LRB on Islam and Money

It was around 11th-12th centuries that Christianity realized that the self-imposed limitations on usury and profits hindered the development of the monetary instruments available to the Church itself (the biggest real estate handler then) and the rich (who needed credits to raise armies to fight each other - they did not have Facebook then, so they had to fight for the right to call each other BFF).
Jewish merchants monopolized the credit markets and the Catholic Church could not allow so much money to be exchanged right under its nose without having a chance to take it all, and not just a taxable portion of it.
So the Purgatory was invented (read Jacque LeGoff) and the indulgences, and then the Reformation occured and the progress became unstoppable...
Now, 9 centuries later, we see the same problem re-occuring. The obscene amounts of money held by the Moslems need to be circulated, so there is a search for reconciling the tenets of faith with the need to reap interest. Read how it is being done - how derivatives and credit swaps can be made halal.




The first part of Jeremy Harding’s piece on high finance in the Islamic World can be read online by clicking the image above or right here.

Islam and the Armies of Mammon
Jeremy Harding returns to the subject of high finance in the Islamic world

The rules that govern Islamic banking and finance are non-negotiable, cast in tradition, as good as stone. A finance house that sticks to the plot will not come to grief in a credit crisis; neither will its clients. Yet once large sums are involved – sums beyond the reach of modest customers – Islamic entrepreneurs, corporate and institutional investors take risks with the principles that sharia-compliant finance is meant to embody, by colonising conventional areas where the promise of riches and power looks irresistible but the path is forbidden. The challenge here is technical as much as moral. Faith-accountable fund managers and devout privateers in Malaysia and the Gulf may want a stake in Western wealth creation, but they must try to stick to Islamic principles when they intrude on the money. ‘Leveraging’, ‘derivatives’, ‘shorting’: the ambient glamour of these operations, like the terminology itself, seems dangerous in the new light of day, yet cautious capitalists still find them serviceable and inventive theorists of sharia-compliance are intrigued by them.
In the Square Mile, compliant financing techniques are available if enough money and intellectual resources are put into a project. In 2007 there was a star turn: a sharia-compliant leveraged buy-out of Aston Martin Lagonda, then part of Ford, and a glamorous accessory in the not so compliant 007 range. (The cars themselves are ‘compliant’, someone involved in the deal assured me.) For the purposes of the acquisition, two investment management companies in Kuwait formed a third company with Aston Martin’s CEO and a retired British rally driver. The financial gadgetry involved was impressive, though by the standards of Bond’s MI6 boffin, the phlegmatic Q, hardly spectacular. AML was bought for about £480 million. To work around the problem of interest payable on the money that had to be rais- ed – from banks – the buyers pressed a compliant dashboard button known as the ‘commodity murabaha’: rather than lending money directly to a borrower, a bank agrees to buy a commodity and sell it on to him (immediately) with a fee added into the sale price; the borrower sells the commodity in the markets (immediately), but his repayment to the bank for the commodity it bought on his behalf is deferred for a period of time agreed by the parties.
The Kuwaitis had already raised the bulk of the money for the purchase; the remainder, in the order of £200 million, was put up by a syndicate of banks, led by the London office of the German commercial bank WestLB, which bought on the London Metal Exchange to the value of the sum required, sold the metal warrants to the purchasing company on the same day, with a mark-up, after which the company sold them on, as the model requires. The deal committed the new owners of AML to a single repayment, five to eight years later. Phased debt repayments, the norm in this kind of arrangement, were avoided, as was the distinction between senior debt (which gets priority repayment) and subordinate debt; Islam is unhappy with different classes of debt, as it is with different classes of stock. Five to eight years seems a long time, but the timing was based on an analysis of AML’s business cycle – high-end toys like Aston Martins are slow earners – and found favour with the Kuwaitis, the banks and the sharia advisers.
Two of the WestLB people who handled the buy-out were satisfied by the impression it made in the City and in the Gulf. It was evidently a lot of work for Eva Bigalke, the bank’s executive director of Islamic Finance, who managed the legal underpinnings of the deal. These were vast as well as intricate: when I asked her for an idea of the size of the legal file, she raised her hand some way from the table, not far short of Proust. It seemed to her that this was the moment when sceptics had to concede that sharia-compliance could find a way to the real money, which was only accessible to conventional entrepreneurs a few years ago.
The AML deal is scarcely mind-boggling; around $25 billion was raised for the acquisition of RJR Nabisco at the end of the 1980s and, as Bigalke’s colleague Harvey Hoogakker remarked, the Alliance Boots buy-out in 2007 involved about £12 billion. Both were the work of the private equity monster Kohlberg Kravis Roberts, with whom a couple of flush Kuwaiti investment companies bear no comparison. Hoogakker, WestLB’s executive director of leveraged finance, described the Aston Martin buy-out as a modest ‘mid-market deal’, whose significance, he felt, had to do with an ‘emerging’ trend having finally, startlingly emerged. There was, Bigalke added, a thoroughgoing change in the way the Middle East was thinking about its wealth. The sudden repatriation of Islamic money after 9/11, and the long period that preceded it, when wealthy Arabs would invest away from petrochemicals only if they saw a real-estate opportunity – anywhere from Knightsbridge via Dubai to the property showrooms of Kuala Lumpur – is over. In its place is a more inquisitive, aggressive approach to non-Islamic wealth creation, and a wish to see it customised in compliant forms. The AML deal, Bigalke reports, was approved by ‘a large constituency’ in the world of Islamic finance as an acceptable customisation of a conventional technique. Clearly it opens up an array of possibilities to devout entrepreneurs, including asset-stripping – and how devout is that?
The commodity murabaha can be used to organise currency swaps or profit swaps between institutions, but many futures and options pose a bigger challenge because Islam is cautious about the buying and selling of contracts. A contract that can be sold on, or one that confers a right, rather than an undertaking to buy, introduces the worry of uncertainty. A contract for a contract, which is what many derivatives amount to, is a sign for a sign, not a sign for a thing; it introduces clutter and congestion into the realm of signs – a realm of solemnity for practising Muslims – and erodes consensus on the value of underlying assets, just as riba (or interest) earned on a principal, like on like, turns money from a counter into an agent, to the detriment of authentic counters and legitimate agents. Islam’s reticence about derivatives means that investors have difficulty reaping the benefits (and incurring the risks) of exposure to hedge funds. The sticking point here is the indispensable feature of the short sale: most sharia scholars agree you can’t sell a thing you don’t own. Then, too, there’s the fact that selling short is a gamble, and you stand to lose if the price of your chosen security starts to rise.
The first step, for Muslims who wish to come to terms with the paradox of the halal (or permissible) derivative, is to admit that even if money isn’t all in the mind, that’s where it likes to spend its time in the West. It’s no use pretending that this is an entirely worthless and precarious arrangement: virtual money may or may not be its own undoing one day, but it isn’t threatened yet by dissident peoples huddling in the forest with their tangible assets. The next step is to find an instrument that makes it possible to go around a haram (or prohibited) transaction and reach the desired consequence by a different route, a bit like avoiding an open drain, with obedience to your faith intact. One might think of this as cynicism or hypocrisy, but the process is not so different from drawing up a complicated legal agreement, and the results can be quite impressive to sharia scholars with a taste for intellectual risk.
You might, for example, invest in a fund that uses your money to buy up sharia-compliant shares. That fund then swaps the returns on the shares for the returns on a conventional fund tied, say, to the performance of a stock-market index. The intention of the compliant swap is to give a little moral leeway to the pious client. Even conscientious Islamic investors, the argument goes, have to draw a line under their misgivings at some point, just like investors in a secular Socially Responsible Investment fund, who know that no returns on their capital are squeaky clean given that the companies in any fund portfolio operate in a non-SRI trading environment.
