Open Source Economics

Before reading this blog from Michael Widenius, I was of the view that open source movement can go on without the support of any organization. In my opinion it was an effort by the contributors. But alas it is not. It needs an economics to sustain. Here is the excerpt

"MySQL is not an end user application, but an infrastructure project that is quite deep in the system stack. Most of the technology partners, where most of the innovation in the MySQL space happen nowadays, depend on being able to get licenses for MySQL so that they can combine their closed source application or closed code (like storage engines) with MySQL. If you take the license revenue and add it to all direct and indirect money that comes from these kind of partners, this is a huge part of the MySQL economic infrastructure (i.e., where the money is).

The simple fact is that keeping a project like MySQL alive and having it compete with big vendors like Oracle, require many people working in it. If they can't get any revenue from doing that (except support revenue, which is not enough), you will find very few companies prepared to do development and extremely few (or none) investment company would put serious money on a company that gets all of it's money on services (not scalable)."

HBR November 2009 Issue Highlights

Be Careful in Interpreting "Riba"

In the context of interpretation of Quranic term "Riba", it is very important to have "Taqwa" i-e one should be conscious of the express or implied commands of Allah (SWT). As there is no respite from pretense or ignorance. Following two references are very much relevant.

Those who devour usury will not stand except as stands one whom the Evil One by his touch hath driven to madness. That is because they say: "Trade is like usury but Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord desist shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (for ever).

Aya 275 Sura Al-Baqara

Narrated Anas

The Prophet said, "On the Day of Resurrection the Believers will assemble and say, 'Let us ask somebody to intercede for us with our Lord.' So they will go to Adam and say, 'You are the father of all the people, and Allah created you with His Own Hands, and ordered the angels to prostrate to you, and taught you the names of all things; so please intercede for us with your Lord, so that He may relieve us from this place of ours.' Adam will say, 'I am not fit for this (i.e. intercession for you).' Then Adam will remember his sin and feel ashamed thereof. He will say, 'Go to Noah, for he was the first Apostle, Allah sent to the inhabitants of the earth.' They will go to him and Noah will say, 'I am not fit for this undertaking.' He will remember his appeal to his Lord to do what he had no knowledge of, then he will feel ashamed thereof and will say, 'Go to the Khalil-r-Rahman (i.e. Abraham).' They will go to him and he will say, 'I am not fit for this undertaking. Go to Moses, the slave to whom Allah spoke (directly) and gave him the Torah.' So they will go to him and he will say, 'I am not fit for this undertaking,' and he will mention (his) killing a person who was not a killer, and so he will feel ashamed thereof before his Lord, and he will say, 'Go to Jesus, Allah's Slave, His Apostle and Allah's Word and a Spirit coming from Him. Jesus will say, 'I am not fit for this undertaking, go to Muhammad the Slave of Allah whose past and future sins were forgiven by Allah.

' So they will come to me and I will proceed till I will ask my Lord's Permission and I will be given permission. When I see my Lord, I will fall down in Prostration and He will let me remain in that state as long as He wishes and then I will be addressed: '(Muhammad!) Raise your head. Ask, and your request will be granted; say, and your saying will be listened to; intercede, and your intercession will be accepted.' I will raise my head and praise Allah with a saying (i.e. invocation) He will teach me, and then I will intercede. He will fix a limit for me (to intercede for) whom I will admit into Paradise. Then I will come back again to Allah, and when I see my Lord, the same thing will happen to me. And then I will intercede and Allah will fix a limit for me to intercede whom I will let into Paradise, then I will come back for the third time; and then I will come back for the fourth time, and will say, 'None remains in Hell but those whom the Quran has imprisoned (in Hell) and who have been destined to an eternal stay in Hell.' " (The compiler) Abu 'Abdullah said: "But those whom the Qur'an has imprisoned in Hell," refers to the Statement of Allah:

"They will dwell therein forever." (16.29)

Sahih Al-Bukhari 6:3

These two quoted references are self explanatory and need no further explanation than one should have extreme care in interpreting the meaning of term "Riba" otherwise the consequences are extreme and there is no respite.

