Islamic banking are misleading consumers. All these deferred sales, service charges, and lease payments are nothing but euphemisms for the cost of borrowed funds, more commonly referred to as interest. As Islamic banks do not function like a traditional bank, they should not use the label “bank.” Instead they should use the more generic term, Islamic Financial Institutions (IFI), so as not to mislead the public. I would not however, recommend the acronym “iffy!”

Next: Islamic Financial Intermediaries (Cont’d)

Religious Obstacles To Malay Economic Development

Ramadan is a month for reflection. As we reflect we cannot avoid the depressing reality that the Muslim world is overrepresented in all categories of underdevelopment. The pat and often cited reason is the inherent incompatibility of Islam to modern development. When such an explanation is offered by non-Muslims, they can barely conceal their smugness. When asserted by a Muslim, he or she would immediately be dismissed as not fully comprehending the faith, or worse, condemned as an apostate.

Such an “explanation,” its certitude not withstanding, is about as useful as someone telling you, when asked why he is in the hospital, “I am sick.” And if you are still not convinced or betray any doubts, would quickly add, “Very sick!” Not very helpful! If however, the answer were to be, “My bowels are not working,” or, “I have difficulty breathing,” we would then be that much closer to identifying the problem, and thus its remedy.

This Islam-is-the-problem explanation does not even describe the symptom, much less the disease. If indeed there is something inherently deficient with Islam, it still would not explain why the faith thrived during its first four centuries, or why its adherents are increasing and becoming more devout today. And if Islamic practices are deficient, then what and where exactly are those deficiencies so we could address them.

It is here, specifically in response to the second query, that Timur Kuran’s book, The Long Divergence: How Islamic Laws Held Back the Middle East outshines the rest. Kuran’s insights came from his studies of the Middle East and Turkey, a sub-segment and a minority one at that of the vast Muslim world; nonetheless they apply to Malays in Malaysia.

Kuran enumerated four problematic areas: institutional development; the concept of riba (interest); Islamic inheritance; and waqaf (trusts). I will add a fifth, zakat (tithe), to parallel the five tenets of our faith.

The Stark Statistics

First, the stark statistics: There are more Muslims living under authoritarian regimes today than there are people ruled by communism. As for economic development, Muslim contribution to global economic activities is less than 5 percent, disproportionately way below our share of the population. If Allah had not blessed us with oil, that figure would be negligible. As for social development, the number of books translated into Arabic during the last 1,000 years is less than those translated into Spanish in one year.

A more nuanced understanding, as expressed by James Lacey, is that it is the Arab, not Muslim civilization that is collapsing. Many miss that as most Arabs are Muslims. We would not attribute the fall of the Western Roman Empire to a crisis of Christianity; it was that of Western Europe.

There is no comparable statistics to relate the equally stark contrast between Muslims (essentially Malays) and non-Muslims in the Malaysian context. Nonetheless, stroll down Main Street, Any Town, Malaysia, and the paucity of Malay establishments is not hard to miss, while Prime Minister Mahathir once asserted that non-Malays pay most of the taxes.

Islam is an integral part of Malay life. Unfortunately when confronted with “Islam is the problem” assertion, Malays like most Muslims would simply recoil and retreat to the comfort of our familiar assumptions. The angry few, unable to rebut the statistics, would simply lash out.

To break from that set pattern we must first liberate our minds so we could critically examine those assumptions. Fear not, for if our faith is strong, such an exercise would not weaken it; on the contrary, it would strengthen it.

Obstacles to Malay Entrepreneurialism

Involvement in trade and commerce opens up one’s mind; apart from improving one’s economic and other well being. It also enhances one’s piety, as with the saying, Kemiskinan mendakati kefukuran (Poverty invites impiety). Anyone doubting that wisdom need only visit neighboring Indonesia. It also reflected Allah’s esteem of the vocation that He had chosen a trader to be His Last Messenger.

Successful traders have to understand their clients and customers, anticipate their needs and wants, and see the world from their perspective. The very act of putting ourselves in their place, or as our Native American Indians would put it, to walk in their moccasins, is a mind-liberating exercise. For example, now that we are trading with China and it is our biggest purchaser of palm oil, previously ultra FELDA Malays have a decidedly different view of the Chinese, at least the mainland variety. That is what trade, and a liberated mind, does to you.

The barriers to Malay participation in business are not the often cited “hard” ones like lack of human or financial capital, rather the less recognized “soft” obstacle imposed by our inflexible and unimaginative interpretations of our faith.

A particular problem is our treatment of interest, which we simplistically equate to riba. Credit, the flip side of interest, is the lifeline of business. Grameen Bank’s Muhammad Yunus goes further, he asserts that access to credit is a basic human rights.

Interest is premised on that rare universal truth in economics: time value of money. That is, a dollar (or dinar) at hand is worth two promised in the future. The ancient Arabs were adept at business; they must have had to come to terms with the concept of interest. They did not quantify it or termed it as such, nonetheless when a borrower returned the money or goods, he would have thrown in something extra as goodwill if for no other reason than to encourage the lender to continue lending.

Charging of interests also factors in that universal human trait; we do sometimes renege on our promises, like not repaying our loans.

I have yet to read a cogent explanation on the meaning of riba, and whether it is equivalent to the interest of the many innovative financial instruments that we have today. Many of them were not even thought of during the prophet’s time. It is like discussing transportation; we are still trapped in the warped time zone of the camel caravans when the world is into container ships, jumbo jets, and long-haul trucks. Yes, they re all transportation, but the commonality ends there.

We go to great length quoting various hadith on the evil of interest income. One equates 1/70th of the sin of riba to be equivalent to the sin of having sex with your mother. How offensive an imagery and metaphor! If interest is really that grave a sin, I would have expected other hadith condemning in even harsher tones those who would renege on their loans. I am yet to hear one.

Current Muslim attitude towards interest is similar to those of medieval Christians. The only difference is that they had come to terms with it (undoubtedly fed up with all the wealth from money lending going to the Jews) and with that came Western economic development. Meanwhile the words in the bible condemning usury have not changed.

If today’s Muslims have qualms about learning from or adopting Christian ways with regards to interests, then go back to the early Muslims. They thrived on trading; learn how they adapted to the concept. In many ways that is exactly what we have done today; hence “Islamic bank,” which is oxymoronic.

Just as the West did, we must continually built on and improve these new Islamic financial institutions, tweaking and innovating along the way to meet changing times and circumstances, just as western banking has evolved over the centuries and continue to do so.

This brings me to Kuran’s observation on the lack of institutional development in the Muslim world. It is not enough to rely on the admonishments of hadith and Koranic verses; there must be a workable mechanism to resolve the inevitable disputes, as when someone reneges on his loans, with or without interests. The West has bankruptcy laws and wage garnishing; Islamic institutions too should have similar mechanisms. This lack of institutional development is the most glaring and consequential deficiency of the Islamic world.

