[R-G] [BillTottenWeblog] The Money that Prays

Thu Jun 11 03:30:13 MDT 2009

by Jeremy Harding

London Review of Books (April 30 2009)

Last September, as dust and debris from the tellers' floors began
raining onto the empty vaults below, a note of satisfaction was sounded
by bankers in the Arab world. Financial institutions sticking to the
tenets of Islam, they announced, were largely immune from the debt
crisis. Devout Muslims may lend and borrow under certain conditions;
they can even buy and sell debt in the form of 'Islamic' bonds, but most
other kinds of debt trading are frowned on. Al Rajhi Bank, based in
Saudi Arabia, and the Kuwait Finance House posted impressive profits in
2008. Both have come under some nervous scrutiny in 2009 but their
ability to weather the recession that has set in behind the credit
crunch is not at issue.

Unlike most banks in the Middle East, Al Rajhi Bank and KFH are
'sharia-compliant' businesses, which means simply that they try to abide
by the evolving body of rules known as the sharia - 'the path to the
headwater' - which govern the lives of Muslims. The sharia serves mostly
as a guide to personal conduct, though some rules are drafted into the
legal codes of majority-Muslim states. It's founded, we're always told,
on revealed truth from the Koran and exemplary stories from the Hadith,
the sayings and doings of the Prophet. But the real influence of the
sharia lies in the way this material is constantly read and recast by
modern Islamic scholars, reinventing old traditions or asserting new
ones. Whatever they take it to be, growing numbers of Muslims are keen
to stay on the path when it comes to banking and finance. The global
Muslim population is upwards of 1.3 billion - roughly one in every five
people on earth - and, with a religious revival of twenty or thirty
years' standing, the way of Islam is now a crowded thoroughfare. It is
plied by a great diversity of travellers from different parts of the
world; some have money to burn, others next to none, but anybody with a
modicum of wealth is nowadays a potential opportunity for banks offering
sharia-compliant retail services: current accounts, straightforward
financing schemes and home-ownership plans.

The term 'Islamic finance' wrests a lot of activities down to a
catch-all definition. The same is true, in the financial universe, of
the words 'sharia' and 'Islam' itself. Sharia is not a single, coherent
jurisprudence for Muslims; there are various schools of interpretation
and marked disagreements within each of them. 'Islam', a broad term of
convenience for most non-Muslims, is a power-point word in the City: it
tells bankers and traders that every day for a few minutes they should
shut out the din of the money that merely talks and tune in to the money
that prays. But why bother, given that sharia-compliant finance is
probably worth less than one per cent of the total value of the world's
stocks, bonds and bank deposits? This was reckoned at about $170
trillion in 2007; it's much less than that now of course, but even so,
with a value of around $700 billion, Islamic stocks, bonds and bank
deposits remain a minority affair, just as Muslims remain a minority in
global terms.

What fascinates the markets about Islamic finance, however, is its
dramatic growth in recent years and confident predictions that it's set
to expand at fifteen to twenty per cent every year. Its allure for
moderately prosperous, pious Muslims - and quite a few non-Muslims
recoiling from the debt crisis in anger and disgust - is different. They
admire what they see as a promise to achieve stability and transparency,
and a sense of proportion about money: look it in the eye, tell it you
like it, but admit that you have lingering doubts about the transcendent
value of paper. That's an unsophisticated position, but since the credit
crunch not many people trust the sophisticated keepers of the modern
money culture; in this sense the rise of sharia-compliant products is
also a challenge to the unofficial, polytheist faith of offshore
Britannia: the worship of markets in general and financial markets in
particular.

