Banking On Shariah

That seems to be the latest thing, as James Joyner writes about in his article in The New Atlanticist, Islamic Banks Surge, Thanks to Financial Crisis: where he quotes from AP business writer Emma Vandore:

France is becoming the latest country to woo Islamic banks, which avoided much of the damage from the subprime mortgage crisis by following strict principles laid out in the Quran — as the global financial crisis broadens the appeal of Islamic finance. French Finance Minister Christine Lagarde has promised to make adjustments to the regulatory and legal arsenal to enable Paris to become a major marketplace in Islamic finance. At a recent forum in Paris, she said Western financiers could learn a thing or two from the Islamic world as global leaders try to establish "new principles for the international financial system, based on transparency, responsibility and, I would like to add, moderation." "In this sense, Islamic finance is calling out to us," she said.

Finance that complies with Shariah, or Islamic law, accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Service. That's grabbing the attention of governments eager to oil their liquidity-strapped economies with money and deposits from the Islamic world. Islamic finance is concentrated in the Persian Gulf and Muslim parts of Asia such as Indonesia and Malaysia but is spreading into North Africa and Europe.

Vandore waxes poetic on the many virtues of Sharia banking

A November report by Moody's shows that Islamic banks have been fairly resilient. No Islamic financial institution has acknowledged investing in Bernard Madoff's $50 billion Ponzi scheme, and Saleh Al Tayar, Secretary General of the Franco-Arab Chamber of Commerce, said the $4.9 billion hit taken by Societe Generale SA from what it calls unauthorized trading by Jerome Kerviel couldn't have happened in an Islamic institution. "If global banking practices were based on Islamic practices then we wouldn't be seeing the kind of crisis we are living through now," he said.

Islamic financial institutions work on a philosophy of prohibiting transactions considered immoral and promoting greater social justice by sharing risk and reward. Investing in casinos, pornography, arm dealers or anything to do with pork is out: long-term investments in projects considered to benefit society are in. Interest payments, short selling and contracts considered excessively risky are also prohibited. That rules out some of the products that got Western finance into so much trouble such as subprime mortgages, collateralized debt obligations or credit default swaps. [emphasis added]

Since the reference to pork is more likely referring to pig than to government appropriations, adding it to the list of risky/illegal investments does seem a bit out of place.

Also, I was under the impression that the Muslim world was not escaping the global recession unscathed. Back in October, The Jerusalem Post reported:

Stock markets across the Arab world experienced unprecedently sharp losses when trading began following the Id al-Fitr holiday earlier this week. The seven stock markets in the oil rich Gulf states shed around $150 billion of their capitalization in the course of the week.

The market in Saudi Arabia sank by 7 percent. In Egypt, the key index fell by around 16%. One Saudi economist quoted by Agence France Presse described the latest developments as a "catastrophe." For a number of reasons, the Arab world may well prove particularly vulnerable to the world economic downturn. This fact has political implications for the region, which are already being glimpsed and acted upon by various regional forces.

This hardly supports the impression that investing and banking according to Shariah provides any insulation from the global market. Nevertheless, the US Treasury Department is also looking into Sharia Banking.

In this regard, Frank J. Gaffney, Jr. has addressed other concerns about Shariah-Compliant Finance (SCF) to the Treasury:

Specifically, we shared with them a detailed legal memorandum written by one of our experts – David Yerushalmi, an attorney specializing in securities law who is deeply knowledgeable about the comprehensive theo-political-legal code that authoritative Islam calls Shariah. Mr. Yerushalmi’s memo makes a compelling case that there is both civil liability and criminal exposure associated with SCF.

This is so because, at its core, Shariah is sedition: It explicitly espouses the violent overthrow of all secular governments and constitutions – including those of the United States – in favor of a global Islamic theocracy. The Yerushalmi memo makes clear that Shariah advisors – who play a central role in this industry as it falls to them to determine whether transactions are Shariah-compliant or not – and/or the companies that employ them appear to be involved in one or more of the following: racketeering, anti-trust violations, consumer and securities fraud or material support for terror.

