Islamic finance: from medieval to contemporary globalization
By Clement M. Henry
The University of Texas at Austin
This paper will first try to explain why Islamic finance objectively shares the interests of the globalizers, putting it in the first moment, so to speak, of the new dialectics of globalization in which Muslim countries labor. Then it is necessary to discuss the internal contradictions besetting the economic reformers, how the logic of global finance may be compromising the distinctively Islamic character of the banks and financial instruments in play. May Islamic finance nevertheless continue to offer a viable alternative to conventional finance and effectively express the myth of a reglobalizing Muslim community, even as it integrates it into the world economy? May the gentle Islamic financiers at the heart of Muslim globalization somehow tame the passions of those puritan Islamists who tend to reject globalization because they view it as a new, American form of imperialism? Finance is necessarily conditioned by the political context in which it operates. The situations of Islamic finance in various Muslim-majority states will be compared, and it will be suggested that a post-Islamist politics may best support the myth of the reglobalizing Umma expressed by Islamic finance.
Applying medieval financial instruments and legal interpretations, the modern movement of Islamic finance brought Islam out of the colonial closet of personal status into a public policy arena. It is the principal manifestation of Islam in matters of economic policy, and it responds to the western challenge of globalization by giving distinctively Muslim institutions a global reach. Although the first Islamic bank opened for business only in 1974, in Dubai the wake of the first oil boom, the proliferation of these banks across the Muslim world echoes globalization’s distinctive Muslim past. Accompanying the new oil boom of the present decade, Islamic financiers have dramatically expanded their inventory of financial instruments. Islamic bonds or sukuk and other shari’a-compliant securities offer the Muslim financiers better opportunities to compete with conventional financial institutions in expanding global markets.
The advocates of Islamic finance are “Muslim reformists” as defined by the present conference organizers. Like the Islamists, they aspire to extend the practical scope of Islam beyond matters of personal status, but unlike the Islamists, as defined here, they are not committed to political mobilization to achieve their objectives. Indeed, bankers almost universally try to avoid, or at least pretend to avoid, any taint of political engagement or activity. Yet the effect of an explicitly Islamic presence in national banking systems and on the international financial scene may carry highly charged political implications for those Muslims who reject any separation of religion and politics.
Islamic finance emerged in the 1970s, just as political Islam was becoming the principal force of political opposition in a number of Arab countries. These new “Islamist” movements tended not only to oppose the incumbent authoritarian regimes but also, as the latter were pressed to engage in neo-liberal reforms in the 1980s, to oppose their economic policies. Even here, however, it is important to note some exceptions, notably the Algerian Front Islamique de Salvation (FIS), which collaborated implicitly with a reform minded government in trying to transform a state-managed economy into one driven by domestic as well as international markets. As for Islamic finance, the subject of this paper, the financiers in general kept their distances from political Islam and also tended, intentionally or unintentionally, to work on behalf of international forces that favored neo-liberal reforms. The story of Islamic finance is complex, and the relative success of the endeavor varied greatly, depending on the home country of the new financial institutions.
Islamic finance lies in the interstices between the two distinct global processes that this conference is trying to examine: “economic globalization driven by the instrumental rationality of neoliberalism, and Islamization inspired by a quest for authentic Islamic reform.” Its proponents are principal allies of economic globalizers, at least in the sense they share objective interests with neoliberal reformers in Muslim regions of the world. They are also indeed in quest of “authentic Islamic reform,” reintroducing into the contemporary world financial instruments that were perhaps invented by Muslims, that recall the earlier precolonial era of a global Muslim umma, and that may serve as the most distinctive marker of a Muslim economy. The practical operations of Islamic finance, moreover, require standardization, a sort of universality to which Islam aspires but never quite meets in most spheres of social activity, given the extremely disparate nature of Muslim communities.
This paper will first try to explain why Islamic finance objectively shares the interests of the globalizers, putting it in the first moment, so to speak, of the new dialectics of globalization in which Muslim countries labor. Then it is necessary to discuss the internal contradictions besetting the economic reformers, how the logic of global finance may be compromising the distinctively Islamic character of the banks and financial instruments in play. Or, conversely, may Islamic finance continue to offer a viable alternative to conventional finance and effectively express the myth of a reglobalizing Muslim community, even as it integrates it into the world economy?
