this was a fascinating paper. I never figured that this could be a reason behind the Arabic world falling behind in industrial development...there you go, one more reason to consider having secular commercial courts.
The courts of 17th and 18th century Istanbul were Sharia courts grounded in Islamic law and tradition, not unlike the courts that are gaining sway in today's Middle East. At the start of the project, Kuran and co-author Jared Rubin of Chapman University knew the courts were heavily biased in favor of men, titled elites and Muslims. By contrast, they strictly punished women, commoners and religious minorities such as Christians and Jews.
Yet as he reviewed the records, Kuran noticed that the very groups the courts favored -- Muslims, men and high-status individuals -- paid significantly higher interest rates for loans. Conversely, society's less fortunate -- women, commoners and religious minorities -- paid lower interest rates.
The reason? Because the courts went easy on Muslims, men and titled elites, lenders could not count on recouping their money and loaning to those groups became a high-risk proposition. Lenders responded by charging privileged individuals higher interest rates to cover their risk.
"The biases of the courts made it risky to lend to privileged groups," Kuran says. "The courts gave privileged groups incentives to break contracts. Judicially favored groups paid more for credit precisely because their promises were relatively less credible."
Men in particular paid significantly higher interest rates than women -- as much as 26 percent more, the study states. Women represented a better credit risk precisely because courts held them accountable, Kuran says. Also, women of the time were not free to travel alone, much less flee their creditors. Men, by contrast, represented a flight risk.
The findings help shed light on the contemporary Middle East, Kuran says. For one, they help explain why the once-prosperous region fell behind Europe economically, a lag from which the region is still recovering, he says.
As the Industrial Revolution took off in the 18th and 19th centuries and factories began springing up across Britain and Europe, access to capital became increasingly important, Kuran says.
Across Britain and Europe, industrialization was financed by wealthy investors who could secure large loans. Istanbul was a thriving commercial center at the time. The high interest rates faced by the city's elites help explain why a similar industrial expansion was slower to take root there.
"To succeed in mass production, one needed much more capital than in the past," Kuran says. "So it became a handicap to face very high borrowing costs."