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<p>Bloomberg</p>

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Jesus Saves, Moses Lends, Muhammad Invests

While orthodox finance is in a mess, Islamic finance is growing strong. Maybe a little financial sharia law would help everybody? Before you cast judgment, let us explain about God and mammon.


It's pretty clear what Jesus thought of the financial sector.

The only example in the Gospels of him using physical force against anyone was when he upset the tables of the moneychangers in the temple.

It's pretty clear, too, what Shakespeare thought. Take Lord Polonius's advice in Hamlet, oft quoted over the 400-odd years since it was written: "Neither a borrower nor a lender be; For loan oft loses both itself and friend."

How vindicated would they feel if they were alive today? Our heedlessness is ruining us all.

It's been almost five years since the start of the so-called global financial crisis, and almost every day, it seems, brings some piece of news showing again how hopelessly we are in thrall to the moneylenders.

“Big banks continue to have an interest in driving up their leverage without enough regard for the consequences of failure: …they expect the public sector to cover the downside.”

The last week of June, for example, saw the release of the 82nd annual report from the Bank for International Settlements — an intergovernmental organisation comprising 60 central banks, including all the world's major economies. And what a depressing read it is. It foreshadows no end to the crisis.

It notes with alarm the fact that since 2007 — the year the financial crisis began — government debt in the advanced economies has increased on average from about 75 per cent of GDP to more than 110 per cent. And the debts of governments to the moneylenders were still growing apace; government deficits had more than quadrupled on average over the period.

The "fiscal maelstrom", as the report called it, is seeing national governments lose their status as essentially risk-free "at an alarming rate".

Meanwhile the financial sector has increasingly displayed "the same high-risk profile it had before the crisis.

"Big banks continue to have an interest in driving up their leverage without enough regard for the consequences of failure: because of their systemic weight, they expect the public sector to cover the downside.

"Another worrying sign is that trading, after a brief crisis-induced squeeze, has again become a major source of income for large banks."

We could go on quoting from the BIS report's long, complex exposition of the enormity of the problem, but there's no need. The situation is summarised in a single sentence on page 26: "Unsustainable debts were ultimately the source of the financial crisis, and there is little evidence that the situation has become much better since."

And yet, the bottom line, the common thread to it all is not just debt, as the BIS says, but something darker. There is an old word for it — usury.

At the time Shakespeare was writing, it referred to the charging of interest, any interest at all, on money loaned. Later it came to refer to excessive interest.

The simple old word struggles to describe the complex financial practices which have brought us so much grief over the past five years or so. But nor is there any better word to describe the way the sub-prime loans, the rigging of capital markets, the complex derivatives, the short-selling — all the ways modern financiers have invented to make gross, excessive amounts of money from money, without reference to actual tangible assets — than usury.

<p>Karim Sahib/AFP</p>

Karim Sahib/AFP

So, to a quick history of usury.

The word itself only came into use some time in the 14th century, but for thousands of years previously, the wise and the spiritual, the lawmakers and the seers, had wrestled with the concept of usury.

Almost 4,000 years ago the Code of Hammurabi (282 laws formulated in Babylonian times to address the rights of any oppressed person) expressed concerns about the ethics of finance and the exploitation of lending. Ancient Vedic texts of India condemned usury. In fact, it was a common concern among most religions.

The Bible is replete with warnings against usury. Right back near the start of the good book, in Exodus, people are warned by God against extorting money from their fellows by demanding interest on loans. According to one tally, this prohibition is repeated no fewer then 22 times in the Old Testament.

Chapter 23.19 of Deuteronomy (quoting the King James Bible) would seem to make the point pretty well: "Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury."

Ah, but there was an escape clause. Deuteronomy 23:20 continues: "Unto a stranger thou mayest lend upon usury; but to thy brother thou shalt not lend upon usury…"

Well, that was good enough for the Jews, but the Christians had the New Testament to contend with. And Jesus did not make this distinction between co-religionists and others. He said we should treat everyone as brothers.

Since 2007 government debt in the advanced economies has increased on average from about 75 per cent of GDP to more than 110 per cent.

This difference between the let-out clause accepted by the Jews and the absolute prohibition apparent to Christians has had a profound effect on western economic history.