Finally the question arises whether
the gentle Islamic financiers at the heart of Muslim globalization can somehow
tame the passions of those puritan Islamists who tend to reject globalization
because they view it as a new, American form of imperialism. Answers will vary, depending on local as well
as international political contexts. Must
they in the end submit to the more violent puritan Islamists who command transnational
terrorist networks? Or, to invert Max Weber’s discussion of the spirit of
capitalism, may Islamic capitalism transform the spirit of puritan Islamism by
giving it a stake in the global economy?
Domesticating the puritans may reinforce those Islamist political
elements who are most supportive of democracy and civil society – perhaps
helping to project them, as in
Islamic finance has a natural affinity for neoliberal reform because distinctively “Islamic” banks are more in need than conventional ones of an investment friendly climate, the supposed outcome of the battery of economic reforms loosely associated with the Washington Consensus. One underlying principle of Islamic banking is that it engages in investment, thereby sharing risk with the recipients of its funds. Its most distinctively Islamic financial instruments are mudaraba and musharaka, forms of equity financing. These forms of investment presuppose an environment of financial transparency and accountability that structural adjustment programs are supposed to promote. Presently in much of the Muslim world, as well as more generally in developing countries, the climate is not particularly propitious for these sorts of investments, and Islamic banks, after suffering some unfortunate experiences of moral hazard in their early days, have tended to stay away from these forms of financial intermediation. At the receiving end the bank is the mudarib or entrepreneur who receives investment funds from the clientele of depositors. But the bank in turn can make few outside investments of this type, since it cannot be sure that other entrepreneurs will honestly share their profits as stipulated in the mudaraba contract. Equity financing presupposes a culture of transparency that, as former Deputy Prime Minister Anwar Ibrahim of Malaysia recently observed, depends on political transparency that is denied in most Muslim countries.[1] No more than 5 per cent or so the current assets of Islamic banks are placed in this manner. What then is distinctive about Islamic banking?
It is still difficult even to define an “Islamic” bank except by the fact that it usually supports a board of religious advisors who are schooled in Islamic jurisprudence and are generally respected by their scholarly peers (Warde 2000). It is they who define what is riba (forbidden forms of interest), as contrasted to Islamically acceptable ribha, or profits. Riba is usually interpreted as any form of interest on a loan or deposit, the bread and butter of conventional banks that pay out interest on deposits to raise funds for loans placed at higher rates of interest. The Islamic bank must seek other ways, then, to invest the funds of its depositor/investors, who expect “profits” on their investment that are more or less competitive with the interest rates offered on deposits in conventional banks. The Islamic bank, just by virtue of being “Islamic,” may enjoy a slight premium; indeed some pious Muslims do not accept interest on their deposits from conventional banks and so might be happy with any “profits” from an investment deposit in an Islamic bank. But in practice Islamic banks have tried to be competitive with conventional banks, even by dipping into their capital to keep their deposit base.
To remain solvent, Islamic banks had to raise revenues to pay off their depositors, and they had to find other less risky sources of revenue than mudaraba and musharaka. Most of their revenues come from instruments that appear very much like fixed returns on loans – the forbidden riba! Their bread and butter is the murabaha, or marked up price on the sale of some good, with some fixed repayment schedule with an implied rate of interest. Leasing is another standby, again with an implicit interest rate. Islamic jurisprudence accepts the time value of money, as long as it is tied to real economic products, not just money. In practice, too, some “investment” vehicles virtual eliminate any underlying product, making Islamic finance perilously resemble conventional banking.
Since the year 2000, responding in part, perhaps, to high oil revenues flooding the economies of the GCC states, Islamic financiers have devised an array of controversial new securities and expanded their market shares in many Muslim countries. Secondly, they have also in these years completed an institutional architecture designed to regulate their burgeoning Islamic finance industry with common standards. Thirdly, international concerns about the stability of the international banking system led in 2004 to the Basel II Accord issuing new guidelines concerning the capital adequacy requirements of banks. Meeting the new guidelines poses special challenges for Islamic banks. By successfully competing with conventional banks and harmonizing their practices to meet the demands of markets and regulators, the Islamic banks may appear to some critics to be losing any distinctively Islamic identity, but much of the religious establishment across the Muslim world supports them.