One of the central differences between the Islamic and conventional
approaches to finance is that our own cults - which may well see a
revision before the end of this crisis - ascribe supernatural powers to
money. Cult specialists are at great pains to understand and control how
it works, but admit that it does so in magical ways that go beyond the
effects of human commerce (for the markets, too, have magical
attributes, including innate goodness). Whatever we want from money, we
suspect, as devotees, that in the end it will always behave as it sees
fit. Our awe of it is a bit like a rapt meditation on the way the shower
of gold behaves - shimmering and falling - when it cascades over Danae
in her cloister in Argos. In the story, it's merely the form chosen by
Zeus for her seduction, but in our meditation, there is no Olympian in
disguise and no intention to seduce, just the metal shimmering and
falling, in consummate self-expression, as deity and dogma. Islamic
approaches - there are quite a few - are much closer to Nonconformist
and Anglican traditions, where the divinity stands to the side of money,
reminding the faithful that he is one thing and mammon another. Money,
in this view, is an object of caution rather than superstition - and, in
spite of its dangers, a useful tool for anyone who wants to build a
respectable world, with God's instructions pinned to the wall above the
workbench.

Maybe this is why sharia-compliant products have been gaining popularity
among British Muslims, even if they differ only slightly from
conventional ones. Take the home-ownership scheme offered by HSBC's
sharia-compliant range, Amanah (amanah means 'trust' in the moral and
legal sense). Muslims are forbidden to pay or receive interest and
troubled by conventional lending, because it appears to put the burden
of risk on the borrower not the lender: in the Islamic view, no
transaction is ethical unless risk is fairly distributed between the
parties. HSBC Amanah's scheme is based on an Islamic contract known as
'diminishing musharaka' and it's approved, like all HSBC Amanah's
services, by a board of sharia scholars. A would-be home-owner must put
up forty per cent of the cost price (much less before the credit
crunch); the property is registered in a trust (amanah) as a jointly
owned asset, with the bank's majority ownership diminishing over an
agreed period, as regular payments are made; the customer promises to
buy the bank's share, and the bank promises to sell it to the client.
The property is envisaged as a set of units and the customer's payments
as twofold: one part is rental, for the right to live in it, another is
a form of unit-acquisition. The trust keeps a tally of the bank's
diminishing ownership and the growing share to the customer. At term,
the trust is dissolved and the home passes to the customer.

In the meantime, no interest has been charged. But the rental payments
received by HSBC Amanah for its willingness to share a risk will have
been reviewed - and therefore been subject to change, much like the
interest charge on a variable-rate mortgage - at regular intervals.
Indeed, rental charges are likely to track changes in a conventional
interest rate, for instance Libor, the London Interbank Offered Rate. In
the eyes of some Muslims, the resemblance of the rental element to an
interest charge casts doubt on the 'Islamic' nature of the scheme;
others are happy to say that even when two things are alike, this does
not make them identical. The questions of likeness and difference, and
what constitutes real compliance, are hotly debated among Muslims
throughout the world.

As regards risk-sharing, HSBC Amanah's scheme seems little different
from those of other lenders when customers fail to keep up payments
('default' is not a sharia-compliant word). The bank will pursue a
customer if it thinks the reasons for the failure were 'avoidable',
because this would constitute a breach of the promise to buy. But it
claims not to handle a genuine misfortune the way conventional mortgage
providers deal with a default. Both parties share any losses according
to the proportionate ownership at the time. The bank can seize the
contents of a customer's current account to offset some of its own
losses, but there the matter ends. No question of a debt-collecting
agency taking up where the bank left off. Most mortgage companies in the
US also draw a line under default, but among Islamic home-ownership
providers in Britain this approach has encouraged prudence. Amjid Ali,
who heads HSBC Amanah's UK operation, told me that in the first five
years of its sharia-compliant home-ownership scheme, he had processed
applications to the value of GBP 700 million, of which, after judicious
sifting, more than half had come good. He knew of only one case that
hadn't worked out: the customer was given eighteen months' grace, at the
end of which the house was sold. Devout Muslims who think the HSBC
Amanah approach is uncomfortably close to the way a conventional default
is handled must surely have had their views confirmed by the
government's insistence to mortgage lenders, since the recession set in,
that patience with people in difficulty would put a floor under falling
house prices and send out a 'caring' signal (reluctant bankers call it
empathy). But perhaps the same Muslims derive a certain satisfaction
from the fact that conventional mortgage lenders are beating a path to
the headwater.

