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Why Minneapolis’s sharia loans must end

February 21, 2012

The city government of Minneapolis made headlines last week for conducting a frightful sharia loan program.  Minneapolis’s “Alternative Financing Program” is dangerous and misguided for four reasons.

First, the program represents a deeper entanglement of the government with sharia law.  What’s next?  Free office space for a Muslim imam to hold a sharia court to rule on Somali divorces?  Privacy screens for local Muslim women at the city pools?  Dog-free zones to comport with Muslim sensibilities?  Gay-free zones to comply with Islamic law against homosexuality?  On the basis of what compelling interest should the government create programs to enact sharia principles in America?  In so doing, Minneapolis runs afoul of the Supreme Court’s Lemon test, which interprets the First Amendment to prohibit measures that create excessive entanglement between government and religion.

Second, although the article does not specify the structural basis of the loans, the description most closely approximates a murabaha model, where interest cross-dresses in the garb of a “markup” embedded in the terms of the loan.  Murabaha has fallen under increasing disrepute by the international Islamic financial advocates, and Minneapolis risks embroiling itself in the same firestorm facing Goldman Sachs.  Staying out of internal religious squabbles is part of the basis of the Supreme Court’s Lemon test.

Third, through the program, Minneapolis legitimizes the notion that charging interest when lending money is somehow inappropriate.  Money has value, and money now has more value than the promise of money later.  In order to get money now instead of later, we pay a small price called interest.  This is an efficient and market-based method to provide capital to businesses and individuals—it is an important factor in the historical economic development of Europe and the United States.  The prohibition on charging interest is a key factor in the economic retardation of the Islamic world.  Despite vast oil wealth, the Middle East faces high poverty, high income inequality, and little innovation.  Catering to Islamic financial principles represents a step backwards toward a foreign system based on superstition, bias, and economic inefficiencies.

Fourth, the program presents an unnecessary financial risk to the taxpayers of Minneapolis.  If the businesses are receiving loans at a lower cost than what they would qualify for through a conventional bank loan, then that means that taxpayers have funded the amount of the difference.

Also, city officials tout a lower default rate through the program than the national rate.  But of course in the conventional financial sector, the costs of default are borne by the banks themselves.  But who bears the costs of default under Minneapolis’s Alternative Financing Program?  The taxpayers of Minneapolis.

For legal, economic, and financial reasons, the government of Minneapolis must cease its alternative lending program.  The taxpayers and voters of Minneapolis should demand it.  If not, legal action against the program should be pursued.

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