An agreement to swap the returns of one fund for those of another might look something like this: the manager of the fund invested in sharia-compliant securities promises to sell x number of shares valued at £1000 on 1 September 2009, the day the promise is made, to a conventional party (another fund, a bank or a trader) at a predefined price on a predefined future date, say 1 September 2010. The trader makes a promise to the compliant fund to buy those shares at that predefined price on that same date. The future price is indeed ‘predefined’, but it is not known as a figure: the fund manager and the conventional party agree only that it will be determined by the value of a given index, say the Dow Jones Industrial Average, on the day of settlement. Imagine that on the date the promises are made, with the relevant halal shares worth £1000, the Average stands at 8000 points. Then imagine that a year later, the value of the shares has remained the same but the Average has increased in value by 10 per cent and stands at 8800. The conventional party will not want to hold the compliant fund to its promise to sell, but the compliant fund will hold the conventional party to its promise to buy, and make a profit of 10 per cent on the sale. If the value of the shares in the course of the year remains the same but the Average has fallen by 10 per cent, the conventional party will hold the compliant fund to its promise to sell, because it can acquire the compliant shares at less than their going rate.
This mechanism was pioneered by Deutsche Bank in 2007: the bank itself sets up the compliant fund with investors’ money while acting both as investment manager and as the other, conventional party with whom the compliant fund exchanges the promises. As a result, devout investors gain exposure to the movement in a conventional index even though they haven’t bought a single haram security or signed a forward contract: they’ve merely made a promise to sell what they own for a predefined price. The forbidden component of gharar – uncertainty – which seems to be brought into play by virtue of the final figure being unknown at the time the promises are made is probably closer to permissible ‘risk’; the real danger of gharar is ambiguity, which is absent, since the promises and the terms defining the settlement price are crystal clear. This structure allows investors to pit a basket of compliant shares that may not have gained much value in the space of a year against an index which may perform better, and make a profit on the rise in the index – or a loss on its fall – just as investors in a tracker fund would. All this is monitored by a sharia board appointed by the bank.
As DB predicted, the two-promises formula was well received in some quarters and has many potential applications, though all of them have one aim: access to the reservoirs of virtual exchange for anyone who wants an alternative to open water and the old ways of doing things. Several investment banks are using DB’s model of the two promises to ease their Muslim clients into derivatives and sketch out a model for ‘Islamic’ hedge funds. DB itself announced last autumn that it would be launching a ‘sharia hedge fund’ facility in the Middle East, and recently in London, Bindesh Shah, a partner in Amiri Capital, showed me how the promises could be used to replicate the process of shorting without the sale of borrowed shares taking place.
Among Islamic scholars, resistance is mounting to this kind of mechanism, in which the technical requirements of the sharia are met but the spirit of the code seems to them to be traduced. Another kind of objection has come from Western security agencies keen to follow Islamic money wherever it leads. Sharia-compliance fell under suspicion long before 9/11, because mandatory regulations (for example, rates of return on deposits), which made it hard for Islamic banks to set up in Western countries, forced them offshore. In the 1990s the anthropologist Bill Maurer found several operating ‘in the international tax havens in the Caribbean’ which ‘provided, as one Islamic finance professional put it, a “safe haven” for Islamically acceptable banking practices’. It has become easier since those days for sharia-compliant banks in the West, but the shadow of the tax haven culture is long and so is the folk-memory of the regulators, who hear the expression ‘Islamic finance’ and still scroll up to the collapse of Agha Hasan Abedi’s Bank of Credit and Commerce International in 1991 – not that BCCI was sharia-compliant or complied with anything very much, but it did have funds from a number of Islamic banks on deposit. The association of BCCI with sharia banking became a commonplace for a time, along with its ‘links’ to the Abu Nidal group, which opened an account at BCCI’s Sloane Street branch in the 1980s.
Sharper security concerns about Islamic banking focus on its readiness to replace a single conventional process (which might involve interest or a conspicuous lack of shared risk) by several processes, making money harder to track: consider the commodity murabaha used for the AML buy-out, which required three transactions involving metal warrants instead of a single cash transfer. This reliance on ‘degrees of separation’ is shared by the money-laundering industry: a flurry of deals where one would do is standard procedure for concealing money of dubious character, just as disguising an interest charge as a fee in conventional finance is a useful way to conceal a debt. In 2005 Mahmoud El-Gamal, a professor of economics at Rice University in Texas, prepared a statement for a committee hearing at the US Senate on ‘terror financing’ in which he conceded that ‘degrees of separation through superfluous trades and leases . . . make regulation and law enforcement more challenging.’ He also felt that it was ‘rather naive to think that a group intent on committing criminal activities would favour Islamic financial venues, especially since they are likely to come under closer scrutiny in that domain following the terrorist attacks of 9/11’. Only a sublimely confident security establishment would take its eye off potential conduits on the grounds that they were too obvious.
Other branches of government, especially in Britain, reach out with unseemly enthusiasm to Islamic finance: it’s money, after all, and good public relations with minorities at home on the part of a regime at war in two Muslim-majority states. The Treasury has been keen for some time to see Islamic finance expand in the UK: in 2004 it joined in the fanfare for the launch of the first independent sharia bank, Islamic Bank of Britain (60,000 accounts by the end of 2008, according to the sharia scholar Mufti Barkatulla); it chased up the FSA to write new rules for sharia-compliant banking; it reviewed the status of products that attract more tax than their conventional counterparts and removed the burden of double stamp duty for Islamic home-ownership plans involving the back-to-back sale of a property; it endorsed sharia-compliant Child Trust Funds and did all it could, as Ed Balls put it in 2007 when he was still a junior Treasury minister, ‘to help the Islamic finance industry go from strength to strength’ and ‘cement London as one of the global centres for Islamic finance’.
The government’s big idea, mooted in 2007, was to issue sharia-compliant bonds, known as sukuk. Other administrations, in the Gulf and Malaysia, have done this with some success: the government creates a special-purpose company and sells it a piece of state-owned property; the company issues certificates to investors, leases the property back to the government and uses the rental return to pay dividends to the investors, whose money it holds in trust on their behalf. When the bond reaches maturity the company sells the asset back to the government and uses the return to pay certificate holders, who may not be the original owners. The transparency of the arrangement and its anchorage to an asset means that it’s permissible to buy and sell sukuk: it’s the only significant form of tradeable debt in the world of Islamic finance.
It isn’t clear what asset the British government had in mind to underpin an issue of non-interest-bearing bills, but the project, which seemed so promising until last September, was put on hold in the 2008 Pre-Budget Report on the grounds that ‘it would not offer value for money at the present time.’ For the moment, the credit crunch and the Ed Balls Cement Co, which busily sang the praises of the FSA for its ‘risk-based’ approach, have buried the sukuk project, and much else in London, under a layer of rubble. Rodney Wilson, one of the consultants brought in to advise on the scheme – well disposed to it too – told me it ‘might not look so attractive after all the talk’.
At WestLB, Bigalke and Hoogakker felt the Treasury was less concerned to attract money from Malaysia and the Gulf, which is how it spun sukuk to the media, than with keeping the Islamic finance sector in the UK in a state of good health. To date there are few compliant sterling instruments to trade: a £2 billion issue of tradeable sukuk would have notched up the temperature for the Islamic sector – worth about £12 billion in the UK by recent estimates – and kept the pious money in London. Instead we have quantitative easing, which offers nothing in particular to devout Muslims – but then neither did credit derivatives.
