FT Op-Ed: Debt is capitalism’s dirty little secret

Ben Funnell wrote a great piece in Financial Times:

The answer is capitalism’s dirty little secret: excessive lending was the only way to maintain the living standards of the vast bulk of the population at a time when wealth was being concentrated in the hands of an elite.

The amount by which the elite has benefited is startling, and illustrates the problem with lightly regulated free markets: the rich get much richer while the rest do not get richer at all. According to Société Générale economists, the inflation-adjusted income of the highest-paid fifth of US earners has risen by 60 per cent since 1970, while it has fallen by more than 10 per cent for the rest. As was recently pointed out in the New York Review of Books, the Walton family, of Wal-Mart fame, is wealthier than the bottom third of the US population put together – about 100m people. These are staggering statistics, confirmed by measures such as the US and UK’s ever-rising Gini coefficients, which estimate income disparity. Another way of putting this is that the share of profits in gross domestic product is at a 100-year high, or was until very recently.

Put simply, the benefits of economic growth have gone into the pockets of plutocrats rather than the bulk of the population. So why has there been no revolution? Because there was a solution: debt. If you couldn’t earn it, you could borrow it.

Interview with Ash-Sharq Al-Awsat

This interview on Islamic finance is buried many links deep on the website.

Islam in America and the Clash of Exceptionalisms

This is the summary of a khutba (sermon) that I gave at ISGH Main Center on May 8, 2009. A number of people asked me to write it down, so here is a brief summary.

One of the traditional verses to start a sermon is [59:18]:

يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَلْتَنْظُرْ نَفْسٌ مَا قَدَّمَتْ لِغَدٍ وَاتَّقُوا اللَّهَ إِنَّ اللَّهَ خَبِيرٌ بِمَا تَعْمَلُونَ

The traditional translation is: "O ye who believe! Fear Allah, and let every soul look to what (provision) he has sent forth for the morrow. Yea, fear Allah: for Allah is well-acquainted with (all) that ye do." I would not limit the collective order اتَّقُوا, which is repeated twice in the plural, I would not limit it to "fear", because the notion of taqwa encompasses God-consciousness, God-wariness, and other concepts besides fear.

Our focus for today is on the following: the verse does not say "let every soul" or "let each soul" (و لتنظر كل نفس) but rather "let a soul" (و لتنظر نفس), focusing on the community of the faithful (addressed: يَا أَيُّهَا الَّذِينَ آمَنُوا) as a single organism. In other words, although we are accountable individually, we are also accountable for the future (مَا قَدَّمَتْ لِغَدٍ) that the community as a single organism forges for itself.

This notion of humanity as a single organism is also prevalent in the Qur'an. Verses [4:1], [6:98], [7:189], and [39:6] all proclaim that all mankind were created from a single soul, e.g. [4:1], another traditional introductory verse for sermons, states:

 يَا أَيُّهَا النَّاسُ اتَّقُوا رَبَّكُمُ الَّذِي خَلَقَكُمْ مِنْ نَفْسٍ وَاحِدَةٍ وَخَلَقَ مِنْهَا زَوْجَهَا وَبَثَّ مِنْهُمَا رِجَالا كَثِيرًا وَنِسَاءً وَاتَّقُوا اللَّهَ الَّذِي تَسَاءَلُونَ بِهِ وَالأَرْحَامَ إِنَّ اللَّهَ كَانَ عَلَيْكُمْ رَقِيبًا 

"O mankind, be wary of your Lord who created you from a single soul and created its spouse therefrom, and put forth from the pair many men and women, so be wary of God whom you ask for favors and be wary of your ties of kinship, verily God is ever watchful over you."

Therefore, depending on the context, one may think of all mankind as a single organism (created from a single soul), think of any given community as a single organism, and so on. Within the context of the community of faith, the Prophet (p) said (as narrated in Muslim): 

مثل المؤمنين في توادهم وتراحمهم وتعاطفهم مثل الجسد إذا ‏ ‏اشتكى ‏ ‏منه عضو تداعى له سائر الجسد بالسهر والحمى 

"The example of the faithful in their mutual empathy, mercy, and sympathy, is like the [single] body, when one organ complains [from injury] the rest of the organs empathize through sleeplessness and fever."

Let's take this metaphor of the body to address the recent affair of Houstonian Zubair Bouchikhi. He has been recently released on bond, but for many months, his case of incarceration was discussed in our mosques and gatherings. It is normal to feel and share the pain that he and his family have suffered, just as the Prophetic Saying suggests parts of the body should respond to one another with empathy. 

Taking the metaphor of the single body to the next level, let us ask: how did the rest of the body (our community) lead this part of the community (Zubair) to incarceration in the first place? It is easy to blame overzealous informants, whose numbers in our mosques have grown exponentially in recent years as part of this lucrative growth industry of xenophobia toward Islam and Muslims. We must also blame ourselves, however, for not understanding our home (America) and the difficult transformations that it has been undergoing in recent decades.

I touched some raw nerves a few years ago when I discussed this very issue. The anger that some of you felt at that time was a natural coping mechanism to being exposed to the fact that our story as Muslims in America (which we are authoring as we play the lead roles) is different from the story that many of us think that we're living. It is safer for me to do what I have done since then, which is to focus on mainstream Islamic teaching on the importance of perseverance, God-wariness, thankfulness for blessings, etc., which would not push anyone in the congregation out of their comfort zone, and you would all leave happy. 

However, this topic of American Islam is too important to leave unspoken. If there is to be an Islam in America 100 years from now, it must be an American Islam that fits comfortably in the fabric of American society. This requires abandoning the rhetoric that there is only one Islam, which is patently false, since Islam in Malaysia is different from Islam in Indonesia, Islam in Pakistan, in Saudi Arabia, in Egypt, etc. Each community evolved within its own historical and cultural context, and although they share some common factors, they are distinctly different. I will try to push you a bit out of your comfort zone of the Orthodoxy narrative, which we feel compelled to profess on the pulpit, in order to start the community thinking about those problems. I hope not to push you too far out of your comfort zone at this time.

First, we must understand our place in American history. As Abraham Lincoln pointed out sarcastically in his debate with Stephen Douglas in 1858, the founding fathers meant that "all [white Protestant] men were created equal." This was, and continues to be, an integral part of American exceptionalism. Of course, this exceptionalism has been fading over time: We elected a Catholic President in 1960 and a black President in 2008.

It is interesting that this transformation (the fading of American white Protestant exceptionalism), which accelerated with the civil rights movements, coincided in 1965 with removal of visa quotas and the ensuing latest (and perhaps final) wave of Muslim immigrants. Earlier waves (Muslim Moorish sailors on the Columbus crew, West-African slaves, 1920s auto workers brought from Lebanon and Palestine to work in Ford factories, etc.) were different. Those of us who came in the 1960s onwards were graduate students and professionals, who built Muslim Student Associations, Islamic organizations, mosques, etc. 

Because American exceptionalism was beginning to fade when we arrived, we did not feel compelled, as Jewish immigrants felt in the 19th Century, to create a reform movement that would integrate our Islam with the dominant Protestant Christianity that defined America in her earlier phases. We were given space to practice our religion as we had in our native countries, and we were even given space to profess the Orthodoxy of Islamic exceptionalism, which sustained some of the more myopic among us into thinking that Islam can survive in America without becoming an "American Islam."

The mass murders of September 11, 2001 may have been a catalytic transformative event, by bringing more law enforcement and intelligence informants into our mosques, but our problems - and the problem of Zubair - cannot be attributed to 9/11. After all, the mass murderers of 9/11 came from somewhere else, they were not home grown. European experiences suggested that home grown problems should also be a concern, but I would suggest that Zubair's problem has a different origin.

Zubair's problem was the following: Most of us do not live the Orthodoxy, nor do we profess it. We all have family members who are the equivalent of Jewish reformed, taking the occasional drink, maybe praying only on festivals and other occasions, etc. Most of us in the mosque are probably conservative: making all prayers, fasting, etc., but not adhering totally to the Orthodoxy as professed, say, in Saudi Arabia, and generally doubtful of the Islamist myth of the "ideal Islamic society". Of course, we also have our Orthodox, who do not wish to mix with the other sex or with other faiths, but they are a tiny minority, mostly composed of non-violent puritans (ultra Orthodox in the Jewish taxonomy). 

However, most of the conservative who come to the mosque regularly want the comfort of hearing the Orthodoxy professed from the pulpit. They lionized those who professed that Orthodoxy, albeit alien to their daily lives both temporally and spatially: The Orthodoxy does not represent who we are, and it does not even represent who the Saudis are -- it belongs to a mythical place in time and space. It is accommodated in our native societies as harmless narrative, but it scared the informants who are increasingly frequenting our mosques and who were not familiar with that narrative. They did not think that this rhetoric is harmless (and maybe for good reason, given the European and more recent American experiences of home-grown cells). They found it quite alarming. The parts of our community that lionized the profession of the Islamist exceptionalist Orthodoxy by Zubair and others is primarily responsible for his predicament.

When America listened and heard our profession of the Orthodoxy of Islamic exceptionalism, this awakened the worst and ugliest of America, the part that America had worked hard for two centuries to overcome: Islamic exceptionalism clashed with and awakened American exceptionalism. America has grown since the 1960s to accept diversity, until part of this diverse mosaic began to profess its own (transnational) exceptionalism, and this made it more difficult to envision Muslim Americans as an acceptable part of the American mosaic.

I promised not to push you any further away from the comfort zone of listening to the familiar Orthodoxy: familiar because we've heard it professed from our pulpits for decades, albeit alien to who we really are. Therefore, I will stop here. However, I beg you, for the sake of my grandchildren and yours, who are and will be fully American and Muslim. They are not only Muslim Americans, but also American Muslims, in the sense that they are culturally and politically different from Muslims native or immigrant to other parts of the world. Let's drop the anachronistic and alien Orthodox rhetoric, and replace it with a narrative that is consistent with who we are as American Muslims. This is the only way to have an Islam in America two generations from now: It has to become (institutionally) an American Islam that defies Islamic exceptionalism even as it defies American exceptionalism.

Parable of the Growth Tragedy

Everyone, from IMF officials to G20 leaders to the rest of the world, are obsessed with restarting economic growth: It is the only way out of poverty, we are told. It is the only way that we can be happy, they imply.

