Wealth is good; I doubt if anyone with common sense can deny this. Money is what makes the division of labour possible. According Adam Smith, division of labour is what creates wealth, and he proved it beyond all reasonable doubt with the example he supplied regarding the manufacture of pins. The development of money was a spontaneous evolution as the organisation of human societies became very complex. It is one of the finest examples of the genuine inventiveness of the human mind. The evidence of the use of money has been found even in the most primitive societies from the use of sea shells to the ultimate – gold. Money is a medium of exchange; it is pure and simple. Without money it is impossible to reward the invaluable services of, for example, a doctor who does not produce tangible goods that can be exchanged. Therefore, money is the first step in human cooperation and progress. Remove money from society and human cooperation will grind to a halt.
The use of money, in almost all human society, is a pointer to the creative capacity of all races. There is no doubt about the fact that some people have got better skills to command more of it legitimately. Others, too, apply sinister tactics to acquire more illegitimately, and we have laws against that. However, the wily and unconventional behaviour of a small group of people have poisoned our perception of money for millennia. Even the bible teaches that it is easier for a camel to go through an eye of a needle than for a rich man to enter into the kingdom of God. The latter biblical statement tends to denigrate wealth. I will not broach the logical conclusion of that statement, but is poverty something to be celebrated? I beg to differ. Such cancerous perception about money and wealth led an intelligent person like Karl Marx to be filled with indignation and a burning desire to abolish money. I am afraid; it would have been the end of society as we know it. Just picture very seriously a society without money, and those that the functions of money broke down like Germany and Argentina just to name these two.
I know you are probably still querying where this is leading to. I am inflicting this pain on you because of the person whose comments forced my hand to embark on the whole Nkrumah series. What you have read so far in the series was basically triggered by the follies of Nkrumah. On the other hand, it wouldn’t have seen the light of day, and the credit goes to one of the comments I read on Francis Kwarteng’s rebuttal to my second piece on the topic. Worse things were said by other commentators; however, I did not take them seriously, because I perceived them as intellectually handicapped comments. On the other hand, that of a university professor could not be allowed to go unanswered. If Professor Kwesi Atta Sakyi thinks that Islamic banking is superior to capitalist banking that is his personal opinion, and he is entitled to his own professorial ignorance, and I respect him for it. But to suggest that Philip Kobina Baidoo Jnr is cringing in the face of Mr Kwarteng’s unmitigated and, perhaps forlorn stupidity Professor Sakyi cannot be allowed to hide in his tall grass and bleat out his childish comments that I expect from an uneducated person. I really do have sympathy for ignorant uneducated people, because they haven’t had the sort of opportunities that I have had in my life. However, my patience withers into thin air when it comes to well educated people like Professor Sakyi. In our country, the word of such a person is taken as sacrosanct and it makes me angry when they pontificate on subjects they have little understanding knowing well that their readers will take them as the gospel.
Islamic banking is a product of the 7th century. It took shape at a time when governments did not tax their subjects like mafia racketeers, printing money to finance their pet projects and literally in modern time buying votes to keep them in power, a process which causes a currency to depreciate. If the conditions of the 7th century still remain then a case can be made for Islamic banking. During the time of the prophet people lived in communities where everyone knew each other and can identify an individual’s family and even their ancestry. In such a milieu, default was relatively rare. But let’s assume that the loans are being offered by an old man who has worked hard all his life and come to retirement. Don’t you think he will need a bit of compensation for his trouble?
The ignorance of these people is beyond comprehension. Usury is a medieval ideology that goes back to ancient times. Perhaps, the only serious literature on the topic before Aristotle was in Deuteronomy when the Jews were told by their patriarch – Moses – not to take interest on loans. But even that, they were meant mainly between family members. The notion of usury is an uncouth terminology, which should have been buried in the middle ages, but it survives in the heads of people like Professor Sakyi. It was a silly idea that kept Europe poor and sometimes ended in deadly pogroms against people who charged interest.
The Saudis the custodians of the Islamic faith do charge interest, at least, as far as I know, around 4.5%. If Islamic banking is that great and able to foster productivity you would expect all the Islamic countries to be falling over their heads to embrace it. Nonetheless, it constitutes just 1% of all financial services in the world out of the 23.4% of the world population who call themselves Muslims.