Islamic banking consolidated its
presence in global markets.[2]
Efforts since 1990 to standardize Islamic financial instruments were
bearing fruit. Islamic banks had faced growing problems of excess liquidity
and mismatched maturities in their first quarter century of operations
(1975-2000). They could not by definition park funds in conventional
interest-bearing financial instruments unless they were ready to commit
financial suicide by foregoing the interest payments. They were in need of
functional equivalents of T-bills and other tradable securities, overnight
inter-bank instruments, and other facilities available as a matter of course to
their conventional commercial bank competitors. Finally, in 2000, the Bahrain
Monetary Agency introduced the first Islamic T-bill, a non-tradable sukuk al-salam.
The following year
Islamic investors were acquiring an ever larger menu of choices,
sponsored by Citigroup and Hong Kong Shanghai as well as Islamic banks. Teams of London and New York lawyers worked
closely with shari’a scholars to devise new packages. Their sheer size,
coupled with a degree of standardization, was reducing cumbersome
transaction costs. The driving force consisted of Muslim
investors, principally located in
An original alliance of ‘ulama,
princes, and merchants has opened up to international banks and lawyers that
are reducing the transaction costs of being “shari’a-compliant” to meet
the needs of global markets. Some
critics argue that Islamic finance is compromising its ethics by mimicking
international financial practices too closely.
Others, in the tradition of the late Ahmad al-Najjar, argue that Islamic
banks have lost their developmental impetus to service small Muslim businesses,
for indeed (like conventional banks in most developing countries) they cater
principally to wealthy individuals who place their funds outside the region.[10]
One sign of the times is that Faisal Private Bank has received a
full Swiss banking license, now that wealthy Gulf individuals are flocking to
“Islamic” financial assets.[11]
In this first neoliberal moment of economic globalization Islamic finance has indeed evolved remarkable financial instruments. It is possible, for instance, for a Saudi investor to buy into real estate development in South Korea by subscribing to a real estate bond that is certified to be Islamic. Through a web of special finance vehicles the complex financial package spins off contracts that may meet precise Islamic investment criteria, as certified by a sharia board, even though the overall product is a conventional bond issue.[12] What to some Muslims and outside observers may appear to be legerdemain is an illustration of others of a resurgence of Muslim globalization.
Virtually all of the three hundred entities in 75 countries that call themselves Islamic banks[13] today have religious advisory boards, but only recently have efforts been underway to develop international standards of compliance with the shari’a. While institutions with sufficient authority to make universally accepted definitions do not yet govern Islamic finance, recent efforts to build a regulatory framework for Islamic finance are a significant step forward. The Islamic Financial Services Board (IFSB), established in 2002 with sponsorship from the International Monetary Fund (IMF), is in effect mandated to define the industry by standardizing its products, and the International Islamic Rating Agency, established a year later and soon to open its offices in Bahrain, is to offer, with the help of a panel of nineteen Islamic scholars, ratings of shari’a quality as well as credit ratings. It is to cover both Islamic banks and other institutions that produce sukuk, and also to provide corporate governance ratings.[14]
These regulatory institutions have materialized just in time – amid an explosion of markets for new securities in response to booming demand from investors. But they are young, under-staffed and under-funded, more an expression of aspirations for Islamic financial order than an established industrial authority. The hope is that the IFSB can set and disseminate international standards for Islamic financial institutions. Its 110 members include sixteen central banks of Muslim-majority states, a variety of Islamic banks, and, as associate members, the IMF, the World Bank, the Bank of International Settlements, the People’s Bank of China, and the Central Bank of the Philippines.[15] As Dr. Rifaat Abdel Karim, the secretary general of the IFSB, explained in June 2006, "We do not attempt to reinvent the wheel for Islamic finance as a niche system, rather, we complement the work of the Basel Committee for Banking Supervision by catering for the specificities of Islamic banks."[16] Earlier he had successfully lobbied for the creation of the IFSB as general secretary of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), established in Bahrain in 1991. To date AAOIFI has issued fifty-six standards on accounting, auditing, governance, and ethical and shari‘a standards, most of them within the past two or three years.[17] Meanwhile, the exuberant growth of Islamic banks and Islamization of existing giants like Saudi Arabia’s National Commerce Bank are generating ever more powerful interests in standardization. The recent launching, in particular, of an Islamic mega bank, Al-Masref, licensed by the Bahrain Monetary Authority and capitalized at $10 billion – almost four times the capital of the largest existing Islamic bank, Al Rajhi of Saudi Arabia, although less one tenth that of Citicorps – may generate consensus across the Muslim world among its prospective clients.