This reminded me of a story that my professor in economic development told us nearly 30 years ago (I think that it was Galal Amin, but I am not sure; it does sound like him, though). The story goes as follows (with some license due to memory deficiencies and the desire to express some thoughts):

A man lived alone on his island. Every morning, he went out of his hut, jumped into the water, caught two fish, and then sat on the shore cooking and then eating them.

An entrepreneur watched the man for a while. Then, he approached the man, and said: "why don't you give me one of your two fish." The man said: "but I like to eat two fish, why should I give you one." The entrepreneur said: "if you give me one fish, I'll give you some of this green paper." The man said: "but I don't eat green paper, I only eat fish." 

The entrepreneur said: "you don't understand: you work harder to catch 3 fish and give me one, then you sell me that extra fish and get some green paper, once you have accumulated enough green paper you can give it to me, and I will give you a fishing rod." The man said: "but I don't need a fishing rod, I can't eat it, and I can catch all the fish that I need without it." 

The entrepreneur said: "but with a fishing rod, you can catch four fish with less work." The man said: "but I only eat two." The entrepreneur said: "So, you eat two and give me two, so that I can give you double the amount of green paper." The man said: "we've already been over this -- I don't eat green paper, I only eat fish." The entrepreneur said: "you're really slow -- when you've accumulated enough green paper, you can give them to me, and I'll give you a fishing boat."

The man said: "but I don't eat boats, I eat fish." The entrepreneur said: "with a boat, you will catch 8 fish a day with even less work." The main said: "but I only eat two." The entrepreneur said: "so, you eat two and give me six so that I may give you more green paper, and before you ask me any further, you will soon have enough green paper to have a fleet of fishing boats, and you can eat as much as you want without doing any work and just keep getting more green paper."

The man said: "maybe I am the slow one, but let me ask you this: would I not then be obsessed with useless green paper, lazy, fat, and possibly exploitative of my fishermen?" Then he added: "and with all those fishing boats, do I not run the risk of overfishing the sea to the point that we all starve in the long run?" In the meantime, "I am happy now, catching my two fish, staying fit, and having time for other things."

The entrepreneur left, thinking to himself: "I'll find somebody else who sees the brilliance of my idea, and you will someday work on one of his boats just to survive, as there will be no easy-to-catch fish readily available near the shore."

Crooks in the name of Islam

As I was thinking of a good name for the RoSCA management and insurance scheme that I wanted to propose for Islamic microfinance, I thought of the name بنك القرية (the village bank). I was extremely depressed when I googled that term, and ran across this article about embezzlement of funds. So, I stopped writing this string of posts. Then, yesterday, I was watching an Egyptian television show on Dream Channel, which covered another wave of شركات توظيف الأموال (fund mobilization companies, similar to the ones that were popular in the 1980s when real interest rates in Egypt became significantly negative). The show discussed a recent case with the wrinkle that marketing was done by the son of the Egyptian Minister of Economic Growth. We all know about the pyramid schemes in the 1980s under the same banner of "Islamic finance".

What is it about this industry that invites snake oil salesmen in religious garb?

Maybe it was a mistake even to contemplate doing research in this field. One should stay away from the snake oil salesmen lest one's reputation and religion be compromised.

A Potential Model for Islamic Microfinance II: Resisting The Banking Temptation

When developing an Islamic financial model, the temptation is very strong to try to mimic what bankers already know. Indeed, that has been the history of Islamic banking and finance: start with the conventional practice that you forbid but want to mimic (e.g. an interest-bearing loan), break it down into its pieces (e.g. money now from A to B, more money later from B to A), and then reconstruct the pieces with some degrees of separation (e.g. goods sold for money now from C to A, goods sold on credit for more money later from A to B, and goods sold for money now from B to C -- this is tawarruq if the bank conducts all three transactions, or commodity murabaha if the bank only does the first two pieces and leaves it up to B to make the spot sale to C or another party D). This is the silly model marketed variously as commodity murabaha or tawarruq (including red arrows formally):

A comment to the previous post mentioned the practice of "chit funds" in the Indian-Pakistani subcontinent, wherein participants in a RoSCA who have not yet collected the pot bid for the pot at each stage of the cycle. This adds an explicit interest rate (discount pricing, similar to the way Treasury Bills are sold) to the implicit one imposed only by the order of collection.

There are many other ways that one can explicitly add interest rates to the basic structure of a balanced RoSCA:

• Later rounds of the RoSCA, approved by jurists, as described in the previous posting, may be for larger pots. This gets around the problem of introducing interest payments within a single RoSCA cycle -- which is the focus both of commercial "chit funds" and much of the Economics literature (e.g. Besley, Coate, and Loury, American Economic Review, 2003). As I shall discuss below, I think that this focus on a single cycle of the RoSCA misses the main significance of investment in social capital: one is compelled to participate (as a later recipient) in a RoSCA when one is asked. Social capital is the availability of a pool of people willing to lend you at zero interest at some/any point in the future. One should focus on the repeated game rather than one stage.
• Participation in one or more RoSCA has been shown to increase with reported religiosity, as shown in Indonesias' participation in one or more arisan using probit and ordered probit estimation by Sowmya Varadharajan. This is very useful because an individual who cannot in one period fulfill their obligation in one RoSCA may start another of which they are the first recipient to meet liquidity problems. In other words, the social capital invested in one's circle of friends/family/... provides guaranty against default and dissolution of earlier RoSCAs. This can easily be used to manufacture banking products through staggered overlapping RoSCAs: the second recipient of the first RoSCA is simultaneously the first recipient of the second RoSCA, the third recipient is the first recipient of the third, and so on. This way, later recipients of the pot from earlier RoSCAs can receive explicit interest for the loans that they extended by receiving an interest free loan of equal or larger size. It would be very easy to mimic any amortization table using such structures (a simple spreadsheet would do).
• Unfortunately, the latter possibility makes these structures vulnerable to the creation of pyramid schemes. Indeed, in the different but related JAK system, it appears that a pyramid scheme did develop in the earlier experiment before the bank was licensed and regulated. There is an inherent pyramid scheme in every fractional reserve system (otherwise, what is the banking multiplier other than a pyramid scheme), and we have seen ample proof over the past few months to illustrate that our entire financial system is one gargantuan-sized pyramid scheme (as Krugman called it, the decade at Bernie's). Of course, one has to be particularly careful not to build  pyramid schemes in the name of Islamic finance, especially given recent decades' experiences in Egypt, Albania, and other countries (in addition to numerous unfortunate web-based pyramid schemes in Malaysia and elsewhere). However, that is a regulatory concern that extends well beyond the specific problem with which we are currently concerned.

So, it is clear that we can deform RoSCAs the way that Islamic finance lawyers and consultants have subverted classical Islamic contracts (e.g. structuring loans cynically through the trust sale known as murabaha, which was simply negotiation of a profit margin instead of the final price, trusting the seller to reveal their cost -- i.e. negotiating markup over invoice, without any credit sale component). However, this would defeat the purpose of trying to reboot Islamic finance. 

The idea is not to have as one's goal replication of the existing conventional finance. Indeed, my argument has been that if we can replicate a conventional practice, then we should use that replication as a form of juristic identification (تكييف فقهي), for example of mortgages, to permit the more efficient conventional practice in such cases. In cases where we or our target audience find a conventional practice to be forbidden Islamically, the objective should be to take an existing practice that is generally accepted by the Muslim public, and (credibly) approved by religious scholars who issued their opinions independently from institutions that make profits based on their religious opinions, and then to see if we can make the practice (e.g. RoSCAs) more efficient. In this quest, we should keep the structures as simple as possible, in order to avoid confusing religious scholars or potential customers.

My proposal (to discuss in the next post) is to organize the leveraging of social capital inherent in RoSCAs using a hybrid of the mutual banking structure of JAK (which is conducive to development into a credit union model) and the theory of takaful (literally: mutual cooperation, but the term is used for non-commutative forms of insurance marketed by Islamic finance providers, albeit not structured properly as mutual insurance).

A Potential Model for Islamic Microfinance I.5: RoSCA permissibility

In my previous posting, I referred to this article for a summary of juristic opinions in Saudi Arabia on the permissibility of Rotating Savings and Credit Associations known as gam`iya or jam`iya in most Arab countries. Here's a translation of this article:

Workers' Cooperative (جمعيات الموظفين)

Among the popular financial dealings between people is that known as "workers' cooperative." There are three main forms of such cooperatives as explained by Associate Professor Abdullah bin Abdulaziz Al-Jibrin in the Teachers' College in Riyadh:

1. A group of people agree each to pay the same amount each month. At prespecified periods, they take turns collecting the entire pot. A full round is finished when each member has collected the pot once. At each step, the payments are equal, and the pot is of the same  size. Thus, everyone pays the same and collects the same as everyone else. The cooperative may continue for two or more rounds if all parties wish it. Most often, the "banker" of the cooperative collects first followed by the next person to join the cooperative. Sometimes, a lottery determines who collects if all parties to the cooperative were equal. At other times, the one most in need collects first.
   
2. ...
3. Another variation would require that two or more rounds must be completed, with the order of collection changing from round to round so that the first borrower in the first round would be the final collector in the second, and so on.

... This is an old practice that has been addressed by classical scholars, including Abu Zar`a Al-Razi, who was one of the leading narrators of Prophetic Traditions, and he indicated that it is permissible, as stated by Dr. Khalid Al-Mashqih, a Saudi scholar.

Scholars' Rulings on the Practice

... Contemporary jurists have issued two opposite opinions:

1. One group of scholars forbid such cooperatives. This group includes Sh. Abdulaziz Al Sheikh the Mufti of the Kingdom of Saudi Arabia, Sh. Saleh Al-Fawzan, a Saudi scholar, and some members of the Saudi Council of Major Scholars
2. The majority (جمهور العلماء) opinion among contemporary scholars is permissibility of this practice. This was the opinion of the late Sh. Bin Baz, the late Sh. bin `Uthaymin, Sh. Muhammad Salih Al-Munajjid, Sh. ibn Jibrin, Dr. Abdulla Al-Faqih, and other scholars, including the majority of the Saudi Council of Major Scholars who thus adopted this majority opinion as its official position in opinion #164 dated 26/2/1410 H, during the 34th round presided upon by the late Sh. Abdulaziz bin Baz...

