This paper presents in a more or less chronological order, the development of the financial institution of banking in association with the concerned social, political, religious and ethical circumstances while concluding to suggest a possible alternative in the form of Islamic Banking. The document tries to answer various questions that arise in this regard at various stages of maturity of the proposition. In the beginning the shift in attitude regarding pursuit of worldly success has been identified that marked relaxing rules about usury (or re-defining it) materializing into a formal banking system.
The protest against the established Christian thought, common among all the ‘Abrahamical Religions’ about the other worldly achievement as the right quest has been manifestly outlined. In the paragraphs following this, has been implied that European exploration, exploitation, colonialism, imperialism etc. have got a close association with the emergence of the system of banking which influenced (as well as, was influenced by) the political power and the society adjacent to it.
Afterwards the pros and cons of this conventional banking have been discussed in the perspective of large scale industrialization which gave Europe distinction from other regions of the world. A not so detailed discussion about the virtues and evils of Capitalism is there while putting forward a thesis that Western Style Banking is at the root of growing economic inequality, the vice particularly attributed to modern day capitalist societies.
Nevertheless acknowledgement is there regarding the role played by traditional banking in funding the advancement of industrialization accompanied by subtle remarks about the superficiality of the related growth. In the last and lengthy portion of this manuscript has been proposed the alternative to this system of banking viz. the Islamic Banking peculiarly characterized by its interest free nature. The experiments which have been going on in and around the globe in this field have been taken into account along with the underlying philosophy and promises it has.
Conventional Banking: Socio-political & Religious Perspective and Islamic Banking The European outlook on usury and banking used to be governed by Christian ethical concerns until what is known as Renaissance, Enlightenment, Reformation and related terms. Wendy Griswold notes that “Innovation, Calculation and the seizure of profitable opportunities presented by another person’s weakness had long been condemned by the church as damnable and regarded by English elite as contemptible” (668).
But with the advancement in Protestantism and enlightenment the attitudes changed and these activities turned out to be accepted as legitimate. Ideas of virtue shifted from being austere and content to competent and successful. Max Weber discussed these in The Protestant Ethics and The Spirit of Capitalism in the form of a theory about which P. C. Gordon Walker in a journal article astonishingly remarks: The bombshell was dropped by Max Weber in this century in a brilliant development of an idea suggested to him by W. Sombart in his 1902 edition of Der Modern Kapitalismus.
Sombart here proclaimed as a guiding force in the evolution of capitalism and the modern world the “Spirit of Capitalism,” which consisted in the pursuit by the individual of gain for its own sake, in exact calculation, and the rigorous rationalisation of every department of life. Max Weber in his Protestant Ethic and the Spirit of Capitalism(1904-5) found a personal vehicle for this capitalist spirit in the Calvinist and the Puritan and demonstrated with ingenuity the causal connection between the doctrine of Calvinism and the inculcation into its adherents of the capitalist spirit (1).
Resultantly a competition for economic power led them to explore new worlds and impose their wills upon the parts of world they were able to dominate to their interests. Colonization was thus the natural outcome and colonialism admixed with a strife among powerful in any particular region sowed the seeds of imperialism. A large group of scholars has taken great pains to justify colonialism and establish European Greatness furnishing and manipulating reasons for it. They contend that the very nature, climatic conditions etc. were responsible for the Europe to advance in civilization first and let others follow. Robert B. Marks writes :
“The implication of this body of scholarship is that Europe possessed some unique characteristics that allowed it—and only it—to modernize first, and hence gave it the moral authority and the power to diffuse “modernity” around the globe where cultural, political and economic “obstacles” prevented modern development from occurring indigenously” (6). Some of their views can be held though but their exercise is futile as various arguments may be presented against them like one that compares the development in Asia and Europe prior to eighteenth century. Nevertheless Europeans explored and allegedly exploited those they reached.
These explorations and then wars needed to be funded and finance was provided by the colonies in terms of real value. But there was no convertibility available in absence of a system that would make the transaction cross boundaries of nations. At the same time Christian doctrines failed to keep the people intact and new order responded with the provisions for savings and taking interest too. Emerged money and banking, more or less simultaneously, as a possible solution for human mode of exchange and a medium to let the grievances in the ruled parts subdued. Regarding the world’s first financial revolution in Netherlands as Peter L.
Rousseau notes in a working paper upon “Historical Perspectives on Financial Development and Economic Growth” about the Bank of Amsterdam which was started in 1602. About the Bank’s functions he mentions that, “The Bank also made large loans to the VOC[a short for Vereenigde Oostindische Compagnie, meaning United East India Company] and to the government over the next two centuries (to the latter for waging wars), but otherwise limited its discounting activities to trade bills” (3). Trivially those who had devised this system were the first to let governments fulfill their vested interests as Modern Usurers in guise.
When political power was influenced by banking and interest it goes without doubt that social impacts were apparent. The social stratification system tried to shift and adjust its basis according to the new developments in the economy. Henry Kamen about the deliberate efforts in this direction writes that, “In many communities periodic efforts were made to create status distinctions between the sectors of the society, sometimes for fiscal reasons and sometimes in interests of public order, so that each group might know the role it was supposed to play” (121).
There are also evidences of the impact of the interest groups upon the pace and nature of development (or the lack of it) of these financial systems. Nicholas Craft notes the inadequacy of these financial institutions even in the nineteenth century owing to these pressure groups in the concluding remarks in a review of research in European economic history that: Even in the first industrial nation, nineteenth century institutional arrangements leave a good deal to be desired by modern standards.
This seems partly to result from having to learn how to react to new problems and opportunities and partly to reflect the ‘inertia imparted by the ability of interest groups to block desirable changes’ (7). Progressing Capitalism’s kinetics were enhanced by industrialization which perceptibly demanded a lot of capital no longer remaining possible for a single entrepreneur to contribute. To rescue corporations came into existence and modern system of banking supplied with the large necessary capital.
P. L. Rousseau supports the same with statistics regarding Dutch Republic, England, United States and Japan. He cautiously writes in his conclusion: The case studies considered in this article offer statistical evidence that the development of banking and securities markets mattered for industrialization and the expansion of commerce in four economies that are generally considered to have experienced “financial revolutions” over the past 400 years. (38, 39)