On the origins, doctrinal propriety, and political significance of Islamic finance.
As Kuran (2004) noted, prior to the 19th century there were no durable financial institutions recognizable as banks in the Muslim world. Although many banks (mostly non-Islamic or traditional) in several Muslim countries had appeared in the 19th and early to mid-20th centuries, the first “modern” commercial “Islamic” bank, Dubai Islamic Bank, was established in 1979.
Coincidentally, 1979 is the year of Iranian revolution which brought Islamists to power in a “modern” state for the first time and some have argued Iranian revolution gave rise to a wider resurgence of Islam across Asia, Africa and elsewhere in the world (Hefner 2010).
But this is not the only interesting coincidence.
The year 1979 coincides also with the beginning of the Deng–Volcker–Thatcher–Reagan revolution (also known as the neoliberal restoration programme) of 1978–80. With this revolution, the economies started to polarise between creditors and debtors, and the debt burden started to shift from the public sector to the private sector (see, for example, Öncü 2016).
If you cannot convince Muslims to participate in the financial system (don’t they call this convincing “financial inclusion” these days?), how can you shift the debt burden from public to private in Islamic countries?
Both the Muslim World League (MWL) and the Organisation of Islamic Cooperation (OIC) are organisations that came to existence relatively early in the era that started when the United States (US) took over the world leadership from the United Kingdom (UK) at the Bretton Woods Conference in 1944. Both of these organisations had the blessing of the US and have been supported by the petrodollars of Saudi Arabia and the Gulf Region. Together with the now world renown Muslim Brotherhood, they have been among the major instruments of the well-known US green belt project to construct a barrier against the Union of Soviet Socialist Republics (USSR) along the USSR’s southern border.
The MWL (known in the Muslim world as Rabitat al-Aalam al-Islami or Rabitat) is a “non-governmental” organisation based in Makkah, Saudi Arabia. It was established by the government of Saudi Arabia in 1962 and has been funded by it till now. Many of Rabitat’s Jurisprudence Committee members are prominent figures in the world of “Islamic Finance” advising governments as well as “Islamic Banks” on the subject.
The OIC came to being in 1969 upon a decision of a summit held in Rabat, Morocco by Muslim countries following the arson of Al-Aqsa Mosque in Jerusalem. Its first conference of foreign ministers was held in Jeddah, Saudi Arabia in 1970 and it was decided to establish a permanent secretariat in Jeddah headed by the OIC’s secretary general. Together with the International Monetary Fund and the World Bank–not to mention Wall Street− the OIC has been one of the main promoters of “Islamic finance” for decades. Indeed, among the OIC’s current priorities is investment and finance, and hence “Islamic finance”.
Let me allow a scholar who knows Malaysia way better than I to speak (Rudnyckyj 2013):
Islam has played a pivotal role in the state’s development strategy, as the state has sought to develop industries and services deemed suitable for an increasingly educated and skilled labouring population. Scholars have noted how the state has strategically deployed Islam to discipline the population and create an environment conducive to economic growth…
With the active encouragement of the developmentalist state, Japanese, American, and European firms set up shop in extensive industrial zones and hired a vast number of new workers to provide the labour for export-oriented growth. Islam was deployed by corporations and the state as a means of disciplining especially the young, female labouring population involved in high-tech assembly…
Thus, ‘government policies seek to bring Islam in line with capitalism’ by promoting a form of Islam that is fully compatible with the state’s development objectives…
The promotion of Malaysia as a global hub for Islamic finance is part of state strategies to sustain the nation’s impressive record of economic development since the early 1970s. In part, efforts to foster the growth of Islamic finance are an outcome of how religion and ethnicity have been integrated into …”postdevelopmentalism” in Malaysia.
Let me finish this section with one last quotation from Rudnyckyj (2013):
Islamic finance experts had long bemoaned the dearth of potential employees with training in Islamic finance and the lack of educational programs to train such professionals … For example, the former deputy governor of the Central Bank, Dato’ Muhammad Razif, who was responsible for the Central Bank’s Islamic finance portfolio, stated, ‘If you critically review, even in Malaysia, [Islamic finance] has been based on imitation rather than innovation … Our starting point is compliance, it’s not sharia-based. The bankers right now are converts; conventional bankers transformed into Islamic bankers. Of course [their] mind sets are conventional … My suggestion [is] that banks would employ sharia scholars as bankers’ …
Most “Islamic finance” products are some form of special purpose vehicles (SPVs). And SPVs were invented in Wall Street in the 1970s when the Government National Mortgage Association wanted to sell securities backed by a portfolio of mortgage loans.
Let me now allow Gorton and Souleles (2007) speak:
An SPV, or a special purpose entity (SPE), is a legal entity created by a firm (known as the sponsor or originator) by transferring assets to the SPV, to carry out some specific purpose or circumscribed activity, or a series of such transactions. SPVs have no purpose other than the transaction(s) for which they were created, and they can make no substantive decisions; the rules governing them are set down in advance and carefully circumscribe their activities. Indeed, no one works at an SPV and it has no physical location.
In short, SPVs are essentially robot firms that have no employees, make no substantive economic decisions, have no physical location, and cannot go bankrupt.
Given what I have said about “riba” so far, I have doubts that Allah would accept any of these.
Let me mention one last thing about “Islamic banking”. In any country where there is “Islamic banking”, “Islamic” banks and conventional banks coexist. And “Islamic” or not, all banks are subject to reserve requirements.
Do you think any bank can obtain reserves without paying interest on them?
Let me now conclude with what I started.
Is “Islamic finance” Islamic?