One of the reasons top of the range Islamic investors can afford to navigate away from the safe haven of sharia-compliance, which has shored up Islamic banks against loss, has to do with the solid ballast of Islamic investment, and available money in the Gulf. It’s easy to imagine the thrust of a halal portfolio, once you’ve subtracted conventional banking, financial services, media, leisure and large swathes of the food and drink industry. It resembles a steady as you go selection, put together for a comfortable client in Basingstoke in the 1950s by a broker with offices in Finsbury Circus: mining, energy, manufacture; housing, property, engineering, construction and telecommunications; chemicals, pharmaceuticals and healthcare; government bonds (in compliant form). Clearly, when Muslim investment began charting a course towards derivatives and hedge funds, it did so from a position of relative strength, knowing it could afford to lose a sail or two.
It’s hard to say how quickly that’s changing in the bleak new environment, but any downturn will please opponents of sharia-compliance. Well-informed researchers at the Center for Security Policy in Washington, opinion-mongers at the Daily Mail and ruddy yeomen like Edward Leigh, the Member for Gainsborough, are not the only people waging the struggle: their enemy’s enemies are just as passionate and they’ve done their homework with a lot more diligence. Tarek El Diwany, author of The Problem with Interest, believes that many sharia-compliant financial instruments, like the murabaha used for the AML buy-out, are ‘interest in Islamic clothing’. In El Diwany’s way of thinking, a financier who provides money now in return for more money later is charging interest, however you describe it. Islamic bankers may argue that their financial products earn a profit rather than interest, but often the profits are calculated on the basis of Libor, the London Interbank Offered Rate.
El Diwany, a UK accounting and finance graduate who went on to work in the London capital markets as an options dealer for Fulton Prebon, began taking Islam seriously in the early 1990s. Persuaded by a combination of reason and faith, he argues that economies in which wealth transfer predominates over wealth creation are destined for poverty, because ‘real’ wealth – food, medicine, bricks and mortar, high and low technology goods – is consumed or decays and has to be renewed. Exchange on its own, however vigorous, is unable to do this renewing. A farm or a factory producing electronic parts is more desirable than a casino, even if they all put resources and people to work. It’s a coarse fundamentalist view of economies – except that El Diwany is neither coarse nor an economic fundamentalist; he is an experienced trader with a fierce parti pris, ready, he told me, to ditch Western financial methodologies ‘where they’ve clearly failed’. In his view, ‘the purpose of exchange and modern economic activity in general cannot be to maximise profit.’
He also finds the theory and practice of the sharia-compliant derivative highly questionable. He looks back at his earlier line of work – dealing options – as a mire of uncertainty. In the Square Mile, many derivatives transactions, he came to feel, were being used to mystify petitioners and enrich the oracles. ‘XYZ bank,’ he remembers from his days as a dealer, ‘would lure the poorly paid treasury manager at the Kingdom of Somewhere-or-Other into a complex swap deal that only a PhD in nuclear physics could properly value. So the bank would book a multi-million-dollar profit the very day the deal was closed and the Kingdom’s officers would never know any better.’ Derivatives departments began to swarm around sovereign and corporate clients, he recalls, ‘like bees around a honeypot’.
El Diwany does not accept the longstanding argument for derivatives – that they shield investors from the instability of markets – because ‘many such remedies address risks that do not need to exist in the first place.’ In 2001, two years before Warren Buffett warned that derivatives were ‘financial weapons of mass destruction’, El Diwany identified them as a likely cause of ‘serious breakdown in the financial system’. He could find no honest ‘Islamic’ approach to these instruments; like an observer of marginal peoples moving round their compounds exchanging beads, or promising to do so, but negligent when it came to crops and livestock – what city traders think of as ‘the underlying’ – El Diwany saw a will to extinction in communities where derivatives were in the ascendant.
The new prestige of sharia-compliant products, and the caveats coming from scholars and thinkers, present potential clients with a dilemma. Mohammed Abdul Ashik, a thirty-something programmer at PriceWaterhouseCoopers, is a good example. ‘If I wasn’t married and about to have children,’ he said when we met in Docklands, ‘renting would be a no-brainer’ – much preferable to paying off a conventional mortgage, with its haram interest component. All the same, having already taken out his standard mortgage and gone on to explore the fee for changing to an Islamic product (£1500) as well as the marginally higher costs of a sharia-compliant home-ownership scheme, he’s uncertain: extra outlay is a deterrent, especially since the onset of the debt crisis. But so is the worry that what looks like sharia-compliance may be a conscience salve or a fraud: that these products feature in so many websites, online discussions and blogs accessed by members of the new internet ummah (iMuslims as they’re known) makes them the focus of an impressive intellectual input, including much scepticism.
Ashik, like El Diwany, came late to piety and made up for lost time, drawing on his days as a non-practising Muslim to refine his passion for Islam. He blogs on a website called ‘Greater Jihad’, where he posts his views about sharia-compliant products. (Greater jihad – sometimes called ‘internal jihad’ – is the struggle to live the life of a good Muslim.) After plenty of Googling and a couple of meetings with banks, he’s not sure that Islamic lending products ‘comply’ as well as they should. Sharia facilities, or ‘windows’, offered by conventional banks are a recurring worry: how can customers know for a fact that the sharia accounts will be kept entirely separate from mainstream business? Worse still, is sharia-compliance a piece of outright duplicity? Can a product available in the West – a home-purchase scheme, for example – be presented to the regulators, for accounting purposes, as a conventional mortgage and to a devout client, in the sales pitch, as a halal instrument? Mahmoud El-Gamal, who testified to the Senate, was sure that it could: a sharia product is only a conventional product that’s been tweaked for religious users by someone who’s spotted a sensibility gap between two markets, like the arbitrageur who’s identified a price-gap. El-Gamal uses the expression ‘sharia arbitrage’ to describe the re-engineering and sale of conventional products as ‘Islamic’ ones; where sharia scholars approve Islamic ‘windows’ in the conventional high street, he sees nothing more than an elaborate exercise in window-dressing.
If devout people with money to invest believed that an Islamic product was simply a conventional one presented in a different way they would probably avoid it, but they tend instead to see a halal product that is very close to a haram one, which leaves them having to ascertain whether they are happy – on the road to home-ownership, say – going by a route that follows the infidel freeway so closely. Some people are comfortable with fees that simulate interest (or promises that replicate a short sale): a vegetarian burger or a decaffeinated coffee falls short of the thing on which it’s modelled; many laws that forbid an activity do not forbid its likeness. Others mistrust the resemblance of the permissible to the forbidden; they also suspect that if an Islamic instrument can achieve the same results as a conventional one, something must be wrong. Prohibitions on interest, excessive debt, uncertainty and the rest were not devised as an obstacle course: a stable world of exchange, as transparent as possible, is the end in view.
The question of overall purpose heightens Ashik’s queasiness about what he calls ‘fatwa shopping’: doing the rounds among the scholars until you find one who approves of your project – for example, acquiring a liquor licence for an Asian restaurant. There are many Islamic scholars around the world, but many more banks and financial institutions in need of advisory boards. Except in Malaysia, which has tightened up the rules, influential consultants can have several of these well-paid sinecures. It’s nonetheless likely, in the view of Muslim sceptics, that sooner or later a company with an idea for an Islamic product will find a scholar to authenticate it. How do devout individuals decide that his endorsement puts it within reach of their conscience? By knowing which school of jurisprudence he belongs to and reading every fatwa he has issued, possibly, or keying in to internet hearsay. It’s often a case of hit and miss in a world where, as Ashik believes, sharia-compliance is a ‘bandwagon’ and there’s money to be made by thinking up products or approving them. (Discussing the Aston Martin deal, Hoogakker and Bigalke mentioned bandwagons too: theirs was creaking with corporate lawyers and accountants suddenly intrigued by sharia-compliant transactions and the handsome commissions entailed.)