Islamic banking is nothing but a myth. One writer described it better than I can as: normal banking sprinkled with holy water. An essay I read on the subject was entitled: Islamic Banking Is Fraud and deception. I am not going to tell you what was written in the article, but I will furnish what I know best in Britain. Here in Britain, the mortgage sector is one of the most vibrant parts of the banking industry. The Islamic banks also charge the going interest rate; however, there is a slight of hand that completes the transmogrification into a holy banking. For example, if a property is selling for £100 to give the cover of Islamic banking, the Islamic banker will buy the property and calculate the payable interest over the period of the mortgage and bill for let’s say £180. The only advantage is that when the mortgagor is unable to meet the repayment and the property needs to be sold any profit accrued will be shared between the mortgagee and the mortgagor. Any loses becomes the problem of the lender. What is the difference between that and normal banking? The fact is you are not having the property for hundred pounds and when you fail to keep up the repayment you will equally end up on the streets. The best part of Islamic banking is the profit sharing aspect. Even that veritable option has a superior counterpart in capitalism called venture capital.
There are some people who wouldn’t mind to lend money for nothing. The question is how many people are willing to do that. In that case, the economic prospects of a nation will depend on the benevolence of some people. Does this make sense to any of my readers? I don’t think that the economic prospects and policies of a state should be driven by hopes, but by incentives. How many people are willing to lend money without interest to be able to generate a critical mass? First and foremost, the charging of interest is a compensation for the effort someone puts into changing the time the loan becomes available. Secondly, for the trouble of the lender as well as security if that is what he does for his daily bread. Interest to some degree is a form of insurance. Even in a stable fiscal environment it is not all those who take out loans who pay back, some default. Unfortunately, those who enjoy the services, which the banker provides will have to contribute to the cost of doing business. That is why interest on ‘payday’ loans, in addition to their administration cost, attracts exorbitant rates between 1000% to 6000% APR due to the high default rate. It is unfortunate that the cost will have to be borne by somebody, and you don’t expect the lender to pick up the cost, do you?
Let me further expatiate on the need for interest on loans. Let’s take, for example, a retired old man living off his savings in an economy, which the activities of the government surreptitiously steal away 15% of his savings every year. I think we can go with the assumption that this old man is even prepared to lend without interest. Will it make sense if, for example, he deposits his GHc100 in the bank, and at the end of the year inflation reduces the purchasing power of his GHc100 to only GHc85? Can Professor Sakyi put himself in the shoes of this old man and tell me whether it is wrong, at least, to accept interest rate of 15% per annum? The high rate of interest is not the fault of the lender, but the inflation created by the government high deficit spending that people like him advocate. Even here in England the effective keeping of financial records have enabled most financial institutions to pass on the cost of default to the group that create the most by paying high rate when you have bad credit record.
I will offer Professor Sakyi a simple scenario to induce his thought processes. Capital is an economic resource and according Lionel Robbins it is scarce in its availability. And once an economic resource is scarce it needs to be rationed, and the price system is the best way to allocate resources in every economy. In effect, interest charged by lenders is a way of rationing the limited capital resources available. Assuming there is no price for money, how are you going to distribute that in a society with such a limitation? The possible outcome is that capital is going to end up in the
An optimum level of interest rate is about 4%, and in most cases competition can further drive it down. However, we do not have such modest rates in a place like Ghana, because the government manipulates the currency through unacceptable deficit spending and stifling corruption. This is what translate into high interest rate that an ignorant Professor Sakyi thinks it’s bad. The depreciation of a national currency has always been brought about by the manipulation of the currency by the state. I am very angry, because it is very sad and difficult to argue with people who think they know, yet don’t know anything about the subject they write about.
The question that a person like Professor Sakyi will have to ask himself is why the base lending rate, for example, Standard Chartered Bank 2009 January 30th was 27.50%. Strangely, it drops to 16.95% by 31st January 2013 and currently it stands at 20.92%. Were the bankers of Standard Chartered Bank less greedy or the inflationary pressure on the cedi was drastically reduced, and, therefore, the reduced cost of doing business could be passed on as benefit to their clients. Was the 27.92% interest rate in 30/1/2009 caused by the capitalist banking system in Ghana or the mismanagement of the macroeconomic fiscal policy? When the government borrows more than the economy can support and it results in high interest rate for clients of the banking industry, these infantile ignoramuses blame capitalism for the debacle brought on by what they trumpet.
Some people will be wondering why I do use insulting language so much. My answer is very simple; I do because I am angry about the retrogressive ideology of people like Mr Kwarteng and Professor Sakyi who are supposed to know better. The fact is these people take us backward. Why should I be writing an article to defend the righteousness of charging interest in an economy? The reality is you are wasting your time reading this. This time wasted should have been about how we can get out of the mess the NDC has landed mother Ghana.
Philip Kobina Baidoo Jnr
London
[email protected]