A home-buyer signing up to a diminishing musharaka would have to take
out buildings insurance with a clause that covered the bank as well. But
Islamic tradition is uneasy with conventional insurance. First, there's
contractual uncertainty (the devilish detail of insurance policies);
second, a risk has been bought by another party, and this is scarcely
ever acceptable; third, far from looking like circumspection,
conventional insurance has every appearance of a punt, with croupier and
client sizing up the odds - and gambling is forbidden. An Islamic
option, now available in the UK, allows devout Muslims to subscribe
regular payments to a managed mutual fund and think of the process as an
exercise in solidarity.

This arrangement, known as takaful, was on offer from HSBC Amanah until
the end of last year, when it realised that customers found the costs
too high: ethical products, like principles, are more expensive, and
less profitable, than off-the-shelf alternatives. Collective
underwriting was the main feature of the retired model, shared with
other takaful services clinging on in a difficult market. The sharia
board instructed HSBC that if the fund was underspent by more than GBP
25 per subscriber in a given year, members could have money back or make
it over to the launch of a micro-credit scheme in Pakistan. Rising costs
are the reality of most insurance, but for takaful members they are
mitigated by the concept of 'donation'; subscribers may be grudging or
disgruntled, but tradition urges them to see the cost of mutuality as
part of their obligation to share risk with their fellow members. If it
seems unacceptably high, and there are enough takaful co-operatives
around, they're free to chase down a better option.

Takaful cover has its origins in Arab seafaring mutuals (not unlike the
whaling mutuals, centuries later, of the Quaker communities in New
Bedford and Nantucket). It is a small sector of the global insurance
business, already thriving in Malaysia and said by its advocates to be
growing throughout the world. In Britain, which prides itself on its
multiculturalism and its financial services in almost equal measure,
takaful has been endorsed by the minister for trade and investment, the
Chartered Insurance Institute and the lord mayor of the City of London.
Like all sharia-compliant products in the UK - and everywhere, as far as
I know - it's available to non-Muslims. One Muslim scholar told me that
they already account for sixteen to twenty per cent of the clientele for
Islamic retail products in Britain. No need to recite the shahada if you
want a sharia-compliant loan from the Islamic Bank of Britain, Lloyds
TSB or a UK branch of the Arab Banking Corporation.

The idea of conventional insurance as a wager is taken seriously, and
sometimes to extremes. Until he was denied the right to re-enter the UK
in 2005, Omar Bakri Muhammad, the Syrian radical, was said to drive
around uninsured on the grounds that a third-party policy with Kwik Fit
or the AA was an abomination in the eyes of God. As a proselytiser for
Hizb ut-Tahrir and later a star of Al-Muhajiroun, Bakri had a headstrong
attachment to the sharia, even when he was a guest of the Home Office.
Many British Muslims, pleased to see the back of him, thought that the
danger he courted by refusing to take out cover was itself a gamble in
which he wagered his faith against the laws of his host country.
Perhaps, if he'd still been around, he'd have joined the first British
sharia-compliant car insurance scheme, Salaam Halal Insurance, when it
was launched last summer (call centres handle inquiries 'in English,
Arabic, Bengali, Gujarati or Urdu').

It isn't just in Britain, and it isn't only in the retail banking
sector, that sharia-compliance is catching on. The last ten years have
also seen a surge in sharia-compliant securities available to corporate
and institutional investors in many parts of the world who want to stick
to the rules of the faith. It's a new impulse: in the 1970s, when the
oil-producing states were awash with money, there weren't too many
worries about petrodollars flooding into the purchase of US Treasury
bonds, even though they bore interest, and there were few alternatives
to conventional securities. This isn't the case any longer. Malaysia is
rich with opportunities for investors in compliant bonds; in Europe, the
German Land of Saxony-Anhalt issued the first 'Islamic' government bond
in 2004; the British Treasury has also looked into the possibility of
issuing sharia-compliant bills. Meanwhile there's no shortage of choice
in equities. The Dow Jones Islamic Market (DJIM) started up in 1999: it
now has dozens of indices and lists hundreds of companies whose products
are approved by its board of sharia scholars.