After we’d met, Ashik emailed saying he wasn’t sure that fatwa shopping was as low as he’d made out. What was wrong with Muslims changing their positions when they came across different scholarly opinions? ‘The important thing,’ he wrote, ‘is not to . . . choose the easiest option/opinion.’ Thinking about how your money behaves when you bank it or part with it became a minority habit in Britain more than two hundred years ago; the legacy of that reflection is the Socially Responsible Investment movement. How a money culture thinks of you and asks you to misbehave is another minority preoccupation and Muslims take it seriously. Whatever the Center for Security Policy has to say, sharia-compliant retail banking falls within the scope of greater jihad rather than jihad in the narrow, militarist sense; its market penetration in the West is not a blow against the free world.
As the financial crisis persists, there are fewer claims for the sturdiness of the compliant banking system as a whole. Big expansions envisaged last year, like that of Noor Islamic Bank in the Gulf, are on hold in the name of consolidation. The astonishing growth of sukuk has also slowed up. One reason is a lingering controversy about their compliance. Doubts were raised in 2008, when Sheikh Taqi Usmani announced that as far as he could see 80 per cent of the sukuk in circulation were not ‘Islamic’ because of the growing practice among borrowers of guaranteeing sukuk investors’ returns: the bond-issuer, having sold a piece of real estate in order to fund the issue, pledges to buy it back at a price that may be less than it’s worth by the time the sukuk mature, thereby guaranteeing the value of the certificates. You might have thought this was a bulwark against gharar; in fact it offends by eliminating much of the investors’ risk.
The approach to risk – it occurs to me, after months trying to get a feel for these unfamiliar products – defines the difference between Islamic and conventional finance more sharply than interest. Whether or not it’s dodged in reality, the willingness to acknowledge risk in every aspect of exchange is reasonable. In Britain, for years now, investment products have had to spell out a warning that our holdings may go down (‘as well as up’): Thatcherism and the radical turn may have claimed to do away with the nanny state but it left many of us in the nursery. A doctrine which reminds us that there’s no such thing as a guaranteed return speaks eloquently of the risk we need to understand when we invest to the best of our ability (in a pension, for example) and the risk that bankers and fund managers, backed by governments, have played down in order to market their products.
Advocates of Islamic retail banking may be right to say that it will weather the crisis, but the sharia-compliant experiment with derivatives has reached a delicate point, largely because of the global recession. Even so, it’s hard to imagine the laboratory closing down: sharia-compliance has been an extraordinary adventure for the pioneers and designers of these products, on both sides of the religious divide, who are ready to put their ideas on the line, where money is made or lost. The ideas will still be in the air even if the money goes to ground, but there’s a far bigger question about the real penetration of Islamic finance, not just among the moderately wealthy and the mega-rich, but among less prosperous Muslims.
This is the point made by Adeel Malik, a lecturer in economics in the Department of International Development at Oxford: however solid the Islamic approach to banking might be, it hasn’t done a great deal for the poor. You can get a rough picture of poverty in Muslim-majority countries by crunching statistics from the 57 member states of the Organisation of the Islamic Conference. Their economies could not be more different – Chad, Djibouti and Afghanistan, on the one hand; the UAE, Kuwait and Qatar, on the other – but between them they contain 40 per cent of the world’s inhabitants living in absolute poverty, on what’s recently been reckoned at something between $1.25 and $1.45 a day. Of the total OIC population itself, the poor also constitute around 40 per cent, with high concentrations in about 15 countries. India, which has the largest Muslim population in the world after Indonesia and Pakistan, is not a member. Only half of India’s Muslim women can read and write, a quarter of children between six and 14 are not in school and 31 per cent of all Indian Muslims live below the national poverty line, unable to access 650 grams of grain a day.
What is the value of compliant derivatives for Muslims who never come within range of an investment opportunity; or of compliant banking for people who have no money in the first place? Microfinance, with its emphasis on small loans to associations of borrowers, contains the germ of a solution, but it’s only available to a small number of impoverished Muslims worldwide, while its Islamic variant reaches even fewer. After a survey in 2007, the Consultative Group to Assist the Poor, a microfinance advocacy and research centre in Washington, estimated that fewer than 400,000 people are beneficiaries of low-level Islamic credit initiatives – that’s a fraction of the number, about half a per cent, of global recipients of all microfinance, conventional and sharia-compliant. CGAP found, too, that the narrow range of products available through Islamic micro-lending schemes aroused suspicions, much as compliant products in general do, that the fee for a loan was too close to an interest charge.
In Bangladesh, the world’s microfinance leader, the market-share held by the Islamic variant is closer to 1 per cent of the total, according to CGAP: still very low for a population of 159 million, more than 80 per cent of them Muslim and many of those impoverished. Perhaps the presence of the Grameen Bank, founded by Muhammad Yunus in the 1980s, has held back Islamic microcredit in Bangladesh. Despite its immense success – Yunus was awarded the Nobel Prize in 2006 – Grameen was still unable to reach the wholly unbankable, partly because it started to filter out what we’d now think of as sub-prime applicants. Its emphasis on ‘social collateral’ – loans to a group of borrowers are guaranteed by members – has the advantage, from an Islamic viewpoint, of mutuality, but this is offset, as Adeel Malik points out, by the fact that a ‘social’ asset does not amount to a tangible asset in the sharia-compliant universe. Pious Muslims also disparaged Grameen for its conventional, interest-based charges and, almost certainly, for its tendency to identify women as reliable, creative borrowers, even though their husbands were sometimes the people with their hands on the money: the bank’s projects and personnel have been targeted by Islamists on several occasions.
There is government backing for microcredit schemes in Malaysia and Indonesia, the latter busily licensing rural banks and training up staff: loans on offer from these village-store facilities are higher than anything from non-compliant counters, but a great deal of ground remains to be covered. ‘When Islam is about social justice, it starts to get interesting,’ Malik told me, but he went on to ask how sharia-compliant microcredit could hope to solve the structural disadvantages of the rural poor. Sharia finance scholars look on land reform in Bangladesh or Pakistan in much the same way as the Vatican regarded peasant struggles in Latin America.
Sharia-compliance is a profitable conversation between Islam and the armies of mammon, but hardly an outline for the widespread redistribution and creation of wealth that Muslim-majority countries need. An impressive tension forces up the heartrate of Islamic finance nonetheless: on the one hand, there is a fascination with Western models that seem to promise money and modernity, on the other, a reluctance to subscribe to the methods and a suspicion of the ideology, especially in its recent, neoliberal expression. In the Gulf, the rich have straddled this contradiction for many years, but the wave of newcomers is harder to read. Advocates of sharia-compliant products are not afraid to lift ideas – and instruments – from the repertoire of Western finance and graft them onto Islamic principles, while their Muslim opponents disdain both the repertoire and the products. The steady rhythms of the faith, which begin with a prayer before dawn and end with another at dusk, mark out the daily round of injustice and poverty for anyone who wants to see it that way. If the vogue for Islamic finance could restore the balance that’s been upset, as Islamists tend to argue, by an invasive, secular capitalism, many more of them would have set aside their objections.
Jeremy Harding is a contributing editor at the LRB. His versions of Rimbaud’s poetry are published by Penguin along with John Sturrock’s translation of the letters.




The second part of Jeremy Harding’s piece on high finance in the Islamic World can be read by clicking the image above or here.

The Money that Prays
Jeremy Harding
Last September, as dust and debris from the tellers’ floors began raining onto the empty vaults below, a note of satisfaction was sounded by bankers in the Arab world. Financial institutions sticking to the tenets of Islam, they announced, were largely immune from the debt crisis. Devout Muslims may lend and borrow under certain conditions; they can even buy and sell debt in the form of ‘Islamic’ bonds, but most other kinds of debt trading are frowned on. Al Rajhi Bank, based in Saudi Arabia, and the Kuwait Finance House posted impressive profits in 2008. Both have come under some nervous scrutiny in 2009 but their ability to weather the recession that has set in behind the credit crunch is not at issue.
