Understanding Shari'a Finance

Understanding Shari‘a Finance

Published in the United States by Isaac Publishing

6729 Curran Street, McLean VA 22101

Copyright © 2008 Patrick Sookhdeo

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means electronic, photocopy or recording without the prior written permission of the publisher, except in brief quotations in written reviews.

ISBN 978-0-9787141-7-8

Printed in the United States of America

Contents

Introduction

1.   History and Theology

2.   The Controversy Over the Meaning of Riba

3.   Additional Aspects of an Islamic Economy

4.   Muslim Critique of Islamic Economics

5.   Islamist Triumph

6.   Shari‘a Finance as Jihad

7.   Dangers and Vulnerabilities of Shari‘a Finance

8.   Efforts at Regulating the Shari‘a Finance Sector

9.   The Role of Shari‘a Experts in Islamic Finance

10. Shari‘a Lists for Trading

11. Impact of Shari‘a Compliance

12. Conclusion

Appendices

Instruments of Shari‘a Finance

Shari‘a Finance in Muslim States

Islamic Economics in the West: Manipulating Darura

Shari‘a Finance in Some Other Non-Muslim States

Shari‘a

Further Reading

Endnotes

Introduction

In the last two decades, there has been a spectacular growth in Islamic economics, including finance and banking. Originated and vigorously advocated by Islamist movements as a theoretical part of their ideology that Islam must dominate all areas of life, the Islamic economy has become a powerful force in the Muslim world and more recently in the West, developing new and sophisticated financial tools and forming a lucrative international market that cannot be ignored.

According to experts, the global market for Islamic financial products in 2008 was worth over £500 billion and it is expected to grow at 15-20% a year.¹ The Islamic Development Bank reported that by the end of 2006 assets managed by Islamic financial institutions were worth $800 billion.² Islamic financial products are likely to account for 50- 60% of the total savings of the world‘s 1.2 billion Muslims within the next decade.³ A McKinsey and Company study in 2007 estimated that the Islamic banking industry would grow 20% annually until 2012.⁴ Already by the beginning of 2006 there were more than 300 institutions worldwide managing assets of $1 trillion in an Islamic way.⁵

Shari‘a finance is a new phenomenon, which suggests that it is not in fact essential to the practice of shari‘a. Shabir Randeree, managing director of the investment company DCD Group, who has completed several deals on Islamic principles, concedes this point: I think it is fair to say that Sharia law was dead and buried for a long time.⁶ It raises the question of why this kind of finance is now such a priority for many Muslims.

In fact, Islamic finance is part of the wave of Islamic resurgence and specifically part of the Islamist agenda.⁷ This is stated repeatedly in Muslim sources. For example, Zamir Iqbal, a principal financial officer with the World Bank, and Abbas Mirakhor, an executive director at the International Monetary Fund, comment:

It is important to remember that any Islamic economic system seeks consistency with Shari‘ah not as an end in itself, but its ordering is part of a much larger unified whole.⁸

Shari‘a finance is facilitated to a large extent by the vast amounts of money in the oil-exporting states, money which needs investment outlets. Western institutions and governments, eager to cash in on the growing Islamic financial market, have introduced Islamic finance and banking into the Western system, thus unknowingly encouraging the Islamist takeover of the Muslim world. The main goals of Islamic economics are political and religious, not financial, namely to gain support for radical Islam and to promote Muslim separatism. A growing concern for some observers is that the burgeoning world of Islamic finance offers terrorist jihadi groups a discreet way in which to raise and move the large amounts of money they need to maintain their activities.⁹

This book is written to raise certain issues of concern relating to the rapid progress of Islamic economics, internationally, in Muslimmajority countries, and in the West. It is not meant to be inflammatory, but to promote discussion of a subject that, although it has not yet made much impact on the public consciousness, is likely to become increasingly important.