Waqaf, Inheritance Laws, and Economic Development

Muslim inheritance laws as currently interpreted may be more just (all children getting a share, albeit the son getting twice that of the daughter) than that of the Europeans (where the entire estate goes to the eldest son), but they are bad for economic growth. One consequence is the fragmentation of the estate on the death of its owner. This is not only disruptive but also prevents a business from growing beyond a generation.

That is also bad social policy even if, as some proclaimed, proscribed in the Koran. Muslims accept the Koran as a document for public and individual good. So if our current interpretation results in otherwise, as with our inheritance practices, then those differences are not real but only apparent. Thus we must re-examine our interpretations. This does not mean disbelieving the Koran. In fact the Koran is silent on when exactly the children would get their share, nor does the Koran specify that the asset itself has to be divided. This paves the way for designing a novel vehicle of issuing shares on the family asset. Then only the shares would be inherited while the asset itself remains intact, thus satisfying the edicts of the Koran and be good economic policy at the same time. Indeed the Western concept of a corporation achieves precisely this objective.

Today we have many large successful Malay enterprises. It saddens me to read of the all-too-frequent ensuing family squabbles upon the death of their owners. The problem is compounded by our tradition of not having wills.

Inheritance practices are what stymied the development of Kampung Baru and Malay Reservations land generally. Unless addressed, those settlements will remain undeveloped no matter how much physical resources we pour into it. The one resource needed is intellectual; for us to re-read and re-interpret those ancient edicts.

Tun Razak anticipated this with his FELDA program; thus the stipulation that the owner specifies only one of his children to inherit the property. This is clearly not in accordance with Islamic inheritance laws. Yet I am yet to hear Muslim scholars challenging the stipulation; likewise the matrilineal inheritance of the Minangkabaus. Perhaps this unique tweaking of the inheritance laws explains why the Minangs are the most economically developed of the Malays.

What we desperately need is the equivalent of the Minangkabua wisdom, adat menurun agama mendadaki (Tradition descends, Faith ascends) synthesis of modern economic insights with our religious precepts.

Landowners of yore recognized this quandary; thus they resorted to bequeathing their properties to waqaf, community trust. The primary motive was undoubtedly charity, but it was also to avoid confiscatory inheritance taxes and fragmentation of their assets.

As noble as the waqaf is, it too needs refinement. As Kuran noted, current interpretation requires that the words of the trust be observed literally. A land bequeathed for a school has to remain so, never mind that it is now in the middle of an industrial area.

For growth to occur there must be capital formation. A common assumption is that Malays have low capital formation; hence our less-than-robust economy.

Zakat is community saving mandated by the Koran. In Malaysia, this is reinforced by favorable secular laws where your zakat is considered tax credit. Annually the sums collected are in the hundreds of millions, if not billions. Yet its management remains rigidly tied to some ossified interpretations of ancient texts. Creatively managed zakat could be construed as the community’s capital formation to boost Malay economy.

Consider zakat’s disbursement; it is still with cold cash that could easily be siphoned off by less-than-trustworthy functionaries. Why not vouchers or direct deposits, as with Mexico’s Progressa program. That would be one way to introduce the poor to the banking system; it would also lead to better bookkeeping.

On a policy level, it would be better if the money were to be invested in a local enterprise that would then employ the poor, combining charity with dignity, and at the same time generating jobs and economic growth. Again we are prevented from such innovations because we have unnecessarily tied ourselves to some old rigid interpretations that have remained unchanged literally over the millennium.

Today there is no transparent accounting of these massive zakat funds. As the Islamic establishment considers interest haram, somebody must be enjoying the benefits accruing from those idle funds. All I know is that the Islamic establishment has some of the most ornate offices, our religious functionaries have luxurious government-issued bungalows and cars, and the religious police and establishment have expanded exponentially. Meanwhile our poor have to seek help elsewhere, as at churches. Bless those generous Christians!

Our trapped minds prevent us from seeing these realities. This Ramadan let us resolve to liberate our entrapped minds so we get a more accurate view of reality. Let us creatively use the provisions of the Koran not to trap us mentally or economically but to liberate us.

Adapted from my forthcoming book, Liberating The Malay Mind, to be published by ZI Publications.

Chapter 9: Islam in Malay Life

Islamic Economics
Dealing With the Concept of Interest

As alluded to earlier, the biggest stumbling block to Islamic economics is the concept of interest. Stripped of its complexities, the issue can be simply reduced thus. When B borrows money ($X) from A, there is a cost involved. Regardless of the terminology, someone has to bear that cost. If at the end of the year B returns to A the same amount of money he borrowed the year earlier, that is $X, he claims to have satisfied the Koranic admonition that he repays his loan at its original amount, nothing more and nothing less. But has B done that?

Consider two facts. First is what economists refer to as the opportunity cost for A; he could use that money for something else that would give him profit or pleasure, instead of lending it to B. Assume the monetary value of that opportunity cost incurred by A to be $Y. The second factor is inflation. Inflation can be simply defined as the diminishing purchasing power of a given nominal sum of money. That is to say, an $X today does not buy quite the same amount of goods and services as a year earlier, or stated in another way, an $X today is not the same (“real”) value as the $X of a few years ago. It is only nominally the same. In actuality X is valued less now than in the past because of inflation. If B were to repay A fully a year later, B should also include the amount lost due to inflation. Had inflation rate been 10 percent, then B should return to A $X plus that 10 percent more. If B only repaid the original $X, then he has only nominally paid the whole sum. In actual practical value, B has only partially repaid in the amount of only $(X minus 10 percent).

Then there is the opportunity costs incurred by A in lending the money to B; that is the $Y discussed above. Thus to fully repay A, B would not only have to repay the 10 percent inflation rate but also the additional $Y opportunity cost incurred. Thus to really fulfill the Koranic requirement of equivalency, the $X of a year ago is now in reality $X plus Y plus 10 percent for inflation. Note that there is no interest at all involved here; these are all real, tangible costs.

My essential point is this: when things are nominally (seen to be) the same, it may not be so in reality. Money was invented in part to put a quantitative value on a transaction so as to make it easier to compare the various costs. If economic transactions were accounted in terms of commodities, for example the number of durians, there will be the added issue of the quality of the fruit, size, and whether it is ripe, unripe or rotten and good only for making tompoyak and not for eating.

Ancient Arabs chose precious metals like gold and silver. Those can be standardized by weight and their quality cannot be adulterated.