Unlike most banks in the Middle East, Al Rajhi Bank and KFH are ‘sharia-compliant’ businesses, which means simply that they try to abide by the evolving body of rules known as the sharia – ‘the path to the headwater’ – which govern the lives of Muslims. The sharia serves mostly as a guide to personal conduct, though some rules are drafted into the legal codes of majority-Muslim states. It’s founded, we’re always told, on revealed truth from the Koran and exemplary stories from the Hadith, the sayings and doings of the Prophet. But the real influence of the sharia lies in the way this material is constantly read and recast by modern Islamic scholars, reinventing old traditions or asserting new ones. Whatever they take it to be, growing numbers of Muslims are keen to stay on the path when it comes to banking and finance. The global Muslim population is upwards of 1.3 billion – roughly one in every five people on earth – and, with a religious revival of twenty or thirty years’ standing, the way of Islam is now a crowded thoroughfare. It is plied by a great diversity of travellers from different parts of the world; some have money to burn, others next to none, but anybody with a modicum of wealth is nowadays a potential opportunity for banks offering sharia-compliant retail services: current accounts, straightforward financing schemes and home-ownership plans.
The term ‘Islamic finance’ wrests a lot of activities down to a catch-all definition. The same is true, in the financial universe, of the words ‘sharia’ and ‘Islam’ itself. Sharia is not a single, coherent jurisprudence for Muslims; there are various schools of interpretation and marked disagreements within each of them. ‘Islam’, a broad term of convenience for most non-Muslims, is a power-point word in the City: it tells bankers and traders that every day for a few minutes they should shut out the din of the money that merely talks and tune in to the money that prays. But why bother, given that sharia-compliant finance is probably worth less than 1 per cent of the total value of the world’s stocks, bonds and bank deposits? This was reckoned at about $170 trillion in 2007; it’s much less than that now of course, but even so, with a value of around $700 billion, Islamic stocks, bonds and bank deposits remain a minority affair, just as Muslims remain a minority in global terms.
What fascinates the markets about Islamic finance, however, is its dramatic growth in recent years and confident predictions that it’s set to expand at 15 to 20 per cent every year. Its allure for moderately prosperous, pious Muslims – and quite a few non-Muslims recoiling from the debt crisis in anger and disgust – is different. They admire what they see as a promise to achieve stability and transparency, and a sense of proportion about money: look it in the eye, tell it you like it, but admit that you have lingering doubts about the transcendent value of paper. That’s an unsophisticated position, but since the credit crunch not many people trust the sophisticated keepers of the modern money culture; in this sense the rise of sharia-compliant products is also a challenge to the unofficial, polytheist faith of offshore Britannia: the worship of markets in general and financial markets in particular.
One of the central differences between the Islamic and conventional approaches to finance is that our own cults – which may well see a revision before the end of this crisis – ascribe supernatural powers to money. Cult specialists are at great pains to understand and control how it works, but admit that it does so in magical ways that go beyond the effects of human commerce (for the markets, too, have magical attributes, including innate goodness). Whatever we want from money, we suspect, as devotees, that in the end it will always behave as it sees fit. Our awe of it is a bit like a rapt meditation on the way the shower of gold behaves – shimmering and falling – when it cascades over Danaë in her cloister in Argos. In the story, it’s merely the form chosen by Zeus for her seduction, but in our meditation, there is no Olympian in disguise and no intention to seduce, just the metal shimmering and falling, in consummate self-expression, as deity and dogma. Islamic approaches – there are quite a few – are much closer to Nonconformist and Anglican traditions, where the divinity stands to the side of money, reminding the faithful that he is one thing and mammon another. Money, in this view, is an object of caution rather than superstition – and, in spite of its dangers, a useful tool for anyone who wants to build a respectable world, with God’s instructions pinned to the wall above the workbench.
Maybe this is why sharia-compliant products have been gaining popularity among British Muslims, even if they differ only slightly from conventional ones. Take the home-ownership scheme offered by HSBC’s sharia-compliant range, Amanah (amanah means ‘trust’ in the moral and legal sense). Muslims are forbidden to pay or receive interest and troubled by conventional lending, because it appears to put the burden of risk on the borrower not the lender: in the Islamic view, no transaction is ethical unless risk is fairly distributed between the parties. HSBC Amanah’s scheme is based on an Islamic contract known as ‘diminishing musharaka’ and it’s approved, like all HSBC Amanah’s services, by a board of sharia scholars. A would-be home-owner must put up 40 per cent of the cost price (much less before the credit crunch); the property is registered in a trust (amanah) as a jointly owned asset, with the bank’s majority ownership diminishing over an agreed period, as regular payments are made; the customer promises to buy the bank’s share, and the bank promises to sell it to the client. The property is envisaged as a set of units and the customer’s payments as twofold: one part is rental, for the right to live in it, another is a form of unit-acquisition. The trust keeps a tally of the bank’s diminishing ownership and the growing share to the customer. At term, the trust is dissolved and the home passes to the customer.
In the meantime, no interest has been charged. But the rental payments received by HSBC Amanah for its willingness to share a risk will have been reviewed – and therefore been subject to change, much like the interest charge on a variable-rate mortgage – at regular intervals. Indeed, rental charges are likely to track changes in a conventional interest rate, for instance Libor, the London Interbank Offered Rate. In the eyes of some Muslims, the resemblance of the rental element to an interest charge casts doubt on the ‘Islamic’ nature of the scheme; others are happy to say that even when two things are alike, this does not make them identical. The questions of likeness and difference, and what constitutes real compliance, are hotly debated among Muslims throughout the world.
As regards risk-sharing, HSBC Amanah’s scheme seems little different from those of other lenders when customers fail to keep up payments (‘default’ is not a sharia-compliant word). The bank will pursue a customer if it thinks the reasons for the failure were ‘avoidable’, because this would constitute a breach of the promise to buy. But it claims not to handle a genuine misfortune the way conventional mortgage providers deal with a default. Both parties share any losses according to the proportionate ownership at the time. The bank can seize the contents of a customer’s current account to offset some of its own losses, but there the matter ends. No question of a debt-collecting agency taking up where the bank left off. Most mortgage companies in the US also draw a line under default, but among Islamic home-ownership providers in Britain this approach has encouraged prudence. Amjid Ali, who heads HSBC Amanah’s UK operation, told me that in the first five years of its sharia-compliant home-ownership scheme, he had processed applications to the value of £700 million, of which, after judicious sifting, more than half had come good. He knew of only one case that hadn’t worked out: the customer was given 18 months’ grace, at the end of which the house was sold. Devout Muslims who think the HSBC Amanah approach is uncomfortably close to the way a conventional default is handled must surely have had their views confirmed by the government’s insistence to mortgage lenders, since the recession set in, that patience with people in difficulty would put a floor under falling house prices and send out a ‘caring’ signal (reluctant bankers call it empathy). But perhaps the same Muslims derive a certain satisfaction from the fact that conventional mortgage lenders are beating a path to the headwater.
A home-buyer signing up to a diminishing musharaka would have to take out buildings insurance with a clause that covered the bank as well. But Islamic tradition is uneasy with conventional insurance. First, there’s contractual uncertainty (the devilish detail of insurance policies); second, a risk has been bought by another party, and this is scarcely ever acceptable; third, far from looking like circumspection, conventional insurance has every appearance of a punt, with croupier and client sizing up the odds – and gambling is forbidden. An Islamic option, now available in the UK, allows devout Muslims to subscribe regular payments to a managed mutual fund and think of the process as an exercise in solidarity.
