What RBS and the banks can learn from early Islam

The disastrous results released by RBS earlier this year were bad from a financial perspective – a loss of £5.2bn in 12 months. But they were even worse morally.

Contained in the 318-page report, and listed in the unfortunately named section “Highlights”, are a catalogue of sins, including fines for fixing Libor, for mis-selling “structured collar products by the cartload and the systemised scandal of PPI [payment protection insurance]”.

If the sentence that follows is not meant as a joke, it is certainly a brave one: “RBS is committed to serving its customers well and helping them realise their ambitions.” Who knew that those ambitions included being ripped off?

Nevertheless, the report does try to seek penance for past deeds. This been a chastening year, it says. A time “to put right past mistakes.” RBS is lucky it was not in the banking business around the time of the birth of Islam – or it would have found things much more uncomfortable than a light grilling by the Financial Services Authority and the series of humiliating fines and provisions. The bankers would not have been losing their bonuses; they’d have been losing their hands.

One of the great secrets of early Islam was the store that was set by justice and on fairness in commerce. It was significant that the spiritual revelations delivered to Muhammad promised a new way of doing things, a way that protected private individuals as well as businesses from being exploited by those with access to credit. Of particular concern was the issue of the principles of lending money – a topic that appears repeatedly in the Koran.

The customers of RBS and the other banks implicated in the current scandals would recognise the sins that Islam’s holy book warns about. Those who set out to exploit their customers by excessive borrowing charges are no different to “those controlled by the devil”, records the Koran.

The glee captured by the internal telephone recordings released during the various rate-rigging enquiries may not be demonic, but the principle is the same. “It’s amazing”, one delighted trader at RBS noted, “how libor-fixing can make you that much money.” The rewards were intoxicating.

In early Islam, it was recognised from the outset that for the community of believers to flourish, a structure that provided protection for all was essential. This meant aligning the interests of the most powerful – those, that is, who had capital to lend. If money was loaned on disproportionate terms, the rich would get richer while those who had borrowed did all the hard work, and worse, had to pass on the fruits of their labour.

Once a former trader himself, it is little surprise that the Prophet Muhammad recognised the pattern of exploitation all too well and sought to do something about it.

So a firm line was taken to prevent this from happening. Excessive interest charges and market manipulation were not just banned by jurists, but declared to be sinful activities. The punishment did not involve fines and settlements with an equivalent of a regulator in late antiquity, but with a higher authority. Those who persist in lending in a way that prejudices the borrower “will incur Hell where they shall live forever.”

It is not all bad, however, as the Koran makes clear, for those who saw the error of their ways could still find their way back to God’s favour – both through true repentance and through charitable acts. There was, unfortunately, not enough space in the 318-page Annual Report to allow RBS to show the good works that it does for charity, even if there are flickers of regret about how things have been done in the past and talk of putting things right.

So, it may not be too late – if RBS and the other banks finally get on with compensating customers trapped in the vast web of one-sided deals and put the bad practices behind them.

Modern economists rarely look at the Islamic world for inspiration when it comes to assessing the impact of austerity measures or central government spending, and seldom look in this direction for tips about how to stimulate an economy. But it is perhaps no coincidence that the strict mechanics insisted on from the first days of Islam concerning lending coincided with one of the biggest financial booms in history that saw the Muslim world blossom into an intercontinental superpower.

Getting the balance right to allow small businesses to grow on terms that are fair and reasonable is the bedrock of any successful political system. But then again, being able to threaten vengeance from on high for greedy bankers can be rather useful too.

  • Boris MacDonut

    That is a loss of £35,000,000,000 since the taxpayer took it over on top of the £37,000,000,000 bailout and various larger gaurantees and they still paid out massive bonuses. I say hand the good bits to the new post office bank and dump the rest asap. Next Wednesday looks like a popular day to “bury bad news”.

  • Boris MacDonut

    #1 my mistake the taxpayer bought £45,000,000,000 of useless RBS shares. The £37 ,000,000,000 was near useless Lloyds stock.

