Islam’s commercial revolution?
I’ve started writing about Islamic finance as of a few months ago. It’s a fascinating, bizarre market, fusing as it does the world of ancient religious law with the world of international finance. And it’s an increasingly important market, because the Middle East is suddenly where all the capital is, so companies, banks, funds and even governments are scrambling for their Koran to work out how to attract this capital.
Particularly interesting to me is the world of Islamic debt. The market for Islamic bonds, or sukuks, has grown from almost nothing in 2000, to $60 billion last year, and is forecast to pass the $100 billion mark in the next few years. The UK is expected to issue its first sovereign sukuk later this year.
Each deal that gets arranged has to get a fatwa approving it from an Islamic scholar. In practice, bankers say that there are only 10 or so Islamic scholars who are well-known and credible enough for their ruling to have weight. So you have this handful of elderly scholars in Dubai, Bahrain and Riyadh giving their scholarly okay to tens of billions of dollars worth of deals.
Their rulings are very important because the whole idea of Islamic debt is a bit shaky. Islam forbids usury, or the earning of interest on loans. Investors have to be equal partners in economic projects, sharing in profits and losses, with aligned incentives. Otherwise lenders might have an incentive to profit from a borrower’s misery, like UK banks profit from credit card borrowers’ misery.
So the structure that has been invented in the last few years backs the sukuk with assets, which the investor ‘buys’ from the borrower, and then the borrower ‘buys’ them back at face value when the bond matures. It’s a bit of a fiddle, in effect.
Now, however, just as the sukuk market is getting really big, one of the leading scholars who cover the market has ruled that 85% of sukuk are haraam, or non-compliant with Shariah. (more…)