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An edited version of this article appeared in the December 2006 edition of Business Islamica magazine.

In Summer 2005, Michael Chussodovsky wrote an article on LIVE 8 and its campaign to reduce global poverty ( Here is a short extract from that article:
"The concerts are totally devoid of political content. They concentrate on simple and misleading cliches. They use poverty as a marketing tool and a consumer-advertising gimmick to increase the number of viewers and listeners worldwide. Live 8 creates an aura of optimism. It conveys the impression that poverty can be vanquished with the stroke of the pen. All we need is good will. The message is that G8 leaders, together with the World Bank and the IMF, are ultimately committed to poverty alleviation. In this regard, the concerts are part of the broader process of media disinformation. They are used as a timely public relations stunt for Prime Minister Tony Blair, who is hosting the G-8 Summit at Gleneagles, Scotland. Tony Blair is presented as stepping up his campaign to convince other G8 nations 'to take action on poverty' ".

Chussodovsky has identified a methodology here. It is used by the establishment to weaken a potentially threatening movement from within and, because it is a methodology, it can be identified elsewhere. For example, with a few minor alterations, Chussodovsky's words suddenly become relevant to the Islamic banking industry:
"The Islamic banking industry concentrates on simple and misleading cliches. It uses Islam as a marketing tool and a consumer-advertising gimmick to increase its following among Muslims worldwide. Islamic bankers create an aura of optimism. They convey the impression that usury can be vanquished with the launch of more financial products. All we need is to set up more Islamic banks. The message is that Western bankers, together with their friends at the World Bank and the IMF, are ultimately committed to providing an Islamic paradigm. In this regard, Islamic banking conferences are part of the broader process of media disinformation. Leading establishment figures are often presented as stepping up their campaign to convince others 'to level the playing field for Islamic finance' ".

The platitudes and gloss of LIVE 8 are repeated in the award ceremonies at Islamic banking conferences. Interest-based loans with Islamic labels win the top prizes but few people stop to ask who exactly is glorifying this trash. Could it just be that these awards are a means of promoting the type of Islamic finance that the interest-based establishment wants? A type that doesn't threaten the existing financial paradigm? In the UK last year, the banking sector made USD 40 billion equivalent in profit. It will try to guard this profit-making machine against all possible threats, whether commercial or ideological. So what if it costs them a few hundred million to do so? To co-opt Islamic banking and influence it from within may in fact be the cheapest strategy available. A member of the design team that won a recent industry award told me privately that the product "is a sham", that he "can't believe the scholars approved it". I can believe it. The methodology is working.

One of the main factors that has propelled us to this low point is, I believe, a lack of vision and confidence among leading Muslims to develop and implement a distinctively Islamic framework for modern financial activity. It is as if critical sections of Muslim academia and business have been intellectually colonised by the West. Hence one finds little difference in the material used to teach finance courses in the Gulf as compared to universities in London or New York, and the symptoms of this malaise have spread well beyond academia. A suit and tie still seems to earn the kind of respect that a thobe and beard cannot, even in the Islamic banking industry.

During my first week of employment in Islamic finance, I suggested to a director of an Islamic housing organisation in London that we should develop together a diminishing partnership home financing product. I told him we could prove a concept together. My firm's financing know-how plus his operational knowledge would fit together nicely, I thought. We would share capital risk together. His clients need no longer fear negative equity, no longer suffer from debt stress. (This was a true diminishing partnership by the way, not at all like the interest-based loans that were to appear in the name of diminishing partnership a few years later.) After maybe fifteen minutes, the director proudly informed me that he'd recently agreed a 5 year loan at 7.5% through Barclays Bank and wasn't interested in Islamic finance. Looking back I realise the extent of my naivety, imagining that a Muslim director of an Islamic housing organisation would be interested to develop an Islamic financing paradigm. But at the time, the thought uppermost in my mind was that my firm's business plan was in real trouble. If this was the state of the Muslim community, what hope Islamic finance?

The story repeated itself as the years went by. On a visit to a Gulf-based Islamic bank in 1996, I proposed the issuance of bonds with coupons linked to project revenues and redeemable at net asset value. A client of mine needed several million dollars to finance an infrastructure project in a stable Muslim country. I saw this as a great opportunity to launch a genuinely halal financial instrument that could act as a template for years to come. This particular institution had a balance sheet in the billions of dollars, but once again I found myself speaking with men who wanted to do "money-now for more-money-later" transactions, men who seemed incapable of thinking beyond the confines of a McGraw Hill textbook. The idea of tradable revenue bonds switched them off entirely, but when an executive from a big Western bank visited this same institution to propose a commodity cash-and-carry with a limp LIBOR related return, then this was a breakthrough! Truly innovative! Soon a variety of technical sounding product names sprouted in the literature. "Revolving murabahahs" and "notes issuance facilities" became the flavour of the day. Often, there would be a feature in some trade magazine, accompanied of course by the obligatory sentence to inform us that the Islamic banking industry is an exciting niche market worth $150 billion, growing at 15% per year.