The word "care" does not capture the entire behavior and the spirit that is required. The word that can capture the required behavior is "Taqwa". The very first order by Allah (SWT) in Quran is in Aya 21 of Sura Baqara, which says "O ye people! adore your Guardian-Lord who created you and those who came before you that ye may have the chance to learn righteousness." The comment on this Aya from Abdullah Yousuf Ali is worth reading.

"I connect this dependent clause with "adore, etc." above, though it could be connected with "created". According to my construction the argument will be as follows. Adoration is the act of the highest and humblest reverence and worship. When you get into that relationship with Allah, Who is your Creator and Guardian, your faith produces works of righteousness. It is a chance given you: will you exercise your free will and take it? If you do, your whole nature will be transformed." The very first guidance from Allah (SWT) for the mankind is to learn "Taqwa" because without having it one can't come to possess the understanding of His message, the way He wants to be understood.

So in matters of Allah (SWT), there is no other way except to have "Taqwa". Following are some of the interpretations of the term "Taqwa", which shall make it clear what is required while interpreting the literal meaning and terms of Quran.

Tafseer ibn Kathir mentions that Atiyah As-Sa’di said the Propeht (pbuh) said, “The servant will not acquire the status of those with taqwa until he abandons what is harmless out of fear of falling into that which is harmful.” [Ibn Majah, Tirmidhi]

Sayyiduna Ali (R.A) defined Taqwa as being the ‘fear of Jaleel (Allah), acting upon the tanzeel (Quran), being content with qaleel (little), and preparing for the day of raheel (journeying from this world).

Hazrat Umar ibn Khattab (R.A) once asked Hazrat Ibn Ka’ab (R.A) the definition of taqwa. In reply Hazrat Ibn Ka’ab asked, “Have you ever had to traverse a thorny path?” Hazrat Umar replied in the affirmative and Hazrat Ka’ab continued, “How do you do so?” Hazrat Umar (R.A) said that he would carefully walk through after first having collected all loose and flowing clothing in his hands so nothing gets caught in the thorns hence injuring him. Hazrat Ka’ab said, “This is the definition of taqwa, to protect oneself from sin through life’s dangerous journey so that one can successfully complete the journey unscathed by sin.”

The confusion around the interpretation of the term "Riba" is intentional one to mislead people for the purposes of some ulterior motives. Some of them have taken refuge in the comments of Hazrat Umar (R.A) about the interpretation of the term "Riba". These people have taken Hazrat Umer’s (RAA) remarks to mean that Riba is a vague term whose meanings were not obvious even to the closest companions of the Prophet (PBUH). They further claimed that whatever has been written on Riba is the personal interpretation of religious scholars and jurists.

The tradition which reports the remark by Hazrat Umar (RAA) that he could not check full details of certain kinds of Riba with the Prophet (PBUH) also includes the words “so give up Riba and whatever may appear akin to Riba.” Hazrat Umar (RAA) himself followed his recommendation to the hilt “We have given up 90% of all legitimate transactions for the fear that an element of Riba might be present in them.” (Reported By Imam Shafi)

Use of Arabic Names for Islamic Financial Contracts

It seems that there is almost a quiet understanding that a financial product to be within the realm of Islamic Finance needs an Arabic name, translation into other languages e.g in English would be detrimental to the very purpose. To name a few of such contracts are

1. Musharika
2. Mudaraba
3. Ijara
4. Murabaha

Their translation can be as follows

1. Partnership
2. Joint Venture
3. Leasing
4. Cost Plus Profit

Is there any harm in it? In my opinion, it would be much easier for understanding the Islamic Finance viz-a-viz Conventional Finance, if we use the modern most easily understood terms.

Islamic Finance and Bankruptcy

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the insolvent individual or organization).