Grounds for disagreement

The reason for differences in opinion regarding this practice is how it is classified juristically. Some viewed it as a loan that is beneficial to the lender, and thus forbade it, and others saw it otherwise and permitted it.

The reason that some saw it as a beneficial loan is that participants extend a loan with a stipulated condition of another later loan, which is beneficial. Thus, those who adopted this position cited the Prophetic Traditions: "every loan that is beneficial to the lender is [forbidden] riba" and "if one of you makes a loan and then receives a gift or a favor to ride the borrower's animal, then he should neither ride nor accept the gift, unless such courtesy had occurred before" (reported by Ibn Majah).

Those who permitted the practice argued that the benefit that accrues to the lender does not result from any financial loss to the borrower. On the contrary, they argued, the benefits were mutual and virtually equal. Thus, both the lender and the borrower are beneficiaries, without any harm imposed on either party or any benefit at the expense of the other. In this regard, the benefit that is forbidden in loans is the type that accrues only to the lender. However, mutually beneficial loans that benefit both lender and borrower are permissible...

Those who permitted the practice also argued that the default ruling for financial transactions is permissibility. Therefore, prohibition requires proof, and there was no valid proof for prohibition in this case. On the contrary, they argued, this is classified under mutual assistance, good charity, and assistance of fellow Muslims.

In addition, the "proof" of prohibition is based on the Tradition "every beneficial loan is [forbidden] riba", which is a weak tradition with faulty chain of narration. The scholar of Tradition ibn Hajar said that its chain of narration is weak. In this regard, the weak tradition was admittedly accepted as a juristic rule, but not every benefit in a loan is deemed forbidden. The other tradition ostensibly presented as proof for forbidding the practice is categofically invalid, as Al-Haythami said in Al-Zawa'id: "it contains `Utba ibn Hamid Al-Dabi, whose narrations are rejected by Ahmad and Abu Hatim. 

Therefore, all proofs of prohibition are weak. In contrast, the proofs of the majority who permitted the practice is much stronger...

In this regard, the great scholar ibn Taymiya listed examples of permissible mutual benefit when he said: "There is no harm for a farmer to say to another: `help me to do my work and I will help you to do yours; you work with me today, and I work with you tomorrow'."

In summary, "financial cooperatives" (الجمعيات المالية) are permissible Islamically, and it is best to use collateral or guaranty (ضمانات) for participation, to minimize disputes, and to document the mutual debts for all participants in a manner that guarantees each party's rights. 

(My emphasis at the end, because this is rarely done in a systematic way: which is the opportunity for microfinancial improvement)

The Egyptian Dar Al-Ifta (opinion #5568) went further by arguing that such mutually useful practices are not only permissible, but commendable because mutual cooperation is one of the best religious works.

A Potential Model for Islamic Microfinance I: Introduction

I am embarking on a potential research program with established researchers in developing-country microfinance experiments (the research team of Dean Karlan). I am not sure if this research program will take off the ground (law enforcement logistics of doing anything in majority Muslim countries are often difficult). I gave a couple of presentations on the proposed structure, including in Abu Dhabi, hoping that somebody from ADIB would be there to give us feedback and possibly to facilitate the experimental study, but had no luck.

Part of my thinking was motivated by a senior thesis on which Mubeen Khumawala, a student at neighboring University of Houston, asked me to serve as external reader. I had known most of the details, but was struck by the sheer magnitudes:

• Approximately 528 million poor (below $2/day) Muslims in five countries: Indonesia, Bangladesh, Pakistan, Nigeria, and Egypt
• Approximately another 100 million poor Muslims in India
• Incredibly high degrees of financial exclusion of Muslims in OIC countries and India (67-80% of Muslims have minimal or no contact with the formal banking sector)
• A recent Consultative Group to Assist the Poor (CGAP) study by Karim, Tarazi and Reille (2008) reports results suggesting that large numbers of poor Muslims in various countries reject all forms of loans, including Grameen-style microloans, on religious grounds
• "Islamic microfinance" using the same ridiculous and insulting (sorry, I couldn't resist taking another shot at the nonsense that is marketed in the name of Islam) 1970s-style murabaha property flipping and other inefficient structures has failed miserably, keeping this subsector to 1% of overall microfinance even though Bangladesh, the epicenter of microfinance, is obviously mostly Muslim. Apparently, the poor illiterate Muslim majorities want something more than the cosmetic and expensive "Islamic" brand name

I have spent far too long arguing with highly-paid bankers, lawyers, and Islamic banking experts regarding the permissibility of conventional mortgages, and suggesting to their potential customers that their portrayal of Islamic jurisprudence is incoherent (e.g. what constitutes a loan as qard and what does not). With mostly illiterate poor populations, that is of course a lost cause, and the highly paid bankers, etc. have -- so far -- made it clear through their actions that they have no interest except for public relations purposes.

The structure that I proposed is a hybrid between the interest-free model of the Scandinavian JAK bank and the well known Rotating Savings and Credit Association (RoSCA) models that are popular in all Islamic societies (as well as non-Islamic developing countries). This model is known in the Egypt, where I grew up, and the rest of the Arab world as gam`iya (financial cooperative). It is a practice that the majority of traditional jurists, including the late Bin Baz have approved.

The need for a hybrid of the two interest-free models follows from shortcomings of each:

• The JAK model is very much focused on mortgage financing, where member loans are secured by the properties financed. (i) This makes it applicable, for example, as an alternative structure for North American or other countries' mortgage markets, but not for the microfinance sector. (ii) Also, the JAK model lacks the ability to utilize social capital through peer-monitoring, which is indigenous to RoSCA structures and successfully adapted by Dr. Yunus in his group-lending Grameen model.
• The RoSCA model suffers from (i) fragility, because one person's withdrawal would ruin the finance facility, (ii) symmetry of contributions to the pot, which makes it difficult for financing smaller consumer and larger business microloans simultaneously, (iii) does not have the flexibility to provide equity positions and/or return on savings for older/richer participants who do not need to receive the pot but would like to participate and receive a return, and (iv) is not conducive to growth and institutional development into bank or credit union structures.

I plan to summarize my proposed hybrid structure in the next posting.

Rebooting Islamic Finance: It's Time

I have been very critical of Islamic finance as it has evolved since the 1970s: an inefficient part of the international financial system that served no purpose except line the pockets of lawyers and experts. Now that the tools of structured finance have been proven to be as much a disaster as others and I had warned, perhaps participants in this industry - many of whom are sincere, I am sure - will hopefully abandon their response to my critiques: "what is wrong with SPVs, that is how all finance is done with success." 

Perhaps now is the time to switch from negative criticism to positive suggestions of how to do things differently.

This is not an area where I believe in keeping ideas to oneself until one publishes them or makes some money in consulting fees for proprietary structures. Also, it is an area where open discourse may help to improve upon proposals...

So, here we go, starting with possible innovations in microfinance structures that I hope to start investigating experimentally this summer: و على الله قصد السبيل

Substance over form, finally!

Following early statements by Gordon Brown on the need for proper financial regulation, Secretary Geithner has finally decided that economic substance should supersede form in financial regulation

To that end, Mr. Geithner said: “Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take,” Mr. Geithner said. “We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.”

His full statement is available here.

Now, if only an Islamic jurist would say the same... Oh, wait a second, they have been saying that for centuries, including ibn Qayim in I`lam al-Muwaqi`in and the Ottoman Empire's jurists in Majallat al-Ahkam al-`Adliyya. The problem is not about rhetoric, but practice and implementation. I hope for everyone's sake that "substance above form" will become the practice in all financial circles.

More on rating agencies and sukuk

During the boom years, many were cheering the absurdly mispriced and risky sukuk issuances, and the rating agencies who approved them. I have listed a number of the problems with sukuk structures in my book and elsewhere. Now, it has become clear that those S&P and Moody's were simply engaged in a race to the bottom:

Oct. 22 (Bloomberg) -- Former executives from Standard & Poor's and Moody's Investors Service told lawmakers today that credit raters relied on outdated models in a ``race to the bottom'' to maximize profits.

Jerome Fons, a former managing director of credit policy at New York-based Moody's, told the House Oversight and Government Reform Committee today that originators of structured securities ``typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.''

Representative Henry Waxman, the committee chairman, said that the recent history of the credit rating companies ``is a story of colossal failure.'' ``The result is that our entire financial system is now at risk,'' Waxman said.

Thank you, Secretary Powell

Finally, a man of the stature of former Secretary of State Colin Powell has said it:

Mr. Powell mentioned Mr. Khan’s death to underscore why he was deeply troubled by Republican personal attacks on Mr. Obama, especially false intimations that he was Muslim.

Mr. Obama is a lifelong Christian, not a Muslim, he said. But, he added, “The really right answer is, what if he is?”

“Is there something wrong with being Muslim in America? No, that’s not America,” he said.

The quest now is to integrate our thought not only as fully American but also as fully Muslim in the internal American thought processes about financial regulation, international relations, and other areas of political discourse, without being dismissed off-hand as being somewhat alien to our homeland of choice. This is not in any way a violation of the separation of Church and State. Our religious choices determine our preferences for society, and bring a wealth of human history and experience that should enrich the political process without tarnishing its areligious nature. 

It is unfortunate that majority Muslim countries of today have suggested that Islam does not allow separation of Church and State -- contrary to historical evidence dating back to the immediate days following the death of the Prophet (p) -- thus preventing their own wealth of history to inform their policy making positively. It is difficult to blame poorly informed westerners for irrational fear of everything "Muslim" when Muslim leaders in various parts of the world are actively nurturing this fear toward political and financial ends.

"Islamic Economics" and the Financial Crisis

A prominent Islamic economist emailed a description of the current financial crisis and a supposed solution in Islamic jurisprudence, which he characterized by morality, emphasis on equity, and the prohibitions of riba (which he equated with interest) and maysir (gambling). The following was my response:

I think that the broad lines of the current crisis are indeed as you have described them. I'd be happy to discuss the specifics at a later stage, but I'd like to take this opportunity to disagree respectfully regarding the classical "Islamic economics" solution that you are advocating. Let me organize my thoughts in four main points:

1. There is a fundamental tradeoff, as you have suggested, between growth and efficiency on the one hand and equity and stability on the other. In a world where some societies choose a high-growth path and others choose the equitable-stable path, the former societies eventually invade or otherwise overtake the others politically and economically. Hence, there is need for a social contract, which you have put under the banner of morality, to shepherd mankind to the safer more equitable path.