Today money is merely paper or beeps of “on” or “off” signs on the digital highway. It is backed not by precious metals but by the people’s faith in the underlying supporting economy. Inflation apart, money may loose its value though formal devaluation or changes in the foreign exchange market. To take an extreme example, a ringgit immediately before September 1, 1998 (the date Malaysia imposed capital control and devalued the rinngit) was not the same value immediately afterward; it had lost 40 percent of its value with respect to the dollar. Thus if you borrowed one ringgit the day before the devaluation and then returned that same ringgit the next day, you have not returned the original loan even though nominally you have returned exactly what you borrowed.

I can further simplify my argument, this time by not using money but a concrete example. Suppose last year my friend “borrowed” a she-camel from me. A year later he returned the same camel to me. Many would consider such a transaction halal (not sinful) as no riba (interest) was incurred; he returned what he borrowed, nothing more and nothing less. But is that true? Imagine my camel was in heat at the time he borrowed it and was later “serviced” in the pasture by some loose bull. After a year (and a few weeks before he was to return my camel), she delivered a baby. Of course that baby camel would belong to my friend, but two questions would immediately arise. One, is the camel he returned a year later the same one (in monetary value as well with common sense assessment) he borrowed? Obviously not; not only is my camel now “worn out” (depreciated, to use a business term) but also I cannot immediately breed her as she had just delivered a baby. That baby camel may be my friend’s gain but it is definitely my “opportunity cost” loss. Had I not lend him the beast I would have a baby camel.

Another is a real life example. During the Japanese occupation a neighbor back in my old village borrowed some money for a short term to buy land. The working currency then was the Japanese “banana” notes. A few months later, as promised, he repaid the loan in full. But by this time there were rumors of the Japanese defeat, and although the currency was still accepted officially, in the marketplace it was rapidly becoming worthless. The crux of the issue: Has the man repaid his creditor in full? Nominally and technically he had; in practical and real terms he had not. This is a very dramatic example, much more than the ringgit depreciation case noted earlier.

In both examples there was no interest calculation to complicate the issue. Yet even without interest involved, defining whether one has actually repaid in full what one has borrowed can be problematic. There is a difference between nominal and real values. Most of the time the difference is small or very subtle, but there are times when it can be very dramatic. When the Koran says you must repay in full, it means to my common sense thinking to repay the real original value. Modern economists differentiate between real and nominal interest rates. If a bank charges an (nominal) interest rate of 15 percent per year but during that time the inflation rate is 10 percent, then the real interest is only 5 percent (15-10). Had the bank charged a rate of 10 percent, then the real interest rate would have been zero, that is, no interest, technically as well as in reality. Looked at another way, the interest rates charged by banks are not interests at all, rather the anticipated inflation rates.

Again this concept can be readily adapted to tangible the items of life. Suppose last year there was a drought and the rice fields were damaged. The price of rice jumped because of the shortage. I borrowed ten pounds of rice from my neighbor. Two years later, the rains came and the harvest was bountiful and the price of rice dropped. At this time I repaid my neighbor with exactly ten pounds of rice. Have I returned exactly what I borrowed? Common sense says no. Two years ago during the drought, ten pounds of rice was worth $20, but with the glut it dropped to $5. To fully repay my neighbor, I should have given him 40 pounds ($20 worth), not 10. And that extra 30 pounds would not be riba.

A comparable episode occurred during the prophet’s time. One of his companions had borrowed a sac of dates. They were the premium first pick of the season: thick, sweet, and luscious. A few months later he repaid with an equal sac of dates, but this was at the end of the harvest season and the nuts were dried up, less sweet, and plentiful. The lender rightly asked for more. The companion asked the prophet whether the added amount demanded was not riba. The prophet emphatically replied that it was not, and indeed asked the companion to go back to the marketplace to ascertain the price differential between the premium first-pick dates versus the season’s leftovers, and make up the difference.

Two important points arise here. One is the concept of nominal versus real. The two sacs of dates may be nominally the same, but in reality they are worth a quite a bit different. Two, the prophet (pbuh) trusted the marketplace to determine what the true value of the two sets of dates. I will return to this second point later in Chapter 11 when I discuss free enterprise as an Islamic tradition.

Modern Islamic bankers have learned well from their predecessors in trying to circumvent the prohibition on riba by resorting to service charges, commissions, and other charges. Those ancient Muslims also published their bag of “tricks” in a book they blatantly titled The Book of Escapes and Ruses! It was these novel interpretations of traditional teachings that enabled the Muslim economic empire to expand. At least those ancient Arabs traders were honest enough to admit that they were circumventing the system. And being honest is the first precept in any religion.

My central thesis is this: money, deprived of its mystique, is like any other commodity and property. I can rent my house and rightly claim rental income. I could similarly “rent” out my capital (money) to someone and collect rental income (return on investment). This rental on my capital can be collected in a variety of forms: interests as in simple lending; dividends with bond investments; company shares with stock market (equity) investment; or co-ownership as with venture capital investments. The differences are only matters of degree and not in kind, quantitative not qualitative. They reflect gradations in magnitude of the risk/benefit ratio. The simple interest with bank deposits represents the lowest risk and also correspondingly the lowest returns. Venture capital investments represent the biggest potential for profits but also the greatest risks. It is an investment axiom that high rewards come only with high risks.

Enthusiasts of Islamic banking go through contorted reasoning in trying to differentiate between riba and other forms of returns on investments that are deemed religiously acceptable—halal. Techniques like cost-plus sales (Murabaha), deferred payment sales (Bay Mu’ajjal), deferred delivery sales (Bay’ Salam), and credit sales (Bay Bi-Thaman ‘Ajil) all carry hidden costs that, as El-Gamal rightly observes, any high school student could easily calculate their imputed interest rates. All these Islamic bankers have achieved is simply to complicate an ordinary and simple traditional credit transaction in an effort to camouflage the cost of the funds (interest) by calling it some other fancy name. In the process it makes “comparison shopping” difficult for the consumers.

The beauty of modern credit sales is that they reduced the costs of the credit to a simplified figure that can be used for easy comparison. Credit, which is a manifestation of lending, is a modern fact of life. If everything had to be done on a cash basis, the economy would be crawling. We use credit to build hospitals, schools, and hosts of other activities that benefit society.

Grameen Bank’s Muhammad Yunus asserts that credit is a basic human right. Everyone is entitled to it, especially the poor. Grameen Bank has improved immensely the livelihood of many Bangladesh peasants with its micro credit lending programs. In any religion, that would be considered a praiseworthy deed.

Credit is a matter of faith, and not repaying a loan would be a breach of faith. And breach of faith is not only a sin, it is also a crime, and rightly so. Today we have some Muslim zealots who rationalize that they can borrow money but need not repay it, claiming that interest is haram, and therefore the loan itself is haram. They suddenly discover religion when it comes time to repay the loan. How convenient!