The concept and origin of bankruptcy law as it is now known in the United States originated in England. The first English bankruptcy law is generally agreed to have been enacted in 1542. Actually, bankruptcy was originally planned as a remedy for creditors - not debtors. During the reign of King Henry VIII., bankruptcy law allowed a creditor to seize all of the assets of a trader who could not pay his debts. Additionally, on top of losing all of one's property, the unfortunate debtor also lost his freedom and was subject to imprisonment for failure to pay his debts. This left the family of the debtor in the position of having to pay the debts in order to obtain the release of the debtor. As time progressed, however, so did the rights of debtors in England. In the 1700s, for example, debtors were often released from prison and many fled to the United States to live. Many immigrated to Georgia and Texas, which became known as debtors’ colonies. Finally, by the early 1800s in England, debtors were often released from prison and their debts discharged. However, for many years, bankruptcy continued to be a remedy favoring creditors, involuntary in nature and largely penal in character. It was generally used only against traders.

In ancient Greece, bankruptcy did not exist. If a man (since only locally born adult males could be citizens, all legal owners of property were men) owed and he could not pay, he and his entire household, whether wife, children or servants were forced into "debt slavery", until the creditor recouped losses via their physical labor. Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb, which regular slaves did not enjoy. However, servants of the debtor could be retained beyond that deadline by the creditor and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.

Bankruptcy is also documented in East Asia. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business. There are two forms of bankruptcy that are in common practice. First, where a debtor surrenders his or her non-exempt property to a bankruptcy trustee who then liquidates the property and distributes the proceeds to the debtor's unsecured creditors. Second, the debtor retains ownership and control of its assets and is re-termed a debtor in possession ("DIP"). The debtor in possession runs the day to day operations of the business while creditors and the debtor work with the Bankruptcy Court in order to negotiate and complete a plan. Upon meeting certain requirements (e.g. fairness among creditors, priority of certain creditors) creditors are permitted to vote on the proposed plan. If a plan is confirmed the debtor will continue to operate and pay its debts under the terms of the confirmed plan. If a specified majority of creditors do not vote to confirm a plan, additional requirements may be imposed by the court in order to confirm the plan. Bankruptcy can also be classified by two types from the point of view of creditor and debtor. When creditors enforce bankruptcy, it is called compulsory and when debtor seeks protection from creditors, it is called voluntary.

In Islamic teaching, according to the Quran, an insolvent person should be allowed time to be able to pay out his debt. This is recorded in the Quran's second chapter (Sura Al-Baqara), Verse 280, which notes: "If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you if ye only knew."

Here are two ahadith of Prophet (PBUH) on the subject.

Narrated Abu Huraira

The Prophet said, "There was a merchant who used to lend the people, and whenever his debtor was in straitened circumstances, he would say to his employees, 'Forgive him so that Allah may forgive us.' So, Allah forgave him." Sahih Al-Bukhari 3.292

Narrated Abdullah ibn AbuQatadah

AbuQatadah demanded (the payment of his debt) from his debtor but he disappeared; later on he found him and he said: I am hard up financially, whereupon he said: (Do you state it) by God? He said: By God. Upon this he (Qatadah) said: I heard Allah's Messenger (peace be upon him) said: He who loves that Allah saves him from the torments of the Day of Resurrection should give respite to the insolvent or remit (his debt). Sahih Muslim 740

Narrated Salama bin Al Akwa

Once, while we were sitting in the company of Prophet, a dead man was brought. The Prophet was requested to lead the funeral prayer for the deceased. He said, "Is he in debt?" The people replied in the negative. He said, "Has he left any wealth?" They said, "No." So, he led his funeral prayer. Another dead man was brought and the people said, "O Allah's Apostle! Lead his funeral prayer." The Prophet said, "Is he in debt?" They said, "Yes." He said, "Has he left any wealth?" They said, ''Three Dinars." So, he led the prayer. Then a third dead man was brought and the people said (to the Prophet ), Please lead his funeral prayer." He said, "Has he left any wealth?" They said, "No." He asked, "Is he in debt?" They said, ("Yes! He has to pay) three Diners.', He (refused to pray and) said, "Then pray for your (dead) companion." Abu Qatada said, "O Allah's Apostle! Lead his funeral prayer, and I will pay his debt." So, he led the prayer. Sahih l-Bukhari 3.488A