2. Morality cannot be legislated, and reliance on social and economic players to exhibit moral conduct voluntarily is a form of Utopianism. There are numerous verses in the Qur'an and numerous Prophetic Ahadith that explicitly characterize mankind as gluttonous wealth seekers. Pious members who are satisfied with little, etc., as you describe, were a minority even immediately following the death of `Umar ibn al-Khattab, as evidenced by the grand fitna and the later paths pursued by the Umayyads, the Abbasids, etc.

3. Islamic jurisprudence used and refined many of the earlier scriptural and human-legal provisions for creating the more equitable and less turbulent path, through restrictions on leverage, fragmentation of estates, redistribution of wealth, etc. In the arena of finance, the prohibitions of riba (absolute) and gharar (relative, but absolute for the extreme of maysir) can be seen as regulations of risk taking. In the ancient world, this was accomplished by permitting certain contracts and forbidding others. I have argued that adoption of this approach in the modern era of financial engineering, where transaction costs of circumventing the prohibitions have become minimal, is incoherent.

4. The mirror-image-problem of this product-oriented regulation of financial markets has been at the core of the current financial crisis. Insurance markets have been generally regulated to keep them from becoming gambling (maysir) tools. For instance, I cannot buy an insurance policy against another person's losses, lest this may be at best a form of gambling and at worst an incentive to harm that other. Credit default swaps and other modern derivatives may equally be seen as forms of insurance, but ones that lack sufficient regulation to prevent gambling. I was tempted in July to buy put options on oil, thinking that a global recession is inevitable and the price of oil will have to fall. I stopped only because I think that this is a type of maysir, because "markets can remain irrational indefinitely, certainly longer than I can remain solvent." Numerous others made the bets, I am sure, and conditional on counterparty risk, some have made small fortunes doing that. The incentive to gamble is simply too great. 

There is nothing uniquely Islamic about modesty, contentment, shunning risk and gluttony, or even the prohibitions of riba and maysir. Even those who do not believe in revelation (to Moses, Jesus, or Muhammmad; p) can be convinced that those ancient prohibitions and injunctions were distillations of human wisdom over the millennia. Calling those injunctions and prohibitions "Islamic" strikes many as exclusionary and encourages others to engage in hateful and myopically-triumphalist celebration of our collective failure (Islamic finance is just as guilty as conventional finance for bringing about the current crisis).

It is not clear that majority-Muslim societies are particularly better equipped to solve the collective-action problem required to find a low-growth-low-risk social contract. In a world where others will pursue higher-risk-higher-growth paths, it is not even clear that pursuing that lower-risk-lower-growth path is warranted (isn't that how Madinah lost to Damascus during the time of Mu`awiyah?). Is it possible to reconfigure our rhetoric to make it less exclusionary (avoid separatist and triumphalist use of the "Islamic" brandname) and to convince multiple populations at very different stages of economic development to shun fast growth in favor of greater equity and stability? The dialogue would likely be very similar to the one witnessed in negotiations over polluting rights. Perhaps we can learn more from the successes and failures of this global dialogue than we can from inspecting ancient laws for outdated modes of regulating financial markets.

Definancialization

It is most unfortunate that "Islamic Economists" over the past two decades have given in to the "Islamic Finance" paradigm of replicating conventional financial markets and institutions in Islamic garb. A few of us have tried to argue that the essence of Islamic jurisprudence and earlier religious teachings on finance is shunning excessive trading in risk (indeed, I have argued that the forbidden gharar is "trading in risk" and that the forbidden riba is "trading in credit," which is an extreme form of gharar). Of course, the financialization of the U.S. and global economies, and the simultaneous financialization of Islamic economic thought and practice over the past three decades, has been primarily about intensified trading in credit and risk through multiple "innovative" approaches ranging from securitized debt instruments to derivatives.

Innovation by itself is not a bad thing, and one expects new more efficient financial instruments to evolve over time. The problem has been an excessive emphasis on financial profit-making, at the expense of substance. My argument for mutualization was thus predicated on eliminating the profit motive from finance, thus reducing the incentive to take very large risks. My argument with Dr. M. Nejatullah Siddiqi (posted on this blog two and a half years ago) shows how some of the more conservative Islamic economists gave in to the temptation for faster growth at the cost of increased risk. 

Today, an article quotes Stiglitz on the folly of following the hare-vs-tortoise recent western model of capitalism:

"People around the world once admired us for our economy, and we told them if you wanted to be like us, here's what you have to do — hand over power to the market," said Joseph Stiglitz, the Nobel Prize-winning economist at Columbia University. "The point now is that no one has respect for that kind of model anymore given this crisis. And of course it raises questions about our credibility. Everyone feels they are suffering now because of us."

Now we should probably see many of the terribly-designed and labeled sukuk backed by shoddy risk analysis and myopic for-hire interpretation of Islamic jurisprudence will begin to collapse. The model of Islamic finance that has emerged since the roaring 1980s should come to an end. Many have blamed the current financial crisis on the greed of financial-market participants. Some of the top bankers and most of the top "Shari`a scholars" will probably keep the millions that they have "earned." One of the prominent Shari`a scholars from the Gulf, whom a central banker from the Middle East said netted $3 million last year, once chastised me in KL, Malaysia, for questioning the fees that they collect: "the lawyers make more money," he said. How many, I wonder, will still feel that they have earned that money.

Religion as the solution to collective action problems

In the West, and in westernized circles in the Islamic world, religious movements are generally regarded with great fear and trepidation. Many of the images associated with the Taliban in Afghanistan, the post-revolution Iranian quasi theocracy, and even the religious establishment in Saudi Arabia, suggest that "Islam is the solution" is at best a vacuous slogan, and at worst a dangerous recipe for replacing one tyranny with another, or creating a cooperation between tyrannies: one secular and military, and the other religious. 

Those worries are justified. Indeed, mixing religion with identity politics and sociopolitical activism has been counterproductive more often than not, in Islamic as well as world history. The political platform of the Muslim Brotherhood in Egypt, which was published last year in draft form, suggests that the leaders of today's better-organized Islamist groups may lack the political acumen to produce viable alternatives in the short-to-medium term, as Diaa Rashwan -- arguably the best contemporary analyst of Islamist movements -- has suggested. 

The obvious success story that Islamists would cite, and anti-Islamists would challenge, is the current Turkish experience with Justice and Development Party. The challengers are correct, of course, that Turkish circumstances are different from those of other majority-Muslim countries -- for one thing, the mainly Sufi Turkish Islamist tide of the Nursi-inspired Gulen is very different from the poorly-named "Salafi" tide exported from Arabia to most other parts of the Islamic world over the past four decades. Those fundamental differences notwithstanding, and earlier failures of the AKP's Erbakan-led predecessor, the Turkish experiment, and its lessons for other Muslim-majority countries, should not be minimized.

At a recent conference in Cairo, I asked the speaker -- who was speaking about collective-action problems, and the pattern of replacing one corrupt leadership with another in various parts of the developing world -- I asked him why he had omitted religion from his analysis. Doesn't religion by its very nature constitute a long-term social contract that solves even the most difficult collective action problems? I was thinking at the time, of the Qur'anic verse [3:103], which explicitly advocates unity through religion as an alternative to social dysfunction, which currently plagues many majority-Muslim countries. The speaker admitted that Islamist groups have in fact been more successful even than their countries' governments at providing social services and otherwise solving collective action problems.

The problem, of course, is that seeking the solution in religion is a very risky strategy. The examples of Taliban, Iran, Sudan, etc. should not be minimized either. The fear is not accurately explained in the glib Bernard Lewis warning that political Islam would be "one man, one vote, once." The fear more generically is that political leaders who reach positions of power on religious platforms tend to claim Divine authority, directly or indirectly. This makes them less open to criticism by those who question their views on secular or alternative-interpretation religious grounds. Thus, one corrupt and misguided secular-military tyranny is more than likely in this scenario to be replaced by a corrupt and misguided pseudo-religious tyranny.

In the absence of any other mechanism for political opposition to the status-quo regimes to solve their collective action problems, one must therefore ask three questions:

1. Is the status quo sufficiently destructive to justify playing the very risky political-religion card? Some contemporary analysts seem to conclude that the risk of invoking anti-humanist fundamentalist-religious solutions is greater. A counter argument would be that elitist humanism, and condescending characterizations of religiosity of any kind as fundamentalist and anti-humanist, betrays a fundamental misunderstanding of the tenets of humanism that the protagonist purports to champion.
2. Is it riskier to allow political-Islam movements to learn on the job? Al-Turabi is arguably one of the most enlightened and sophisticated of the proponents of political Islam, and yet, his Sudanese political-Islamic experiment of learning-by-doing was catastrophic. 
3. Is it possible to integrate political-Islamist movements in more seasoned opposition and ruling-party platforms? This approach seems to have had a checkered history in contemporary politics, dating back at least to the short-lived partnership of the Muslim Brotherhood with the Egyptian Free Officers before and shortly after the 1952 revolution/coup, serving more recently as legitimacy and political vehicles for presidents as different as Egypt's Sadat and Pakistan's Zia Ul-Haq, and making carefully-managed parliamentary appearances in Jordan, Egypt, and elsewhere. Those experiments seemed promising in principle, but have always failed because the group in power truly has no incentive to concede it to political-Islamic groups, neither in the short nor in the long run.

This brings us back full circle to the Western and western-minded apprehensions regarding political Islam: Yes, this is a force that may solve today's critical collective action problems of the Islamic world and replace the current dysfunctional social environment with a viable social contract. However, unleashing the forces of religious identity politics and incoherent pietist rhetoric may prevent religion from playing this positive role; and may even exacerbate social, economic, and political problems, as many failed experiments have demonstrated. Can we afford to wait for "destructive chaos" to produce functioning social mechanisms? Can we afford to let political Islamists learn from failures of incoherent-pietist regimes so that they may find a realist Islamic-democratic template that embodies the true essence of religious social contracts?

We cannot expect any elected official(who worries about her or his political future and legacy) or business community (who worry primarily about their immediate economic fortunes) to contemplate those questions seriously. Likewise, we cannot expect the ideologues and the political opportunists who are most likely to influence political-Islamic movements, either to find viable solutions or to convince the political and business elites to adopt them.