If they feel that way, then they should not have borrowed the money in the first place. To me the greater sin is to borrow with no intention of repaying.

The greatest obstacle to the economic growth of Malays and Muslims generally is that we have denigrated the rewards of savings by labeling them as interest and thus haram. Thus I purposely choose the neutral term “rewards on investments.” We can encourage Malays to save even more if we can dispense with the theologically loaded term “interest” and substitute my “rewards on savings” instead. This is more than just a semantic change or an attempt at “spinning,” rather it represents a qualitative change in concept. It recognizes that lending is a legitimate human activity – a valid service – and therefore profits on it are as valid as in with other economic activities. I will elaborate on this point in the following section on Islamic banks.

Next: Islamic Financial Intermediaries

Chapter 9: Islam in Malay Life

Islamic Economics

The success and vitality of the modern economy is based on the availability of credit. It is credit that makes the economic world spin smoothly. “Credit is the vital air of the system of modern commerce,” observed Daniel Webster. “It has done more, a thousand times, to enrich nations, than all the mines of all the world.” A plaque on Wall Street, the heart of American capitalism, declares, “Credit: Man’s Faith in Man.” Credit is predicated on the promise that it will be repaid.

Shakespeare’s words in Hamlet, “Neither a borrower, nor a lender be: For loan oft loses both itself and friend….” is only true if we do not repay our loans and the gratitude that goes with them. Indeed not repaying our debts can give rise to even worse consequences, as victims of the mafia and triads will testify. Even threats of defaulting can be devastating, as Argentina is now discovering.

Ancient Muslim traders must have had a system of credit and promissory notes; they could not be hauling their gold and silver bullions on their caravans, risking robbery. The hang-up today’s Muslims (and also others) have on the issue of credit rests on the related question of interest (riba) and usury.

The usual argument that interest is sinful arises because of the connotation of extortion. If a father needs money to buy food or medicine for his children, yes it is indeed sinful to charge him any interest at all for the money. If the recipient is truly needy, then simply donate the money. That is the basis of zakat or tithe, one of Islam’s five pillars. If I charge the poor soul an exorbitant interest rate (usury) and if he fails to repay me (as he surely would), do I then break his leg, mafia style? That would not only be sinful but also criminal. You need not wait till Judgment Day to be punished; you go to jail right here on earth, and deservedly so. Nor can I make him my slave to pay off his debt. Slavery and indentured labor have long been banned.

On the other hand, if I have some spare funds that I do not need right away (for example, savings for my children’s education) and an entrepreneur could use that capital to start his business, I see no reason why I cannot be rewarded for letting him use my idle money. After all my money is like any other property I own. If he uses my car, for example, I can charge him a rental fee, so why cannot I charge him a similar “rent” (which is what interest is) for the use of my money?

Another way of looking at it, my lending him money is comparable to my providing him a service. Therefore I should be suitably compensated for that, just as surely as had I repaired his hernia. Besides, my lending serves the greater society, not just the two of us. His company would employ workers and produce useful goods. Had I kept my money under my mattress, nobody would benefit.

There is no question that riba is prohibited in Islam. It says so clearly in the Qur’an as well as in the various ahadith. The crux of the issue is to the actual meaning and intent of that ancient Arabic word. Words have a way of acquiring different meanings with time. Earlier I alluded to the term “poet,” which was highly pejorative during the prophet’s time. Likewise, what riba meant to the ancient Bedouins cannot be simplistically and literally be transferred to all forms of costs of capital in modern economics. One simple reason is that many of these modern financial instruments were non-existent in the prophet’s time. There was no such thing as venture capital or corporate bonds in ancient times.

Another reason for the prohibition of riba is that Islam prohibits “making money on money,” which interests and other forms of the costs of capital imply. One can, however, make money by trading on goods and services, and Islam encourages this. The distinction between money and tangible goods is that the former has no “intrinsic value,” thus trading on it is equivalent to gambling. The value of money is what society puts on it. While this is true for paper money, it is not necessarily so for gold and silver, Islam’s ancient currencies. Those precious commodities do have intrinsic industrial values quite apart from their aesthetic (thus acquired) ones. Silver for example is an important ingredient in film imaging. And gold is useful in certain precision engineering as well as in pharmaceuticals.

For modern Islamic scholars to simply equate riba to all forms of interests is unwarranted. As I will show shortly, there are conceptual differences in the various forms of costs of capital (interest) and that, stripped of its mystery, trading on capital (money) is no different from trading in other goods and services.

Going to my earlier example, how I charge that entrepreneur for the cost of renting my property (capital) is a separate issue. I could for example, share in the risk, that is, seek part control of his company. This is the basis of modern venture capital. When his company is successful, I would sell my shares and recoup my principle plus the “rent” or profit of my money, thus rewarding me for my earlier savings. If I do not want to take the risk of losing my principle, I could pre-sell my shares for a preset price to another willing individual. In this way if the company becomes very successful he gets a bigger reward, if it fails then he takes the risk. This after all is the basis of share options. These are all manifestations of the costs of my money, that is, interest. Or to use my preferred term, reward on savings and investments.

Alternatively I could claim a percentage of the final product. This is common in rural Malaysia where farmers would “rent” their idle rice fields in return for a portion of the harvest. The landowner may decide not to get the harvest and would prefer to sell his share back to the farmer and merely collect the cash. Whatever it is, there is a cost for the use of capital, in this case, his land. You may label this cost in whichever way: interest, stock options, dividends, part ownership, share of harvest, or whatever.

Muslim theologians have no difficulty grasping and agreeing to this concept of borrowing as the lender shares the risks with the borrower. This in contrast, in their view, of putting money is a simple savings account where the depositor bears no risks of losing his money (capital). That is only a matter of degree. There is a small risk, but thanks to modern safeguards banks today are very safe. But back in the early 20th Century in the West and in many Third World countries today, you risk losing your precious money should the bank goes belly up. Indeed many Third World citizens today (including many Malaysians) see an unacceptable risk in their local banks and thus put their money in foreign banks. Similarly, many an investor had lost their capital investing in Third World Railroad bonds.

Thus when an investor seems to invest his funds “passively,” in reality it is far from that. He has to be prudent and investigate the risks and balance the rewards. Even in choosing a bank, not only has he to be careful to choose one that gives the best returns (interests) but also one that is safe, convenient, an offers superior services. All these require diligent evaluations. There is no such being as a passive investor. Thus we could look upon interest as rewards for the diligence of the investor.

Viewed another way, interest or costs of capital may be considered as profits on the trading of that capital which happens in this case to be money, instead of land or rice.

