Sorry. In the buyback arrangements in Islamic banks the resale is for more, not less. The borrower must buy back the assets for more than they were sold to the lender. Surprise, surprise, the agreement generally involves the difference between the two prices, the net which the borrower must pay to the lender, to be paid out in fixed amounts over a specified time period. Gosh, and what does this resemble awfully closely? Barkley Rosser On Wed, 26 Aug 1998 14:51:41 -0400 (Eastern Daylight Time) "Rosser Jr, John Barkley" <rosserjb at jmu.edu> wrote:
> Carl,
> You can find extended discussion and lists of sources
> in the sources I listed in my last post on this.
> However, let me note that classically there have been
> a number of financing arrangements approved of for Islamic
> banks, although there is considerable controversy among
> Islamic economists about these. Some look much more like
> "profit-sharing," in effect making the banks like mutual
> funds with equity interests in their borrowers. Other
> arrangements, which have become increasingly common in many
> Islamic banks, involve essentially what are charades or fig
> leaf arrangements that are essentially interest.
> A popular one involves buybacks. Thus technically the
> borrower sells the assets to the lender for some period of
> time who then sells them back to the borrower. But the
> resale is for less. Given that this sale-resale
> transaction can happen in a matter of seconds during a
> single closing transaction, the period of bank ownership
> during which it is "bearing the risk" of equity ownership
> may be infinitesimal. The difference between the sale and
> buy back prices then becomes essentially interest.
> Such arrangements have spread as Islamic borrowers
> lied to their creditors about their profits. Neoclassical
> economists would call this a "principal-agent problem."
> Barkley Rosser
> On Wed, 26 Aug 1998 09:34:46 -0400 Carl Remick
> <cremick at rlmnet.com> wrote:
>
> > Re JBRJr's: " Let me note that there is an economic aspect to this
> > in the form of Islamic economics, that gets pushed by
> > Islamic fundamentalists, including the Wah'habists. In
> > virtually all of the Islamic Shari'as is the forbidding of
> > interest (riba), found vigorously expressed in the Qur'an.
> > There is now a worldwide Islamic banking movement that does
> > not technically involve the payment of interest ... I note, however,
> > that .... profit is approved."
> >
> > With the growing polarization between Western and Islamic cultures, the
> > topic of Islamic economics deserves extended discussion. The
> > proscription concerning interest has always intrigued me -- though that
> > "not technically" point shows there is a lot of wiggle room there. In
> > any case, I would value learning more about this subject.
> >
> > Carl Remick
>
> --
> Rosser Jr, John Barkley
> rosserjb at jmu.edu
>
>
-- Rosser Jr, John Barkley rosserjb at jmu.edu