Nation-states may decide to devalue their currencies or privatise their
telecommunications, but the odds are against them adopting full
sharia-compliance. A few years ago Sudan had a unitary sharia banking
system, but since the peace deal between Khartoum and the non-Muslim
SPLA in 2005, conventional banking has become the norm in southern
Sudan. That leaves Iran as the only country that boasts a banking system
operating fully on Islamic principles (the evils of interest, it argues,
obtain only if the borrower and lender are wholly distinct, and since
Iranian banks are nationalised, the country's interbank lending rate is
regarded as a family foible). All other Muslim-majority states have
conventional or dual systems; in all cases, the central banks behave
conventionally.

Conversion to sharia would be ruinous for a wealthy city-state like
Dubai, thriving - until the crunch - on Western finance and the
'conventional' lifestyles of expatriates. At the end of last year, the
monthly retail-purchase interest on a Platinum Visa card issued by the
National Bank of Dubai was 2.99 per cent, while Dubai's sovereign debt
stood at 148 per cent of GDP - both well out of order for a
conscientious Muslim. Dubai has been on the ropes since last September,
but even in better times, the ruling family, like the government of
Malaysia, had encouraged sharia-financing across a range of state-funded
development projects. Gulf regimes are keenly aware of the changes in
fashion that have driven demand for sharia-compliance.

So is the private sector. Many innovative sharia-compliant instruments
have been theorised - and some of them applied - by companies whose
interest in Islam is decidedly recent, among them Deutsche Bank as well
as HSBC. Their idea is to access the large amounts of cash swilling
around to no great avail in the Gulf: an ambition reciprocated by the
owners of this money, who want to put it to work. The difference between
now and 1973 is not one of quantity: liquidity in the Gulf has been high
again, partly as a result of oil prices, partly because billions of
dollars were repatriated from the West by worried owners after 9/11, but
also because the Islamic revival has left many Muslims doubting the
wisdom of conventional investment. The diffusion of sharia-compliant
financial products has opened new routes for their money. For a while
some of it headed towards Malaysia and, until the end of last year,
plenty was creeping westward again. The appetite for world markets
remains strong, but it now answers more closely to the will of God.

The prohibitions for Muslims are puzzling to the modern commercial mind.
The first obstacle for a pious Muslim trading and banking in
conventional economies is interest, the term I've been using for the
Arabic riba, though its literal sense is closer to 'excess' and it is
sometimes translated as 'usury'. Often, in the Hadith and even more in
recent proselytising on the internet, riba is said to be 'eaten'. One of
the objections to riba is its propensity to up-end the social order. A
person who consumes riba bungles the proper management of need - his own
and his debtor's - whereupon the grand plan of give and take,
sufficiency for rich and poor alike, begins to come apart. This, as
Charles Tripp explains in Islam and the Moral Economy (2006), is also a
challenge to 'the balance and proportion of God's ordering of the
universe', which must be reflected in 'human relations'. Islamic
tradition warns that riba is likely to lead to injustice and exploitation.

There's a categorical objection, too: that money may not be conjured up
from money to generate like from like. The goods that served (we're
told) as currency in Islamic tradition - gold, silver, salt, grain and
dates - can only be exchanged 'hand to hand', that is, in a spot
transaction, without deferment; and only at parity, one quantity for its
exact equivalent, no more, no less. It's not clear why you'd want to
swap something - a gold weight, say - for its identical other, but the
point here is probably that units of currency, unlike the shirt or the
saddle for which they're exchanged, must be beyond any cavilling with
regard to value for the system to hold up: an Islamic marker set down
fourteen centuries ago against arbitrage. In a story told by Abu Said al
Khudri, one of Muhammad's younger companions, the Prophet describes the
transaction of a greater number of low-grade dates for a smaller number
of quality dates as riba.

The most famous chapter and verse on riba is in sura two of the Koran.
It warns that dealing in riba will bring on madness or 'torment' (via
'Satan's touch'), and that if you're not prepared to waive a mark-up on
a debt, war will be waged against you by God and the Prophet. One
sharia-compliant banker I met last year told me that's about as bad as
it gets. There is also an injunction to forgive debt in a broader sense:
'If the debtor is in difficulty, then delay things ... Still, if you
were to write it off as an act of charity, that would be better for you,
if only you knew' (the rules followed by HSBC Amanah try to catch
something of this). The charging of riba, it follows, is always a missed
opportunity to act generously, to give where a gift is in order, a
gesture highly prized in Islamic tradition. In a faith embodied by a
trader prophet and espoused by an impressive trading community for
which, at its height, knowledge was a key commodity, believers are
admonished not to confuse riba with trade. From the second sura, again:
'God has allowed trade and forbidden usury'.

