[Spaceships] Islamic Banking and Financing Spaceships Purchases

[Anthony]

Originally Posted by Ulzgoroth

Can startups usually borrow much money when they've typically got no revenue and next to no assets?

Depends on your definition of 'much'. It can certainly be the difference between "practical to start a business" and "not practical to start a business".

[dcarson]

I read of an approach in the middle ages of lending the money interest free for a six month trading trip but the loan was for a month. Since they didn't pay it back on time they get fined a certain amount for each month late they are paying it back.

[TGLS]

Some comments:

Originally Posted by vicky_molokh

Co-ownership of a ship as an enterprise (e.g. 20%:80%), with the bank receiving a portion of the earnings pro rata, with the captain having and retaining the right to buy the shares from the bank, with some pre-agreements about what the price is and how it may or may not be adjusted. This seems to be the silent partner path, with some adjustments.

I suppose the question becomes why banks don't purchase equity in perpetuity instead of only temporarily. They seem to be keeping all the penalties of a business partnership, except with a set return.

Originally Posted by vicky_molokh

Both seem more suited to letting partners decide to go their separate ways (at least judging by some arguments of economists), and avoids debt, interest and the possibility of 'interest pits'. Also, in both of these cases, nothing prevents the bank from pre-agreeing that the ship's cost-to-be-sold-to-the-captain is higher than the cost-of-the-ship-as-bought-by-the-bank-from-shipyard.

What I'm interested the most are:

• How each of those schemes will change the calculation of costs/payments / what the reasonable playable approximation of payment calculations should be for them.
• What changes to the legal status of ownership and insurance should I keep in mind when dealing with each of these schemes, especially during adventures.

OK, assuming that the payments on the "loan" are fixed (i.e. no compound interest) and if the debtor doesn't pay they just lose the asset. If this is the case, calculate the value of the loan for the whole term, and divide by the number of payment periods for cost per period.

If there is no interaction between Usury-No and Usury-Yes then you might slightly increase the interest you calculate the loan with to reflect the loss to the bank if the debtor quits (the bank may only receive a few payments and a very devalued asset). If the interaction between the societies are high, the Usury-No loans are likely to have significantly higher interest because of the greater security to the investor that the Usury-Yes loans provide (assuming that the investors don't care about the lenders practices).

On the second point. Usury-No has been in its game for long enough for a the governments of its society to understand the legal fiction of the banks "investments". It's likely that the government would support this industry by creating a corporate model that doesn't rely on what amounts to a legal hack (i. e. The "borrower" assumes all responsibilities for company actions, while the "lender" is shielded). Of course, this leads to more legal hacks, for example a a corporation may provide funding for a deniable operation through the auspices of a "loan".

On the other hand, if no such structure exists, then the lender has an interest in making sure that none of the actions by the borrower endanger it, so a business agent would likely be assigned to each ship.

[malloyd]

Originally Posted by TGLS

I suppose the question becomes why banks don't purchase equity in perpetuity instead of only temporarily. They seem to be keeping all the penalties of a business partnership, except with a set return.

It seems relatively close to the deal with callable preferred stocks, and there are plenty of buyers for those. Generally that set return is the draw.

[Anthony]

Originally Posted by vicky_molokh

The cultural reasoning is the population's wariness of 'dept pits' (i.e. situations where one becomes indebted, then loses the source of income that was meant to pay off the dept, resulting in the dept growing and growing, eventually bankrupting the indebted person).

Correction: resulting in debt growing and growing, with no ability to pay the debt off. The concept of bankruptcy dates to the 16th century and thus postdates most anti-usury codes; it's actually intended as a solution to the problem of unpayable debt. The other significant modern solution to this problem is incorporation -- you create an artificial entity with assets and debts, and if the corporation's net worth becomes negative, it gets dissolved without affecting the shareholder's personal assets (unless they engage in malfeasance). Both cases have significant costs for a borrower who fails to repay a loan, but they do allow a complete discharge of debt while retaining some personal assets.

Also note that spaceship loans are generally secured loans, and though the rules don't address it, may be structured as a non-recourse loan. This means that, in the event of the borrower going into default, the bank seizes the asset to recover its costs, and the remaining debt, if any, is discharged.