Gaffney gives an example:

In these regards, it might be helpful if, while Secretary Kimmitt is in Qatar, he pays a visit to one of the most prominent of the SCF advisors, Sheik Yusef al-Qaradawi, who serves on, among numerous others, the Shariah advisory board of two Qatari Islamic banks. As my colleague Christopher Holton has pointed out in a recent posting on the Family Security Matters website , Qaradawi has called for the Islamic world to use the present financial crisis to destroy Western capitalism and replace it with “an Islamic economic system.”

Inquiring minds among Treasury’s experts trying to “learn about Islamic banking” might also be interested to know that, in a 2006 interview with the BBC, Qaradawi also declared that he calls SCF “jihad with money, because God has ordered us to fight enemies with our lives and our money.”

The question is whether this particular line of attack on SCF goes too far. David Yerushalmi, one of Gaffney's experts mentioned above founded a group called SANE that opposes the Federal bailout of AIG in a lawsuit. According to an email I received from the group:

The basis of the lawsuit is that AIG intentionally promotes Shariah-compliant businesses and insurance products, which by necessity must comply with the 1200 year old body of Islamic cannon law based on the Quran, which demands the conversion, subjugation, or destruction of the infidel West, including the United States. To help achieve these objectives and with the aid of federal tax dollars, AIG employs a three-person Shariah Advisory Board, with members from Saudi Arabia, Bahrain, and Pakistan. According to AIG, the role of its Shariah authority "is to review [its] operations, supervise its development of Islamic products, and determine Shariah compliance of these products and [its] investments."

Of particular significance is the Pakistani Board member, Dr. Muhammed Imran Ashraf Usmani. Dr. Usmani is the son and devoted disciple of Sheik Mufti Taqi Usmani, the leading authority on Shariah financing who, in 1999, authored a book dedicating an entire chapter on why a Western Muslim must engage in violent jihad against his own country - even if Muslims are given equality and freedom to practice their religion and to proselytize.

Just how easy is it to find a relationship between a Muslim and a relative or associate who is an extremist?

Supna Zaidi, assistant director of Islamist Watch gives another reason for caution:

In the case of SCF, only Sharia scholars can decide whether a financial product is permissible (halal) or not. They are thus the only individuals who can theorize as to why or how a product can become “halal.” This removes the ability of all practitioners who are not part of the SSB from engaging in product development beyond doing what they are told to find and prevent any illegality. If questions of fraud, breach of duty, negligence, criminal liability, etc. arise over any transactions, these same individuals will nevertheless remain liable.

...In its worst-case scenario, SSBs [Sharia Supervisory Boards] act just as unilaterally, can go back on previous decisions, or contradict the decisions of other SSBs. Who is right and who decides? What administrative body or court in the U.S. is in a position to question a Sharia-based product? Even if transactions state New York as the jurisdiction for dispute resolution, the courts must invariably rely on Sharia-based decisions from foreign courts for theories and interpretation. If a U.S. court offers a decision based on its own theory, who will make the decision binding since Sharia is divine, i.e., not to be superceded by secular law?

I don't know if anyone has addressed the question of whether such potential legal conflicts are reason for concern.

Joyner concludes his article with an interesting point that seems to have been lost in the middle of all this:

It's worth noting, too, that while Sharia banking has Islam-specific limits, such as prohibing loans to fund "anything involving alcohol, gambling, pornography, tobacco, weapons or pork," most of the practices Vandore emphasizes are age-old and cross religious boundaries: "Charging high interest rates to lend money is repeatedly condemned in the Bible. The Greek philosopher Aristotle denounced it, the Romans limited it, and the early Christian church prohibited it. Western theologians eventually distinguished interest from usury, and it was reintroduced to Christians and Muslims around the time of the Renaissance. " [emphasis added]

This is an issue that is only going to grow, since we are unlikely to see a return to basics when a ready-made solution seems to be available. Unlike steps towards accomodation of Muslims that are based on fear or appeasement, accomodating Sharia Compliant Financing is based on good old fashioned greed.

Technorati Tag: Sharia Banking and Sharia Compliant Financing.