Shariah law can be modern

Terry LACEY
The recent controversy in the United Kingdom when the Archbishop of Canterbury raised the possibility that some aspects of Shariah law might be implemented in the UK Muslim communities raised cultural and economic issues rather than simply religious questions. Shariah law is not always about backwardness, despite its image in the West.

If Shariah banking can be modernized, globalized and in management terms Westernized in synergy with a liberal financial system, then why not other aspects of Shariah law? Interpretation of Shariah law is culturally
The liberal Islamic Indonesian scholar Zuhairi Misrawi argues that shariah law is a cultural product because it has been historically constructed and is attached to a specific territorial, geographical and socio-political culture [Jakarta Post Feb. 2, 2008].


The success of Shariah banking:

Last year there were a series of seminars on Shariah banking in Indonesia organized with the British Chamber of Commerce. Shariah banking can be very modern. It has export credits, bonds, mortgages, leasing and profit-sharing, and will doubtless devise environmental credits too.

The profit and loss sharing aspect of Shariah banking is the most innovative, but the poor can normally only access fixed cost Islamic facilities more similar to Western interest. However Islamic profit & loss sharing instruments in Asia are surprisingly heavily used by non Muslims (in Malaysia).

The big issue in shariah banking policy is the gap between rich and poor. When a modern economically dynamic society like UK absorbs migrants from a culture of rural poverty, with tribal and feudal influences, then economics is driving social change.

Shariah banking could make a greater contribution to resolving these problems by extending its more innovative profit sharing concepts to poorer people to reduce marginalization & promote social inclusion.

Maybe the UK should consult more with social workers in Pakistani and Bangladeshi cities who are also coping with urbanization from backward rural areas. The only way out of this will be economic and social change, in UK, and in countries of origin.

Shariah banking should offer part of the way forward without excluding other groups or religions. In Indonesia the trend is towards Islamic windows in conventional banks, based on consumer choice, not to an institutionally separatist Muslim banking system. If non-Muslim Chinese business people in Malaysia or Indonesia want to use Islamic banking they are welcome to do so, it is open to everybody.

One way to mobilize Islamic banking to help the poor would be to promote more investment in what we might call social capital markets like water supply and power supply, especially New & Renewable Energy. The profit and loss instruments of Islamic finance are the right shape to finance these long term investments where poor people cannot afford the services at the start, but can afford to pay as incomes rise.


Broad-mindedness for all:

Some UK Muslim communities are already resolving family disputes voluntarily with sharia law. Of course all parties should also have the right of recourse to the jurisdiction of UK courts. However, such rights have to be taught, learned and upheld. Politicizing the debate on sharia law and confusing it with extreme criminal punishments which are not agreed with or practiced by most Muslims in the world does not help this process.

We should study the voluntary use of shariah law to resolve family disputes in UK, Canada and elsewhere, parallel to recourse to normal courts, to see if this helps resolve conflicts or hinders social changes.

Most of the same people who react strongly about sharia law in the UK would not be so negative if the modernization of their factory or water supply was partly financed by an Islamic Financing Institution .

Nor do they object to shariah law when they eat in a halal restaurant , while they are drinking their lager with their curry. If the Muslims who serve the lager can be broad minded , is it too much to ask of other people?

There’s no doubt about Shariah

By Frank Kane

One of the wisest maxims of life is: “If it isn’t broken, don’t fix it.” If the car is purring along nicely, resist the temptation to dismantle the engine. If the home entertainment system is providing hours of fun for the family, fight the urge to take it apart with a screwdriver.

The same applies to the financial and economic world. If a stock exchange is working well and efficiently as a market for raising capital, leave it alone. If a banking system is providing security and convenience for its customers, let it be. Interfering with it is only going to make things worse.

In the modern globalised economic world, one of the few sectors moving along very nicely indeed, even accelerating at impressive speed, is the Shariah financial market.

Over the past decade, Islamic financial instruments have grown from being a little-understood sideline to traditional Western capitalism, to the situation in the world today, where Shariah finance is becoming a central part of the global economy.