"This important exception [allowing Jews to charge interest of non-Jews] in Deuteronomy will be very important in creating the phenomenon where Jews become known as the moneylenders of Europe," says professor Constant Mews, director of the Centre for Studies in Religion and Theology at Monash University.

No question, he says, there were Christian moneylenders during the religion's first few hundred years. Moneylending was a Roman practice.

It is equally clear that the church frowned on the practice. And coincident with the decline of Rome, Catholic theologians took a tougher line on usury. By the late Middle Ages the view was that lending for a fixed rate of interest was, literally, damnable.

Indeed the Catholic church still holds that view, officially, as is noted by Paul Oslington, professor of economics at Australian Catholic University (a joint appointment in the School of Business and School of Theology).

"The Catholic church's usury prohibition is still on the books. The papal prohibition is still on the books," he says.

So, how were things financed during that theocratic millennium between about the fifth and fifteenth centuries after Christ? To a great extent, they weren't. There was not a lot of capital around in medieval times, though, as Mews says, "Jews were certainly engaged in moneylending because there was a great shortage of credit in the medieval period and that was the only job they were able to do."

<p>Saeed Khan/AFP</p>

Saeed Khan/AFP

In the later Middle Ages, they lost their privileged position; first the Italians and then others got involved as Christians found their own ways to work around the rules.

"One way around it was the convention of a wealthy merchant on his deathbed giving back to the community the money they were suspected of having stolen through usury. The prohibition facilitated, in some ways, great works of patronage in public buildings, churches and hospitals," says Mews.

There developed another way to obtain finance, not dissimilar to what we now think of as venture capital. It was generally accepted that if the lender and borrower agreed to share in the risk of the venture, the loan was legal. If the venture was profitable, the lender got a cut; if it failed, the lender missed out. The key point was that, whatever transpired with the venture, the lender was not entitled to a return in the form of interest.

"Until about 1570," says Mohamed Ariff, professor of finance at Bond University, "most of the lending in the world was based on profit share.

"That was the way the East India Company first raised money, the way the Dutch East India Company raised money. That is the way commerce was conducted."

But over the next 400-odd years, with the rise of modern banking, he says, "this form of borrowing largely disappeared".

That is not, however, to say concerns about usury disappeared. Indeed with the Enlightenment and the Reformation, and the rise of some early semblance of Christian capitalism, the issue of usury got hotter.

Regulators are fighting an uphill battle to put ethics back into the Judeo-Christian financial system. But the Islamic system has them built in.

The big question, says Paul Oslington, was whether it was prohibited absolutely, or whether it was a relative thing. In summary, the newer brands of Christianity gradually came to the more practical view that clever financiers had developed so many ways of getting around the prohibition on usury that it was more sensible to regulate than to prohibit.

"So," says Mews, "in the Reformation there's a move… to say a payment is acceptable if you don't go above a certain amount, like five per cent.

"In other words usury is redefined as interest beyond what might be generally accepted as legitimate compensation for a lender."

And so were born usury laws, which still exist in some mild form in many countries today.

But even as what might be called the Judeo-Christian, or perhaps the Judeo-Protestant system of finance evolved, eventually becoming the complex, ill-regulated mess it is today, another model for lending existed.

The third of the great monotheistic religions, Islam, always took God's word more seriously when it came to usury.

It developed its own way of capital provision, which did not rely on charging interest. It was, in fact, the model which Christians had begun to copy in the late Middle Ages — the risk-sharing model.

<p>Courtesy of Monash University</p>

Courtesy of Monash University

Professor Constant Mews

"The interesting thing about Islam," says Mews, "is that it was a much more commercial culture from the outset than Christianity."

And from around the middle of the eighth century to the middle of the 13th, while European Christians were struggling through the Dark Ages, the Islamic world enjoyed a golden age.

Arab merchants had a lot to do with it.

"They developed alternative ways of regulating funds," says Mews.

"In particular the core Islamic principle is simply one of sharing profit and loss. The desire is to promote investment by taking commercial risk.

"Risk, incidentally, is an Arabic word, referring to where you lend money to others without requiring a return unless there is profitable growth."

Latin didn't even have an equivalent word, he says. "The nearest equivalent was danger, which is quite a different thing. It is a negative word."

