Link to Islamic Finance Today Article

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And when he [Moses] came to the well of Madyan, he found there a crowd of people watering [their flocks], and he found aside from them two women driving back [their flocks]. He said, “What is your circumstance?” They said, “We do not water until the shepherds dispatch [finish watering their flocks]; and our father is an old man”

So he [Moses] watered [their flocks] for them; then he went back to the shade and said, “My Lord!  Truly, I am in need of whatever good that You bestow on me!”

Then one of the two women came to him walking with shyness. She said, “Indeed, my father would like to reward you for having watered for us.” So when he [Moses] came to him [the father] and told him the story [of why he escaped Egypt], he said [the father], “Fear not. You have escaped from the wrongdoing people.”

One of the women said, “O my father, hire him. Indeed, the best one you can hire is the strong and the trustworthy.”

He said [the father], “Indeed, I wish to wed you [Moses] one of my two daughters, on [the condition] that you serve me for eight years; but if you complete ten, it will be [as a favor] from you. And I do not wish to put you in difficulty. You will find me, if Allah wills, from among the righteous.”

[Moses] said, “Then it is [established] between me and you. Whichever of the two terms I complete – there is no injustice to me, and Allah, over what we say, is Witness.”

(Quran 28:23 – 28:28)

Did you catch it? The aforementioned verses from the generous Quran describe a consumer financing product that could help millions of people across the globe escape interest-bearing debt and enter more equitable financing arrangements.

You see, Moses, after having escaped Egypt with nothing more than the clothes on his back, had only one asset: the work he could do in the future. After earning credit for helping water the flock of two women with no expectation of return, his future labor became a compelling buy for their father. The father, seeing that Moses wasn’t married and didn’t have money to pay the typical dowry of marriage, offered to purchase the prophet’s future labor for 8 years with the dowry he would typically expect from a groom marrying his daughter. The result is that Moses received the financing he needed to get married while the father, described as an “old man”, received the labor of the younger stronger Moses.

Today, societies largely comprise of these same groups; Younger people whose most valuable asset is their future income stream and older people who have accumulated wealth but are nearing or have passed the end of their productive years.  So now a question suggests itself:  why not use the financing arrangement Moses used to match the needs of these two segments of society? Why not offer a product wherein people receive financing in return for committing their labor to the financier. It is obviously not practical for people to commit all their labor or work directly for their financier, but they can commit a small percentage of the fruits of their labor (their income) for a fixed period of time to their financier.

So what would this look like?

Suppose Adam just graduated college and needs $25,000 in financing to buy his first car.

An investor estimates Adam will earn $60,000 annually over the next five years.

Assuming the investor is targeting a 6% annual return, he offers Adam $25,000 in return for an 11% share of Adam’s income for the next 5 years in which he is working.

If the investor’s prediction of what Adam will earn turns out to be spot on, the investor will achieve its target return of 6% annually. On the other hand if Adam’s income turns out above or below the $60,000 prediction, the investor will earn above or below the 6% respectively and may even lose money.

One may argue that in my example Adam and his financier are receiving money from one another during the life of the contract whereas Moses and the father never actually received any money from each other and therefore the analogy isn’t valid. Remember however that money is simply a medium of exchange. It’s an intermediary used in trade to avoid the inconveniences of a pure barter system. It just so happens that in the example of Moses and the father, pure barter was possible because of the coincidence of needs. Moses wanted to get married and the father needed the prophet’s physical help. If Moses and the father did not have a coincidence of needs and decided to use a medium in their exchange, nothing about their transaction would be fundamentally different.

Since the arrangement I am describing involves investing in the income-earning potential or human capital of the financed, I like to call these arrangements “Human Capital Investments” or HCI for short.

Some will hear the words “income sharing” and have a visceral reaction to reject the idea. They often feel uncomfortable with the idea of committing a percentage of whatever they earn because they don’t know how much money they will end up paying. But the truth is, whether one realizes it or not, everyone commits a percentage of what they earn when they receive financing. The problem with debt is that the percentage of income owed changes unfavorably for the indebted. When the indebted earns less money, since debt payments are fixed, the percentage of income owed increases. Conversely, when income rises and the indebted can afford to pay more, the percentage of income they owe decreases. On the other hand, with Human Capital Investments, the percentage of income owed is fixed while the payments are variable. Therefore, when you can afford to pay more you owe more and when you can afford less you owe less. The later seems like a much more sensible approach to financing and one that is in line with Islamic values.

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Aside from payments that are designed to stay affordable, Human Capital Investments guarantee the well-being of the financed and the financier are always in alignment. With HCI, the only way the financier does well is if the financed does well and earns a lot of income for themselves. Alternatively, the financed cannot cause the financier to do poorly without reducing their own income. This dynamic is absent with interest-bearing debt; often lenders will wish default on borrowers in order to foreclose on collateral and sometimes borrowers will purposefully default on their obligations if the asset they purchased becomes worth less than what they owe. These dynamics of competing interests which are present in debt are completely absent in Human Capital Investments.

Further still, HCI has the advantage of ensuring that people are living within their means. When the amount of financing one can receive is directly tied to an objective estimate of what they will earn in the future, it’s much more difficult for people to overburden themselves with financial obligations. One of the problems with debt is that people often have unrealistic expectations for how much they are going to earn in the future (especially college students with no real world experience). This causes them to take out more debt than they can possibly afford and consequently they end up living a good portion of their lives trying to dig themselves out from the hole of debt they dug themselves in.

On a societal level, the burden of financial stress harms people’s health, relationships and destroys families. Substituting debt with a product that is designed to provide affordable payments will reduce the burden of financial stress on society. This means less money spent on divorce, marriage counseling, and family services along with lower rates of theft, illness and crime.

I encourage Islamic finance practitioners to think about Human Capital Investment implementations and how they can use this product to service their clients. HCI avoids many of the pitfalls of other “Islamic” financing products which deviate from the profit-and-loss sharing principle underlying Islamic finance. HCI is a product that you can convincingly make an argument for and distinguish easily from traditional interest-bearing debt; not just in form and ceremony but in substance as well. And it’s a product that can earn the financier a healthy return that is at least on par with any other alternative investment out there.

With all its advantages and wide range of possible implementations, Human Capital Investments have the potential to cause the biggest financial revolution the world has seen in a very long time. Muslims and non-Muslims alike can benefit from using Human Capital Investments with Muslims having the added religious motivation to replace interest-bearing debt with this product.


So now the question becomes: shouldn’t Islamic finance lead the effort to spread this product across the globe? It seems only fitting that it does.