  • Boris MacDonut

    Doc Franzopan. Any relation to Eric of Pomernia circa 1400?
    You are right to point to the early years tolerance of Islam. But I fear modern Islam is more akin to Thatcher and the Banks. Intransigent, intolerant and so certain it is right there is no need to research other possibilities.
    I have just finished Judith Herrin’s History of Byzantium.It has filled a big hole in my knowledge and I am now firmly on the side of the Orthodox Christian…..and not the grocer’s shop Methodists and Moslems

  • May Hem

    Nice to see some lateral thinking for a change. I’m not in favour of bodily mutilations but more effort is needed to find ways to discourage financial chicanery. Prison is too short, too expensive, too comfortable for white-collar criminals and too hard to arrange within our legal system.

  • Orb

    “Intransigent, intolerant and so certain it is right there is no need to research other possibilities.” – reading your rants on other MW articles Boris, sounds like an accurate description of your attitudes in them! Imagine that: a likening to Mrs T.

    “It has filled a big hole in my knowledge…” we needed salvation from your dictations and abuse before; ‘heaven’ help us now…

  • 4caster

    Usury, or the charging of excessive interest is against all three Abrahamic religions. Islam takes that to the extreme, and outlaws all interest. Depositors in Islamic banks still get a return, but it is based on the profit their capital generates, and is not guaranteed. I don’t recall any Islamic banks being involved in the scandals of recent years, so that is one (perhaps the only) bit of Sharia law I can support. Perhaps we should all switch to Islamic banks!

  • jackanory

    Boris, “I say hand the good bits to the new post office bank and dump the rest asap” In your opnion would that include bad mortage dept and poor business loans? Cut off the dead wood springs to mind

  • insaan

    well written…..and very well pointed out the facts from the most misunderstood religion

  • Bayard

    “Perhaps we should all switch to Islamic banks!”

    Good idea. However, I noted in my last visit to a branch of Lloyds that they now offer a “Shariah compliant” account, so perhaps there is no need. Perhaps a rich Arab might like to take Lloyds off the hands of the government and turn it into a proper Muslim bank.

  • Boris MacDonut

    #7jackanory. I’ve seen the bad mortgage debt problems at RBS at close hand. Yes, I agree wipe it out and long with this mismanaged zombie bank.

  • FR

    Judaism, Christianity and Islam eschew Usury.

    Jesus (a Jew, not Christian) kicked out moneylenders from the temple, calling them robbers (Matt. 21:12). In Arabic ‘Riba’ includes lending money or goods, wanting multiple amounts back (>100% interest), considering it oppression. (Quran 3:130)

    Most people (Muslims too) simply equate interest and usury, unaware how fiat currency is not real money. Its controllers (central banks, who print cash even in normal times) constantly depreciate value of cash by 2% pa. So lenders of fiat need to take interest just to break even – taking no interest is really GIVING borrowers 2% pa.

    So paper currency is a house of cards built on a foundation of evil, with residents blissfully unaware. (Doug Casey joke: 95% of Americans don’t know gold exists.)

    You thought the common factor between Bubbles Bernankers, Mario Super Druggie, and Carnal Mark was Goldman Sachs ? How about – the DEVIL ? (Then again… what’s the difference ?!)

  • Sea Bass

    Good article…. Nice to get a different perspective on things.

  • marcus

    I suspect central bankers would find a welcome home with the Islamic theocracy. They are both blessed with a similar level of integrity and serve their congregation for the benefit of all humanity. Mervyn Akbar!

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  • Fahad

    Very well written article.
    I think it’s about time that the western world starts to look more into Islam and the Economic solutions that Islam offers and how it can run a stable economy that seeks to secure and satisfy the needs of every citizen.

  • Shuaib

    I am pleased for once the topic of Islam is discussed in a civilised manner, free from biased propaganda we often see and hear. I think it does provide a real alternative to today’s economy. But I think there will be a very serious clash of values here, capitalism will seek to profit through exploitation, while islam promotes fairness and equity. I for one have an interest free account, what’s stopping all of us switching? Not because of religious purpose, but for a better alternative. That would certainly shake the foundation of the paper based economy.

  • Almir Colan

    well said, we need more ethical approach to banking and finance.