This leaves us with the general public, who stand to win the most if the religious-political solution succeeds in delivering a functioning social contract. The collective action problem of forging this social contract appears to require solving what appears to be a more difficult collective action problem of channeling increased religiosity into viable political processes. This is often possible -- especially in the Islamic world -- only through the emergence of highly- charismatic (almost-prophetic) leaders who can articulate the vision for that social contract. Without the support of military, political, and business leaders, such leaders are highly unlikely to succeed, or even to survive. 

All hope is not lost: The tide of increased religiosity has begun to reach those upper echelons of military, political, and economic circles. Unfortunately, it is a type of religiosity that is highly personal and generally divorced from any notion of changing the political and social status quo. A religious-reformist agenda, such as that of Muhammad Abduh in the early twentieth century, may tap into that swell of religiosity to forge the nucleus of a new social contract and functioning Islamic-democratic political system. Candidates for leading this reformist tide must resist political, financial, and social bribes, while avoiding the risks of offending the various powers' vested interests. This is a very tall order. On the other hand, it is also the nature of religiosity that one never loses hope, and waits -- despite all expectations of failure -- for a successful reformation.

New York Times Magazine Article on Shari`ah (Islamic Law)

New York Times Magazine Article on Shari`ah (Islamic Law):

In fact, for most of its history, Islamic law offered the most liberal and humane legal principles available anywhere in the world.

The article is well-researched -- distinguishing between Shari`ah and fiqh, and outlining the deficiencies and advantages of various common law traditions. The political dimension of Islamism is generously portrayed as an issue of "rule of law:

The answer lies in a little-remarked feature of traditional Islamic government: that a state under Shariah was, for more than a thousand years, subject to a version of the rule of law. And as a rule-of-law government, the traditional Islamic state had an advantage that has been lost in the dictatorships and autocratic monarchies that have governed so much of the Muslim world for the last century.

Finally, a good western understanding of the rise of political Islamism. Thank you Professor Feldman. Needless to say, there are vulgar understandings of the nature of Islamic law on the part of many Islamists as well as many western observers. The debate over exactly what the Shari`a entails (i.e. contemporary fiqh) is still in its earliest stages.

Rating agencies, shoddy risk analysis, and sukuk

A recent article in the Wall Street Journal identifies the role played by rating agencies in perpetuating the credit boom that is currently imploding. The primary fault of investors, of course, is that they believed that credit ratings of new and unknown instruments, such as credit derivatives, are meaningful in any way. It is obvious that credit and asset-backed derivatives are signficantly different from the types of bonds that rating-agency experts are qualified to to assess (in terms of default risk).

In the case of sukuk, the silly bonds marketed as "Islamic" by rent-seekers, there are numerous legal risks that are very poorly understood, including by the lawyers and bankers who structure the instruments. The problem in this case is self-inflicted: the lawyers want to structure the instruments, e.g. lease-backed bonds or sukuk al-ijara, in such a way as to assure "Shari`a scholars" that bond-holders have material ownership of the underlying assets and receive "rent" rather than "interest". At the same time, they want to assure markets and rating agencies that the instruments are indistinguishable from conventional bonds, where the only mateiral risk is credit risk of the issuer. The rating agencies read the legalese and conclude that the lawyers are right: the "Islamic" structure is merely a fiction, and there is only credit risk. They give the sukuk the same credit rating they would give any other unsecured bond issued by the same entity (see, e.g. S&P's analysis of Qatar's Global Sukuk, where the rating was based on the soundness of the Qatari economy, without any significance lent to the asset ostensibly being leased back by the issuing SPV).

Unless and until we have a high-visibilty case of bankruptcy, we will not know with any certainty who owns what in the maze of SPVs that lawyers and structured financiers love to use. Until then, many will continue to line their pockets with legal, structuring, and advisory fees, as they congratulate themselves on "innovative Islamic products." What a shame!

Zakah and Waqf -- Form & Substance Revisited

Dr. Fahim Khan recently made an argument on IBFnet that we put the cart before the horse by jumping to Islamic banking and finance, which put the industry in bankers' hands, and therefore turned to satisfying historical forms of Shari`a, without any interest in substance. His prescribed cure is to turn to religious and historical Islamic institutions, Zakah and Waqf, focusing on Islamic economics, rather than merely finance -- which will take care of itself if we define proper economic objectives. I think that there is merit to this argument, but I fear that it is not sufficient.

First, and very briefly, financial considerations have been at the forefront of most economic activities nowadays. If we look at the real estate boom in Saudi Arabia, where Dr. Fahim lives, we will see that it is merely a mortar-and-steel manifestation of a financial bubble (that showed up first in the Saudi and neighboring stock markets, and in commodities, and then ultimately in the ridiculous waste of petrodollars in the building of vacant tall buildings in Dubai, Bahrain, Qatar, etc.). In the U.S., where I live, finance has also taken over much of what we do, with hedge funds and private equity firms buying and selling companies to turn a quick profit, rather than to restructure them and make them more productive.

Second, and more importantly, I fear that focusing on the historical institution of Waqf can be as detrimental to Islamic economics as focusing on sales and leases has been detrimental to Islamic finance. Moreover, the focus on Zakah is also misplaced given the narrow religious frame that real Islamic scholars (most notably, Dr. Al-Qaradawi) have imposed, despite the attempts of economists such as the late Dr. Mahmoud Abou El Saoud. Let me elaborate.

Problems with Awqaf

There is nothing distinctively Islamic about Waqf. At the advent of Islam in Arabia, there were two models of charitable trusts that the Muslims could have borrowed: the Roman and the Persian. The first texts in Sunna tell us that the first waqf in Madina was formed by one of the Medinese wealthy Jews, and then the second was by `Umar ibn Al-Khattab (r). In the second Hadith, the Prophet (p) simply told him "make it a waqf," clearly establishing that this was already a known practice. In fact, the Islamic Waqf, as the rules were later established by scholars, mimicked the Persian system. As historians have shown, this system of waqf then evolved with different rules, as scholars were very liberal in awqaf, since their essence
was charitable. In fact, however, awqaf quickly became means of circumventing inheritance rules -- to avoid division of property -- while ostensibly remaining charitable due to clauses that they became so once the waqif's genetic line ended.

Timur Kuran has written extensively on the inefficiencies of awqaf in Turkey and elsewhere in the Ottoman empire. The Iranian Bonyads continue to be a major source of monopoly power and inefficiency in the economy.

Of course, that does not mean that the trust/waqf model is inherently inferior to corporations, as Timur has argued. Indeed, one of the most powerful monopolies in the previous round of globalization around the turn of the 20th century was Standard Oil, which was a trust -- hence the U.S. has "anti-trust" rather than "anti-monopoly" laws, even when applied to corporations such as Microsoft.

Historians have traced the roots of the Anglo-American trust system to Awqaf, which King Roger II knew during his youth in Sicily. However, that model evolved in different directions, giving us much more effective trusts in the west today than the awqaf that have survived governments' attacks in the Islamic world. The evolution of the trust as an "un-corporation" might have given us a superior institution, as some legal scholars have argued recently, see Robert Sitkoff's papers on the topic. However, the Islamic world has in fact failed to make awqaf even play their own traditional role, let alone to become an engine for economic growth and development.

Thus, I fear that our focus on awqaf as a historical institution will put us in the same trap of looking at it as some kind of sacred institution, ignoring that there are no set rules for awqaf that are written in stone, and adhering again to form rather than substance.

Problems with Contemporary Zakah

Zakah is fundamentally a poverty-alleviation mechanism (the poor and destitute being the first two categories of recipients listed in the Qur'an), and therefore its role is by necessity quite restricted. In a country with limited poverty, it might turn into more general public finance, but even then restricted by scholars' categories of spending "in the way of Allah" (they include education, infrastructure building, etc.).

Those problems of spending Zakah funds notwithstanding, the biggest problem today with Zakah has to do with the collection of funds. The biggest source of Zakah funds if we were to apply the classical rules would be a percentage of oil and gas wealth (zakat al-ma`adin w al-rikaz). However, since those resources are generally nationalized, there is no point in going there!

For private individuals, there are numerous Zakah shelters. The rules of Zakah as a wealth tax was appropriate for the categories of merchants, shepherds, and farmers who possessed wealth during the Prophet's (p) time. Those rules are grossly inadequate today. Dr. Al-Qaradawi himself commented that when he visited Malaysia, he found that small farmers who produced grains and fruits paid the Zakah (zakat al-zuru` w al-thimar), but that the richer landowners who grew trees for the production of rubber paid no Zakah, since the classical rules do not include a tax on trees that did not bear fruit!

Worse, yet, today's capital for the average well-to-do Muslim may be in large part human capital (lawyers, doctors, etc.). Those can earn huge incomes, but then live in equally huge homes (Zakah exempt) and drive equally expensive cars (Zakah exempt), etc. In the end of the day, they have no gold or silver, no merchandise, no livestock, etc., and therefore pay no Zakah. The late Dr. Mohammad Al-Ghazali, and the late Dr. Abou El Saoud, tried to argue for an income Zakah, but Dr. Al-Qaradawi argued that Zakah contains a major ta`abbud (ritual worship) element, as the third pillar of Islam, and therefore did not want to apply analogical reasoning with much liberty. Needless to say, wealthy Muslims were more than happy to adopt this conservative view that allowed them to pay less!

Again, we have a problem with religious substance giving way to pietist adherence to forms. This is the general malaise of Muslims today. It is not restricted to finance.

Rising Islamism and (Bad) Islamic Economics

Any keen observer of the Islamic world must see this. Islamism is on the rise, first and foremost in terms of identity politics of the Muslim masses. Other forms of identity have failed, and have been abandoned by the masses: Arab nationalism and socialism of Nasser and the Ba`th; ancient nationalism such as Pharonic Egypt, Babylonian Iraq, Phoenecian Lebanon, and Cyrus's Persia, etc.; and globalized westernism. Elements of all three tendencies continue, of course, but they are constantly being pushed to the margins, as a new brand of Islamism is on the rise.

When they think of rising Islamism, people (and governments) in the west tend to think mainly of violent "jihadists", as they like to call them, but that is far from accurate. My own casual observation identifies mainly two groups. The first is a group who adopt the appearance of religiosity, in dress, language, etc., but retain a true identity that is some mixture of the three aforementioned (non-Islamist) tendencies. This includes people who use religion to advance their economic objectives, or simply to fit into an increasingly religious society.