In the ordinary trading of goods and services, there is a fair and right price, determined by the free market of willing buyers and sellers. But if one party monopolizes a commodity and starts hoarding it in order to exact an exorbitant price to rake in the maximum profit, than that is rightly considered illegal (and sinful). America has elaborate antitrust and other laws to prevent business collusion and other anti-competitive behaviors.

Similarly in the trading of capital (money), there is a legitimate cost beyond which it becomes not only exorbitant but creates other serious consequences. Usurious (excessively high) interest rates are bad not only for individuals but also for society. They will extinguish all economic and business activities. There is no redeeming social or economic value in that. The economy would simply collapse.

Malaysia was smart enough not to heed the advice of the IMF during its recent [1997] economic crisis to jack up interest rates to levels that would cripple an already ailing economy, just to support the currency and satisfy the IMF bureaucrats. The bane of many Latin American countries is that their interest rates are so high that they choke off all economic activities.

It is interesting that in the current economic crisis in America triggered by the bust in the housing market, its central bank has purposely kept the interest rate very low.

The voluminous Islamic literature on interests and credits can be divided into two categories: one, usually written by religious scholars who are well versed in Islamic literature but woefully ignorant of modern economics; two, works of competent economists but whose knowledge of Islam consists of selective quotations of the Qur’an and hadith to support their positions. Rare indeed is an exposition that compares and contrasts accepted and well-tested concepts and principles of modern economics and banking with traditional Islamic understanding of the subject. The reason for this is that few economists are well grounded in Islamic learning, and fewer still are religious scholars who also understand modern economics. The ulama’s versions are long on erudite recitations of the Qur’an, hadith, and traditions. They strain to create qualitative differences between various terms which, stripped of their semantic gymnastics, are nothing more than a continuum on the risk-versus-returns spectrum.

The few notable exceptions to this sorry state of affairs are the contributions of Rice University’s economist Mahmoud El-Gamal. He readily admits to not being an Islamic scholar but he has the advantage of at least being a native-born Arabic speaker and thus can read the original Islamic texts and relate those terms and practices into their modern counterparts.

Next: Dealing With the Concept of Interest

Chapter 9: Islam in Malay Life

Islamization of Education

There was a time when religion did not have any role in the Malaysian education system. Public schools were completely secular. There were some Christian missionary schools during colonial times, but they did not attract many Malay pupils. Malay parents were fearful that their children would be converted, a not unreasonable anxiety given the proselytizing fervor of those early missionaries. Following independence, religion was still kept out of the schools. There were Islamic schools but these were private, small, and mainly in rural areas. They catered exclusively to children of poor villagers. Their mission too was equally modest: teaching the basic rituals of Islam. Typically they were the one-teacher schools, the madrasah. Not much was expected and not much was delivered. I briefly attended one of them.

In light of the 9-11 attacks, there is much attention paid to the goings-on in these madrasah. They are less educational institutions and more indoctrination centers. They breed the kind of fanatical adherents to the faith – rigid and intolerant – that are the bane of so many Muslim societies.

Sometime in the 1980s Islam began creeping into the formal school system, at first imperceptibly but later accelerated under the tenure of Anwar Ibrahim as Education Minister. Today, Islamic Studies is a core subject for all Muslims students. There was an arrogant attempt by Anwar at making it mandatory to all at the university level, but that was quickly withdrawn amidst intense opposition from non-Muslims.

The government also set up a system of public religious schools where the entire curriculum is consumed with Islamic Studies. The physical facilities of these schools are far superior to the madrasah but the intellectual climate is only marginally better. Universities that are supposedly geared for science and technology also have large Islamic Studies departments. The International Islamic University only very recently established engineering and medical faculties. Thus while the nation is in desperate need of scientists and IT graduates, Malaysian universities still churn out Islamic Studies graduates by the thousands. Their only avenue of employment is public service; they are useless in the private sector because of their narrow education.

At the time of independence in 1957, Malaysia had a substantial cadre of well-trained English teachers but none or very few in Islamic Studies. It amazes me that forty years later Malaysia is chronically short of English teachers but has a glut of religious teachers. Why this is so reflects the emphasis of the educational establishment.

Examine the typical school day. There are only so many hours, thus time devoted to the study of prophetic traditions and Qur’an must come at the expense of other subjects. It is not surprising then that Malay students do not excel in English, science, or mathematics. Too much is expected of them.

Malaysia is forever lamenting the shortage of Malays in the sciences. Look at the facts. One third of Malay students opt for religious schools, where there is little science taught. Of the remaining who chose national schools, more than half pursue the non-science stream. Thus only a third of Malay students are channeled into the science stream. Non-Malays have no religious or ethnic studies to distract them.

In the religious schools it is, as expected, all religion. Thus if their graduates do not get accepted into Islamic Studies at local or Arab universities, they are stuck. There is little transferability. Every year thousands of these students are stranded, unemployed or simply unemployable. These are the youngsters who have plenty of time to demonstrate on the streets. The system has failed them and they have every right to be angry.

Clearly, the religious schools must be revamped. I would broaden their curriculum to include English, science, and mathematics. Religion should only be one subject, not the all-consuming curriculum. Likewise secular schools should relegate Islamic Studies as an elective or at least de-emphasize it. The manner in which religion is taught too should also be changed, away from rote memory and emphasis on rituals and catechisms, to understanding the underlying concepts and essence of the faith. Use the vast literature and scholarship in Islam to develop critical thinking among the students. They should be exposed to the rich and diverse viewpoints within Islam so as to broaden their intellectual horizon.

Religious schools are popular with Malays because of the Islamic cachet. Unlike secular schools, they have low dropout rates. Malays value education when wrapped in Islamic garment. Because of this natural affinity it is all the more important that the government should not fail them.

In the decade following independence, at the height of nationalism and resurgent pride in Malay language and culture, a generation of precious young Malay minds was wasted in the relentless pursuit of the national language policy. The dreams and hopes of thousands of promising youngsters were crushed when they discovered that their hard-earned certificates and diplomas were worthless. Today Malaysia is repeating the same mistake with its zeal and emphasis on Islamic Studies. Sadly like before, the victims are again all young Malays.

The cause of Islam is enhanced greatly if future ulama have a broad-based liberal education. It would also give them a wider and better perspective. If nothing else, it would disabuse them of their arrogant certitude. They would then be less likely to resort to simplistic recitations of the hadith or the Qur’an when confronted with complex problems. Perhaps then they would make real and meaningful contributions to their ummah.