Originally Posted by vicky_molokh

the fact that in our techpath, banks can basically wash their hands off in case something goes wrong

Well, if they don't mind losing a bunch of money, sure.

Originally Posted by vicky_molokh

, and thus are incentivized to give credits even to people who aren't all that likely to be able to handle them which in turn leads to bad stuff.

It's perfectly possible to set up rules that discourage this. It has the side effect of a large underclass of people who cannot get legal credit, which causes its own class of problems (for example, you need a car to get a better job, but you cannot save up enough money for a car until you get a better job, so if you can't get a loan, you can't get a better job).

Originally Posted by vicky_molokh

As discussed by others, when there's reduced demand for alternative ways of financing, of which two seem more easy to handle while avoiding use of interest:

1. Co-ownership of a ship as an enterprise (e.g. 20%:80%), with the bank receiving a portion of the earnings pro rata, with the captain having and retaining the right to buy the shares from the bank, with some pre-agreements about what the price is and how it may or may not be adjusted. This seems to be the silent partner path, with some adjustments.
2. Co-ownership of a ship, with the right to buy it out piece by piece, again with some pre-agreements, plus rental of the bank-owned fraction to the captain. This seems to be more appropriate for ships used for non-earnings-generating ships, such as a yacht that the captain uses purely for recreation.

The first differs from interest in that the bank makes more money if you do better than expected, and less money if you do worse than expected. It has a tendency to result in legal rules that allow the bank to meddle with your business if you seem to be doing a bad job.

The second does not differ meaningfully from a conventional secured loan, and can be treated as one.

[whswhs]

Originally Posted by Anthony

Correction: resulting in debt growing and growing, with no ability to pay the debt off. The concept of bankruptcy dates to the 16th century and thus postdates most anti-usury codes; it's actually intended as a solution to the problem of unpayable debt. The other significant modern solution to this problem is incorporation -- you create an artificial entity with assets and debts, and if the corporation's net worth becomes negative, it gets dissolved without affecting the shareholder's personal assets (unless they engage in malfeasance). Both cases have significant costs for a borrower who fails to repay a loan, but they do allow a complete discharge of debt while retaining some personal assets.

Yes. The old solution to unpayable debt is that you sell the only asset you have, yourself. This isn't quite unthinkable in a world where slaves can buy their freedom, but it creates some terrible problems. Bankruptcy is basically a legal compromise that allows moneylending without making it equivalent to slavery—and a more sophisticated one than the Old Testament jubilee year.

[Humabout]

Originally Posted by vicky_molokh

Actually, inflation is a totally separate concern. . . .

I do have to beg to differ here. Inflation is one of the factors any financier worth his salt will take into account when deciding what interest rate is acceptable for a loan. Same can be said in reverese when offering a loan. Offsetting inflation is the bare minimum an interest rate needs to accomplish. As a borrower, I would want inflation to be higher than my interest rate, so I end up paying back less purchasing power than I borrowed. As the bank, I want jnterest to be higher than inflation.

[vicky_molokh]

Originally Posted by Anthony

Correction: resulting in debt growing and growing, with no ability to pay the debt off. The concept of bankruptcy dates to the 16th century and thus postdates most anti-usury codes; it's actually intended as a solution to the problem of unpayable debt. The other significant modern solution to this problem is incorporation -- you create an artificial entity with assets and debts, and if the corporation's net worth becomes negative, it gets dissolved without affecting the shareholder's personal assets (unless they engage in malfeasance). Both cases have significant costs for a borrower who fails to repay a loan, but they do allow a complete discharge of debt while retaining some personal assets.

I mentioned bankruptcy in the very post you quoted as something most people wouldn't want to happen to them. Among other things, this thread is an attempt to explore a divergent techpath that dealt with the root cause (or at least closer to the root cause) than the bankruptcy 'patch'.

Originally Posted by Anthony

Well, if they don't mind losing a bunch of money, sure.

It's perfectly possible to set up rules that discourage this. It has the side effect of a large underclass of people who cannot get legal credit, which causes its own class of problems (for example, you need a car to get a better job, but you cannot save up enough money for a car until you get a better job, so if you can't get a loan, you can't get a better job).

