Why $2 Trillion Is Kept In Banks That Can't Give Interest - YouTube

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Alright, well, this video is about the nuances of Islamic law, so surely nothing could possibly

go wrong.

Pretty positive all the comments are just going to be about how my voiceover style has

been really good lately.

So, let’s start this off by saying that almost everything I’m going to discuss here

is subject to some level of disagreement by scholars.

But if I start every sentence by saying “some scholars believe” and then end every sentence

with “but interpretations vary,” then I’ll never get to the ads that are gonna

pay for me to upgrade my Tesla to a larger, faster, and newer Tesla while my writer toils

away on more scripts.

So, the Quran, the Islamic holy book, is generally understood to ban “riba.”

Why they hate charming southern sitcoms is beyond me, but apparently, riba is often also

translated to mean “interest”—as in, the type you pay on a loan, not the type girls

never showed me in middle school.

So, at some point in between a long time ago and now, some Muslim folks decide to get serious

about this whole riba thing, and create a whole banking system that complied with shariah

law.

But, you ask, how can a bank operate if it can’t charge interest?

Interest is banks’ whole thing.

A bank without interest is like a Biden speech without the phrase “Look, folks.”

Well, first off, there are a lot of things that the riba-free banks just can’t do.

They can’t buy or sell traditional bonds, because those are interest-based, and they

can’t offer normal mortgages or interest-backed loans.

Even apart from interest, they also can’t invest in a lot of classic financial assets.

That’s because in addition to banning riba, Islamic law is generally understood to ban

“ghirar” or “uncertainty,” and “masir” or “gambling.”

Essentially, this means Islamic banks can’t buy or sell a lot of the things conventional

banks buy and sell and sometimes create international economic collapses with, like forwards, futures,

options, or swaps.

The idea here is that those things are less investments—putting money into something

to help it grow—and more just bets on what will happen.

If I short something, I’m not trying to help it grow; I’m just making a bet that

it will fail—or I’m behind a giant onion conspiracy, but that’s a different video.

Finally, there’s also a ban on investing in anything that’s haram, which includes

the alcohol, pork, gambling, or arms industries—basically, anything Joe Rogan is into, Islamic banks

can’t fund.

But look, folks: instead of focusing on what they can’t do, let’s focus on what they

can.

There are a number of different services and workarounds that Islamic banks offer—in

fact, so many that if we went through all of them it would take, like, twelve videos,

and writing videos about really long bus rides and stuff is a lot easier, so we’re going

to avoid that.

So let’s focus on the system’s two key lending mechanisms: mudarabah and murabaha,

which I know look like the same word, but hey, the English world expects everyone to

know the difference between the words though, tough, and thought so I say we don’t complain

too much.

So, in conventional banking, if I wanted to start a business, let’s say it’s an Irish

breakfast tapas place called “Tapas The Mornin’ To Ya,” I would go to the bank

and ask for a loan, and then they would give it to me, because it’s a brilliant idea,

and I’d have pay back that loan, plus interest—which, if you don’t know because you’re not a

big business boi, is a percentage of the loan that accumulates over time.

The longer you take to pay the loan back, the more interest you owe.

Under mudarabah, though, instead of owing the bank money, I would enter into a partnership

of profit and loss sharing with the bank.

For “Tapas the Mornin’ To Ya,” the bank, called the rabb-ul-mal, or sleeping partner,

would provide the capital, I, the person starting the business, called the mudarib, would lend

my expertise and labor and incredible restaurant naming skills, and then we would share profits

at a pre-agreed ratio.

If “Tapas The Mornin’ To Ya” failed, which again is impossible because it’s literally

a perfect idea, but if it did, the bank and I would lose equally in proportion to our

ownership.

There’s also a popular version of this called musharaka, which is the same except there

can be more than two parties and all of them have the right to be involved in management.

But the most common tool used in Islamic finance is something called murabaha.

So, let’s say I want to get a loan to make a big purchase, like a house, or an even faster

Tesla that I won’t let my writer touch nor look at.

Well instead of a mortgage, where I would get a loan from the bank, buy the house, then

pay the bank back with interest, under murabaha, the bank would buy that house, and then sell

it back to me at a higher predetermined price, which I can pay to them over time.

This doesn’t violate the riba ban because, according to the banks, there can be a legitimate

difference between the cash price and the credit price of something.

Now if you’re saying to yourself, “I dunno that’s like… pretty similar to a normal

mortgage,” first of all, there is a key distinction, which is that there’s no penalty

for late payment or reward for early payment.

But second of all, well, yeah you’re kind of right, which is why this method isn’t

preferred by most shariah law advisers—although the customers don’t seem to care, seeing

as murabaha accounts for 80% of loans by Islamic banks.

Now, to be clear, not all Muslims use Islamic banking—in fact, the majority don’t—but

still, it’s gotten pretty popular in recent years: as of 2019 there were over 430 Islamic

banks plus a couple hundred mutual funds, which in total hold around $2 trillion in

assets, which is approximately 1% of the world’s assets, or about 8% of the assets of the world’s

billionaires.

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