I am equally alarmed at the current intellectual fad of “Islamization” of knowledge, that is, the attempt to put an Islamic imprint on all disciplines, especially the natural sciences. Invariably it means the adulteration of science. Thus we have Islamic “scientists” who have never seen, let alone used, a test tube! Yet another absurd example: Malaysian Islamic scholars trying to blame the jinn (devil) for the recent onslaught of computer viruses! Such incidents only expose their woeful ignorance of science. The insight and wisdom of science are also ultimately derived from God and we should respect that without having to dilute or spin it into one’s preconceived ideas of what is Islamic. Science is science; there is no such thing as Islamic science just as there is no such thing as Western science. Hydrogen combines with oxygen to produce water, in Islamic Saudi Arabia as well as in atheistic Russia. Likewise, two plus two equals four, whether in Islamic mathematics or Greek numerology.

Science and religion are complementary, not adversarial. Science attempts to explain the physical world around and within us, while religion answers man’s basic spiritual needs. Advancements in science has benefited mankind immensely, we should not belittle those. But no matter how well off man is materially, there will always be the spiritual void that needs to be filled with religion. The seminal difference between science and religion is this. In science you have to see in order to believe. With religion, first you believe, then you see.

In trying to discern differences where none exists, Muslim intellectuals and scientists are wasting their energy. They would be better off trying to elucidate the secrets of nature. That after all is the essence of science. Such activities as “Islamizing” this and that simply mask their dearth of intellectual ingenuity and curiosity. They cannot discover anything original in their own discipline and thus spend their time concocting schemes at such puerile intellectual pursuits as “Islamizing” established principles.

A more sinister aspect to the activities of these Islamic “scholars” is that they are hiding behind their Islamic credentials as a back door to success. Unable to advance on the usual merit, they put on the Islamic garment. Religion has always been the refuge of scoundrels, including academic ones. With the emphasis on Islam in Malaysia today, nobody dares call these academics to the carpet. Instead they are being rewarded with promotions and honors for “uplifting” the image of Islam. In truth, scientists like Abdus Salam (1979 Nobel laureate in Physics), Ahmad Zewail (Chemistry-1999) and thousands of others quietly toiling in their laboratories to uncover Allah’s secrets, do more to enhance the image of Islam than third-rate Muslim scientists cloaking themselves in the veneer of the faith.

In many ways the Islamization of Malaysia generally and of the government specifically, is reminiscent of the communist ways in the old Soviet empire. Then young Russians knew that the way to the top was not by excelling in their own field but by the back door—through the party. Thus unable to be productive as scientists or engineers, they found it much easier to be promoted by displaying their party credentials. Likewise Malay scholars and professionals today, unable to shine on their own merit, found it easier and more rewarding to embellish their Islamic credentials. Malay civil servants, lacking in executive ability and innovative ideas, exuberantly display their ardor for Islam (at least superficially), so their own incompetence could be easily overlooked.

I see only continued and increasing influence of these Islamists on Malaysia’s educational and other institutions; Malaysia risks degenerating into an Ireland of the 1920s. If this trend is not reversed, the nation and Malays specifically will continue to be mired in mediocrity.

Next: Islamic Economics

Chapter 9: Islam in Malay Life

The Quest For Answers

Present-day Muslims look askance at the sorry state in which the vast majority of our ummah live. Muslim nations, even those well endowed by Allah with abundant rich natural resources, live in abject poverty. Human rights abuses are the norm in many Islamic countries. As painfully noted by Abdullahi An-Naim, the vast majority of Muslims live at a superficial level of both Islam and modern civilization. Although we claim adherence to Islam and exhibit apparent commitment to its ritualistic formalities, we fail to appreciate and live up to its moral and spiritual essence. Likewise most Muslims benefit from modern civilization but have little appreciation of the values and ways of thinking that underlie and sustain those technologies and institutions. Further, many Muslims’ understanding of Western civilization is often reduced to the gaudy simplistic images propagated by Hollywood, and the seamier aspects highlighted by Muslim fundamentalists eager to denigrate the West.

Muslim leaders are no better. They smugly and gleefully gloat over the ills of the West without once pausing to look over the inadequacies of their own society. Meanwhile the West progresses while Islamic societies stagnate. Envy and jealousy are common human faults. As a result today there is considerable rage against the West among Muslims. The 9-11 Al Qaeda’s attacks on America are only the latest and most vicious manifestation of this ugly emotion. I suggest that Muslims emulate, not hate the West. The energies of Muslim leaders and scholars should instead be directed to picking the best out of the West for emulation. Condemning (or destroying) does not take any talent.

Bernard Lewis’s critique of Islamic societies in What Went Wrong, suggests that contemporary Muslims in pondering their fate should stop asking the question, “Who did this to us?” and more usefully substitute, “What did we do wrong?” and, “How do we right it?” That Lewis is not a Muslim does not in any way diminish the wisdom of his observation.

Muslims can begin to answer the “What we did wrong?” by first critically reexamining the sunnah and Shari’a. Foremost we must remember that both are the creations of man and have qualities inherent in all such endeavors, including the possibility of errors and imperfections.

Only the Koran is perfect. Contrary to accepted wisdom, the sunnah is not the practices and sayings of the prophet, rather what some scholars interpret to be so. It is instructive that the collection of ahadith (plural for hadith) considered most authoritative is that of Imam Bukhari. But he was not even born until nearly two hundred years after the prophet’s death. It is equally instructive that he rejected thousands of purported sayings of the prophet (pbuh). The essential criterion he used was the lineage of the oral propagation (isnah), relying heavily on the piety and reputation of the transmitters. The assumption is that the pious would not willingly fabricate or embellish. May be not willingly or consciously, but our memory does play fools on us, regardless of our piety or wisdom. Being a mere mortal, we can expect errors on Bukhari’s part both in including the less-than-truthful ahadith as well as excluding some legitimate ones. Remember, only Allah is perfect.

Had Imam Bukhari and the early scholars not put as much effort on evaluating the theological pedigree of the transmitters and instead concentrated their intellectual energies on reconciling the purported sayings and practices of the prophet (pbuh) with the message of the Koran, their ensuing treatises might have been considerably different. Or perhaps Bukhari, knowing full well how entrenched some of the beliefs in the purported sayings and ways of the prophet (pbuh) were in the minds and culture of the Muslims then, dared not personally challenge the perceived wisdom. He knew only too well the fate that befell “deviationists.” Thus he ingeniously devised the “science” of hadith by using his considerable intellect and prodigious memory to tracing the lineage and transmission of each hadith. With this “science” he found a neutral or objective way of dispensing with the more outrageous and embellished sunnah and ahadith. Were he to simply dismiss them through his own independent research and critical thinking, he would have been lynched. As it was, he had his share of denigration and banishment for daring to dispense with some of the more popularly accepted but obviously preposterous ahadith.

Today over a millennium later, there is no possible way of independently ascertaining the veracity of the lineage and pedigree of the sunnah. In the interpretation of the Koran, modern scholars pay as much attention to the “occasion of the revelation” as to the text, thus giving us a much richer and more perceptive reading. We should likewise do the same in interpreting the various ahadith, that is, examine the occasion of the purported sayings as well as analyzing their historical and sociological contexts.