In Economics, Ethics and Religion (1997) Rodney Wilson went through the
6226 verses of the Koran and found that 1400 refer to 'economic issues'.
It follows that there is a vast body of scholarly opinion dealing with
money. A fatwa about charging for debt, or any financial matter, issued
by a group of experts such as the Fiqh Academy in Jeddah can carry great
weight for certain Muslims, and less for others. In the sharia, like any
code which hasn't ossified, the element of interpretation is crucial and
within each of the schools of Islamic jurisprudence, there are divergent
views, especially between conservatives and modernisers and especially
about money. Yet not all the source material under interpretation is
stable or straightforward. In the Hadith, for instance, it's said that
the Prophet warned against seventy different forms of riba. These have
decayed and combined under the pressures of modernity, but there's still
room for doubt. Modern nuance can be as puzzling to a non-Muslim (maybe
even a Muslim) as the founding inventories: Wilson records a sharia
ruling in the United Arab Emirates which found that simple interest was
permissible and only compound interest forbidden.

Riba catches many non-Muslims out. After a long study of Islamic
finance, the anthropologist Bill Maurer couldn't settle on 'interest' as
the perfect translation: it seemed clear at first but became streaky as
he looked closer. 'Usury' is the obvious alternative, but are we to rely
on the older sense of the term - any charge, however small, for the use
of borrowed money - or on the way it's understood today, as extortionate
interest only? Wilson, a professor in the School of Government and
International Affairs at Durham who is intrigued by 'the influences of
religious belief on economic behaviour', holds that riba is usury in the
first sense. That's the view of most practising Muslims; it seems to
echo the meaning of the word in Deuteronomy, where Moses instructs the
people of Israel not to lend to their own kith and kin at a rate: 'Unto
a stranger thou mayest lend upon usury; but unto thy brother thou shalt
not lend upon usury'. Very close to 'interest' after all then. Yet if,
like Melanie Phillips, you believe Islamic banking in the UK merely
hastens the day when a green flag is raised over Westminster, it's
important to think of 'usury' in the later sense, in order to insist
that Muslim law is either deluded or deceitful: 'The whole issue of
sharia finance', Phillips wrote last year, 'is based on a fabrication
... sharia does not proscribe interest. It proscribes usury.' Were riba
just a term for exploitative lending, however, one or two countries
might have shuffled nearer to a unitary sharia banking system. But the
sharia has few attractions for exchequers and central banks in a modern
economy, where the interest rate is a basic tool of monetary policy. The
appeal of sharia-compliant banking and investing is in essence to the
individual conscience.

The emphasis on risk-sharing in HSBC Amanah's products - and all Islamic
products - is related to the prohibition on interest: it's obvious to
the devout Muslim that collecting interest on a debt involves no risk
worth the name; all that's required, in this view, is for a creditor to
sit back and wait. The exposure involved in the mere lending of money -
self-evident to a non-Muslim - is an unticked box in Islamic tradition,
while savings, for which non-Muslims see interest as a fair reward, give
rise to worries about hoarding: money should be out there doing the work
that enables trade to flourish. A Treasury expert would say Islamic
tradition approves of narrow money; a historian would remember Bacon's
essay 'Of Seditions and Troubles' and his famous dictum that muck is
'not good except it be spread'. (The essay goes on: 'This is done
chiefly by suppressing, or at the least keeping a strait hand upon the
devouring trades of usury'.)

Risk-sharing, like generosity, puts human relations on an even keel in
the Islamic view. A capitalist can weigh a risk but shouldn't accept a
promise from a partner to eliminate it: that would be 'risk-transfer',
which denies the inherent truth of risk. (In the eyes of sharia scholars
it also opens up a vista of potential exploitation, especially when risk
is passed on in unknowable ways, say in the form of a mortgage-backed
security with a dodgy rating.) No one must guarantee investors' money,
except against fraud.

