Islam forbids its adherents to charge interest on money lent - as
does Judaism. To circumvent this onerous decree, entrepreneurs and
religious figures in Egypt and in Pakistan established "Islamic
banks". These institutions pay no interest on deposits, nor do they
demand interest from borrowers. Instead, depositors are made
partners in the banks' - largely fictitious - profits. Clients are
charged for - no less fictitious - losses. A few Islamic banks were
in the habit of offering vertiginously high "profits". They went the
way of other, less pious, pyramid schemes.
They melted down and dragged economies and political establishments
with them.
By definition, pyramid schemes are doomed to failure. The number of
new "investors" - and the new money they make available to the
pyramid's organizers - is limited. When the funds run out and the
old investors can no longer be paid, panic ensues. In a classic "run
on the bank", everyone attempts to draw his money simultaneously.
Even healthy banks - a distant relative of pyramid schemes - cannot
cope with such stampedes. Some of the money is invested long-term,
or lent. Few financial institutions keep more than 10 percent of
their deposits in liquid on-call reserves.
Studies repeatedly demonstrated that investors in pyramid schemes
realize their dubious nature and stand forewarned by the collapse of
other contemporaneous scams.
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