Narrated AbuQatadah

The Messenger of Allah (peace be upon him) stood up among them (his companions) to deliver his sermon, in which he told them that Jihad in the cause of Allah and belief in Allah (with all His Attributes) were the most meritorious of acts. A man stood up and said: Messenger of Allah, do you think that if I am killed in the cause of Allah, my sins will be blotted out from me? The Messenger of Allah (peace be upon him) said: Yes, in the case where you are killed in the way of Allah, you were patient and sincere and you always fought facing the enemy, never turning your back upon him. Then he added: What have you said (now)? (Wishing to have further assurance from him for his satisfaction), he asked (again): Do you think if I am killed in the say of Allah, all my sins will be obliterated from me? The Messenger of Allah (peace be upon him) Said: Yes, if you were patient and sincere, and always fought facing the enemy, never turning your back upon him, (all your lapses shall be forgiven) except debt. Gabriel has told me this. Sahih Muslim 871

Narrated AbuSa'id al-Khudri

In the time of Allah's Messenger (peace be upon him) a man suffered loss in fruits he had bought and his debt increased; so Allah's Messenger (peace be upon him) told (the people) to give him charity and they gave him charity, but that was not enough to pay the debt in full, whereupon Allah's Messenger (peace be upon him) said to his creditors: "Take what you find, you will have nothing but alms." Sahih Muslim 738

Narrated Jabir ibn Abdullah

The Apostle of Allah (peace be upon him) would not say funeral prayer over a person who died while the debt was due from him. A dead Muslim was brought to him and he asked: Is there any debt due from him? They (the people) said: Yes, two dirhams. He said: Pray yourselves over your companion. Then AbuQatadah al-Ansari said: I shall pay them, Apostle of Allah. The Apostle of Allah (peace be upon him) then prayed over him. When Allah granted conquests to the Apostle of Allah (peace be upon him), he said: I am nearer to every believer than himself, so if anyone (dies and) leaves a debt, I shall be responsible for paying it; and if anyone leaves property, it goes to his heirs. Sunnan Abu-Dawood 1482

From the foregoing deliberations, it is clear that in Islamic Finance there is no concept of bankruptcy either forced or voluntary. It is the responsibility of the debtor to pay his debt and after his death it becomes the responsibility of the heirs, community and state in this particular order to arrange for payment of the debt of the deceased.

Behavioral Finance - Impatience

Tim Harford comments that Thaler and Sunstein have an optical illusion at the beginning of chapter one of Nudge. Their point: the human brain has evolved to take short cuts in the way it processes information, short cuts that sometimes lead us astray. Hence, sometimes we could use a little help in nudging us towards the correct decision when we make mistakes. ''That's right, I am not very happy with the unbalanced emphasis on stock price and market cap and short-term earnings,'' Dr. Drucker said in an interview. ''The most critical management job is to balance short term and long term. In the long term, today's one-sided emphasis is deleterious and dangerous.''

"Short cuts" and "short term" as described above can be termed as impatience. This trait is an integral part of human nature. Human beings are by their very nature are impatient. Quran declares this in Aya 19 of Sura Al-Ma'arij "Truly man was created very impatient". The case in hand is the "Efficient Market Hypothesis" (EMH). EMH is an example of impatience. Andrei Shleifer explained EMH

"The basic theoretical case for the EMH rests on three arguments which rely on progressively weaker assumptions.

1. First, investors are assumed to be rational and hence to value securities rationally.
2. Second, to the extent that some investors are not rational, their trades are random and therefore cancel each other out without affecting prices.
3. Third, to the extent that investors are irrational in similar ways, they are met in the market by rational arbitrageurs who eliminate their influence on prices.

When investors are rational, they value each security for its fundamental value: the net present value of its future cash flows, discounted using their risk characteristics. When investors learn something about fundamental values of securities, they quickly respond to the new information by bidding up prices when the news is good and bidding them down when the news is bad. As a consequence, security prices incorporate all the available information almost immediately and prices adjust to new levels corresponding to the new net present values of cash flows."

