Islamic finance and Islamic banking, which are among the fastest growing financial industries in the world, are best understood in their political and cultural contexts, and by what formed their theoretical origins.
To begin with, Islamic banks are based on a corpus of doctrines called “Islamic economics,” which claims to be based on the Quran, but is actually the creation of the Islamist thinker Abu’l-A’la Mawdudi (1903-1979).
Mawdudi is both the father of Islamic economics and (together with Hassan al-Banna, founder of the Muslim Brotherhood) the father of modern political Islam. His crucial contribution to the development of Islamism has been highlighted by Seyyed Vali Reza Nasr in “Mawdudi and the Making of Islamic Revivalism,” while his role in the birth of Islamic economics has been studied by Timur Kuran in “The Genesis of Islamic Economics.”
Mawdudi, the founder in 1941 of the Islamist party, Jamaat-e-Islami, in Pakistan, was persuaded that it was necessary for Muslims to bring all aspects of life into the practice of “Islam” and submission to the will of Allah. Therefore, both the spheres of politics and economics could not be autonomous from the Quranic revelation and the Islamic tradition (sunna).
In the political field, Mawdudi asserted the need for the establishment of an Islam in which all sovereignty belongs only to Allah; thus, popular sovereignty would a usurpation of his rights. According to Mawdudi, the proclamation of faith, in which the Muslim believer affirms that “there is no God but Allah,” implies that “one should recognise no sovereign, nor accept any government, nor yet obey any law, or that one should refuse to accept the jurisdiction of any court and to carry out the command of anyone” except from Allah.
For Mawdudi, the duty of his party, the Jamaat-e-Islami, was to form an army of “Allah’s troopers,” with the goal of establishing an Islamic state where shari’a (Islamic law) could be enforced. The creation of an Islamic state was, however, just the first step: he writes, “Islam does not want to bring about this revolution in one country or a few countries. It wants to spread it to the entire world. Although it is the duty of the ‘Muslim party’ to bring this revolution first to its own nation, its ultimate goal is world revolution.”
Mawdudi, studying the French, Russian and National Socialist revolutions, was of the opinion that Islamic revolutions should have learned from them. Like Lenin, Mawdudi affirms the need for a vanguard of Allah’s army; like Trotsky, he calls for exporting the revolution worldwide.
The spread of the Islamic revolution also had to follow the example set by the Prophet Muhammad. Mawdudi affirms that:
“When every method of persuasion had failed, the Prophet took to the sword. That sword removed evil mischief, the impurities of evil and the filth of the soul. The sword did something more – it removed their blindness so that they could see the light of truth, and also cured them of their arrogance; arrogance which prevents people from accepting the truth, stiff necks and proud heads bowed with humility. As in Arabia and other countries, Islam’s expansion was so fast that within a century a quarter of the world accepted it. This conversion took place because the sword of Islam tore away the veils which had covered men’s hearts.”
To purify society from non Islamic influences (“the veils which cover our hearts”), Mawdudi also advocated the restoration of a classic tenet of Islam: the death penalty for apostasy (ridda). Mawdudi further states that such a punishment should not just be reserved for those who consciously refuse Islam, but also for all the non-practising Muslims:
“Whenever the death penalty for apostasy is enforced in a new Islamic state, then Muslims are kept within Islam’s fold. But there is a danger that a large number of hypocrites will live alongside them. They will always pose a danger of treason. My solution to the problem is this. That whenever an Islamic revolution takes place, all non-practising Muslims should, within one year, declare their turning away from Islam and get out of Muslim society. After one year all born Muslims will be considered Muslim. All Islamic laws will be enforced upon them. They will be forced to practice all the fara’id and wajibat [duties and obligations] of their religion and, if anyone then wishes to leave Islam, he will be executed.”
Advocating the necessity of emancipating knowledge from the influence of the West to give birth to a true Islamic polity, Mawdudi goes on to state: “Islam is the very antithesis of secular Western democracy.” Not only does society have to be purged from non- Islamic contaminations, but also science and knowledge. Islamic society and Islamic culture have to be pure:
Islamic finance and Islamic banking, which are among the fastest growing financial industries in the world, are best understood in their political and cultural contexts, and by what formed their theoretical origins.
To begin with, Islamic banks are based on a corpus of doctrines called “Islamic economics,” which claims to be based on the Quran, but is actually the creation of the Islamist thinker Abu’l-A’la Mawdudi (1903-1979).
