Wednesday, 11 December 2013

Sharia finance: Letters tussle

Cloudy with a chance of Sharia
As I expected, my letter of 22nd November on Sharia finance has elicited reaction.
First, the letter [PDF] from Vikas Mohammed Khan, followed by my rebuttal letter sent to the South China Morning Post this morning.

Peter Forsythe denounces Islamic banking practices as being "the work of global Islamists" ("No place for 'sukuk' bonds in HK market ", November 22).
The adjective "Islamic" refers to rules of procedure (as "kosher" refers to Judaic procedures for food and is commonly patronised by Muslims overseas, not only by Jewish people). It is simply advertising to buyers that here is a product which is of a certain nature. The word "halal" would do just as well. The fundamental premise is that money not be allowed to grow by time alone, i.e., by interest. The lender must accept some risk in the venture being financed.
It also makes foreclosure on "pledged" assets somewhat difficult, and is in general more lenient towards the borrower than conventional debt.
Islamic financing tries to, or is at least designed to, link social benefits to purely monetary ambitions, which is hardly a bad thing in the "me-my" culture of today. Let us not denounce it just because it is associated with the current Western hype regarding Islam.
The ethos of Islamic financing is related to the concept of social justice, and is not limited to Islam: the Old Testament categorically forbids interest. Several Catholic popes have historically condemned the practice, as have Plato, Gautama Buddha, Moses, and Thomas Aquinas, among others.
Philosophy aside, on a fully practical note there is obviously a large population of Muslims worldwide, and therefore Islamic financing is seen by some banks and financial institutions as a good market (US$1.3 trillion by some estimates). Hong Kong is now trying to actively tap into this market, and very rightly so, in my opinion.
At 1.62 billion, Muslims are 23 per cent of the world's population, and more than 40 per cent of Southeast Asia's. As a global financial centre, without any doubt Hong Kong must try to attract this large and growing market. You can hardly be a global centre while ignoring a quarter of the world and almost half your largest neighbouring region.
Mr Forsythe is plainly fatuous in connecting Islamic financing to some global religious conspiracy. His labelling of Islamic financing as "inefficient" is hardly credible, especially in light of the "efficiencies" of Wall-Street-type banking practices as seen over the last few years.
Vikas Mohammed Khan, Mid-Levels
My rebuttal, with a preface to John Lee, the Letters Editor of the South China Morning Post:
Dear John,
I expect that your readers are not much interested in the arcane pros and cons of Islamic finance.  
Still, there is at least one issue that deserves our attention: the fact that HK tax payers will end up paying for the tax exemptions that the government proposes for Sharia banking: for its inefficiencies means it cannot stand on its own feet without such tax breaks.  So, this is a “pocketbook” issue for all of us.
By the way, a friend of mine thought he noticed that in Letters discussions on matters Islamic, the final word seemed to go to those folk on “the other side” of the argument, as it were.  This does seem to have been the case, at least in relation to discussions on the meaning of “Jihad” (with Elsie Tu) and on the Burka recently.
I’m not suggesting this is policy, of course.  And I do understand that you have to bring debates to an end sometime, particularly when it’s on what might be considered non-mainstream issues.  
But if there is to be a “final word” on this issue of Sharia finance, perhaps it could be on this side of the debate?...
In any case, over to you.
The letter below focusses on the issue of inefficiency of Islamic finance, and the potential cost to the Hong Kong Taxpayer
Peter F... etc

Letter Follows (333 words):
Mr Khan claims that my saying Sharia banking is inefficient is “hardly credible, especially in the light of the ‘efficiencies’ of Wall-Street-type banking…”.  (“Global financial centre can’t afford to ignore Islamic banking”, December 7).  
But whether or not Western banking is inefficient is irrelevant to the contention that Sharia banking is itself inefficient. (Khan’s is a classic tu quoque argument). Many experts in Sharia banking, including professors Timur Kuran and Mahmoud El-Gamal, attest to its inefficiencies.
None of this would matter if it did not affect people who don’t wish to avail themselves of Sharia banking. But it does.
For the very inefficiency of Sharia banking is the reason that Hong Kong taxpayers will end up paying for it.
The Hong Kong government plans to give tax breaks to Sharia banking, since it can’t stand on its own without such exemptions.  This affects all Hong Kong residents, as the foregone taxes are money that could be spent elsewhere.
In short, it is a “pocketbook issue” for all of us.
Surely this deservers our attention and debate.  Or should we simply accept that tax exemptions are to be given to religiously mandated financing without question or examination?  Rather, we should be asking ourselves whether it’s right for our government to encourage inefficiencies by providing tax breaks at our cost.
Western banking has come under very close scrutiny, debate and regulation, especially since 2008. Sharia banking ought to be subject to similar scrutiny and debate, without that attention being characterised as “Western hype regarding Islam”.
Finally, Mr Khan says I’m “fatuous” in connecting Islamic financing with a “global religious conspiracy”.  I nowhere said that there was a “conspiracy”.  I said that it was quite openly an “Islamist program”, not by my judgment, but by the clear statements of Islamic leaders including influential Egyptian cleric Yusuf al-Qaradawi who calls it "jihad with money”. If Mr Khan denies that, perhaps he ought direct his remarks to such gentlemen, rather than to me, who is simply reporting them.
Peter F... etc.
There are many other reasons to be concerned about Sharia finance.  I decided in the letter to focus on the inefficiencies and potential cost to Hong Kong taxpayers, as "money talks".  
I have written often about Sharia finance, some of it informed by very useful exchanges with an Australian banker working in the Middle East, doing Sharia financing, and who himself attested to its inefficiencies, and to the largely bogus nature of so-called "interest free" banking (it is, of course, no such thing, as deals must be structured with artificial sale and buy-back arrangements to provide the equivalent to interest, as no bank can operate for long without profit).  
For a bit more on those concerns with Sharia finance, if you can bear it, see my post of 11 November 2010, "Sharia finance is more than a 'moral hazard'".