Is spaghettification of single sentences really necessary? It seems to make the line of discussion harder to follow. And now, to answer the two halves in aggregate, because they are heavily intertwined and that's why I put them into a single sentence:
When I talk about washing hands off, I mean specifically the banks being very insulated from losses in such cases, as compared to people who get into debt they are likely to fail repaying in time. Yes, rules down the line can be used to mitigate this, but apparently our world hasn't managed to reduce the problem to an un-notable one, and I'm interested in exploring a divergent approach.

Originally Posted by Anthony

The first differs from interest in that the bank makes more money if you do better than expected, and less money if you do worse than expected. It has a tendency to result in legal rules that allow the bank to meddle with your business if you seem to be doing a bad job.

To some extent. But presumably the captain has better skills at profitable ship-captaining than the people whose skill set is focused on banks-running, and is too interested in earning more (and paying off the ship earlier, thus being able to keep all the profits to oneself).

Originally Posted by Humabout

I do have to beg to differ here. Inflation is one of the factors any financier worth his salt will take into account when deciding what interest rate is acceptable for a loan. Same can be said in reverese when offering a loan. Offsetting inflation is the bare minimum an interest rate needs to accomplish. As a borrower, I would want inflation to be higher than my interest rate, so I end up paying back less purchasing power than I borrowed. As the bank, I want jnterest to be higher than inflation.

It is one of the factors, but GURPS operates on a level of playability which largely isolates pricing of everything (including financing of ship purchases) from it, by keeping the GURPS Dollar static.

Obviously if going into an unplayable level of detail, there are levels of interweaving that can't be even summarized in a thread like this - I touched upon a small bit of those when comparing hard currency vs. regular money credits and mentioning that the former look lucrative due to lower interest rates.

[malloyd]

Originally Posted by vicky_molokh

When I talk about washing hands off, I mean specifically the banks being very insulated from losses in such cases, as compared to people who get into debt they are likely to fail repaying in time. Yes, rules down the line can be used to mitigate this, but apparently our world hasn't managed to reduce the problem to an un-notable one, and I'm interested in exploring a divergent approach.

Do you actually want an economic system to reduce the problem to an un-notable one? Because to the extent you do, you inevitably reduce the willingness of people to loan anybody money. That's largely the point of relaxing the religious bans on usury in the first place after all - they sound nice if you are usually a debtor, but the practical effect isn't debtors are better off, but that there are no debtors because nobody will loan them anything.

[Anthony]

Originally Posted by vicky_molokh

I mentioned bankruptcy in the very post you quoted as something most people wouldn't want to happen to them.

Not sure how that's a problem. People should want to avoid debts they can't pay off. The goal with things like bankruptcy law is to have a penalty that's large enough to discourage the unwanted behavior (people borrowing money they cannot or will not repay) without being utterly crippling. You can certainly argue with the proper magnitude of the cost, but there has to be a cost. Unless of course you want credit to be unavailable.

Originally Posted by vicky_molokh

Among other things, this thread is an attempt to explore a divergent techpath that dealt with the root cause (or at least closer to the root cause) than the bankruptcy 'patch'.

What is it you think is the root cause? It's not interest. Interest is not per se bad. The root problem is borrowers being unlucky or making bad financial decisions and bankers encouraging people to make bad financial decisions. You can't legislate away stupidity or bad luck, but you may be able to structure the financial system to discourage it or mitigate it.

Originally Posted by vicky_molokh

When I talk about washing hands off, I mean specifically the banks being very insulated from losses in such cases, as compared to people who get into debt they are likely to fail repaying in time. Yes, rules down the line can be used to mitigate this, but apparently our world hasn't managed to reduce the problem to an un-notable one, and I'm interested in exploring a divergent approach.

It's impossible to make the problem un-notable; credit cannot exist without a means for the lender to profit, and an enforcement mechanism to require borrowers to make an honest effort to repay their debts. This is, necessarily, going to be bad for people who fail to repay debts. You can tweak around the edges to adjust what you consider an honest effort, and what the penalties shall be, but penalties necessarily exist.

Originally Posted by vicky_molokh

To some extent. But presumably the captain has better skills at profitable ship-captaining than the people whose skill set is focused on banks-running

This assumes a captain who is honest and competent. Neither of these things can be taken for granted.