This arrangement, known as takaful, was on offer from HSBC Amanah until the end of last year, when it realised that customers found the costs too high: ethical products, like principles, are more expensive, and less profitable, than off-the-shelf alternatives. Collective underwriting was the main feature of the retired model, shared with other takaful services clinging on in a difficult market. The sharia board instructed HSBC that if the fund was underspent by more than £25 per subscriber in a given year, members could have money back or make it over to the launch of a micro-credit scheme in Pakistan. Rising costs are the reality of most insurance, but for takaful members they are mitigated by the concept of ‘donation’; subscribers may be grudging or disgruntled, but tradition urges them to see the cost of mutuality as part of their obligation to share risk with their fellow members. If it seems unacceptably high, and there are enough takaful co-operatives around, they’re free to chase down a better option.
Takaful cover has its origins in Arab seafaring mutuals (not unlike the whaling mutuals, centuries later, of the Quaker communities in New Bedford and Nantucket). It is a small sector of the global insurance business, already thriving in Malaysia and said by its advocates to be growing throughout the world. In Britain, which prides itself on its multiculturalism and its financial services in almost equal measure, takaful has been endorsed by the minister for trade and investment, the Chartered Insurance Institute and the lord mayor of the City of London. Like all sharia-compliant products in the UK – and everywhere, as far as I know – it’s available to non-Muslims. One Muslim scholar told me that they already account for 16 to 20 per cent of the clientele for Islamic retail products in Britain. No need to recite the shahada if you want a sharia-compliant loan from the Islamic Bank of Britain, Lloyds TSB or a UK branch of the Arab Banking Corporation.
The idea of conventional insurance as a wager is taken seriously, and sometimes to extremes. Until he was denied the right to re-enter the UK in 2005, Omar Bakri Muhammad, the Syrian radical, was said to drive around uninsured on the grounds that a third-party policy with Kwik Fit or the AA was an abomination in the eyes of God. As a proselytiser for Hizb ut-Tahrir and later a star of Al-Muhajiroun, Bakri had a headstrong attachment to the sharia, even when he was a guest of the Home Office. Many British Muslims, pleased to see the back of him, thought that the danger he courted by refusing to take out cover was itself a gamble in which he wagered his faith against the laws of his host country. Perhaps, if he’d still been around, he’d have joined the first British sharia-compliant car insurance scheme, Salaam Halal Insurance, when it was launched last summer (call centres handle inquiries ‘in English, Arabic, Bengali, Gujarati or Urdu’).
It isn’t just in Britain, and it isn’t only in the retail banking sector, that sharia-compliance is catching on. The last ten years have also seen a surge in sharia-compliant securities available to corporate and institutional investors in many parts of the world who want to stick to the rules of the faith. It’s a new impulse: in the 1970s, when the oil-producing states were awash with money, there weren’t too many worries about petrodollars flooding into the purchase of US Treasury bonds, even though they bore interest, and there were few alternatives to conventional securities. This isn’t the case any longer. Malaysia is rich with opportunities for investors in compliant bonds; in Europe, the German Land of Saxony-Anhalt issued the first ‘Islamic’ government bond in 2004; the British Treasury has also looked into the possibility of issuing sharia-compliant bills. Meanwhile there’s no shortage of choice in equities. The Dow Jones Islamic Market (DJIM) started up in 1999: it now has dozens of indices and lists hundreds of companies whose products are approved by its board of sharia scholars.
Nation-states may decide to devalue their currencies or privatise their telecommunications, but the odds are against them adopting full sharia-compliance. A few years ago Sudan had a unitary sharia banking system, but since the peace deal between Khartoum and the non-Muslim SPLA in 2005, conventional banking has become the norm in southern Sudan. That leaves Iran as the only country that boasts a banking system operating fully on Islamic principles (the evils of interest, it argues, obtain only if the borrower and lender are wholly distinct, and since Iranian banks are nationalised, the country’s interbank lending rate is regarded as a family foible). All other Muslim-majority states have conventional or dual systems; in all cases, the central banks behave conventionally.
Conversion to sharia would be ruinous for a wealthy city-state like Dubai, thriving – until the crunch – on Western finance and the ‘conventional’ lifestyles of expatriates. At the end of last year, the monthly retail-purchase interest on a Platinum Visa card issued by the National Bank of Dubai was 2.99 per cent, while Dubai’s sovereign debt stood at 148 per cent of GDP – both well out of order for a conscientious Muslim. Dubai has been on the ropes since last September, but even in better times, the ruling family, like the government of Malaysia, had encouraged sharia-financing across a range of state-funded development projects. Gulf regimes are keenly aware of the changes in fashion that have driven demand for sharia-compliance.
So is the private sector. Many innovative sharia-compliant instruments have been theorised – and some of them applied – by companies whose interest in Islam is decidedly recent, among them Deutsche Bank as well as HSBC. Their idea is to access the large amounts of cash swilling around to no great avail in the Gulf: an ambition reciprocated by the owners of this money, who want to put it to work. The difference between now and 1973 is not one of quantity: liquidity in the Gulf has been high again, partly as a result of oil prices, partly because billions of dollars were repatriated from the West by worried owners after 9/11, but also because the Islamic revival has left many Muslims doubting the wisdom of conventional investment. The diffusion of sharia-compliant financial products has opened new routes for their money. For a while some of it headed towards Malaysia and, until the end of last year, plenty was creeping westward again. The appetite for world markets remains strong, but it now answers more closely to the will of God.
The prohibitions for Muslims are puzzling to the modern commercial mind. The first obstacle for a pious Muslim trading and banking in conventional economies is interest, the term I’ve been using for the Arabic riba, though its literal sense is closer to ‘excess’ and it is sometimes translated as ‘usury’. Often, in the Hadith and even more in recent proselytising on the internet, riba is said to be ‘eaten’. One of the objections to riba is its propensity to up-end the social order. A person who consumes riba bungles the proper management of need – his own and his debtor’s – whereupon the grand plan of give and take, sufficiency for rich and poor alike, begins to come apart. This, as Charles Tripp explains in Islam and the Moral Economy, is also a challenge to ‘the balance and proportion of God’s ordering of the universe’, which must be reflected in ‘human relations’. Islamic tradition warns that riba is likely to lead to injustice and exploitation.
There’s a categorical objection, too: that money may not be conjured up from money to generate like from like. The goods that served (we’re told) as currency in Islamic tradition – gold, silver, salt, grain and dates – can only be exchanged ‘hand to hand’, i.e. in a spot transaction, without deferment; and only at parity, one quantity for its exact equivalent, no more, no less. It’s not clear why you’d want to swap something – a gold weight, say – for its identical other, but the point here is probably that units of currency, unlike the shirt or the saddle for which they’re exchanged, must be beyond any cavilling with regard to value for the system to hold up: an Islamic marker set down 14 centuries ago against arbitrage. In a story told by Abu Said al Khudri, one of Muhammad’s younger companions, the Prophet describes the transaction of a greater number of low-grade dates for a smaller number of quality dates as riba.
The most famous chapter and verse on riba is in sura 2 of the Koran. It warns that dealing in riba will bring on madness or ‘torment’ (via ‘Satan’s touch’), and that if you’re not prepared to waive a mark-up on a debt, war will be waged against you by God and the Prophet. One sharia-compliant banker I met last year told me that’s about as bad as it gets. There is also an injunction to forgive debt in a broader sense: ‘If the debtor is in difficulty, then delay things . . . Still, if you were to write it off as an act of charity, that would be better for you, if only you knew’ (the rules followed by HSBC Amanah try to catch something of this). The charging of riba, it follows, is always a missed opportunity to act generously, to give where a gift is in order, a gesture highly prized in Islamic tradition. In a faith embodied by a trader prophet and espoused by an impressive trading community for which, at its height, knowledge was a key commodity, believers are admonished not to confuse riba with trade. From the second sura, again: ‘God has allowed trade and forbidden usury.’
