Friday 15 November 2013

"Bonds of Faith": critique of Sharia Finance

Letter to South China Morning Post
I refer to "Bonds of Faith" (Back to Buisiness, 15 November.  PDF), which reports on Hong Kong's issue of its first Sharia-compliant bonds (or sukuk).  The article paints these sukuk in a completely positive light.
But that's not the whole story.  
Sukuk are inefficient.  Many Islamic banks promote a ban on usury as being "interest-free".  But no bank can work for free, so deals are structured with sale and buyback of artificial "assets" with profit margins at levels equivalent to prevailing interest rates.  The preeminent Muslim scholar of Sharia Finance, Timur Kuran, notes that all Islamic banks actually give and take interest routinely, using “ruses” to make interest appear as a return for risk.  In short they are an elaborate ploy of form over substance, and inefficient because of that structure: sukuk have fees up to 20% higher than standard.  
Is it right that we the taxpayers be expected to pay for this inefficiency by exempting taxation on the transfer of underlying assets, an exemption not granted to any other financial instrument?
Sukuk are discriminatory.  Investments are banned not only alcohol and gambling. They are also not permitted to invest in companies that benefit non-Islamic religions; companies that promote equal rights for women and gays; companies involved with western books, films or media; and companies linked to Israel.  Is it right for Hong Kong to promote manifestly anti-semitic, homophobic and misogynist financial instruments?
Sukuk are an Islamist program.  Sharia Finance was first promoted by the Pakistani Islamist Sayyid Al-Mawdudi, founder of the radical Jamaat-e-Islami, in the 1960s. It is promoted today by Islamists like influential Egyptian cleric Al-Qaradawi as being “Jihad with money”. [fn1]  According to Professor Kumar "Mawdudi’s aim … was to reassert Islam’s importance … [to] defy the common separation between economics and religion… to invoke Islamic authority." Sharia banking, he says, boosts the global movement of Islamism. [fn2]
Is it right for Hong Kong to support the work of global Islamists?
Sukuk perform badly. As for Sharia finance's alleged success, that is moot: In the UK, Sharia-compliant banking has been a huge flop. Your article itself notes a 20% drop in sales last year.

Our government should reconsider its support for an innately inefficient, discriminatory and poorly performing religious financial product which has an Islamist genesis.

Peter F, etc,
[fn1] Qaradawi"I like to call it Jihad with money, because God has ordered us to fight enemies with our lives and our money." [towards the end of the article].  He is referring to Zakat, or Islamic charity, which is required to be paid by issuers of sukuk.  According to Islamic law, at least one-eight of zakat must be use in the furtherance of Islam.
[fn2] Timur Kuran, “Islam and Mammon; the economic predicaments of Islamism”.  Princeton University Press, p. 52.