The second group is much more interesting, but it appears to be suffering an identity crisis. They seek to live according to an Islamic ideal, but quickly discover that the Islamic ideal is largely fictional. This group includes well-meaning Muslims who turn to religious studies, only to discover the irrelevance and corruption of what they had considered scholarly circles. It includes MBA-holders who decide to get into "Islamic finance", only to discover that it is a racket for enriching cynical English bankers and lawyers, along with some corrupt, gullible, or greedy Muslims.

Most importantly, the second group includes most of the masses in Egypt, Pakistan, Indonesia, Malaysia, Turkey, and elsewhere, who would like to embrace the slogan "Islam is the solution", but fail to see how that solution would work in reality. This is the greatest failure of the school of thought generally known as "Islamic Economics", which sought to develop an understanding of Political Economy from "an Islamic perspective".

Timur Kuran has written a lot about this school of thought and its failures (most of those writings were reproduced in his recent book Islam and Mammon). Timur's conclusion is that the historical and intellectual record of "Islamic economics" illustrates that Islamism has also failed. It is definitely true that the brand of mid-Twentieth Century Islamism, which is still unfortunately marketed by most formal Islamic organizations, including the Islamic Development Bank and others, have indeed failed, and failed miserably, especially in the countries where it was taken most seriously -- Pakistan, Iran and Sudan.

However, if we are interested in real economic development in the Islamic world (beyond just pumping oil and gas, erecting buildings, and selling cell phones), we cannot dismiss the rising wave of Islamism. Indeed, religious inclinations can serve as a greater social bond for a new social contract than any nationalism or western materialism.

The difficulty is this: to find or develop and workable "Islamic solution", one must abandon historical and pietist utopianism. Islamic history, from its earliest days, has never painted a rosy picture. Islamic societies prospered when they were open to learning from others: Sassanid, Byzantine, etc. The famous Prophetic tradition said: "seek knowledge (`ilm), even [if you have to go to] China", and yet our young still seek knowledge (`ilm) only by going to Saudi Arabia, Pakistan, or Egypt, centuries after the Islamic world ceased to be a main depositary of knowledge.

The result is "Islamic finance", "Islamic jeans", and "Islamic Cola", along with satellite channels that broadcast feel good televangelist speeches about Islam, and broadcasting songs about Hijab and the Prophet in between MTV-style videoclips. This pattern cannot satisfy the increasing Islamist sentiment for long. Suspicions about the Muslim Brotherhood, Hamas, and other political Islamist groups notwithstanding, it seems almost inevitable that the growing wave of Islamism will bring a wave of political Islamists to power throughout the region.

The choice is most likely restricted to one of three scenarios:

(1) If they use the current pietist/historical brands of Islamism, those Islamist groups will fail, just like their predecessors did in Pakistan, Iran, and Sudan. Advocates of western capitalism will point to that failure to advocate abanadoning the Islamist identity. The Islamists will increase in their opposition to western capitalism, arguing that the fault was not with the ideal, but with its implementation. The rift between the two groups grows until every country in the region looks like Turkey.

(2) Some may follow the Erdogan route, but that is really just western capitalism dressed in Islamist garb, and thus unlikely to serve any long-term socioeconomic goals. In the meantime, as we learned from the recent Turkish presidency campaign fallout, the secularists will not allow even some token symbolic victories to Islamists. To survive, the Islamists must make more compromises to prove that they are "moderates", but they will only be tolerated if they become effectively more secularist than the secularists.

(3) A new definition of Islamic-democratic political economy emerges. It is not clear that Muslims have the requisite political and intellectual human capital to develop such a paradigm over the course of few decades. Daunting as the task may be, this seems to be the least painful of the available options, and the one most conducive to bona fide economic and social development in the short to medium term.

Islamic student-loan alternatives

I have just sent this to IBFnet, but post it here also to get all the useful ideas that I can:

There is no doubt that education is one of the most important Islamic social objectives (no need to repeat numerous Hadiths here that we all know). Unfortunately, the typical way that Muslims in the west can afford the best education (including college as well as law school, business school, medical school, etc.) is by resorting to student loans.

In the U.S. Sallie Mae and other government sponsored initiatives try to make interest rates on those loans lower than market levels, but the accumulated debt can still be quite substantial. Moreover, I have met a number of young men and women at local masajid in Houston who accumulated student loan debts (some of which were marketed to them quite aggressively) but then failed to complete their degrees and therefore have a terrible problem with debts that they cannot repay with their low service-sector wages.

I know that there are alternatives in the GCC, including tawarruq to synthesize the loan (two spot and one credit trades of a commodity to give the student cash now in exchange for a debt owed later), but those are just inefficient replications that increase the cost of funds to the poor students without reducing the bad effects of debt.

I have read about another alternative based on the banks buying spots at universities and then leasing them to the students. Again, this seems awfully inefficient. One way to structure a similar but better alternative is to endow scholarships at the target elite universities, thus giving the students something to compete for, and then a means to get the elite education that they cannot afford, once they are admitted to the university. I know of some scholarships of this kind (e.g. King Faisal) for graduate studies. However, it would be nice if wealthier Muslims will focus on creating scholarships at elite universities for bright Muslim students who cannot afford those schools otherwise.

I discussed other "Islamic" alternatives in a recent lecture at a local Masjid mostly catering to the Nigerian Muslim community in Houston (some of whose youth either already have problems with student-loan debt, or need access to student-loan alternatives), and at a recent khutba in our main local Masjid. Perhaps I can spell out some of those ideas here and hope to start a useful discussion that can produce good Islamic products.

The starting point is that there is no better Islamic investment than in the education of our community's children: see a summary of the earlier set-up khutba at the earlier posting: Poor Muslim-American Islamic Investment Strategies.

Since this is a forum for financial professionals and those interested in the field, let's focus on the financial mechanics.

One idea that would work relies on cooperatives (why am I not surprised :-) such as credit unions. A very good Muslim banker friend of mine doesn't like credit unions because they are "one member one vote", so we can structure the institution as a mutual savings bank, where it is "one share one vote".

Make the institution not for profit, so that it can also be eligible for (tax deductible) zakah funds used for community development, and deserve the Islamic label (profit is OK, but profit from extension of credit seems awfully close to the essence of riba, as I have argued elsewhere in defense of mutuality).

We can have networks of mutual financial institutions tied to our Islamic centers. As churches do in this country, we can require that young men and women who wish to gain access to our student loan alternatives must be shareholders of the mutual financial institution (one share is, say, $5) and active members of the community (volunteering at the Islamic centers and in the community, etc.).

Funding to those students can be given based on the story of Musa and Shu`ayb [28:27]. Shu`ayb tells Musa that he owes a certain debt, but he can pay more if he wishes. It is well documented that the Prophet (p) repaid debts with more than he owed (unilaterally). We are not resorting to the Malaysian Investment Certificate method, based on the Egyptian Ahli bank investment certificates (C) with "gifts". This is the opposite case, where the debtor is a member of the community who is helped by the community to attain an education and then pays the community by returning more than was lent to him voluntarily, and possibly buying more shares in the mutual to fund the education of later generations, etc.

The adverse selection and moral hazard problems associated with giving money to people who are not obliged to pay interest (and whose debts will be forgiven if they cannot pay) is ameliorated by the requirement of being a member of the community in good standing (again as churches do). Investment in those members of the community should pay off manyfold, iA, as some of them become very successful and pay back by investing more in the community, etc.

Growth and sustainability can also be supported by zakah money, which can be spent on education by the agreement of Dr. Al-Qaradawi (today's authority on zakah) as well as premodern scholars. This can be set up as educational funds that grants scholarships and concessionary student loans, or it can be handled directly by financial mutuals that cater to other social needs of the community.

Suggestions of better products and structures would be greatly appreciated and encouraged. I would be happy to provide free advice to anyone working on this or similar products that justify the "Islamic" label by more than juristic mechanics (to the extent that I may have any value to add, of course :-).

Ibn Qayyim on Riba and more expensive Riba: Which should we choose?

Let's hear the voice of ibn Qayyim al-Jawziyya on the ruses used today in Islamic finance (be it named `ina, murabaha, tawarruq, or anything else):

فمن المستحيل على شريعة أحكم الحاكمين أن يحرم ما فيه مفسدة و يلعن فاعله و يؤذنه بحرب منه و رسوله و يوعده أشد الوعيد ثم يبيح التحيل على حصول ذلك بعينه سواء مع قيام تلك المفسدة و زيادتها بتعب الاحتيال في معصية و مخادعة الله و رسوله. هذا لا يأتي به الشرع؛ فإن الربا على الأرض أسهل و أقل مفسدة من الربا بسلم طويل صعب التراقي يترابى المترابيان على رأسه

فيالله العجب. أي مفسدة من مفاسد الربا زالت بهذا الاحتيال و الخداع؟

It is impossible for the Law of the Wisest of the wise [God] that He would forbid a harmful dealing [riba, or usury], curse its perpetrators and warn them of a war from God and his Messenger, and then to allow a ruse to result in the same effect with the same harm and added transaction costs in constructing the ruse to deceive God and his Messenger. This cannot be in accordance with the law, because riba on the ground is more facile and less harmful than riba with a tall ladder atop of which the two parties conduct the riba…

I wonder, which of the harmful effects of riba was removed by this deception and lies?"

Source: Ibn Qayyim Al-Jawziya, I`lam Al-Muwaqqi`in `an Rabb Al-`Alamin, Beirut: Dar al-Kutub al-`Ilmiyya, 1996, vol.3, p. 92.

And the legal abitrageurs will still come around quoting "God permitted trade and forbade usury" (deceptively, twisting the meaning) to justify their trade!!

Recommended books on Islamic finance

I received the following email

Besides your book, what other books on "Islamic Finance" do you recommend (in English)? It would be a good idea if you could post your answer on your blog so that other viewers benefit.

Here's a partial list of some recent books that I have found most useful to read:

• Saeed, Abdullah, Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation, Brill Academic Publishers, 1997. A wonderful scholarly work.
  
• Lewis, Mervin and Latifa Algaoud, Islamic Banking, Edward Elgar, Pub., 2001. A good survey with a nice interfaith introduction covering Abrahamic religious views on usury.
  
