From: deniz@mandolin.ctr.columbia.edu (Deniz Akkus)
Subject: Re: ERBAKAN HOCA ve EKONOMIK PROGRAMI (Islamcilardan secmeler)
Organization: Columbia University Center for Telecommunications Research
Date: Wed, 23 Dec 1992 15:55:57 GMT
X-Posted-From: mandolin.ctr.columbia.edu
NNTP-Posting-Host: sol.ctr.columbia.edu

In article <29830@castle.ed.ac.uk> emev02@castle.ed.ac.uk (H Oral) writes:
>Do you justify then that a men who do not produce anything but just
>by putting money into bank gaining so much money that he becomes like
>a Saudi petro-millionaire, a fatso; and while a man who works so much that
>his underwear sticks to his body from sweat, and still suffers from
>low living conditions due to low wages?
>
>I also would like to ask you:  Where does the money come from to pay
>to the fatso?  Why is he legally able to claim a share in it?
>
>If this is your understanding of justice, then this discussion needs
>not to continue.  Because I do not think that at the end what we are
>aiming is the same.  My aim is to achieve peace through establishing a just
>system, not an unjust system where at the end we have unhealthy social
>structures both domestically and internationally.
>

>Hamid

There are two types of investments: Fixed income and equity.  

Fixed income investments occur when there is lending after some fashion
involved.  This would be a loan from a bank, a certificate of deposit, a
mortgage, issuing bonds etc.  By issuing debt, the debtor agrees to pay
interest backed by some securitization.  The securitization can be your
house in the case of a mortgage, nothing but your promise to pay in the
case of a credit card, or the full faith and paying ability of the US
government in the case of a Treasury bond.  This is what you are liable
for in case of default.  In turn, you pay a certain rate of interest
which changes in response to the kind of security you have offered to
the lendor.  If you are college student paying interest on credit card,
the rate of interest that a lendor is willing to give you is higher than
the rate of interest the same lendor is willing to give to the US
government when the lendor buys a US Treasury bond.  This is because the
college student poses higher risk.  If the rates are usurious, in a free
economy, the college student goes elsewhere and finds someone else
willing to offer him less interest.  The ability of both the lendor and
the debtor to choose freely in an economy large enough to handle such
movement causes efficient markets -- there is a price for risk.  If
there is more risk, the debtor pays more to make the lendor assume the
greater risk.  Risk and cash are commodities to be bought and sold.

The second part of investment is equity.  You found a business in
conjunction with someone, you purchase a house, you buy stock in a
company.  You are part owner -- in the case of stock ownership you are
liable for only the value of the stock -- which can decline to zero.
Generally your liability increases with the level of involvement you
have in the running of the business.  

Both are valid forms of investment.  If you wish to share in the ups and
downs of a certain enterprise, you buy a share.  If you do not wish to
experience the full swings of such an enterprise, you estimate the level
of risk they pose and charge them a fee for giving them the necessary
cash.  Your liability *and* your upswing is limited.  If the company you
lent money to is the old Xerox way back when they were penny stock, too
bad, you collect only your fee, no more.  

The Islamic laws governing interest date from a time when they were
posed to protect people from usury.  In an efficient free market, there
is no usury.

regards,
Deniz Akkus deniz@ctr.columbia.edu