Many scholars, past and present, have cautioned Muslims on attributing infallibility to the sunnah and Shari’a. We should reserve that only for the Koran. Kassim Ahmad has suggested doing away completely with hadith. For that audacious position, his book was banned in Malaysia and he was branded an apostasy. So much for Muslim tolerance in Malaysia! I disagree with Kassim, but I find his views refreshing even though his analyses and reasoning are less than rigorous. We must have an open mind and treat the hadith and sunnah as historical and sociological vignettes in order to understand the Koran better.

To me the current debate on whether Malaysia should adopt the Shari’a and whether it is an Islamic state is futile, nonproductive, and highly divisive. Such controversies are nothing more than wayang kulit (shadow play) or sandiwara (staged theater) between UMNO and PAS out to display their religious aroma. At least wayang kulit and sandiwara are entertaining and help bring people together. The bigger question that has yet to be addressed and is being shunted aside in the preoccupation with trivia, is how to make the present laws and institutions conform to the ideals of the Koran.

Next: Islamization of Education

Chapter 9: Islam in Malay Life

Confusing Examples For Principles

My main criticism of the traditional ulama is that in their meticulous and detailed studies of the individual verses of the Qur’an and sunnah, they completely miss out on the underlying theme – missing the proverbial forest for the tress.

To Taha, Muslims’ preoccupation between secular and Islamic state is arbitrary and useless. The values of supposedly secular Western societies like gender equality, commitment to basic human rights, abhorrence of cruel and inhumane punishment, the brotherhood of mankind, and participatory democracy are also Islamic values and ideals. That the West has absorbed and claimed these virtues to be its core is no reason why Muslims should not also subscribe to them. If we follow Taha’s message and make the Shari’a compatible with modern values and aspirations, which as we have seen are also Islamic, then the question of secular versus Islamic would not arise.

The Syrian reformist Muhammad Syahrur argues along similar lines. In his book, al-Kitab wa al Qutan: Qira’a Mucasira (The Book and the Qur’an: A Contemporary Interpretation), he challenges Muslims to imagine: Had Allah revealed the Qur’an today, how would it be written? Apart from being an intellectually stimulating exercise, it would certainly help us understand the Holy Book better. Such an endeavor however, requires considerable mental effort, much more demanding intellectually than simply parroting the lessons of the past.

In my book The Malay Dilemma Revisited, I posed a similar question. Had Allah chosen an Eskimo to be His Last Messenger instead of an Arab, would the imagery of Hell be a place of eternal fire or a cold frozen dungeon?

The Qur’an and sunnah teach through parables and anecdotes, but we should not confuse these examples with the underlying principles. Let me illustrate this principle with, well, an example.

If I were to explain the universal theory of gravity by stating that gravitational pull is directly proportional to the mass and inversely to the square of the distance, or more precisely and elegantly stated by the simple formula g=km/d2, only math jocks would get excited. Others would fall asleep. But if I were to illustrate this with the example of an apple falling to the ground, then the concept is readily grasped. But if one confuses this example with the underlying principle, then one’s faith would be severely shattered on seeing an apple floating when in a spaceship. Indeed if you drop an apple while on one of those gut-wrenching roller coaster rides, it “falls” to the sky. If we truly understand the principle of gravity, then these apparent aberrations, far from shaking our faith, reaffirm it.

Much of the disagreements over the interpretations of the Qur’an and the sunnah are attributable to this confusing of examples over principles. We interpret the Qur’an literally, often completely missing its essence.

I am reminded of the Catholic priest who was sent to preach among the Eskimos. On his first sermon he was in his usual fire and brimstone form, exhorting the natives not to plunder, lie, or fornicate lest they would be sent to burning Hell. Imagine his horror the very next day to find his congregation enthusiastically doing all those damnable deeds. To his angry admonition, they jovially countered, “But Father, we want to go to that place where the fire burns all the time!” Confusing example with principle!

It is instructive that many of the fresh insights into Islam are the result of the intellectual efforts of lay Muslim scholars rather than traditional ulama. Equally significant is that these scholars often are the product of Western liberal education, imbued with the capacity for critical thinking. Taha and Syahrur were professional engineers. Abdullahi An-Naim has a law degree from Cambridge and a doctorate from Edinburgh. As noted by Fazlur Rahman, himself an Oxford PhD, the level of scholarship of the traditional ulama is severely challenged. Their training is narrow, lacks scholarly rigor, and is singularly devoid of original thought. The state of the traditional Islamic educational institutions is no better. Al-Azhar University, Islam’s Harvard, did not have disciplines outside the traditional theological field until the late 1960s. Thus its scholars did not have the opportunity for intellectual cross-fertilization with those in other fields. They remained insular intellectually and socially.

The best hope for the future will be the new breed of scholars coming out of Western universities. It is gratifying that many leading American campuses now have chairs in Islamic Studies. These future scholars, trained under the liberal, broad-based education that is the hallmark of the American system, will lead Islam into its renaissance. According to Osman Bakar, the Malaysian Chair of the Institute of Islamic and Christian Understanding at Georgetown University, America will be the second Mecca. Islam flourishes only in an atmosphere of freedom. America amply provides that.

Traditional ulama are dismissive of Western-trained scholars. To them you are not a “real” Islamic scholar if you do not have the overflowing robe (preferably green, the color of the prophet), oversized turban, and scruffy beard. The spiritual leader of PAS, Tok Guru Nik Aziz, in a Friday sermon contemptuously dismissed Western-trained scholars as having been brainwashed by “orientalists” out to ridicule Islam. When you cannot challenge the message, simply attack the messenger – an age-old trick, and a very cheap and ineffective one at that.

Next: The Quest For Answers

Applying Prospect Theory To Ending Affirmative Action
M. Bakri Musa
www.bakrimusa.com
bakrimusa@juno.com

An insight of cognitive psychology (that sub-discipline dealing with mental processes like thinking and decision making) is that humans are far removed from the ideal of a rational self-interested Homo economicus (Economic man) when making decisions, contrary to the core assumption of traditional economics.

Two factors weigh heavily when we make decisions, given a set of alternatives. One, we are loss averse; that is, we magnify the value of a potential loss and minimize the potential gain even if the two are quantitatively the same. The other is that how those alternatives are framed very much influences our decision.

Although these insights refer to individual decision-making processes, nonetheless they can be extrapolated to the societal level, on how we collectively make decisions. This has relevance to the central wrenching issue dividing our Malay community today, on whether to continue or do away with affirmative action.