Interest and risk-evasion are largely absent, Islamic investors believe,
from the world of stocks and shares. To invest in a company is to sign
up to joint ownership and collective risk, while ordinary shares pay
dividends not interest. Even so, there are constraints. It is forbidden
to invest in companies that have anything to do with gambling and you're
unlikely to find a business listed in the Dow Jones Islamic Markets
indexes with more than a toehold in this area of the leisure industry.
In sura two of the Koran, the evils of drinking and gambling are deemed
to outweigh their benefits - though these are granted - and maisir (the
drawing of arrows, like straws, to divine a course of action or simply
to bet) is condemned in sura two. There are other exclusions for devout
shareholders. Clearly breweries and distilleries are off-limits, along
with pork products. Pornography offends on three overlapping counts:
shame, obscenity and baghi, loosely speaking, 'transgression',
'injustice' or 'trespass', anything intrusive then, from a
misunderstanding of privacy to a foreign occupation. The DJIM indexes
exclude most media businesses but also hotel chains, where minibars and
adult channels lower the tone (basement gaming rooms too). Critically,
daily trading in debt and riba makes almost all conventional financial
institutions, including banks, unacceptable.

The way companies that survive this triage are run must next be examined
closely. Sharia scholars are unlikely to approve of a firm whose clients
owe it large amounts of money - 'accounts receivable' - or one that
depends on high returns from interest. The bigger question, though, is a
company's financial structure - how much of its capital it has raised by
borrowing and how much by selling its performance or potential in the
form of share distributions. The DJIM board of sharia advisers screens
out any company whose debt is higher than one third of its market
capitalisation (a valuation based on the total number of shares issued
times the prevailing share price).

Debt is a problem in its own right. Borrowing on a regular,
matter-of-fact basis is open to question since sharia scholars are wary
of conventional banking's dependence on interbank borrowing. The ideal
Islamic bank, Rodney Wilson told me, is financed entirely by its
depositors' money. In practice, there is plenty of imperfection, but a
compliant bank will want to stay as close as possible to this model.
Like riba, debt also raises fears about poverty and injustice (some
Muslim NGOs are as evangelical about Third World debt as their Christian
and secular counterparts). In the Hadith, debt presents a troubling face
once the possibility of deferment arises, as it might with a debtor in
difficulty. Is it a good thing or a bad thing to put off repayment? Does
it matter whether the debtor is wealthy or poor? Bad faith is always
threatening to break in on the relationship between a debtor and a
creditor: a debtor says he can pay back a loan but how can he be sure?
All this drags human relations into the realm of uncertainty - gharar -
from which faith, the discourse of absolute certainty, was supposed to
protect them. In commerce, gharar is best avoided. Whence the
persistence of doubts about contracting for things that don't (yet)
exist: tradition might allow for a joiner taking orders on furniture he
hadn't yet made, but it disqualified the sale of a foal that was still
in the body of the mare. Even the benign, textbook version of the
forward contract - a farmer and a miller agreeing a grain price ahead of
the harvest - brings a sense of uneasiness.

The concept of gharar doesn't just apply to goods whose status is in
doubt, but to bargains whose terms are ambiguous and contracting parties
whose liability is vague. Though it's often translated as 'hazard', it's
not the same as risk, which Muslim societies understand as well as
anyone. Business risk is unavoidable and begins when a cargo plane taxis
towards the runway. Gharar has more to do with the commercial
imagination running ahead of itself: speculation still troubles Islamic
scholars; many take a dim view not just of credit derivatives, the
villains of the banking crisis, but of any instrument whose value is
based on a contract for an underlying asset rather than the asset
itself. This is changing, slowly, as a growing number of experts wrestle
with intellectual tradition till they get to a place where derivatives,
some in any case, appear acceptable. But no sharia adviser would approve
of an Islamic financial institution bundling toxic mortgage debts into
securities and packing them off to market, still less buying them up. To
a conscientious Muslim, this is the perfect storm, in which opaque
liabilities, the unknown nature of the underlying debt, fair-weather
forecasts by ratings agencies, plus risk transfer and riba, conspire to
wreck large parts of the fleet. Is there anyone clinging to the flotsam,
post-9/15, who disagrees?

