Why not Sharia loans for all?

by Mick Fletcher

In April BIS issued a consultation on proposals to develop a sharia compliant finance product that might serve as an alternative to higher education loans1 – see http://tinyurl.com/ohzpt89 .  The aim of the proposals is to overcome the potential difficulties in accessing higher education that might be experienced by those whose faith is offended by payment of interest or usury.  Although this may seem a somewhat specialised, even abstruse consultation the content is actually of much wider interest.

The first reaction of people in FE to the consultation may well have been to bridle at the exclusive focus on HE.  After all those over the age of 24 can only access support for provision at levels 3 and 4 through advanced learning loans, organised on exactly the same basis as HE loans.  FE students are just as likely to be Muslim and just as likely to be potentially offended by the payment of interest.  For FE to be ignored by its own sponsoring department is shocking (though will hardly be surprising to most in the sector) but importantly it is not the key issue.

A second reaction of sceptics on reading the proposals might be that it is all smoke and mirrors.  Those using the new product would pay exactly the same amounts as those taking out a conventional loan.  They would be expected to make payments in the same circumstances and at the same rate and pay back more than they received. There is however a crucial difference.

The difference is that the Islamic ‘Takaful’ system positions the transaction as a moral, not a financial one.  Those who are helped by the fund to access higher education have a moral obligation to help succeeding generations improve their circumstances in the same way.  The system is underpinned by written contracts and the understanding that repayments reflect the time over which monies are paid back but the core of the system is that it is seen as a means of mutual support.  As the consultation makes clear

“The model’s underlying principle is one of communal interest and transparent sharing of benefit and obligation, with the repayments of students participating in the fund being used to provide finance to future students who select to join the fund”

Put like that the mutual aspect of the scheme could well have attractions far beyond the Islamic community.  In a world in which more and more moral choices are reduced to economics we are in danger of forgetting that trust and intention still matter to many of us.  Moreover, a large part of the antipathy to student loans derives from the fact that many people (with good reason) don’t trust financial institutions and don’t like the reduction of education to a commodity. It explains why many people prefer the idea of a graduate tax even though it means they might pay more – ultimately paying tax to support a social good is an ethical activity; paying interest to make bankers rich is not.

Finding a way to recast student finance in an ethical rather than a transactional frame could be the key to promoting a sustainable adult education system.  It is clear, if regrettable, that even if the current enthusiasm for cutting public spending wanes there is little chance of much extra public funding for adult FE given the competing claims of health, early years and social care.  The chances of firms contributing more for public benefit are not good so the burden of meeting the growing demand for education will fall on families. Their willingness to contribute may well be more effectively engaged by appealing to the instincts that support the blood transfusion service or underpin credit unions than the grubbier motivations of private profit and rates of return that currently dominate our debased policy discourse.

Mick Fletcher is a policy consultant to the Campaign for Learning and a member of the Policy Consortium http://policyconsortium.co.uk/  He writes here in a personal capacity.