So participants in the multi-billion dollar Shariah market must have been surprised and concerned by a recent statement from the Accounting and Auditing Organisation for Islamic Financial Institutions, the body of Muslim scholars that sets the standards for the industry.

Focusing on sukuks – bonds that conform to the Islamic requirement that forbids interest in a financial system – the organisation, led by Sheikh Muhammad Taqi Usmani, said that as many as 85 per cent of sukuks in issue “may not fully conform to all precepts of Islamic law”.

The Bahrain-based organisation, advised by 17 scholars in Islamic law, said that “blemishes” had crept into the system, and these had to be removed. If the present set-up was allowed to continue, it said, “Islamic banks will stumble and there is a danger that this virtuous movement will fail.” Serious words indeed.

There is no doubt that Shariah finance has been a “virtuous” system. It has satisfied the needs of the world’s 1.3 billion Muslims, who found that traditional Western banking structures and investment policies did not meet their needs, especially with regard to the concept of interest, and those industries, like alcohol production and gambling, which are forbidden to Islamic investors.

According to a recent survey by accounting firm Ernst & Young, Islamic investment is one of the fastest growing areas of global finance. It has shown annual growth of 20 per cent per year for the past five years, and in 2007 the total amount invested in Islamic instruments of all kinds is estimated at $900 billion (Dh3.3 trillion).

This year, it is anticipated that there will be another $100bn of cash ploughed into Shariah-compliant financial instruments. The market potential is truly enormous.

Ernst & Young calculates that by 2009 there will be $1.5trn of personal wealth in the Middle East alone, and that 70 per cent of this is likely to seek investment outlets compatible with Islamic precepts. That staggering sum is without including the huge capital reserves of the sovereign wealth funds of the region.

The rest of the world is catching on. Of course, the big Muslim communities in Asia and Africa will be natural customers for Islamic finance, but the growing Muslim communities in the West are increasingly seeking financial instruments, from credit cards to mortgages through to multi-billion dollar corporate bonds, that conform to their religious principles.

The financial establishments of Europe and North America have woken up to this enormous market potential, and are trying to gain access to it. Some of the best financial brains in the world, like Goldman Sachs and Deutsche Bank, are busy designing and marketing Shariah-compliant products to sell across the world.

Just last week, Morgan Stanley, one of America’s biggest investment banks, said it was close to launching the first sukuk for a multinational corporate customer – a global “household name” – that could be the prompt for other big corporates to enter the sukuk markets.

The urge to tap Middle East liquidity pools will be irresistible for other corporate borrowers, unable to finance their operations from the increasingly cash-strapped western banking system.

One banker told me recently: “So far all the attention has focused on what the sovereign wealth funds and other big Middle East investors will want to buy in the West, but it will be a two-way flow. We are only just starting to see a process whereby the West wants to come to the Middle Eastern markets, and they [Western corporates] are beginning to accept that a commitment to Islamic finance will get them to the table.

It could be the quantum leap for Islamic finance.” In these circumstances, it is a fair question to ask whether this is the right time for Islamic experts to be questioning the basis of the system. Just as Western capitalism is beginning to understand the rules of Shariah-compliant finance, should those rules be changed?

One Dubai financial expert has voiced this opinion: “There may be an element of nervousness in issuers when faced with a structure they have not seen before.”

That is an understatement. If doubts creep in to the Islamic financial system now, just when it is on the verge of critical momentum, the result could be very damaging to the world financial structure, and to the Islamic financial industry itself.

It is right to clarify the rules, in particular the notion of “true ownership” essential to Shariah-compliant finances, and to remove worries there may be among the experts about risk-analysis in the current structures. But if that involves a structural change, as implied in the statement that 85 per cent of existing sukuks may not conform to all precepts of shariah, then it is too much change, and too radical.

With the global financial structure in such a delicate state at present, conventional capitalism needs robust and reliable Islamic alternatives more than ever.