“Risk, incidentally, is an Arabic word, referring to where you lend money to others without requiring a return unless there is profitable growth.”

And for some 500 years, this financial model underpinned advances in science, the arts, architecture, and innovation generally. Then came the Crusades and the Mongol hordes, and the Islamic model of finance declined, the space becoming filled by that other model.

Islamic finance, however, is undergoing something of a renaissance.

It is now a USD1 trillion industry. Sure, that's still tiny compared with orthodox finance, but it's a substantial number, and it's growing fast. The phenomenon is all the more impressive given that Islamic financial institutions have only been back on the scene for a few decades.

Since the late 70s, however, says Hayat Khan, lecturer in finance and co-founder of the masters course in Islamic Finance at Latrobe University, it has experienced double-digit growth.

"Until recently it averaged 15 to 20 per cent [growth], and now is still more than 10 per cent.

"It is projected by 2020, the Muslim world will be doing 50 per cent of its banking with Islamic institutions."

Mohamed Ariff continues the litany of statistical growth: there are 57 majority-Muslim nations, 76 countries which already practice Islamic banking, 350 banks, 15 insurance companies and about 1,200 mutual funds.

<p>Bloomberg</p>

Bloomberg

But perhaps the most interesting statistic of all is contained in a paper published in April this year by professor Kerrie Sadiq of the school of accountancy at Queensland University of Technology and Dr Ann Black of the TC Beirne School of Law, Queensland University.

They cite a Standard and Poor's report of 2009, which showed that in that year, while many of the world's financial systems were deleveraging, assets of the top 500 Islamic banks expanded by 28.6 per cent.

"Given such statistics," the authors wrote, "it is suggested that Islamic finance…can contribute to global financial stability."

The balance of the paper was devoted to analysis of the steps that Australia could take to put Islamic finance on an equal legal and regulatory footing with traditional finance — of which more later.

So what is it that makes the Islamic model distinctive and, apparently, more stable?

Sadiq and Black summarise the distinguishing tenets as: the ban on interest, the ban on speculation, the ban on financing certain economic sectors, the profit- and loss- sharing principle and the asset-backing principle.

Khan boils it down further still: "The broad way of putting that is that Islamic finance is asset-based and conventional finance is debt-based."

“It is projected by 2020, the Muslim world will be doing 50 per cent of its banking with Islamic institutions.”

"Islam says that you want to identify a real project and share the returns — profit or loss. Whereas [with] conventional finance you lend me money and whatever I do with it, you get interest.

"It assumes that profit will be greater than the interest rate and that the deal is viable. In fact, what we've seen is that when you don't tie the loan to something real, it creates problems."

Islamic finance eschews those complex deals on the secondary market — the layers upon layers of debt and interest, side bets and speculation built on tenuous tangible assets, which Khan says are "completely detached from reality".

During the GFC, conventional finance fell into what he calls this "chasm between real economic activity and nominal economic activity".

"The reasons for the GFC are practices prohibited by Islamic finance," says Khan.

Professor Michael Skully, of the faculty of Business & Economics at Monash University, agrees.

"The things that killed us [during the GFC] were the financials. When we talk about the Islamic funds doing better, it was a function of them not being exposed to financials and highly levered companies.

<p>Atta Kenare/AFP</p>

Atta Kenare/AFP

"In fact they had almost no leverage. In a downturn, if you don't have any debt, you are more likely to survive and prosper than if you have a lot of debt."

So how exactly does it work?

Skully explains: "Say you want to borrow to buy some inventory for your business. The bank says 'I'll buy the inventory for you and then as you go to sell it you can buy it back from me.' And the difference between the profit and the resale is the bank's profit."

Or, in the case of housing finance, the customer selects a property, the bank buys it, and the customer then buys it back over time from the bank.

"So the real estate is actually on the balance sheet of the bank," he says.

"The big difference is that in the Islamic system, these institutions actually own the assets. If you look at an Islamic bank's balance sheet, you will find it has a lot of fixed assets on it. A bank in Australia for example would own some computers and ATM machines and other bits and pieces, but not much in the way of other assets…"

The other key difference is that Islamic finance has, as the very name implies, a religious and moral component to it.

“Australia could lay the foundation to become a leader in the Asia-Pacific Islamic-finance market.”

