Sunday, March 04, 2012

Joel Brinkley: Sharia's Failure in Saudi Arabia?

Joel Brinkley

Joel Brinkley writes a weekly column on foreign affairs that appears in many papers, but I usually read it in a local paper, The Korea Herald, and the column this week was rather carefully titled "Youth aren't served in Saudi Arabia" (March 3-4, 2012), but it's really about the failure of sharia to deal with the modern world:
Saudi Arabia faces a mammoth housing shortage for . . . [its] young people and others. Banque Saudi Fransi warns that the state will need 1.65 million new homes in the next three years, just to meet current demand . . . . [A] proposed mortgage law, intended to open the housing market . . . . has been marooned, "under study," in government committees, for more than a decade now . . . . These problems raise an important, even fundamental, question: In the modern era, can a fully Islamic state, like Saudi Arabia, function in way that serves its people? . . . . [T]he issue behind the housing, jobs and other problems is Islam . . . . [Saudi Arabia is] the only state governed entirely by Sharia law in its most uncompromising form. And Islam forbids lending or borrowing money under any scheme that requires paying interest. In other words, mortgages . . . . [Last year], King Abdullah . . . [promised] to build 500,000 new homes . . . . [But] how can young people, particularly, buy homes without a mortgage? The state does run a Sharia-certified, interest-free mortgage service, essentially a charity. But it can't fund every new homeowner -- especially since 60 percent of Saudi Arabia's 28 million people are under 30 years old . . . . [P]otential homeowners must wait 18 years for a mortgage . . . . Last year, the government took up the mortgage bill again, talked about it a bit, enacted a couple of incremental bits, but then tossed it back into the swamp where it remains today.

I knew of sharia's ban on interest (riba), which I presume is the issue here, and one can read more on Islam's economic laws at Wikipedia. I hadn't realized that this single prohibition had such far-reaching effects in a relatively successful Islamic state that is bursting with oil wealth. I hadn't given the issue any thought, but if asked, I'd have surmised that sharia-compliant banking had dealt with the issue of mortgages and had found a way to provide housing loans.

Is Mr. Brinkley correct on this point, i.e., that the most Islamic of states, Saudi Arabia, can't find an Islamically approved manner of providing loans in a way that will work successfully?

Or do the Saudi youth fail to take out loans because they refuse to work at menial jobs and simply expect the government to provide everything for them, including free housing?

UPDATE: I emailed Professor Brinkley to ask if he were aware of the issues raised by Erdal in the comments, and he responded as follows:
"Thanks very much for your note. I appreciate it. I am aware of much of what your commentator said, but there's only so much detail you can include in a 750-word column. I often wish I had a longer format available for pieces like that one."

That's the extent of the reply, and having written columns myself, I grant his point, but construe it as you think fitting . . .

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At 9:22 AM, Anonymous Erdal said...

There's no shortage oh sharia-compliant housing finance models, some lease-based, some sale-based, some around some form of shared ownership. They work as well as any other model, and they compete well with interst-bast loans via ordinary bank credit. Also, they all enable the bank, or institutional investors, to profit from their investment. This has been working in Turkey for decades.

However, if you introduce up-front and interest-free loans into the market, as the Saudi state did with their state fund RDEF in 1975, you crowd out the commercial competition, which is precisely what happend here. They have 5-year-plans and quantitative targets, as if Breshnev was their economic advisor! They had overcapacity in the past, they have undercapacity now. State planning.

At 11:52 AM, Blogger Horace Jeffery Hodges said...

I wondered if that were the problem. Who would take out a costly loan if the government provides inexpensive ones?

Thanks again, Erdal. Maybe you should tell Mr. Brinkley . . .

Jeffery Hodges

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