Non-Muslims will recognise the process of screening companies out of a
portfolio: many charities and individuals have been doing it for years.
The fashion in the West for Socially Responsible Investment (SRI), which
gained ground in the 1980s and 90s, has become a model for Muslims.
That's the view of Mufti Barkatulla, a scholar trained in Uttar Pradesh,
and now an adviser on several sharia boards in the UK, among them the
Islamic Bank of Britain and Lloyds TSB. He points out that sharia
scholars (including the ones who advise the DJIM) rule against
investments in tobacco companies and arms manufacturers, even though
Islam has no quarrel with either. The sharia is strictly speaking a
matter of law, but sharia-compliance and SRI are, in Barkatulla's sense
of it, largely about the intimate decisions of prosperous individuals
and the grandiose 'ethical' claims of big business. Sharia-compliance
doesn't have the boycott component that turns SRI from a sum of personal
choices into a self-conscious movement. Opting away from a conventional
current account is hardly the same as refusing to buy sugar grown by
slaves, as the Quakers did in the 1790s, or divesting from companies
with links to apartheid, as American universities did in the 1980s.

Even so, it's sometimes seen as a front for Islamic supremacists
scheming to overrun the West. The crusader-jihadist wars are a
favourable habitat for this kind of idea, which feeds off suspicion and
a regular diet of incidental detail. Eccentric Islamists announce that
they hope to see Britain under a caliphate; angry groupuscules and male
covens dabble in jihadist ideology and scour explosives websites; the
Archbishop of Canterbury thinks aloud on Radio 4 about the sharia as 'an
alternative to the divorce courts as we understand them' and
congratulates Muslims 'on the faithful completion of Ramadan' as though
he were handing round the sherry on Easter Sunday. With all this and
years of high-profile terrorist attacks, from New York to Lahore, plus
two wars that have not gone well, a person in Birmingham seeking a
fee-based home loan begins to look like the enemy.

Before the surge of Islamic banking, many devout Muslims shied away from
banks: for the poorly educated, everything, even a non-interest-bearing
current account, came under the general heading haram - 'impermissible'.
Banks dealt with interest, therefore Muslims shouldn't deal with banks.
Mufti Barkatulla told me he'd had to mediate in several cases where
police raids had turned up large sums of money stashed in people's
homes. Sometimes, he remembered, people were holding GBP 30,000 or more.
To the police, this was deeply suspicious; in fact people were hoarding
their way out of riba. One of the changes that sharia-compliant banking
is bringing in Britain, Barkatulla believes, is that working-class
Muslims, older ones especially, are at last shifting 'from a cash-based
to a cashless society', as Muslim professionals and businessmen did
years ago.

If Muslims can't take part in a conventional economy without breaking
the rules, at least they can compromise by keeping track of their
infringements and 'purifying' the balance by charitable giving
equivalent to the amounts in question. These self-administered
transfusions are payable over and above the mandatory deduction, known
as zakat, that devout Muslims must make and donate to charity in the
space of a year. The most common zakat payment is 2.5 per cent per annum
on cash, savings and investments less liabilities. (It can be a finicky
piece of accounting; the 'zakat calculator' at
http://www.ramadhanzone.com is worth a visit.) Unbelievers who worry
that Muslims may not wish them well - a complicated piece of projection,
but not wholly fantastic right now - should put a yellow highlight over
the word zakat, and another over 'purification'. Successful Muslims in
the West remitting to the 'poor' and 'needy', as the rules require, are
the worry here. Their money may well go to families of the unemployed in
Bradford, NGOs in Kuala Lumpur or prosthetics clinics in Sarajevo, but
it can also be headed in the direction of people under fire in the West
Bank, Gaza, Iraq, Afghanistan, Kashmir.