The example (minus the intricate mathematics and fancy graphs) used to illustrate the Prospect Theory (as this new insight is called) is the potential epidemic of an Asian disease hitting America that is expected to kill 600 people. When asked to choose between an intervention that would save 200 people and another that would have a 1/3 probability that 600 people would be saved with 2/3 probability that no one would, most would approve the first. Both propositions state exactly the same thing. The first however, framed it more positively with the element of undue certainty thrown in.

There are other variations on the same theme. Thus we willingly drive across town to save $5 on a $15 calculator but not on a $125 suit. The savings are the same – $5 in both cases – but what decides is the framing. Never mind that you spend $10 on gas to drive across town! Marketers make full use of these insights of cognitive psychology when advertising their products. Thus the grabbing banners: “Fifty percent savings!”

Returning to the difficult issue of affirmative action, we have made it unduly contentious as we have framed it unwisely. One, we have stated it as taking away special privileges, and being risk averse, we rightly reject that. Two, we have framed special privileges as being part of our character, our right by virtue of being the indigenous people. We forget that affirmative action was instituted for the explicit purpose of overcoming disadvantages we suffered under colonialism. Those privileges were meant to jumpstart our development so we could be on par with the rest of the community.

New Frame of Reference

We can deal with the issue of special privileges more effectively and less acrimoniously by tapping the wisdom of modern cognitive psychology. First, we must reframe the discussion differently, away from privileges and the taking away of them, to the more general but pertinent issue of enhancing Malay competitiveness; and second, we must amplify the benefits and minimize or lessen the loss of doing away with these crutches.

By making affirmative action part of our culture and character, we have made it difficult to critically examine it. No matter how noble in intention and beneficial the results, any scrutiny would be viewed as an attack on our values, character and heritage. Those are formidable obstacles.

Instead we should focus not on special privileges per se but on how to prepare our people for this new highly competitive economy. Indeed I would specifically eschew any talk of doing away with special privileges; all that does is to inflame passions and further polarize us. Once we are competitive, then the need for special privileges would simply melt away. Then we can talk of about ending them more rationally as they would have become irrelevant in the lives of most Malays.

What made affirmative action so highly effective at its inception was its emphasis on education and rural development. Under Tun Razak, schools were literally mushrooming in the villages, bringing both development and education. I vividly recall that in the seven-mile bus ride from home to my high school in town, there were no fewer than seven primary schools being built! In the afternoon when the children were finished, those schools would still be full, this time with adults attending literacy classes.

The emphasis on rural development made great sense; the overwhelming majority of Malays then were rural dwellers. Under FELDA, massive land development schemes were initiated, with mass relocations of landless kampong folks, an internal migration of sorts, so they could begin a new life away from the stifling atmosphere of their old villages. Its sterling success in mass relocating poor people remains the only shining example in the world up to this day.

Today the noble mission of FELDA has been hijacked, the entity itself being “corporatized,” another government-linked company (GLC). Tell me, how does the building of a RM 670 million headquarters in the glittering part of KL make those FELDA settlers in Ulu Pahang more competitive? Headquarters are nothing but expensive overhead. Likewise, I fail to see how FELDA’s plantations abroad would help the poor people back in my kampong.

The same query could be posed on the billions spent on GLCs. Najib, like his predecessor Abdullah, cannot find a GLC he does not love. He and we accept that because those expenditures are being framed as furthering NEP and not on the more pertinent issue of making Malays competitive. Had we done that, then obviously those funds would be better off diverted to making schools in FELDA settlements have the best facilities and teachers, as well as making sure that those settlers have electricity and potable water.

Maximize The Gain, Minimize The Loss

The other insight is of risk aversion. For us to favor a decision, we have to be convinced that the promised gains would vastly outweigh the potential loss, and that the majority would benefit and the loss suffered by the minority, preferably a minority we (the majority) are not enamored with.

If we dispense with inflated contracts to UMNO cronies and instead get the best price through competitive bidding, then we could build two schools for the price of one. Even if that contract were to be won by a non-Malay or even a foreigner, the benefits would fall on the hundreds more Malay families whose children would now have safer and better schools. The losers would be the handful of UMNO-connected “contractors” and Ali Baba “entrepreneurs.” Again, many more gainers with far fewer losers! Besides, those losers are the types we have difficulty identifying or sympathizing with.

Similarly with the billions spent on GLCs; again if we divert those resources to improving our schools and universities by recruiting superior teachers and professors from abroad, thousands would benefit. The losers would be few, those has-been politicians and near-retirement civil servants seeking cushy corporate jobs. Again, those are the people we do not readily sympathize or identify with.

I advocate this in my forthcoming book, Liberating the Malay Mind. Sell all those GLCs including and especially such jewels as Petronas and MAS, and put the proceeds in a professionally-managed trust fund with the returns to be used exclusively for education and improving the lives of our urban and rural poor. To me, it is far more important to train young Malays to be pilots, airline mechanics, geologists and petroleum engineers than to own an airline or oil company.

One big benefit to selling those GLCs would be the elimination of a major source of undue lobbying and influence peddling by politicians and senior civil servants. Currently they, especially the near-retirement civil servants, are preoccupied with ingratiating themselves to their political superiors in the hope securing a coveted chairmanship of a GLC on retirement from government service. With that no longer an option, these civil servants would then be emboldened to challenge their political superiors should they embark on some silly policies. Were that to happen, we would have a far superior civil service, and the whole country would benefit.

Another benefit to ridding these GLCs is that those highly accomplished Malays presently in Petronas and Khazanah would be free to sell their talents to the highest bidder and then be appropriately compensated. Right now they are being unfairly taken advantage of, in fact seduced by such silly sentiments as national service and misguided notions of patriotism.

As for those less talented who infest the many money-losing GLCs, well, those companies were not created to be public work projects for them.

The other reality to the discussions on special privileges is this. If today we were to embark on a policy to enhance Malay competitiveness, assuming that it is highly effective, it would take a while for its results to be apparent. Further, we do not know or can predict specific potential winners except for the amorphous “Malay masses” and the aggregate results. Hence there will be no one to lobby or vigorously advocate for the changes.

On the other hand, if we were to terminate affirmative action today, the losers would feel the loss right away. Not being saints, they will fight it; they will immediately be on the streets protesting, as those in Perkasa are doing. That is predictable.

This dilemma is the greatest challenge facing policymakers everywhere, especially in a democratic society. China does not have that problem. Thus it would take an extraordinarily enlightened and farsighted leader to achieve this, someone focused on the long term and not on the next election. Such leaders are also the ones most likely to tap the wisdom of others, including that of behavioral economists and cognitive psychologists.

Unfortunately for Malaysians, Malays specifically, our current leaders are content parroting the latest buzzwords of those disciplines, while their long-term strategy never extends beyond the next party elections. Self-interested they very much are, rational they are not.