In Economics, Ethics and Religion (1997) Rodney Wilson went through the 6226 verses of the Koran and found that 1400 refer to ‘economic issues’. It follows that there is a vast body of scholarly opinion dealing with money. A fatwa about charging for debt, or any financial matter, issued by a group of experts such as the Fiqh Academy in Jeddah can carry great weight for certain Muslims, and less for others. In the sharia, like any code which hasn’t ossified, the element of interpretation is crucial and within each of the schools of Islamic jurisprudence, there are divergent views, especially between conservatives and modernisers and especially about money. Yet not all the source material under interpretation is stable or straightforward. In the Hadith, for instance, it’s said that the Prophet warned against 70 different forms of riba. These have decayed and combined under the pressures of modernity, but there’s still room for doubt. Modern nuance can be as puzzling to a non-Muslim (maybe even a Muslim) as the founding inventories: Wilson records a sharia ruling in the United Arab Emirates which found that simple interest was permissible and only compound interest forbidden.
Riba catches many non-Muslims out. After a long study of Islamic finance, the anthropologist Bill Maurer couldn’t settle on ‘interest’ as the perfect translation: it seemed clear at first but became streaky as he looked closer. ‘Usury’ is the obvious alternative, but are we to rely on the older sense of the term – any charge, however small, for the use of borrowed money – or on the way it’s understood today, as extortionate interest only? Wilson, a professor in the School of Government and International Affairs at Durham who is intrigued by ‘the influences of religious belief on economic behaviour’, holds that riba is usury in the first sense. That’s the view of most practising Muslims; it seems to echo the meaning of the word in Deuteronomy, where Moses instructs the people of Israel not to lend to their own kith and kin at a rate: ‘Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury.’ Very close to ‘interest’ after all then. Yet if, like Melanie Phillips, you believe Islamic banking in the UK merely hastens the day when a green flag is raised over Westminster, it’s important to think of ‘usury’ in the later sense, in order to insist that Muslim law is either deluded or deceitful: ‘The whole issue of sharia finance,’ Phillips wrote last year, ‘is based on a fabrication . . . sharia does not proscribe interest. It proscribes usury.’ Were riba just a term for exploitative lending, however, one or two countries might have shuffled nearer to a unitary sharia banking system. But the sharia has few attractions for exchequers and central banks in a modern economy, where the interest rate is a basic tool of monetary policy. The appeal of sharia-compliant banking and investing is in essence to the individual conscience.
The emphasis on risk-sharing in HSBC Amanah’s products – and all Islamic products – is related to the prohibition on interest: it’s obvious to the devout Muslim that collecting interest on a debt involves no risk worth the name; all that’s required, in this view, is for a creditor to sit back and wait. The exposure involved in the mere lending of money – self-evident to a non-Muslim – is an unticked box in Islamic tradition, while savings, for which non-Muslims see interest as a fair reward, give rise to worries about hoarding: money should be out there doing the work that enables trade to flourish. A Treasury expert would say Islamic tradition approves of narrow money; a historian would remember Bacon’s essay ‘Of Seditions and Troubles’ and his famous dictum that muck is ‘not good except it be spread’. (The essay goes on: ‘This is done chiefly by suppressing, or at the least keeping a strait hand upon the devouring trades of usury.’)
Risk-sharing, like generosity, puts human relations on an even keel in the Islamic view. A capitalist can weigh a risk but shouldn’t accept a promise from a partner to eliminate it: that would be ‘risk-transfer’, which denies the inherent truth of risk. (In the eyes of sharia scholars it also opens up a vista of potential exploitation, especially when risk is passed on in unknowable ways, say in the form of a mortgage-backed security with a dodgy rating.) No one must guarantee investors’ money, except against fraud.
Interest and risk-evasion are largely absent, Islamic investors believe, from the world of stocks and shares. To invest in a company is to sign up to joint ownership and collective risk, while ordinary shares pay dividends not interest. Even so, there are constraints. It is forbidden to invest in companies that have anything to do with gambling and you’re unlikely to find a business listed in the Dow Jones Islamic Markets indexes with more than a toehold in this area of the leisure industry. In sura 2 of the Koran, the evils of drinking and gambling are deemed to outweigh their benefits – though these are granted – and maisir (the drawing of arrows, like straws, to divine a course of action or simply to bet) is condemned in sura 5. There are other exclusions for devout shareholders. Clearly breweries and distilleries are off-limits, along with pork products. Pornography offends on three overlapping counts: shame, obscenity and baghi, loosely speaking, ‘transgression’, ‘injustice’ or ‘trespass’, anything intrusive then, from a misunderstanding of privacy to a foreign occupation. The DJIM indexes exclude most media businesses but also hotel chains, where minibars and adult channels lower the tone (basement gaming rooms too). Critically, daily trading in debt and riba makes almost all conventional financial institutions, including banks, unacceptable.
The way companies that survive this triage are run must next be examined closely. Sharia scholars are unlikely to approve of a firm whose clients owe it large amounts of money – ‘accounts receivable’ – or one that depends on high returns from interest. The bigger question, though, is a company’s financial structure – how much of its capital it has raised by borrowing and how much by selling its performance or potential in the form of share distributions. The DJIM board of sharia advisers screens out any company whose debt is higher than one third of its market capitalisation (a valuation based on the total number of shares issued times the prevailing share price).
Debt is a problem in its own right. Borrowing on a regular, matter-of-fact basis is open to question since sharia scholars are wary of conventional banking’s dependence on interbank borrowing. The ideal Islamic bank, Rodney Wilson told me, is financed entirely by its depositors’ money. In practice, there is plenty of imperfection, but a compliant bank will want to stay as close as possible to this model. Like riba, debt also raises fears about poverty and injustice (some Muslim NGOs are as evangelical about Third World debt as their Christian and secular counterparts). In the Hadith, debt presents a troubling face once the possibility of deferment arises, as it might with a debtor in difficulty. Is it a good thing or a bad thing to put off repayment? Does it matter whether the debtor is wealthy or poor? Bad faith is always threatening to break in on the relationship between a debtor and a creditor: a debtor says he can pay back a loan but how can he be sure? All this drags human relations into the realm of uncertainty – gharar – from which faith, the discourse of absolute certainty, was supposed to protect them. In commerce, gharar is best avoided. Whence the persistence of doubts about contracting for things that don’t (yet) exist: tradition might allow for a joiner taking orders on furniture he hadn’t yet made, but it disqualified the sale of a foal that was still in the body of the mare. Even the benign, textbook version of the forward contract – a farmer and a miller agreeing a grain price ahead of the harvest – brings a sense of uneasiness.
The concept of gharar doesn’t just apply to goods whose status is in doubt, but to bargains whose terms are ambiguous and contracting parties whose liability is vague. Though it’s often translated as ‘hazard’, it’s not the same as risk, which Muslim societies understand as well as anyone. Business risk is unavoidable and begins when a cargo plane taxis towards the runway. Gharar has more to do with the commercial imagination running ahead of itself: speculation still troubles Islamic scholars; many take a dim view not just of credit derivatives, the villains of the banking crisis, but of any instrument whose value is based on a contract for an underlying asset rather than the asset itself. This is changing, slowly, as a growing number of experts wrestle with intellectual tradition till they get to a place where derivatives, some in any case, appear acceptable. But no sharia adviser would approve of an Islamic financial institution bundling toxic mortgage debts into securities and packing them off to market, still less buying them up. To a conscientious Muslim, this is the perfect storm, in which opaque liabilities, the unknown nature of the underlying debt, fair-weather forecasts by ratings agencies, plus risk transfer and riba, conspire to wreck large parts of the fleet. Is there anyone clinging to the flotsam, post-9/15, who disagrees?
