The first part of Jeremy Harding’s piece on Sharia finance can be read here.
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 raised – 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.
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