In those days, commentators were still arguing that murabahah was just a temporary phase in Islamic banking, something to get by with until a truly Islamic product could be found. People were saying "yes, I know, it's not ideal, but it's a start", "one step is better than no step", and so on. But it is quite possible that no step would have been better than that step because, in the formulation of modern murabahah, principles were established that have led us to tawarruq and a whole new selection of excuses. I am thinking in particular of the use of contract combination in the design of Islamic financial products but also, at a more general level, of the promotion of legal form over substance in so much of what the industry does. The resultant transformation has been remarkable. For decades in the Middle East, much of the Muslim public resisted tempting offers of interest-bearing loans from the banking system. The sinful connotations were sufficiently strong to block the borrowing impulse. But the emergence of tawarruq has changed all of this by providing a convenient fig-leaf for borrowing at interest. This largely explains why, for example, consumer borrowing in Saudi Arabia has leapt by more than 50% over the last year. It is therefore rather ironic to find a scholar who was for many years a leading voice in favour of those questionable legal principles now warning his ex-clients that their products are becoming indistinguishable from interest. The time to warn and prohibit passed long ago, Sheikh. Your fatawa commanded such a high price not because you were more capable than other scholars, but because you were willing to permit what others would not, and because your opinions suited what the bankers wanted to do. The result is that the money-now for more-money-later transaction has become a cornerstone of the Islamic banking business model, just as it is in interest-based commercial banking. The least we can do now is to make sure that those who opened the legal flood gates, so to speak, are not given responsibility for closing them again.

It is rather worrying that the collapse of the Christian prohibition of usury has left behind a similar story, one of jurisprudence and intellectual thought influenced by a powerful banking establishment. That influence has continued up to the present day. For example, the London Business School is a creation of the major British commercial banks and the Citibank Foundation spends much of its funds on financial education. A powerful anti-banking thesis is most unlikely to emerge under the patronage of such institutions, and the executives who grow up on that theoretical diet will know little of the interest-free economic paradigm. Yet such men are invited to develop and manage Islamic banking departments across the world.

The Western range of instruments (overdrafts, fixed income bonds, home mortgages, derivatives) are a fruit that can only grow upon a certain tree (the institutional framework of fiat money, a central bank, fractional reserve banking and so on) and that tree can only grow in a certain soil (the concepts of riba, gharar, speculation). We cannot Islamise this tree or its fruit any more than we can Islamise theft, but I am not advocating that we "go back to the Stone Age" or regress in some other way as orthodox economists occasionally suggest. We must simply plant our seed in a soil of our own, let the tree grow, and harvest whatever fruit results. Dr. Daud Bakar, who has spent many years researching the matter, finds no record of deposit-taking banks in the early centuries of Islam yet the Islamic Empire was advanced in every way given the technological limits of the time. Why then has the Western model of commercial banking been so unquestioningly adopted by the modern pioneers of Islamic banking? Did we really think that we could transplant a model that grew so uniquely in the soil of usury to the soil of Shari`ah? The scheme should have been a non-starter, but it lives, sustained by the smoke and mirrors of the Islamic banking community, producing ever more absurd semantics as the years go by.

I have believed for a long time that the Muslim world can only solve its problems if it first understands what those problems are. This seems an obvious idea to me, in Islamic banking and finance especially, but apparently not so to others. The continuing suspicions and legal confusions in Islamic banking have only reinforced the fact that something is badly wrong in the industry. It is especially sad that the industry has never seriously investigated the theory of fractional reserve banking, or recognised that it consistently predicts the development of the economic landscape around us. Without this vital re-appraisal of the raison d'etre of commercial banking, its Islamic variant will in due course be absorbed by the interest-based sector and disappear entirely. This will happen because there will be no substantive difference between the two. Already those who pull the strings at the conferences are debating whether the word "Islamic" should be dropped from the industry's marketing effort, and Harvard's 2006 conference has the integration of Islamic finance into the mainstream as its theme. Stephen Green, CEO of HSBC, goes so far as to suggest that the success of Islamic banking products "will be their acceptance in the mainstream financial community" (Islamic Banking and Finance Magazine #4, UK, 2004). No Stephen, it's precisely the opposite. The failure of Islamic banking and finance will be measured by the degree to which it is accepted in the mainstream. If such a dreadful thing should happen it will be a victory for usury and a defeat for Islam and for the suffering people of this world.