"There are some scholars who specialise in deciding…whether a financial product is compliant with Islam," he says.

"These are not just your ordinary mosque imams, but people who specialise in finance and theory as well as Islamic law. And all the big institutions use them. So if you want to do well, you will populate your sharia advisory council with people who have a good brand presence.

"They're not concerned with return, but with getting a product that is compliant with Islam."

It can be a very well-paid job.

Indeed the whole world of Islamic banking is looking pretty lucrative these days, so it's not surprising that conventional financial institutions and markets are looking for a piece of the action. Britain in particular has gone a long way towards making its system welcoming to Islamic banking. Australia is lagging somewhat.

Our system, also unsurprisingly, faces are legal and logistical hurdles in integrating Islamic banking. Stamp duty, just to cite one of the simpler issues, might be doubled by the two-part transactions in which banks buy and then on-sell to clients. There are a host of others.

The Federal Government is well aware of all the difficulties. A couple of years ago, there was a flurry of activity and publicity as it indicated an intent to make changes.

That intent, according to all the experts The Global Mail spoke to for this article, has now been placed on a backburner. The government has a lot on its plate just now.

No doubt it is also leery of the inevitable controversy. Just think of the scope for a scare campaign inherent in the words "sharia law".

But the case for Australia to clear the path for Islamic banking seems overwhelming. All our big banks are interested. The expert reports call for it.

To quote Sadiq and Black, with the right regulatory measures, "Australia could lay the foundation to become a leader in the Asia-Pacific Islamic-finance market."

To quote Michael Skully:

"One of the big attractions is that we have all this infrastructure that we need to develop. And we need to have people willing to make long-term investments. Islamic finance — your purchase and resale arrangements or joint-venture arrangements — are perfect for it.

They're exactly what you need for infrastructure funding."

But beyond that is the broader consideration of encouraging financial practices which are not usurious, not speculative, and based on real assets and real ethics.

Around the world, regulators are fighting an uphill battle to put ethics back into the Judeo-Christian financial system. But the Islamic system has them built in.

We should clarify that no-one's arguing the Islamic system is perfect; Constant Mews notes concern among some Islamic thinkers that "Islamic finance may go the same way as Christian scholasticism went, in finding very clever ways to legitimise financial self-interest."

But to him, it all points back to those ancient verities about finance. "You could argue," he says, "that all the currently proposed credit controls and legal reforms are attempts to get back to some form of regulation like there has always been in these religious cultures."

Amen to that.

21 comments on this story
by Peter

An interesting read. Taught me some things I didn't know. But ultimately it all boils down to the ethics and morals of the lenders and borrowers. One thing all religions do agree is that both are corruptible.

Thanks Mike.

July 9, 2012 @ 4:09pm
by morgan

very interesting

July 9, 2012 @ 11:54pm
by CK

I would like to see a serious study comparing costs of Islamic transactions with those financed conventionally. In my experience as a banker, Islamic finance has been structured in a way that (surely not by coincidence), imputes a cost to the 'borrower' that effectively competes with or matches the cost of traditional finance (i.e. the cost of interest). And it appears that borrowers will chose between traditional and Islamic finance based on these cost parameters, not on moral grounds. While there is undoubtedly a cultural component at play in Islamic countries that favours 'local' solutions, it would be naive to assume less than sound commercial decisions underpin the adoption of any given solution.

July 10, 2012 @ 2:10pm
by rick

interesting concept and very new to me, going to search in the internet about the idea.. but really impressive story

Out of curiosity, Would they finance people buying a house? There isn't really a profit if the buyer stay in the house, it categorized as consumer purchase as opposed to investment.

July 10, 2012 @ 8:34pm
by Robert

Great article, even though I knew a bit about it, it was great to get some good detail and of course exposure on the trouble with interest
Thanks for all your work

July 11, 2012 @ 5:54pm
by Almir

Great article, @Rick - you can get the basics intro to Islamic Finance from auscif.com website as well as few info on challenges and opportunities in Australia.

July 11, 2012 @ 8:34pm
by John

I am not a business person but your entertaining article has greatly clarified my understanding of the attitude of 'Abrahamic' religions towards lending. Bring on Islamic investment and lets get rid of the present ruthless manipulative capitalistic style of finance!!