Were the IFSB to gain the full international authority required to define Islamic banking practices, they might still be subject to religious or ethically inspired objections to their “Islamic” identity. Their efforts to join the mainstream of international finance and accommodating with the Basel II banking standards are quite explicit. As stated on its website,
In elaborating the specificities of IIFS, the IFSB Capital Adequacy standard complements Pillar I, Supervisory Review complements Pillar II and Transparency and Market Discipline complements Pillar III of Basel II, respectively. Meanwhile, the Corporate Governance standard is based on the Organisation for Economic Cooperation and Development (OECD) Principles and Basel Paper on Corporate Governance.
Such claims of “specificities” are designed to defend the Islamic banks from charges of simply mimicking conventional banks and selling out the essence of Islam to dubious marketing strategies that play on people’s piety. There is no infallible authority to define contemporary application of the shari’a. The combined muscle of a rising class of Islamic capitalists in Saudi Arabia[18] and elsewhere in the Muslim world, however, allied to a nucleus of distinguished and representative ‘ulama, may possibly convince more Muslims of the correctness of their interpretations over those of the radical theorists of defensive jihad, other Islamists, or pious skeptics. Substantial financial resource and the tacit backing of the International Monetary Fund may empower an expressive myth of Muslim reglobalization associated with Islamic finance.
To keep the first moment in perspective, the financial surface of Islamic banking remains very small in a global perspective. From its beginnings in 1975, when the first privately owned, self-styled Islamic bank opened in Dubai, until today Islamic banking has gradually acquired the financial surface of a medium-sized international bank. Its total assets are unknown but estimates range from $250 to $750 billion, with ritual estimates usually echoed in symposia and conferences on the subject since 1995 of an annual growth rate of 15 per cent.[19] Such numbers are quite small in the world of international finance, where the total assets of Citigroup alone amounted to $1.5 trillion in 2005. Without greater standardization and transparency, the markets for the outstanding $90 billion of sukuk and other Islamic finance products remain limited. Project finance also features some Islamic components in large and complex packages, but we cannot even quantify their dimensions for lack of adequate data.[20]
Penetration
of financial markets within Muslim-majority states also remains quite limited
and in some cases, such as
Table 1 shows how much Islamic banks have penetrated Muslim markets since the 1970s.[21] Iran is not included for lack of data about privately owned commercial banks, permitted in theory after 2000 to operate alongside the traditional system that had been Islamized and brought under state ownership after 1979. Pakistan’s commercial banking was also cosmetically Islamized under General Zia-ul-Haq in the early 1980s, but the table only includes privately owned Islamic banks, created recently in the wake of legal contestation about the Islamic character of the other banks. It is readily seen that the penetration of Islamic banks has been greatest in Sudan (where the remainder were in theory also Islamized after 1983) and in the Gulf Cooperation Council states (except Oman). In Saudi Arabia the penetration was much greater by 2005 than the 13.9 per cent of the market achieved by Al-Rajhi, the kingdom’s only self-styled Islamic bank in 2000. The National Commerce Bank, with 27.3 per cent of the commercial banking system’s deposits at the end of 2005, had become primarily Islamic under new management. In 2006 the bank claimed that 243 of its 263 branches were “dedicated exclusively to Islamic Banking services,”[22] but it was not possible to discover the value of the deposits managed by the Islamic branches or whether they were pooled with conventional funds and lent out in conventional ways. SAMBA, another major Saudi bank, also has an Islamic banking unit, opened in 1996, which in 2005 accounted for almost one-third of the bank’s outstanding loans.[23] The kingdom has in a sense contained Islamic financial activity, however, by integrating most of it, as Egypt had done, into these conventional banks.
