Thursday, 25 July 2013

Islamic finance is nonsense, says Prof. Timur Kuran.

Timur Kuran had an article in the Financial Times a day or two ago in which he said amongst other things that "Islamic banking, in it's current form, will go down in history as a mighty deceit...".   He also says the main reason that British universities teach Islamic finance is that there given loads of money by the Saudis to do so. And on the question as to whether Islamic finance is actually practiced in the Muslim world, the article says "Not at all. The overwhelming majority of the Muslim world's business schools teach the economics taught at the world's leading business schools".

There is more about Timur Kuran here.


  1. First of all, Timur Kuran didn't use the word "nonsense." Maybe you like to call it nonsense.

    Second, Timur Kuran has made a career out of trashing anything associated with Islam. And he plays it safe and avoids coming to any Islamic finance conference to defend his views, not even at the confs at Harvard.

    Third, because you are in Durham, it may help you to know that Durham univ is running the largest Islamic finance Phd program in the world. May be you should take their popular Islamic finance summer school and do a more informed less emotional blog?


    1. First, given that Timur Kuran uses the words “deceit” and “bogus”, the word “nonsense” is a perfectly fair. If you really want, I’ll replace the word “nonsense” in the title with the phrase “a deceit”.

      Second, the fact that he doesn’t turn up at Islamic conferences proves nothing. I get asked to all sorts of conferences but vary rarely go because it consumes large amounts of time and money, which is ridiculous given that one can communicate instantaneously with anyone in the world and at no cost via the internet.

      Third, I have no intention of going to Durham University’s Islamic courses. But I have looked at several sites advocating Islamic finance. I found what I expected to find, namely the idea that interest should be banned because God says so, or because the Koran says so, etc. I haven’t time for that nonsense. What I want is SPECIFIC and DETAILED REASONS as to why interest actually does harm.

      As it happens, a number of Western economists, me included, have worked out that there actually are SPECIFIC CIRCUMSTANCES where lending money and demanding interest does do harm. See:

  2. If what you want is "SPECIFIC and DETAILED REASONS as to why interest actually does harm", try Diwani's "Problem with Interest."

  3. Dear Ralph,

    Would you agree that fractional reserve system only creates debt based money but no equity based money? Would you deem it logically that this creates an imbalance, which is not at all sustainable and will end badly?

    Further let me add that the prohibition of Riba in Islamic finance does still allow certain debt. It however ends interest on interest, leading to exponential growth of debt, and links each credit transaction to the real economy (at least it should: by leases and credit sales).

    Thus, Islam does suggest a preference for equity finance and recommends modesty of debt, abolishing exponential debt growth, while allowing some forms of asset finance.

    Would you consider this as worth a thought?

    NB: Judaism, Christianity and Islam all do agree in principle.

    Best regards,

    Michael Gassner

    1. Hi Michael,

      Speaking as an educated person (so I like to think) who has read a large amount about economics, I don’t want to see our banking or economic system based on the ideas of some religious leader who lived 1,500 or 2,000 years ago. I can think for myself.

      But actually I’m a keen supporter of full reserve banking: i.e. I oppose fractional reserve. E.g. see this paper of mine:

      The basic flaw in fractional reserve banks, I think, is that they are vulnerable to collapse, as has been shown over and over again thru history. Therefor they require taxpayer support or subsidies, and its widely accepted in economics that subsidies do not make sense, unless there are very good social justifications for them.

      Banks or other lending entities under full reserve are funded just by equity. So to that extent I agree with Islamic banking. However I see nothing wrong with those entities charging borrowers some fixed amount of interest (10% or whatever). And I suspect I part company with Islamic banking principles there.


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