July 13, 2012 @ 11:47am
by Evan

This report was a fascinating and informative read. I was particularly impressed with the quote “Islamic finance is asset-based and conventional finance is debt-based.” It helped my understanding about the defining features of the two different financial systems. I hope, however, that the Islamic system resists corruptive efforts to circumvent these ethical practices within, which evidently occurred with the Jewish and then Christian systems, resulting in the chaotic quagmire in conventional financial systems worldwide that are being supported by the public sector –welfare to the top 1% group at its disgusting worst!

July 14, 2012 @ 9:16am
by mahdi

if only we can follow what the prophets told us we wouldn't be in this mess. but then again "Greed is Good?"

July 24, 2012 @ 11:55pm
by Megan

The article was a great general overview of Islamic Finance, but seemed to have a misconceived idea of the history of Christians and the Bible’s stance on finance. It seems there’s this misconception out there that Christians slowly decided to make the Bible more practical for themselves, starting with the strict word of God and then morphing it to meet their needs. I’m not saying that today’s financial systems should be branded as biblical, but that interest itself is not necessarily something the Bible tells us we need to stay away from. The skewing of our financial systems didn’t arise from a slow bend of the Christian view on financial matters, rather it was a non-religious deviation that arose from people who kept finance and religion completely separate.

First to clarify, the example of Jesus in the temple was NOT a representation of what he thought of the financial sector. He drove the men out of the temple not because they were 'moneychangers' but because these men (he called them thieves) had not only turned the temple into a marketplace, but also a marketplace where they would take advantage of the faith of the poor. There were people selling sacrificial doves to the poor and scribes who preyed on poor widows. This is actually a story that could speak to today’s predatory lending and not a story that says Jesus hates commerce.

Regarding the origins of the prohibition of interest, the laws of the old testament were given specifically to Israel to follow until Jesus would come and fulfill the larger purpose of the law (salvation), which is in line with the fact that this law said it was ok for Jews to charge non-Jews interest. This is not to say that Jesus came and threw out all the laws, it’s just that these laws were specific to Israel and specific to the time before Jesus would come, die for the sins of every man, and rise again allowing everyone a chance to be forgiven and saved (not just perfect law abiders).

There’s also a parable from Jesus that includes the scolding of a servant who was given money and decided to bury it, and his lord said it would've been better for him to have given it to the bank and earned interest. He also rewarded the other two servants who were able to multiply what he had given them. Although a parable about what God gives us, its literal context seems to show Jesus’ general acceptance of investing.

Also, it makes sense that many early Christians didn’t feel comfortable with the idea of interest because many had come from Jewish families or were familiar with the laws that were given to the Jews. However this doesn’t mean that their unease about interest stood strong on the teachings of Jesus or the Bible.

This article goes on to mention the Reformation where there were ‘newer Christians’ that bent the rules. The real context of this was that the Reformation was all about the people of the church realizing that a lot of their practices were just the Catholic Church's traditions rather than biblical, and that anything that wasn't based on the Bible was not from God and therefore was man-made. It makes sense that a new view on usury would be established in the Reformation because the idea that God prohibited interest was not Biblical. So it was a shift from listening to the Catholic Church and convention to listening to the Bible (not a shift from conservative to liberal).

So what I take from the Bible regarding this topic is that we shouldn’t keep our money under mattresses and that interest in general is fine but the use of any financial system for the corrupt purposes of preying on the poor is wrong. I agree with the first commenter, it ultimately comes down to the actual people involved and their susceptibility to corruption.

Finally, my view of Islamic Finance from a Christian perspective. Although I don't believe God has commanded the prohibition of all interest, I believe that Islamic Finance can easily be called Christian or Jewish Finance (as we've seen through history). It’s just that ‘Christian Finance’ for me would be less of a necessity than ‘Islamic Finance’ would be to a Muslim. This is just as I don't believe God has commanded a prohibition of alcohol but that limiting my consumption aligns with the principles in the Bible (and on an earthly, nonspiritual level is healthier for me). In fact, I think if someone could rebrand ‘Islamic Finance’ as ‘Christian Finance’, literally just change the name and make all the terms in English, there would be a much quicker mainstreaming in the US since it would negate all of the fears of ‘shariah law’ infiltration yet still be a system that Muslims, Christians, Jews, and the rest of the country could use. I mean if we started calling all water 'halal water' a lot of people would get the wrong idea and stop drinking water, just as the 'Islamic' part of 'Islamic Finance' scares people off from something that is simply a financial system with some sensible parameters.