• Warde, Ibrahim, Islamic Finance in the Global Economy, Edinburgh University Press, 2000. The best political-economy coverage of Islamic finance that I have read.
  
• Henry, Clement and Rodney Wilson (eds.), The Politics of Islamic Finance, Edinburgh University Press, 2004. The best collection of essays on the political economy of Islamic finance that I have read. See, in particular, Dr. Monzer Kahf's chapter.
  
• Vogel, Frank, and Samuel Hayes, Islamic Law and Finance:Religion, Risk, and Return, (paperback) Springer, 1998. Very scholarly work. Vogel's part is a learned survey of classical jurisprudence and its interpretation by contemporary participants in Islamic finance. Hayes's part is an example of superior Islamic financial engineering (of which I am not fond, but if one is to do it, it is better to do it right).
  
• Usmani, M. Taqi, An Introduction to Islamic Finance, Springer, 2002. This book was published earlier in Pakistan and elsewhere, and free versions were available online when I last checked. You can think of this as the bible for Islamic financial engineers. Justice Usmani is the most respected name on the "Shari`a scholar" circuit, so widely respected in fact that a number of his family members are quickly becoming prominent members of that scholar circuit as well as he nears retirement.
  
• Maurer, Bill, Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason, Princeton University Press, 2005. An anthropologist's social scientific study of Islamic finance as a social phenomenon, with comparison to other unorthodox financial systems.
  
• Kuran, Timur, Islam and Mammon: The Economic Predicaments of Islamism, Princeton University Press, 2005. A collection of earlier essays by Timur Kuran, constituting the most blistering attack on the bulk of Islamic economics, revealing its political and economic failures, as well as its academic incoherence. If you are sympathetic to Islamic economics, as I am, you have to get beyond your first (knee jerk) reaction to Timur's relentless attack. Once you get over it, you will see that most of his points are very valid, and accepting such criticism may be the first step toward coherent thought about Islam and economics.
  

Incoherent Pietism and Shari`a Arbitrage

This Op-Ed piece appeared in today's Financial Times. Due to space constraints, the editors removed the paragraph wherein I claimed that microfinance institutions, and not today's multinational marketers of structured "Islamic finance", are the rightful heirs to the legacy of early initatives in Islamic banking in rural Egypt, India and Pakistan. They also removed my sentence on the use of the term sukuk, which I had only heard in my school years in Egypt in reference to sukuk al-ghufran, the Arabic name of the Easter Church's version of pre-reformation indulgences.

Identity politics and Islamic law

In a recent conference entitled "Shari`a (Islamic law), Identity, and the Constitution", a group of scholars reaffirmed the identity-political nature of adherence to Shari`a. On the other hand, the scholars who spoke at the conference, including Dr. Yahia El-Gamal (no relation), Dr. M. Salim Al-`Awwa, and others, affirmed that theocracy is not known in Islam, and that Islamic states are civil/secular, even if the laws are derived from Shari`a. In this regard, the issue of objectives of the law (Maqasid al-Shari`a) again featured prominently in the discussion, suggesting that -- outside the area of theology and acts of worship -- specific rulings are not as important, and the main Islamic legal principles are identical with those underlying other human legal systems.

Haunted by Amartya Sen's Identity and Violence: The Illusion of Destiny

As I sit this morning, getting ready to prepare my khutba for later today, I have tried four different topics, but keep getting back to a book that's been haunting me ever since I read it two weeks ago on the plane back from DC (after participating at a GMU conference honoring one of my ex-colleagues who is near retirement). The book is Amartya Sen's Identity and Violence: The Illusion of Destiny, NY: Norton, 2006. The book's main idea is obvious (we all have multiple identities, and trying to reduce any individual or group of individuals to a single identity can only lead to trouble).

The book is based on a series of lectures, and therefore it is somewhat simplistic and repetitive, at least as compared to Prof. Sen's more profound writings. Yet, I was captivated -- and still am -- by the book's strong message. Consequently, there is no escaping the topic for my khutbas this month. The first challenge, ironically, is how to make the book's universal message "Islamic" so that it may be appropriate for a sermon, without chauvinistic claims that Islamic principles are necessarily universal, or vice versa. The second challenge is to avoid being excessively critical of my communities of Arab Americans, Muslim Americans, Egyptian expats, Arab expats, Muslims in America, academic economists, etc.

I have been trying to focus in recent khutbas on positive messages, conducive to building the community and integrating it in society in productive ways, and that is -- of course -- difficult to accomplish without attacking the separatist and triumphalist approaches that have plagued many communities and countries (a disease that is not by any means restricted to Muslims, although people usually cannot see the same disease in their own nationalisms and religious chauvinisms, even if you put up a mirror to their faces -- see the movie Borat for a great example of how embarrassing the realization can be). There will not be any shortage of scriptures (Qur'anic and from the Sunna) to support my message. Unfortunately, there will not be any shortage of scriptures to support the opposite message either. So, am I about to commit intellectual (and/or religious) fraud?

Al-`Awwa on the need to reinvestigate Legal Objectives (Maqasid)

In an interesting article on islamonline.net, Muhammad Salim Al-`Awwa, the Secretary General of the Council of Islamic Scholars, is quoted to have argued in a lecture delivered on April 11 for continuous reinvestigation of the Objectives (Maqasid) of Islamic Law (Shari`a). He cited, for example, the methodology of the great contemporary scholar of Zaytuna Al-Tahir ibn `Ashur, who added such Maqasid as justice, liberty, and egalitarianism to the usual lists by Al-Ghazali and other scholars of the classic era. See this discussion of a translation of ibn `Ashur's treatise on Maqasid. Also, the middle part of this article provides a basic introduction to the thought of ibn `Ashur.

Al-`Awwa is reported to have argued that in modern times, we can infer Maqasid (Islamic legal objectives) based on our understanding of society, not necessarily being restricted to the religious Canon. Utilizing that methodology himself, he added fairness of wealth distribution and fairness of elections to be among the Maqasid of Shari`a today (an implicit reference, no doubt, to the current conditions in his native Egypt).

Business Week on Equity-Sharing Mortgages

In a story this week, Business Week reports on family members helping out by taking an equity stake in their younger/poorer relatives' homes. This is a topic that I had addressed a while ago on this blog, within the context of hedging home equity risk.

The following two paragraphs appears toward the end of the BusinessWeek article:

At the moment, shared equity financings are largely ad hoc legal agreements negotiated between well-off parents and their young adult children. There was an attempt in the 1970s to popularize "shared appreciation mortgages," but they never took off because the terms were unfavorable to investors.

In the next couple of years a more formalized shared equity arrangement could get new life. At least that's the vision motivating real estate scholars like economist Andrew Caplin of New York University. He and a number of other experts are designing standardized shared equity mortgages that would allow outside investors to buy a piece of the equity gain. Caplin estimates that about 25% of first-time home buyers could find such arrangements attractive. When they do come along, investors in it for the money will extract stiffer terms than mom or dad.

Even though I had known Caplin's Psychology and Economics work, I was not aware of this literature on housing partnerships. This is of course reminiscent of some of the mutual/musharaka models such as the Islamic housing coop in Canada. I wonder if this will soon become a more viable (and more Islamic, as some would argue) alternative to the bad replication of mortgage loans currently being provided via multiple structured sales or leases.

Poor Muslim-American Islamic-Investment Strategies

The topic of this posting and a recent khutba is the real "Islamic finance": How to maximize the good that one can do, or in our quasi-materialistic religious rhetoric, how to maximize our wealth of hasanat or good deeds.

In this regard, the Islamic canon clearly preaches a "financial planning" approach: start with your moment of death, and work your way with backward induction to current time. What are your goals? What are the resources and investment tools that you can use to attain those goals? What is the best investment strategy to have a wealth of good deeds in the final account?

Most of our sermons are about how to maximize earning of good deeds (better times to pay to charity, better times and places to pray, etc.). That is good. But then the analogy we seem to have in mind is one of the good deeds going into a checking account and sitting there until we have the accounting. But nobody ever got wealthy putting money in a checking account, no matter how much income that person was earning. So, while we should indeed maximize that income of good deeds, we should also invest it wisely if we are going to generate wealth.

So, let's approach the problem of Islamic financial planning. What does the canon tell us about the resource endowments on which we'll face accounting. Those are the same endowments that we can use to generate income, and then to invest that income to generate wealth. In the Hadith narrated by Mu`adh ibn Jabal, the Prophet (p) said: "No human's will move from his station of accounting until he is asked about four things: (1) his lifetime, how did he consume it, (2) his body, how did he wear it out, (3) his knowledge, how did he use it, and (4) his wealth, how did he earn it and how did he spend it."

So those are our four endowments: time (the most essential and most precious of all), physical existence, knowledge, and material wealth. Another Hadith, narrated by abu Hurayra tells us the three investment vehicles that we can use to make this wealth grow long after our time is up, our bodies are decaying, our knowledge is obsolete, and our wealth belongs to someone else. The Prophet (p) said: "When a person dies, his works stop except for three things: (1) perpetual self-sustaining charity, (2) useful knowledge, and (3) pious children who supplicate for their parents."

A good investment strategy would require three things. The first is that we have to work with what we've got. We shouldn't wait until our income is large in order to start saving and investing. We should start saving and investing with however little resources we have. Now, as American Muslims, we have no wealthy people. None of us can endow a Gates foundation to fight against aids or other epidemics. None of us can endow a Carnegie foundation and sponsor various types of research and information dissemination. On the other hand, we are collectively above average for the society in terms of income and wealth. That means that we have to act collectively in order to reach the critical mass required for the best investments in good deeds.

The second aspect of good investment is that we need to diversify our portfolio of moral investments. For example, if we ignore our children, what good are all the mosques we are building: little more than hollow buildings that are idle 99% of the time today, and likely to be emptier in the future. More importantly, when it comes to beneficial knowledge, why are we not sufficiently encouraging our children to be scientists -- where just one success, say in developing a cure for cancer, can save many more lives than any doctor can, even if the expected income of the doctor is higher than that of someone engaged in basic research? Why are we not encouraging them to be political scientists or historians, whose work educates society and helps to shape public policy in directions that save and improve lives in much more meaningful ways?

Finally, we should seek the highest return on our investments, subject to being sufficiently diversified. In fact, given the current portfolio of Muslim-American investments, we can increase the expected return and reduce risk simultaneously by diversifying away from the current wasteful strategy. Yes, of course, if you build a mosque you should expect to earn some good credits, but it is risky to have nothing but mosques, and the return on that investment is very small compared to other strategies.