Joined
in 1979 by the Kuwait Finance House, which was 49 per cent owned by government
ministries, a nucleus of Saudi-owned transnationals rapidly invested with other
partners in much of the Muslim world, albeit not in Saudi Arabia (or Morocco,
for that matter), where any new institution claiming an “Islamic” distinction
might reflect adversely upon the ruler’s legitimacy. In its core areas of strength, however, the
movement faced hard times in the mid-1980s.
The Kuwait Finance House, like the conventional banks, had to be rescued
by the government in 1984, in the wake of the Souk al-Manakh crisis. In Egypt, so-called “Islamic” fund
management companies devised pyramid schemes that collapsed with the
devaluation of the Egyptian pound in 1987-88.
Although the Faisal Islamic Bank was not associated with these schemes,
it lost a quarter of its total assets with the collapse of the rogue Bank of
Credit and Commerce International (BCCI) in 1991.
Evidently Islamic banks could attract funds as long as they could
distribute profits to their “investor”-depositors that were competitive with
interest rates offered by conventional banks.
Profits stagnated by the late 1980s, and the market shares of
these banks peaked at about 10 per cent in their strongholds, Egypt, Jordan,
and the microstates of Bahrain and Kuwait. Only in Sudan, where they supported
Hassan Turabi’s rise to power (1989-1999), did they win a greater share of the
deposits and total assets of a commercial banking system, all of which had been
theoretically Islamized by decree in 1983.
Meanwhile, state sponsored Islamic banking in Pakistan and Iran produced
only cosmetic changes in the respective commercial banking systems until 2000,
when Iran permitted privately owned Islamic banks to compete with the public
sector. Pakistan, obliged by law to
reorganize its “Islamic” system, permitted its first privately owned Islamic
bank in 2002: the Al-Meezan Bank rapidly gained market share, and other banks
opened Islamic windows.[24]
So also in Indonesia, General Suharto supported the founders of
the Bank Muamalat Indonesia (BMI) in 1989-1992 to gain support from Islamists
in his bid to stay in power in the early 1990s.[25]
BMI and Bank Syariah Mega Indonesia, reinforced by new Islamic windows of
conventional banks, were
aiming for two per cent of the market in 2005, and there were plans to
establish Jakarta as a leading Islamic finance center, competing with Kuala
Lumpur, Malaysia, and Bahrain.[26]
In Turkey five “special finance houses,” defined by a law passed in 1983
that Turgut Özal’s staff had negotiated with Saleh Kamel, were fully integrated
into the country’s commercial banking system in 1999, survived the financial
crisis of 2001, and grew more rapidly than their conventional competitors to
gain 5 per cent of the market by 2005.[27]
In business Islamic banks are generally at a disadvantage with conventional commercial banks because, while the two may compete reasonably well in trade financing, the former cannot match or mimic the lucrative term lending of the conventional banks. Instead, they are supposed to engage in equity financing like a venture capital firm, but the risks are usually too great. Broad constituencies of business friendly Islamists may help to even the playing field, whereas politically polarized climates, as in Algeria, Egypt, and Tunisia, tend instead to keep Islamic banks at a disadvantage. In countries where there is a sharp division between government and Islamist opposition, the Islamic banks are obliged to keep a low profile and sustain their ties with the government and its official religious establishment, even if the opposition Islamists are of the mainstream rather than radical puritan variety.