At the beginning of last year the Pakistani cleric Sheikh Muhammad Taqi
Usmani was a member of the sharia supervisory board at DJIM. A scholar,
judge, financial expert and prolific writer, Usmani was also involved
with a sharia-compliant mutual in Illinois which Dow had allowed to
manage its 'Islamic' fund. But there were internet murmurings about
Usmani and in the spring, the McCormick Foundation and the ultra-con
Center for Security Policy held an anti-sharia finance workshop in
Illinois where his published views about jihad and the subjugation of
unbelievers came under scrutiny. Media attention now turned to the
Illinois mutual. In 2007, somewhere in the sprawling paperwork for a
federal 'terror-funding' trial in Dallas, it had been named by the
government as an 'un-indicted co-conspirator' - one of about three
hundred - with alleged links to the US Muslim Brotherhood. These,
apparently, were forged via the Holy Land Foundation (HLF), a US-based
charity at the centre of the investigation. Usmani's thoughts on the
obligations of jihad - in the CPS presentation, they were non-ecumenical
to say the least - have done sharia-compliant finance in the US very few
favours; he's no longer a DJIM adviser. As for the Illinois mutual, it's
had to call in the American Civil Liberties Union to help it restore its
damaged reputation.

Last year, after a mistrial in 2007, a jury in Dallas found the HLF and
five of its members guilty of funding Hamas to the tune of $12 million
or more, even though the prosecution conceded that the money was spent
on medical facilities and good works. But in the US, charitable gifts,
purifications and zakat simply cannot go to Palestinians without donors
risking a federal investigation. As David Feige explained in Slate after
the mistrial, the HLF was accused of 'aiding a terrorist organisation by
helping it spread its ideology and recruit members. Translation: even
those who support good works are guilty of terrorism if the good works
make the terrorists look good.'

Governments may strive in their own jurisdictions to compound the
hardships of the Palestinians; freedom-loving think tanks may vent their
dismay (verging on disgust) about the rise of sharia-compliant
mechanisms in the West; but it is too late to quarantine Islamic
finance. Alongside the notional clash of civilisations and the real
collisions, a very different encounter with Islam has taken place in the
worlds of banking and finance. The constant exchange of money and ideas,
the morphology of ingenious instruments that can accommodate a different
philosophy of wealth-creation, the familiarity with Islamic tradition
among conventional financiers and lawyers who draw them up - all this
suggests a convergence both more real and less visible than anything
that multiculturalism in the arts, the media or interfaith groups was
meant to bring about. The old imperatives of trade and profit are at
work here, but so is the recent radical style of the money culture itself.

The 1980s may have mourned the death of avant-gardes in the arts, but
there was a thriving avant-garde in the City, which became a magnet for
cadres of bright, ambitious, untried people with remote horizons,
dealers sans frontières. By the end of the 1990s, this gilded bohemia
had a good grasp of sharia-compliance and the breadth of modern, secular
trading it could offer Muslims with qualms about the way their money had
been doubled back in the 1970s. There were fortunes to be made, and an
intellectual challenge in the air. The idea that Islamic finance was out
to hobble Western values - 'financial jihad', as the Center for Security
Policy calls it - was greeted with scepticism, even a subversive 'So
what?' Radical innovation was the watchword and the search was on for
complex products that could lock more and more transactions into a
compliant framework. Since last September, the dangers of innovation
have become clear and the ideal of reckless creativity has taken a
hammering.

The world of sharia-compliant finance is largely unscathed: Islamic
banks in the Middle and Far East have not followed the low
collateral/high borrowing regimes favoured by their conventional
competitors at home and abroad; Islamic principles have denied investors
any real access to shares in the banking sector and thus any exposure to
toxic debt. Yet there is still a hunger for access and experimentation -
what Mufti Barkatulla describes, enthusiastially, as a willingness to
take risks with interpretation itself; 'sharia risk', as he calls it -
and a fascination with the sums of money that have been made on markets
forbidden to Muslims. To that extent, convergence is still the order of
the day, as sharia-compliancy wizards, Muslim and non-Muslim, seek to
open up the trade in derivatives to the small but growing number of
devout investors who can be persuaded to bid for a calf while the camel
is still in labour.

_____

The second part of Jeremy Harding's piece on high finance in the Islamic
World can be read here: http://www.lrb.co.uk/v31/n09/hard01_.html

Jeremy Harding is a contributing editor at the LRB. His versions of
Rimbaud's poetry are published by Penguin along with John Sturrock's
translation of the letters.