I gave an example without naming specific projects. If you are in the process of putting together $3 million to build yet another mosque in Houston (we already have around 80 mosques for a Muslim population estimated to be around 100,000!). Yes, while we do not have wealthy Muslims, we have some rich ones, so 20 or more people can get together and build such a mosque. But think of the opportunity cost: You can use those $3 million to endow six scholarships for Muslim children who get admitted to top universities but cannot afford to pay tuition. In twenty years, you would have helped 30 young members of the community graduate from the best universities to become successful scientists, engineers, etc. Some of them may even get some crucial patents and generate some serious wealth that can be invested to do even more good: sponsor more research that can help humanity, etc. Having enabled that growth of good deeds decade after decade, and century after century, one surely would have invested today's good deeds much more intelligently that just building another structure.

The Pope, The Condescending, and Closet-Intolerance

Now that the Pope is trying to rebuild "bridges" with the Islamic world, I think that one can reflect on his now-infmaous speech without eliciting angry responses. I would like to draw analogies between the Pope's remarks on the one hand, and what appear to be very different but are in fact very similar remarks on the other: As reported recently by BBC UK Chancellor of the exchequer Gordon Brown expressed his desire to make his country the global "gateway" for Islamic finance. The latter is a combination of ratinoalist desire to enrich one's own country (fat fees for investment bankers and lawyers), and the typical condescending attitude that "politically correct" and "tolerant" non-Muslims exhibit toward Islam.

Parsing Chancellor Brown's message, one cannot but conclude that acceptance (on face value) of the ludicrous claim that Islamic finance can do finance without interest is simply to say that Islam does not have to make sense (or even use coherent language). That is no different from the Pope's ahistorical claim that Islam favors dogma over rationalism. The Pope's charge is historically inaccurate, and -- depending on the particular historical period -- may be applied to his Church or any other form of organized religion during its dark ages. It just so happens that the Pope's remarks may be very applicable to Muslim societies today: he merely stated what others (who are condescending and closet-intolerant) dare not say.

For my money, I appreciate the Pope's remarks more than the Chancellor's.

Short Selling and the Travesty of Islamic Finance

I received an email this morning from a young practitioner in the Islamic finance field:

Dear Professor El Gamal

I would like to pick your brains regarding some recent developments In Islamic finance, if I may.

I have just returned from an Islamic Funds conference in Dubai. I was somewhat surprised to find there was a widespread assumption amongst the fund managers speaking that taking short positions was now Islamically acceptable and basically a done deal. Names of Sharia scholars who had accepted it were bandied about

2 questions please.

1. How does it work ? I was told that there was some combination of Murabah + Arboun but no one would tell me exactly how it worked, for obvious proprietary reasons.

2. Is it a done deal Sharia speaking ?

3. If it is a done deal why is everybody not doing it ? Or are they ?

Here is my response:

Dear Mr. ______:

As I have argued repeatedly, every contract can be "Islamized" in the age of financial engineering. That is why the industry's obsession with the Islamicity of contracts, and the identities of jurists-for-hire who certify them, is a disastrous combination.

Every beginner's textbook in financial engineering shows how to synthesize short sales and leveraged buying from forwards. The easiest way to get a forward "Islamically" is with the use of salam, which has an element of short-selling already built-in. The use of `urbun as call option allows you to use call-put parity to do the same and synthesize a forward.

It is a silly game. The distinction between contracts that are "now allowed in Islam" and those that aren't is only a function of who is willing to pay sufficient fees for the rent-a-jurists to certify an engineered product, and how high are the transaction costs of the reengineering.

Those people have made a mockery of Islam.

In my recent book, I have shown in detail how to synthesize a forward from salam and a credit facility characterized as murabaha or tawarruq, depending on preference and cost. From forwards, we can then synthesize everything. That is a theorem. So, why are we wasting everyone's time with those big announcements of "the first ever Islamic this or that"? Because it is the selective prohibition of some modern practices and synthesis of others from medieval contracts that creates rent-seeking Shari`a arbitrage opportunities, and that is -- regrettably -- the nature of Islamic finance as practiced today.

Unfortunately, my interlocutor responded back with this:

Yes the Salam route was discussed but the Murabaha Arboun route was the one alluded to throughout. I will try to find out how it works.

I responded as follows:

Why do you care about the specific mechanics?

Short-selling is short-selling. So do it in the most efficient manner possible, or don't do it at all.

I obviously don't get it.

John Esposito explains Islamism and rising anti-Americanism

In a new article, John Esposito, no doubt one of the world's foremost experts on political Islam, tries to explain the roots of anger in the Islamic world, but also the roots and goals of Islamism more generally. Washington's failure to distinguish between moderate and extreme Islamism -- in his opinion -- is feeding the cycle of extremism:

As Islamist parties continue to rise in prominence across the globe, it is necessary that policymakers learn to make distinctions and adopt differentiated policy approaches. This requires a deeper understanding of what motivates and informs Islamist parties and the support they receive, including the ways in which some US policies feed the more radical and extreme Islamist movements while weakening the appeal of the moderate organizations to Muslim populations. It also requires the political will to adopt approaches of engagement and dialogue.

He implicitly mocks the Washington doctrine of supporting democracy, but only if their favorite candidates win and enforce their favorite policies:

A critical challenge for US policymakers will continue to be the need to distinguish between mainstream and extremists groups and to work with democratically-elected Islamists. US administrations have often said that they distinguish between mainstream and extremist groups. However, more often that not, they have looked the other way when autocratic rulers in Algeria, Tunisia, Egypt, and elsewhere have intimidated and suppressed mainstream Islamist groups or attempted to reverse their successes in elections in the past several decades.
...
Global terrorism has also become the excuse for many Muslim autocratic rulers and Western policymakers to backslide or retreat from democratization. They warn that the promotion of a democratic process runs the risk of furthering Islamist inroads into centers of power and is counterproductive to Western interests, encouraging a more virulent anti-Westernism and increased instability.

The article includes reference to a detailed Gallup study of opinions in the Muslim world. His final conclusion comes as no surprise to most Muslims and careful observers of the Muslim scene, and clearly contradicts the "clash of civilizations" view that "they hate our way of life". In fact, they mostly want a similar way of life, but feel that failed and malicious policies by their own and foreign governments are frustrating their aspirations to better economic and political conditions.

Of course, as in most cases, the true cause of the problem is economic in nature:

In a major policy address, Ambassador Richard Haass, a senior State Department official in the George W. Bush administration, acknowledged that both Democratic and Republican administrations had practiced what he termed “Democratic Exceptionalism” in the Muslim world: subordinating democracy to other national interests such as accessing oil, containing the Soviet Union, and grappling with the Arab-Israeli conflict.

For better understanding the role of oil in U.S. foreign policy toward the Islamic world, especially in recent years, there is no better reference than Kevin Phillips' recent book: American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century.

Esposito concludes:

Finally, most fundamental and important is the recognition that widespread anti-Americanism among mainstream Muslims and Islamists results from what the United States does—its policies and actions—not its way of life, culture, or religion.

Impatience and intolerance: the deadly global partnership

There is a large and growing literature on hyperbolic discounting (excessive impatience that favors instant gratification) in human decision making, which leads to dynamically inconsistent behavior and other problems. I have relied on this literature in part for my understanding of the paternalistic prohibitions in Islamic jurisprudence for certain types of trading in risk and credit (resp. prohibitions of gharar and riba).

In recent weeks, I have been depressed by the events in the middle east: most depressed of course by the senseless and tragic deaths of innocent civilians.

I think that those regional problems are tragic manifestations of the same problem of excessive impatience:

• The US and Israel are impatient in their desire to "resolve" the regional problems. This is exemplified by the many paradoxical views held by those parties, from Secretary Rice's delusions of an imminent birth of a "new middle east" to Israel's alternating hopes for peaceful coexistence with its neighbors (with full normalization of relations, economic cooperation, etc.) and simultaneous pulverization of all militant opponents of that vision, which those opponents see simply (and not entirely unreasonably) as continued hopes of American/Israeli hegemony that aborts the dreams of future indigenous economic growth and political/democratic institutional development in the region.
  
• Arabs and Muslims generally have also been extremely impatient. They cling to memories, and more often, highly mythical dreams of a glorious past when their ancestors had built the most advanced societies on earth. They do not recognize that it would take centuries to rebuild another civilization of which they can be proud. Resentment of other advanced civilizations and their satellite groups in the region (including wealthy enclaves around Cairo and elsewhere in the region, which serve as economic satellites for the advanced western economies), and employment of destructive force, will only widen the gap between the wealthy west and the resource rich but otherwise extremely poor region.
  
• What we need is a new partnership between the West and the Arab and Islamic worlds. A partnership that is not built on myopic self-interest, but one wherein each group is willing to sacrifice some of its present well-being for future development. The billions of dollars spent on destruction can and should be directed toward education, institution building, and poverty alleviation. By education, I do not mean indoctrination and the desire to raise like-minded generations of Arabs and Muslims. I mean genuine education that respects differences and aims to assist those societies in outgrowing their sick rentier mentality which was exacerbated and entrenched with decades of reliance on oil receipts. By institution building, I do not mean the mechanics of democracy (elections, civil society, etc.), but rather the marginalization of interest groups who have successfully aborted the development of genuine social and political institutions, even as they adopt empty shells of Western institutions...
  
• That is a tall order. It is unfortunately easy for Congress and other sources of funds in various parts of the world to approve and finance the spending of billions upon billions that lead to nothing but destruction and entrenchment of the sources of the current crises. The ease with which this money is thrown at the highly profitable war machine contrasts with the great difficulties in trying to raise money for curing disease, eliminating hunger, or improving education (where a million dollars is considered a very large sum).
  

Thus, impatience and greed have sown the seeds of death and misery. Just as impatience and dynamic inconsistency at the individual level can be remedied with religious and social norms in the form of prohibitions of certain types of trading in credit and risk, the tragic consequences of those same diseases can be remedied at the social level with basic norms of international decency, morality, norms, and laws. Sadly, there appear to be virtually no recognizable force on the international scene today that shows even the slightest bit of decency and morality. Consequently, there appears to be no end in sight for this catastrophic condition of the miserable human species.