Adjusting the security price "almost immediately" by incorporating any good or bad news is one of the manifestation of impatience. The story of United Airlines is a good example of this behavior.

The steep sell-off in United’s shares came after a news service in Florida distributed an old story posted on the South Florida Sun-Sentinel Web site six years ago. Monday’s recirculated story gave the appearance that United had filed for bankruptcy protection again. In fact, the story was originally published Dec. 10, 2002, by the Chicago Tribune, marking the airline’s decision at that time to seek protection from creditors. And more importantly for us, moments after a headline for the story hit Bloomberg, shares in United stock fell from about $12 a share to a low of $3, prompting a halt in trading of United stock.

Of course, once the truth was out the stock got back to a slightly lower $10 odd.

The second manifestation of the impatience is the theory of Arbitrage, which induces so called rational investor to loose their patience.

"A textbook definition (Sharpe and Alexander 1990) defines arbitrage as ‘the simultaneous purchase and sale of the same, or essentially similar, security in two different markets at advantageously different prices.’ Suppose that some security, say a stock, becomes over-priced in a market relative to its fundamental value as a result of correlated purchases by unsophisticated, or irrational, investors. This security now represents a bad buy, since its price exceeds the properly risk adjusted net present value of its cash flows or dividends. Noting this overpricing, smart investors, or arbitrageurs, would sell or even sell short this expensive security and simultaneously purchase other, ‘essentially similar,’ securities to hedge their risks. If such substitute securities are available and arbitrageurs are able to trade them, they can earn a profit."

But it is not so simple and easy to make money. In doing so the rational trader can make a huge loss. Barberis and Thaler describe as "Noise trader risk, an idea introduced by De Long et al. (1990a) and studied further by Shleifer and Vishny (1997), is the risk that the mispricing being exploited by the arbitrageur worsens in the short run. Even if General Motors is a perfect substitute security for Ford, the arbitrageur still faces the risk that the pessimistic investors causing Ford to be undervalued in the first place become even more pessimistic, lowering its price even further. Once one has granted the possibility that a security’s price can be different from its fundamental value, then one must also grant the possibility that future price movements will increase the divergence. Noise trader risk matters because it can force arbitrageurs to liquidate their positions early, bringing them potentially steep losses. To see this, note that most real-world arbitrageurs—in other words, professional portfolio managers—are not managing their own money, but rather managing money for other people. In the words of Shleifer and Vishny (1997), there is [“a separation of brains and capital.”]"

Impatience in adversity and as well as in pursuit of something good is disliked in Islam. Here are few Hadith of Prophet (PBUH) on the subject.

Narrated Nafi

Ibn 'Umar said, "Allah's Apostle said, 'If the supper is served for anyone of you and the Iqama is pronounced, start with the supper and don't be in haste (and carry on eating) till you finish it.' " If food was served for Ibn 'Umar and Iqama was pronounced, he never came to the prayer till he finished it (i.e. food) in spite of the fact that he heard the recitation (of the Qur'an) by the Imam (in the prayer). Narrated Ibn 'Umar: The Prophet said, "If anyone of you is having his meals, he should not hurry up till he is satisfied even if the prayer has been started."

Sahih Al-Bukhari 1.642

Narrated Abu Huraira

Allah's Apostle said, "The invocation of anyone of you is granted (by Allah) if he does not show impatience (by saying, "I invoked Allah but my request has not been granted)."

Sahih Al-Bukhari 8.352

Narrated Al Hasan

'Amr bin Taghlib said, "Some property was given to the Prophet and he gave it to some people and withheld it from some others. Then he came to know that they (the latter) were dissatisfied. So the Prophet said, 'I give to one man and leave (do not give) another, and the one to whom I do not give is dearer to me than the one to whom I give. I give to some people because of the impatience and discontent present in their hearts, and leave other people because of the content and goodness Allah has bestowed on them, and one of them is 'Amr bin Taghlib.' " 'Amr bin Taghlib said, "The sentence which Allah's Apostle said in my favor is dearer to me than the possession of nice red camels."

Sahih Al-Bukhari 9.626