Mawdudi is both the father of Islamic economics and (together with Hassan al-Banna, founder of the Muslim Brotherhood) the father of modern political Islam.
THE Treasury plans to rewrite Britain’s tax rules to usher in a new wave of Sharia law for the country’s financial system.
The one-line revelation is buried in the 212-page pre-Budget report.
It is among a string of startling details which barely merit a mention in Alistair Darling’s controversial mini-Budget – prompting fresh accusations that Labour is “burying bad news”.
The Government wants to tap into the fast-growing Sharia finance market, set to top £205billion a year, and turn London into the “global gateway for Islamic finance”.
Many conventional financial products are not Sharia compliant because Muslim clerics view conventional loans, which involve interest payments, as sinful.
The UK Government was one of the first Western countries to issue a state-backed sukuk, an Islamic bond. It now wants to rewrite tax laws to stop Muslim businessmen being unfairly taxed when they try to raise money on their companies.
Conventional loans allow them to take equity out of their business, using the property as collateral, but to be Sharia compliant a Muslim “sells” the business to the bank and then rents it back. That leaves the businessman facing a bill for capital gains tax and the Treasury wants to level the tax playing field.
Mohammed Amin, head of Islamic finance at PricewaterhouseCoopers, said: “The UK has become the leading Western country in Islamic finance by taking a series of measures to ensure that Islamic finance is taxed no worse and no better than conventional finance.
“The pre-Budget report continues this progress by including measures to equalise the tax treatment of property refinancing transactions.” Ministers are also considering issuing Government bonds to Islamic banks to help them comply with new financial regulations.
Sharia-compliant mortgages, car insurance and even baby bonds are available for Muslims wanting to avoid “riba” – interest payments.
Supporters say the Government is wisely getting in on the ground floor of a market which could net the City billions in the future.
Critics warn Labour is rushing into a financial system it does not fully understand and question how far laws should be rewritten to accommodate Islamic practices.
The Financial Services Authority says its policy is one of “no obstacles, no special favours” for Islamic finance.
Last week’s pre-Budget report includes the revelation that bankers will still net £4.5billion in bonuses this year despite the so-called super-tax on the City.
Ministers also used the cover of the report to admit the Homeowner Mortgage Support Scheme, permitting deferment of interest payments, has been an abject failure.
Shadow Housing Minister Grant Shapps said: “It’s gone the way of many other Brown initiatives. We’ve stumped up for the expensive consultancy bills but the actual scheme has failed to help more than a handful of hard-pressed families.”
A Communities and Local Government spokeswoman said: “The Government has widely publicised that fortunately only 15 families have so far needed the backstop help of the Homeowner Mortgage Support Scheme.”
A DEFAULT by Dubai will put the world of Islamic finance to the test at a time when hard questions are being asked by bankers and lawyers about the protection afforded by financial instruments that are Shariah compliant.
The bond that lies at the heart of the threat of default and financial ignominy for Dubai is a sukuk, an instrument invented by bankers and Islamic scholars to comply with a Shariah (Islamic law) prohibition against the payment of interest on money.
Islamic finance has five pillars: a ban on interest, a ban on speculation, a ban on haram (forbidden) investments, such as pork or gambling, the requirement of partnership or sharing of profit and loss and the requirement of asset backing. Getting round the ban on interest is the problem and opportunity of Islamic finance.
A bond that doesn't (in theory) pay interest sounds unattractive but in the Gulf and Malaysia, Islamic finance has flourished over the past decade.
Typically, interest is expressed as a share in a profit, such as the rent paid for use of a property or asset. According to estimates by HSBC Amanah, the Islamic arm of the British bank, outstanding Islamic finance debt is worth $US822 billion ($902 billion).
Even Western investors have been persuaded to dip their toes in the exotic financial tool, tempted by the deep pool of petrodollars available in the Gulf.
Only days before Dubai revealed its bombshell - a threat of possible default on Nakheel's $US4 billion sukuk - GE Capital, the American financial services group, issued the first sukuk by a Western company, raising $US500 million.
The underpinning of a sukuk with assets makes it attractive for use in property lending or asset leasing. The sukuk issued by GE this week was a loan for aircraft leasing.
GE's decision to use the Islamic finance market for funds reflected renewed confidence in a market that had almost collapsed after expansion in 2007 when the Gulf was awash with money fuelled by high oil prices.