Non-Muslims will recognise the process of screening companies out of a portfolio: many charities and individuals have been doing it for years. The fashion in the West for Socially Responsible Investment (SRI), which gained ground in the 1980s and 90s, has become a model for Muslims. That’s the view of Mufti Barkatulla, a scholar trained in Uttar Pradesh, and now an adviser on several sharia boards in the UK, among them the Islamic Bank of Britain and Lloyds TSB. He points out that sharia scholars (including the ones who advise the DJIM) rule against investments in tobacco companies and arms manufacturers, even though Islam has no quarrel with either. The sharia is strictly speaking a matter of law, but sharia-compliance and SRI are, in Barkatulla’s sense of it, largely about the intimate decisions of prosperous individuals and the grandiose ‘ethical’ claims of big business. Sharia-compliance doesn’t have the boycott component that turns SRI from a sum of personal choices into a self-conscious movement. Opting away from a conventional current account is hardly the same as refusing to buy sugar grown by slaves, as the Quakers did in the 1790s, or divesting from companies with links to apartheid, as American universities did in the 1980s.
Even so, it’s sometimes seen as a front for Islamic supremacists scheming to overrun the West. The crusader-jihadist wars are a favourable habitat for this kind of idea, which feeds off suspicion and a regular diet of incidental detail. Eccentric Islamists announce that they hope to see Britain under a caliphate; angry groupuscules and male covens dabble in jihadist ideology and scour explosives websites; the Archbishop of Canterbury thinks aloud on Radio 4 about the sharia as ‘an alternative to the divorce courts as we understand them’ and congratulates Muslims ‘on the faithful completion of Ramadan’ as though he were handing round the sherry on Easter Sunday. With all this and years of high-profile terrorist attacks, from New York to Lahore, plus two wars that have not gone well, a person in Birmingham seeking a fee-based home loan begins to look like the enemy.
Before the surge of Islamic banking, many devout Muslims shied away from banks: for the poorly educated, everything, even a non-interest-bearing current account, came under the general heading haram – ‘impermissible’. Banks dealt with interest, therefore Muslims shouldn’t deal with banks. Mufti Barkatulla told me he’d had to mediate in several cases where police raids had turned up large sums of money stashed in people’s homes. Sometimes, he remembered, people were holding £30,000 or more. To the police, this was deeply suspicious; in fact people were hoarding their way out of riba. One of the changes that sharia-compliant banking is bringing in Britain, Barkatulla believes, is that working-class Muslims, older ones especially, are at last shifting ‘from a cash-based to a cashless society’, as Muslim professionals and businessmen did years ago.
If Muslims can’t take part in a conventional economy without breaking the rules, at least they can compromise by keeping track of their infringements and ‘purifying’ the balance by charitable giving equivalent to the amounts in question. These self-administered transfusions are payable over and above the mandatory deduction, known as zakat, that devout Muslims must make and donate to charity in the space of a year. The most common zakat payment is 2.5 per cent per annum on cash, savings and investments less liabilities. (It can be a finicky piece of accounting; the ‘zakat calculator’ at http://www.ramadhanzone.com is worth a visit.) Unbelievers who worry that Muslims may not wish them well – a complicated piece of projection, but not wholly fantastic right now – should put a yellow highlight over the word zakat, and another over ‘purification’. Successful Muslims in the West remitting to the ‘poor’ and ‘needy’, as the rules require, are the worry here. Their money may well go to families of the unemployed in Bradford, NGOs in Kuala Lumpur or prosthetics clinics in Sarajevo, but it can also be headed in the direction of people under fire in the West Bank, Gaza, Iraq, Afghanistan, Kashmir.
At the beginning of last year the Pakistani cleric Sheikh Muhammad Taqi Usmani was a member of the sharia supervisory board at DJIM. A scholar, judge, financial expert and prolific writer, Usmani was also involved with a sharia-compliant mutual in Illinois which Dow had allowed to manage its ‘Islamic’ fund. But there were internet murmurings about Usmani and in the spring, the McCormick Foundation and the ultra-con Center for Security Policy held an anti-sharia finance workshop in Illinois where his published views about jihad and the subjugation of unbelievers came under scrutiny. Media attention now turned to the Illinois mutual. In 2007, somewhere in the sprawling paperwork for a federal ‘terror-funding’ trial in Dallas, it had been named by the government as an ‘un-indicted co-conspirator’ – one of about three hundred – with alleged links to the US Muslim Brotherhood. These, apparently, were forged via the Holy Land Foundation (HLF), a US-based charity at the centre of the investigation. Usmani’s thoughts on the obligations of jihad – in the CPS presentation, they were non-ecumenical to say the least – have done sharia-compliant finance in the US very few favours; he’s no longer a DJIM adviser. As for the Illinois mutual, it’s had to call in the American Civil Liberties Union to help it restore its damaged reputation.
Last year, after a mistrial in 2007, a jury in Dallas found the HLF and five of its members guilty of funding Hamas to the tune of $12 million or more, even though the prosecution conceded that the money was spent on medical facilities and good works. But in the US, charitable gifts, purifications and zakat simply cannot go to Palestinians without donors risking a federal investigation. As David Feige explained in Slate after the mistrial, the HLF was accused of ‘aiding a terrorist organisation by helping it spread its ideology and recruit members. Translation: even those who support good works are guilty of terrorism if the good works make the terrorists look good.’
Governments may strive in their own jurisdictions to compound the hardships of the Palestinians; freedom-loving think tanks may vent their dismay (verging on disgust) about the rise of sharia-compliant mechanisms in the West; but it is too late to quarantine Islamic finance. Alongside the notional clash of civilisations and the real collisions, a very different encounter with Islam has taken place in the worlds of banking and finance. The constant exchange of money and ideas, the morphology of ingenious instruments that can accommodate a different philosophy of wealth-creation, the familiarity with Islamic tradition among conventional financiers and lawyers who draw them up – all this suggests a convergence both more real and less visible than anything that multiculturalism in the arts, the media or interfaith groups was meant to bring about. The old imperatives of trade and profit are at work here, but so is the recent radical style of the money culture itself.
The 1980s may have mourned the death of avant-gardes in the arts, but there was a thriving avant-garde in the City, which became a magnet for cadres of bright, ambitious, untried people with remote horizons, dealers sans frontières. By the end of the 1990s, this gilded bohemia had a good grasp of sharia-compliance and the breadth of modern, secular trading it could offer Muslims with qualms about the way their money had been doubled back in the 1970s. There were fortunes to be made, and an intellectual challenge in the air. The idea that Islamic finance was out to hobble Western values – ‘financial jihad’, as the Center for Security Policy calls it – was greeted with scepticism, even a subversive ‘So what?’ Radical innovation was the watchword and the search was on for complex products that could lock more and more transactions into a compliant framework. Since last September, the dangers of innovation have become clear and the ideal of reckless creativity has taken a hammering.
The world of sharia-compliant finance is largely unscathed: Islamic banks in the Middle and Far East have not followed the low collateral/high borrowing regimes favoured by their conventional competitors at home and abroad; Islamic principles have denied investors any real access to shares in the banking sector and thus any exposure to toxic debt. Yet there is still a hunger for access and experimentation – what Mufti Barkatulla describes, enthusiastially, as a willingness to take risks with interpretation itself; ‘sharia risk’, as he calls it – and a fascination with the sums of money that have been made on markets forbidden to Muslims. To that extent, convergence is still the order of the day, as sharia-compliancy wizards, Muslim and non-Muslim, seek to open up the trade in derivatives to the small but growing number of devout investors who can be persuaded to bid for a calf while the camel is still in labour.