Hope this helped everyone who bore with me gain a more accurate understanding of what the Bible says on this matter.

July 26, 2012 @ 2:15pm
by John

Great article. A friend was driving around Turkey when he asked his Muslim driver why many of the houses weren't finished. He replied that Muslims won't borrow to build their own homes. That would make sense of their system as financing anything would normaly involve profit shareing and risk.

July 29, 2012 @ 9:58am
by Kim Venskunas

Who owns the Islamic Banks?

I wonder if the answer holds any merit for the Islamic Bank's success - especially in recent times.

August 23, 2012 @ 1:44pm
by maliha hamid hussein

Fascinating

September 14, 2012 @ 7:52am
by Asiya

interesting article about islamic finance

October 3, 2012 @ 9:11pm
by Imran Nawaz

remarkable article

October 15, 2012 @ 4:05am
by irma

subhanallah! Thank you for writing.

October 16, 2012 @ 12:44am
by havban

interesting point of view about asset-based and debt-based :)

October 16, 2012 @ 1:45pm
by Zul

At the current rate, China would soon be overtaking the US as the World No. 1 economic superpower .... it then really depends on PBOC's general and future direction for an either asset or debt-based global finance system. Lately reports have shown PBOC's increased and encouraged purchases in and of gold, a stored valued asset. And the current and increasing 12 trillion dollars owed to them by a weakening US economy wont help the debt-based finance course either. Therein lies the hint ....

October 21, 2012 @ 4:43am
Show previous 18 comments
by rodney allsworth

what are you talking about here-quote-Regulators are fighting an uphill battle to put ethics back into the Judeo-Christian financial system.- this current system has no relevance to the -judeo-christian system-, the current world monetary system is based on debt only, the Christian bible tells one and all-OWE NO MAN ANYTHING, + DO NOT CHARGE INTEREST - it is nonsense to think the worlds financing arrangements are anything other than -PURELY SECULAR CAPITALISM BASED ON DEBT FINANCING, and to top it all off, and as for this debt when the crap hits the fan.,IE, GFC. it just gets handed down to the common taxpayer, and that's fraudulent treachery. Christian financing is different to -secular debt financing, that's why it would appear to the author that the Christian basis is gone out of it, its not Christian or judeo. whereas the Islamic financing is still as it was originally because the religion of Islam and the politics of Islam are one and the same. which is something the western peoples do not understand, THE POLITICIANS OF THE WEST DONT WANT US TO UNDERSTAND THIS POINT. just ask a Muslim what the difference between THEIR POLITICS AND THEIR RELIGION IS, and all you will get is a blank stare, it is our western concept of separation of church and state that they do not understand.

rod qld aust

November 1, 2012 @ 12:42pm
by Cinthia

Agreed with Rodney, the Bible states clearly: "The rich rule over the poor, and the borrower is slave of the lender". Proverbs 22:7 (Written probably by the wisest and richest man on earth, Solomon).

The Scriptures talk much more about money than love. God knows. Do your homework. Christian finances are very different from this capitalism system where 70% is based on consumption and credit.

November 16, 2012 @ 2:53pm
by Kevin Cobley

The religious prohibition of usary is rooted in the laws of mathematics, in steady state economies (that is where there is no econmic growth) fractional reserve banking is impossible as the only possible interest rate is zero. It requires a growing economy to support interest because the interest is paid from growth. If there is no growth interest eventually sucks all the capital out of the system and debts fail to be paid.
That's the new system the world is entering (Japan has been down this road for 10 years, zero interest rates because the economy is no longer growing) and as the world's growth rates head towards zero because the resources required to underpin growth are no longer available, interest rates must head to zero and the governments must print money to pay interest on existing debts otherwise capital would just be extracted from the system and all debts would eventually fail, failed debts are failed superannuation funds and bank deposits.
There are only 2 choices facing the world, everbody must loose their money or money must be made worthless. Either way your still broke, there's no way to fix this problem and anbody selling a way to fix it is con man.

January 20, 2013 @ 4:02am
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