1

History and Theology

Timur Kuran, a Muslim scholar and professor of Economics and Political Science at Duke University, claims that shari‘a finance is an invented tradition of our times that does not go back to Muhammad‘s day. Even Islamic scholars of a century ago would have been very surprised at the modern version of Islamic economics.¹⁰

Islamic economics is a creation of the modern Islamist movements, who derive the concept from various verses in the Qur’an, from some frequently quoted hadith,¹¹ and from examples in the early days of Islam. It is because the Islamists interpret these sources according to a strict understanding of key terms, including riba (which will be discussed in the next chapter), that they have developed modern-day Islamic economics. In earlier centuries such rigid views about interest and profit do not appear to have been the norm.

Early Islamic Era

It is to be noted that Mecca was the site of a flourishing trading community, Muhammad himself was a trader, and religious texts, both pre-Islamic and Islamic, frequently refer to trade and to commerce. The practice of lending at interest was commonplace within pre-Islamic Arabian society, and many sources attest to its continued practice within the Islamic commercial system in most areas of the Muslim world up to Ottoman times. Nes‘et Cagatay shows that despite what are deemed to be the prohibitions on lending at interest to be found in the Qur’an and hadith,

Advancing money on interest had a long standing amongst all countries of the Faith. There are numerous examples of transactions wherein both riba and interest were involved in Morocco, Algeria, Egypt, India, Iran and above all Mecca. Cahiz who lived in Basra in 9th century A.D. tells us in his Kitab al-Buhala about two Persian Gulf merchants who bought back for cash the same articles they has just sold on fixed term. Of the Abbasid caliphs Muqtadir borrowed some 200,000 dinars from merchants at a rate of interest of 7% between the years 912-932.¹²

Writing about what he terms the conceptual openness of Islam towards business, Mustafa Akyol, a Turkish Muslim journalist who is opinion editor and columnist for The Turkish Daily News, attributes the decline of the Ottoman Empire to the decline in trade in the Muslim world (owing to the diversion of trade to Europe):

The Islamic world was at the heart of global trade routes and Muslim traders took advantage of this quite successfully. They even laid the foundations of some aspects of modern banking: instead of carrying heavy and easily stolen gold, medieval Muslim traders used paper checks. This innovation in credit transfer would be emulated and transferred to Europe by the Crusaders, particularly the Knights Templar. So central was trade to Muslim civilization that its very decline may be attributed to changes in the pattern of global trade ... The Ottoman Empire would excel for a few more centuries, but decline was inevitable.¹³

Aykol also demonstrates that the loss of trade caused by the shift in global trade from the Middle East and the Mediterranean, following the earlier depredations of the Mongols, created the conditions for the rise of religious bigotry:

While the early commentators of the Koran cherished trade and wealth as God‘s bounties, late Medieval Islamic literature began to emphasize extreme asceticism.¹⁴

The Ottoman Empire

In the Ottoman Empire, lending and borrowing money, and obtaining loans against security that provided the creditor with considerable profit, took place from the early days of the Empire. There are many instances of charitable or pious foundations lending funds. The interpretations of the issues concerning riba have varied among the different schools of Islamic thought.

There is evidence, for example, in the case of cash waqf (an interest- bearing trust fund) that its use was acceptable according to some interpretations of Hanifi [i.e. Hanafi] Fiqh, whereas it was unacceptable to the other schools. While this controversy continued in sixteenth century Ottoman Turkey, the actual practice of founding cash waqfs apparently was established in the fifteenth century, and by the seventeenth century it was generally accepted in the Ottoman legal and economic systems.¹⁵

Mehmet the Conqueror (1432-1481) used interest-derived income to help fund the Janissary army:

The Conqueror was the first Sultan to set up foundations of which incomes – derived through loaning out on interest-rate – were used to meet imperial expenses. He had donated 24,000 gold pieces of which the interest was to be used to meet probable increases in the prices of the meat that was supplied to the Janissaries (the slave armies loyal to the Sultan).¹⁶

Ebusuud Effendi, the well-known Sheikh-ul Islam during the reign of Suleiman the Magnificent (1494-1566), granted permission for religious endowments (waqfs) to collect interest.¹⁷ There was some controversy and a variety of fatwas written on