Demand shrivelled after the collapse of Lehman Brothers with only $US16 billion issued last year. More importantly, fears surfaced that sukuk failed to provide the same legal protection as conventional bonds. To date, the legal structure of sukuk has never been tested in a court.
There have been high-profile defaults, including the Saudi Arabian Saad Group and Investment Dar, a Kuwaiti Islamic Investment Fund. Investment Dar owns half of Aston Martin, the luxury British car company, and the fund failed to make a payment in April on a $US100 million sukuk issue. In June, Golden Belt, a $US650 million issue by Saad Group, the investment house controlled by Maan al-Sanea, was downgraded to default status.
The concern is that sukuk creditors may not be protected. According to Neale Downes, a Bahrain-resident partner at Trowers & Hamlins, the law firm, it is not clear how creditors will rank in an insolvency.
In some cases, he said that investors have found themselves competing against other creditors, rather than being able to enforce their claim on the underlying asset supporting the sukuk.
But the repeated declarations of support by Dubai's ruler gave the market confidence that the sovereign would stand behind its debts. Only a month before the Nakheel shock, Dubai raised $US2 billion in sukuk issues.
London Mayor Boris Johnson today encouraged people to undergo a day of fasting to help understand their 'Muslim neighbour'.
He said Muslims in the capital were 'challenging traditional stereotypes' to show they wanted to be part of the mainstream during a visit to the East London Mosque and London Muslim Centre.
Mr Johnson's visit coincided with the holy period of Ramadan in which participating Muslims fast from dawn until sunset.
He said: 'Whether it's in theatre, comedy, sports, music or politics, Muslims are challenging the traditional stereotypes and showing that they are, and want to be, a part of the mainstream community.
'That's why I urge people, particularly during Ramadan, to find out more about Islam, increase your understanding and learning, even fast for a day with your Muslim neighbour and break your fast at the local mosque.
'I would be very surprised if you didn't find that you share more in common than you thought.'
He added: 'Muslims are at the heart of every aspect of society. Their contribution is something that all Londoners benefit from.
'Muslim police officers, doctors, scientists and teachers are an essential part of the fabric of London.
'Islamic finance is contributing to the economy by changing the way Londoners invest, save, borrow and spend.
'There are valuable lessons that people of all backgrounds can learn from Islam such as the importance of community spirit, family ties, compassion and helping those less fortunate, all of which lie at the heart of the teachings of Ramadan.'
With irresponsible banking practices taking the blame for bringing about the global economic crisis, there has been a surge of interest in Islamic finance.
Islamic finance is estimated to be worth $700 billion and has been growing by 15 to 20 percent per year.
Now, a slew of academic courses are springing up to meet the demand of those wanting to break into an expanding market.
According to ratings agency Moody's, the global Islamic finance sector is worth $700 billion and has the potential to be worth $4 trillion.
What's more, the ethical principles underpinning Islamic finance are seen by some as offering a more sustainable alternative to profit-oriented conventional banking. The result is that academic institutions are lining up to offer formal training in the area.
"There is a huge demand for Islamic finance courses now, so large that it's difficult to cope with," Professor Habib Ahmed, Sharjarh chair in the school of government and international affairs at Durham University, England, told CNN.
Durham will launch a Masters degree in Islamic finance from October, becoming one of a number of European institutions to offer Islamic finance programs.
"Islamic finance has been growing by 15 to 20 percent per year for some time and there is a lot of interest at the moment. People are looking for alternatives after the economic crisis."
"Islamic economists believe that if the principles of Islamic finance were followed the crisis wouldn't have happed. We are seeing a lot of non-Muslim countries, including the UK, France, Japan, Hong Kong and Singapore encouraging Islamic finance," he said.
There are many differences between Islamic and conventional banking practices. One fundamental difference is that Islamic banks do not charge interest. Rather than borrowers and lenders, the system is based on buyers and sellers.
"Conventional banking is biased to the seller. Islamic finance is trying to level the ethics between the two parties," Aly Khorshid, an Islamic finance scholar who writes for Islamic Banking and Finance magazine, told CNN.
"People think the Islamic system is based on faith, but it's based on justice. Read more here ...
The first government sukuk was listed on the London Stock Exchange as Britain reaffirmed its reputation as the main western centre for Islamic finance. Read more ...
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by Daniel Atzori
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