But if we are to Islamise modern day Islamic banking and finance, a number of radical policy changes are required. Where these policies cannot be implemented immediately, they should at least be put on the agenda for discussion. I do not care whether it is in the Muslim world or the non-Muslim world that such a debate takes place for they are reforms that will benefit all of mankind, as indeed Islam is meant to. Here are some of those ideas in brief:

  • Serious moves should be made to reform the present interest-based monetary system. It should be replaced over time with a commodity based currency issued under the supervision of the state.
  • A 100% reserve requirement should be imposed on the sight deposit accounts of deposit-taking institutions and the payment of returns on these accounts should be prohibited by law.
  • As a transitionary step, securitisation and tradability of real assets should be encouraged so as to provide holders of money with an alternative liquid investment that does not suffer longer term devaluation due to the operation of credit creation by the commercial banks. With the elimination of fractional reserve banking, the need for such securities will diminish substantially.
  • Investment accounts should be operated as off-balance sheet items, and should be legally segregated from the payment transmission operations of deposit takers. The investment accounts would carry a 0% reserve requirement, and returns to investors as well as withdrawal rights from the accounts would be subject to the performance and liquidity of the underlying portfolio of assets.
  • Interest-based forms of finance should be phased out over time by statute, and incentives put in place to encourage genuine alternatives such as operating leases and installment payment facilities.
  • Revenue bonds should be promoted to finance infrastructure projects where an identifiable revenue stream exists (a toll road project for example). These will be easier to administer than profit sharing securities since project revenues can be directly observed, whereas profits can be distorted through creative accounting.
  • Diminishing partnership financing (of the kind in which capital risk is genuinely shared) should be promoted for capital investment and financing of large ticket items, in property and transport for example. Insolvency due to an unequal apportionment of risk between the user and provider of funds will then be a far less frequent occurrence, but a legal and financial framework should be established to minimise the negative social and economic consequences of those cases in which investments do fail. I am thinking here of good corporate governance, proper regulation of the financial sector, the establishment of mutual insurance funds, the promotion of good portfolio management practices, and so on.
  • Interest-free loans should be provided to lower income groups for home purchase, car purchase and education through a public sector agency. This would be the lowest cost option for society to fund many such purchases, and has been operated successfully in the past. For example, until recently, interest-free loans from the government were a major source of home finance in Saudi Arabia.
  • The use of margined transactions on financial markets should be restricted in accordance with Shari`ah such that at most only one counterparty can defer delivery of a countervalue to a future date. This policy will help to reduce speculative dealing in key areas.
  • Contract combination in Islamic banking should be explicitly prohibited under industry standards because it allows the synthesis of interest-based loans in the name of Islam. This would include a prohibition on the use of mutual promises for achieving the same ends.
  • A wealth tax should be instituted where it has not already been put in place in order to address issues of wealth inequality, and to address the harmful impact of monopolistic control over mineral and other resources in certain countries of the Muslim world. Zakat upon mineral extraction is a right of the Ummah.

Away from the purely financial arena, there is a more general reform that urgently needs to be implemented. Many Muslim countries desperately need a legal framework that an honest businessman can trust, a framework that operates speedily and impartially. The benefits of such a reform for economic and social progress are hard to underestimate. When one sees counterparties based in the Muslim world choosing English law and English courts to mediate their financial disputes, this really says something about the present condition of the Ummah. To think, lands under Islamic rule were once renowned as a place of justice for all. Now, in many cases, they are not even a place of justice for the Muslims.

To move forward we must have the vision to strike out in our own direction, upon our own methodology, to grow our own tree. We should know that the way to achieve a truly interest-free paradigm is to practice Islamic finance for the sake of Allah, not for the sake of profit, not even for the sake of economic development. Then, when that paradigm has been built, the profit-seeking businessmen can join the party and play by the new set of rules. The strategy we see now, however, is the precise opposite of this. The rules are being set by the profit-seeking businessmen and the paradigm builders are being ignored. The longer we travel on this road, the harder it will be to find our way back when the time comes. But let us not be disheartened by the task ahead. Many of the problems we face are the result of an un-Islamic framework. Derivative products are a cause of volatility, not the cure for it. Interest is not a recompense for inflation, it is a cause of it. Take away that which is haram, instead of re-labelling it, and many of our economic problems will simply disappear.

I'm told that Brazil, the world's most indebted country, is cutting down its rainforest at the fastest ever rate in order to meet its debt repayments. The Amazon rainforest produces a large proportion of the world's oxygen supply, and at this rate of deforestation it will almost disappear within three generations. Where have we heard that interest might be the cause of such ecological disasters? Not in many places. It is the truth that dare not speak its name, the one the media doesn't discuss very much. In its present condition Islamic banking will not restrain this monster. Its clients will still have to repay debt at interest, in all but name. They will still have to cut down the rainforest to satisfy their repayment schedules. So it has become a matter of global ecological importance that Islamic banking adopts a different paradigm, that it becomes more of a solution and less of a get-rich-quick bandwagon.

Editorial, February 2006