Fairness of bank loans

#‎Islamic_Finance‬: Applying a fixed price for money (interest rate) is unfair for investors and for the society. Islam prohibits the fact that a borrower carries the total risks of the failure while the lender receive a fixed income out of the venture regardless it is a total failure or a total success.

Someone might clain that the lender bear a minimum risk of default. We know that 70% of startup fails during the first three years of operations. We know also that the default rates on interest bearing rates is no more than 2% in good times and 6% in bad times (Federal reserve delinguishy rate).

Hence, faireness is not established and the entrepreneur cost is way beyond his capacity.

House of Debt

The book is deep and offering an alternative point of view that is of prime importance to understand the deep depression cycle of the economy. 

 

Dr. Asad Zaman wrote:

Ben Bernanke has called explaining the Great Depression (GD) the “Holy Grail” of Macroeconomics. In the course of providing a convincing and surprising explanation of both GD and the Global Financial Crisis (GFC) of 2007-8, Mian & Sufi (2014) remark nonchalantly that Keynes did not have access to the wealth of data that is now available. “House of Debt” is a tour-de-force which succeeds in solving a problem which eminent economists like Keynes, Friedman, and many others failed to do. Not only does the book explain the root causes of the GFC, but it also shows how the continuing economic problems created by it can be resolved. In addition, Mian and Sufi suggest radical changes that need to be made to avoid such crises in the future. Even though the authors do not mention the Islamic angle, the main message of the book resonates strongly with Islamic ideas about finance. In particular, replacing debt and interest with equity based contracts is the key to avoiding recurrent financial crises in a capitalist system. In this review, we make some of these connections explicit. 

Mian and Sufi have written a thriller; a detective story in which we pursue many false leads, rejected by empirical evidence, before identifying the culprit (interest based debt) by putting together a variety of clues. This review offers a spoiler: a summary of the main arguments. The most exciting part, which is the strong empirical evidence offered in support of all of the assertions, is omitted from this brief summary. Although Mian and Sufi modestly attribute their success to the data, this data was available to all. Their tremendous contribution lies in focussing on the relevant portions and extracting extremely valuable information from delicate and subtle clues. We review some basic elements of the explanation to be provided, before plunging into the details.

To buy: http://www.amazon.ca/House-Debt-Recession-Prevent-Happening/dp/022608194X