Islamic banks seem to have had little impact on politics in the countries where they operate, except in Sudan in the 1980s. The business constituencies associated with these banks usually developed some political traction only in countries where the government already tolerated Islamist political forces. At the margins, Turkey’s special finance houses may have tipped the balance within the remnants of Erbaken’s Welfare/Virtue Party in 1999 to moderates following Tayyip Erdogan and Abdullah Gul, who had worked as an economist for the Islamic Development Bank from 1983 to 1991. Certainly their victory in the 2002 elections paved the way for a dramatic expansion of these banks. In Saudi Arabia the rise of Islamic finance may benefit some ‘ulama on the supervisory boards of the banks, but it is not clear what relationship, if any, they may have with the “Islamo-liberal” or any other trend among the power elite of Saudi ‘ulama.[28]
What emerges from this brief summary is Islamic banks seem trapped in much of the Arab world, where they enjoyed a head start, between overbearing authoritarian regimes and Islamist oppositions with which they must at all cost avoid any appearance of association. Only in the GCC are there some signs of synergy between the financiers and Islamists, although in Saudi Arabia the two founders of international Islamic financial networks, Prince Mohammad al Faisal and Shaikh Saleh Kamel, were not permitted to establish Islamic banks for fear that the other institutions permitted by the Defender of the Holy Places would be viewed as un-Islamic, a clearly unacceptable state of affairs for the kingdom!
Strong Islamist opposition and bitter polarization between Islamists and incumbent power holders usually results in stunted growth for Islamic finance and excessive dependence upon their central banks. The regime attempts to coopt the movement together with any associated by-products of political legitimacy. Islamist political movements may harbor a diversity of views about their potential financial ally. In Egypt in the late 1980s until 1992, when Mubarak reversed course and associated the entire political spectrum of Islamists with extremists rather than selectively coopting them and deepening their divisions, Islamist take-overs of the professional syndicates gave rise to interesting problems. Would the new management try to use Islamic or conventional banks? In the case of the engineers, the syndicate already managed a bank – should they convert it to Islamic banking operations, leave it as is, or get out of the banking business altogether? Muslim Brothers within the syndicate’s leadership had divided opinions including all three options.
Conclusion
With further polarization between regimes and Islamists, exacerbated by a growing US-Muslim divide, the outlook for Islamic finance within most Arab countries outside the GCC appears bleak. Presumably the more politically radicalized the Islamists become, the less likely they will be to make common cause with the Islamic financiers. Any journalistic conflations of Islamic finance and terrorism are far off the mark. To this writer’s knowledge, the US Treasury’s Office of Foreign Assets Control (OFAC), which is well informed about Islamic banks, uncovered only one case of an Islamic bank being associated with international terrorism – a small agricultural bank in the Sudan. Critics sometimes accuse Islamic banks of doing things akin to money laundering when they engage in “shari’a arbitrage,” a process whereby a conventional financial instrument (like the South Korean real estate bond) may be transformed into an Islamically acceptable one by adding one or more degrees of separation between the Islamic clients and the underlying financial product.[29] But they are no more likely than any other bank to engage in real money laundering.
It seems unlikely, then, given the present drift of the Muslim heartland, that the gentle Islamic financiers at the heart of Muslim globalization can somehow tame the passions of those puritan Islamists who tend to reject globalization because they view it as a new, American form of imperialism. Islamist oppositions become more radical in most Arab countries because of the US occupation of Iraq and the Israeli occupation of Palestine – in which the US is also viewed as an accomplice. Regimes become more oppressive in the face of rising opposition to the United States and more generally to economic globalization, and these oppositions usually adopt an Islamist vocabulary. The Islamic financial institutions suffer in the crossfire. Islamic finance takes an ethereal quality associated with the thousands of high wealth individuals of the oil kingdoms. Middle classes constitute the potential mass clientele of financial institutions as well as puritan Islam, but their participation is marginalized.
So far it seems to be principally high net worth individuals from the GCC states who have diversified their holdings and have some Islamic stake in the global economy, among their portfolio of investments. Despite some discussion of an emerging bourgeoisie in Saudi Arabia,[30] Islamic finance has yet to coagulate into a relatively autonomous industrial sphere like, say, those of the German bankers at the turn of the last century. Islamic capitalism is certainly not yet transforming the spirit of puritan Islamism.
It would not be prudent, however, simply to dismiss the myth of Islamic finance as a fairy tale. It also still serves as a myth and set of discourses uniting growing numbers of bankers and international administrators as well as high net worth individuals. Institutions are taking shape to facilitate those processes of sharia arbitrage that are essential for the growth of the industry. Sharia law is acquiring new scope and offering new career opportunities for potential opinion leaders. Pious publics are being instructed into some intricacies of modern financial activity. Most regimes in Muslim-majority states, however authoritarian and however much they repress political Islamists, accept Islamic financial institutions coexisting with their state-owned or client private sector banks. Were the banks to disappear, the big international ones would still be selling Islamic instruments to interested Muslim clienteles. It seems safe to conclude that Islamic finance, barely 35 years old in its recent reincarnations, will survive as a central symbol of the globalization of Muslim-majority states linking them to their precolonial past. While the financiers cannot stabilize Islam and bring it back to a more pluralistic and tolerant precolonial past, it does offer practical guidelines for puritans who may prefer to forsake politics for business.
A final irony is that Islamic banks may find the most business friendly environments for their distinctive sorts of investments in political economies dominated by post-Islamists. Turkey (Malaysia too?) is a principal exemplar of such development, where post-Islamists are consolidating democracy by bringing pious conservative Muslims, the natural clientele of Islamic finance, into the political mainstream. Islamic financial institutions, in other words, may flourish best in environments where Islamists have been superceded in the postcolonial dialectic, downplaying the public marketing of Islam. Islamic finance perhaps loses some of its domestic gloss, in that its survival requires sound banking more than “Islamic” branding. Such climates may, however, offer the soundest state foundations for perpetuating the expressive myth of a reglobalizing Islam. Shari’a arbitrage of entrepreneurial ulama with help from London and New York law firms may underlie the myth, but it may also in time be substantiated by the hard (puritan?) work of new Muslim capitalists.
[1] Keynote
Address of Anwar Ibrahim, Seventh
Harvard University Forum on Islamic Finance, April 22, 2006. For a more
rigorous exposition of the theme, see Tarik M. Yousef, “The Murabaha Syndrome in Islamic Finance:
Laws, Institutions, and Politics,” in
[2] Kristin Smith, Islamic
Banking and the Politics of International Financial Harmonization, in in S.
Nazim Ali, ed., Islamic Finance Current Legal and Regulatory Issues
(Cambridge, MA: Islamic Finance Project, Harvard Law School, 2005).
[3] The seven bonds to be selected were the sukuk of the Islamic Development Bank, the sukuk of Solidarity Trust Services Ltd, BMA International Sukuk, Qatar Global Sukuk, Malaysia Global Sukuk, Sarawak Global Sukuk, and Dubai Global Sukuk. To be listed, a bond must qualify to be shari’a compliant, as determined by the Dow Jones Shari’a Board consisting of Muslim scholars from a number of countries, and the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). See “First Islamic bond index to set global industry standards,” March 20, 2006, by Al-Bawaba Reporters (retrieved from Lexis Nexus, April 26, 2006). The Dow Jones Citigroup Sukuk Index is available online at http://www.djindexes.com/mdsidx/?event=Sukuk.
[4] Michael J. T. McMillen, “Sukuk and Islamic Bonds: Toward Viable Secondary Markets,” presentation to Seventh Harvard University Forum on Islamic Finance, April 23, 2006.
[5] “Islamic bond issues slump on
[6]
Bloomberg, “Sukuk Market on the Decline, Khaleej Times, Sept. 4, 2008
[8] “More non-Muslims turning to safe haven of Islamic finance,”
[9] “Financial Hubs See an Opening Up at the Top; Wall Street's Long,
Dominant Run Is Fading, Global Financiers Say,”
[10] See the essays, for instance, by Mahmoud A. Al-Gamal and Walid Hegazy, in Ali, Islamic Finance.
[11]
“A Genève, Faisal Finance fonde la
première banque privée islamique au monde,” [“In Geneva Faisal Finance is
founding the first Islamic private bank in the world”] Le Temps, October
5, 2006.
[12] For an illustration see Michael J. T. McMillen, “Structuring a Securitized Shari‘a-Compliant Real Estate Acquisition Financing: A South Korean Case Study,” in Ali, Islamic Finance
[13] A Basic Guide to Islamic Finance, Grapeshisha #013 (19 March 2006): http://www.grapeshisha.com/gs13.html (retrieved 30 June 2006).
[14] Paul McNamara, “The Islamic International Rating Agency,” Islamic Business and Finance, March 2006, pp. 38-40.
[15] The current members are listed on the IFSB website at http://www.ifsb.org/index.php?ch=3&pg=7&ac=10
(last visited February 28, 2007).
[16] Keynote Address at the Seminar on Islam and the Global Economy: Malaysian and NZ Perspectives held in Wellington, New Zealand, on June 13, 2006, posted on www.isfb.org.
[17] See the AAOIFI website at
http://www.aaoifi.com/ (last visited April 28, 2006).
[18] See in particular Giocomo Luciani, “From
Private Sector to National Bourgeoisie: Saudi Arabian Business,” in Paul
Arts and Gerd Nonneman, eds., Saudi
Arabia in the Balance (London: Hurst 2005), pp. 144-181.
[19] As observed by Samuel L. Hayes III, chairing the Governors and Institutions Roundtable, Seventh Harvard University Forum on Islamic Finance, April 22, 2006. On Lexis Nexus I retrieve $500 billion from “Global Islamic banks must consolidate to be competitive, says industry group,” Associated Press (Eileen NG), Kwala Lumpur, November 15, 2005.
[20] Mohammed El Qorchi, “Islamic Finance Gears
Up,” Finance and Development. December 2005, p. 49, http://www.imf.org/external/pubs/ft/fandd/2005/12/qorchi.htm
(retrieved April 28, 2006). The central banks of
[21] Taken from
[22] National Commercial Bank web page: http://www.alahli.com/personalbanking/aboutus.asp (retrieved on July 4, 2006). It claimed 105 billion riyals of customer deposits at the end of 2005, when the Saudi Arabian Monetary Authority indicated a total of 384.5 billion.
[23] See SAMBA’s financial statements, note 6: http://www.samba.com.sa/about/pdf/FS-2005_FINAL_with_Dir_Report.pdf (retrieved July 4, 2006).
[24]
International Monetary Fund, Pakistan--Financial Sector Assessment Program--Technical
Note--Condition of the Banking System (May 11, 2005):
http://www.imf.org/external/pubs/ft/scr/2005/cr05157.pdf
[25] Robert Hefner, "Islamizing Capitalism: On the Founding of Indonesia's First Islamic Bank," in Arskul Salim and Azyumardi Azva, ed., Shari'a and Politics in Modern Indonesia, 2003, 152-156.
[26] Shanthy Nambiar, Bloomberg News, March 2, 2005 (www.wwrn.org/parse.php?idd=9518&c=82).
[27]
Ji-Hyang Jang, Taming Political Islamists by Islamic Capital: The Passions and
the Interests in Turkish Islamic Society (Ph.D. diss., University of Texas at
Austin, 2005), 158-165. In 2005 the
“participation banks” had 4.7% of the outstanding commercial bank credits and
3.4% of the deposits, and their market shares increased to 3.8 and 5.0%,
respectively, by the end of September 2006.
See Central Bank of the
[28] See Stéphane Lacroix, “Islamo-Liberal Politics in Saudi Arabia,” in Paul Arts and Gerd Nonneman, eds., Saudi Arabia in the Balance (London: Hurst 2005), pp. 35-56.
[29] See Mahmoud El Gamal, “Shari’a arbitrage relies on two main tools to achieve its objective: (i) dual characterization of a financial dealing, one for jurists and one for regulators, as discussed in the previous section, and (ii) addition of one or more degrees of separation between Islamic finance clients and the underlying conventional financial products. The latter is often achieved by inspecting each part of a complex transaction in isolation, rather than studying the entire transaction.”
[30] Giacomo Luciani, From Private Sector to National Bourgeoisie: Saudi Arabian Business, in Paul Aarts and Gerd Nonneman, eds., Saudi Arabia in the Balance (London: Hurst 2005), pp. 144-181.