This Post Really Suk-kuks: Examining Islamic Finance
Before you read on, know that this one of those listen-to-me-now-believe-me-later on posts.
Enter the Sukuk: the interest-free loan, based on Muslim principals and before you laugh, understand this: Citigroup, Morgan Stanley, HSBC, Standard Chartered and others are getting into the Sukuk issuance business in force.
Moreover, while we grunt and grimace at the fact that it took 50 bucks to "fill-er up" or that 40 bucks only got us to three quarters of a tank or in some cases, only half a tank -- the sheer quantity of cash from petrodollars is creating a financial boom in the Middle East as well as Asian Tiger economies such as Malaysia and Indonesia -- all seats of Islam, the dominant religion among that region's populations.
Mohammed Mahmud Awan, a scholar at Malaysia-based International Center for Education in Islamic Finance, said recently in a speech that the mortgage crisis is "unthinkable" under Islamic principles regarding debt. Awan said that it was "time" for the Islamic banking industry to present solutions to the global economic community in the wake of the crisis.
Well, Islamic finance assets are growing at an annual pace of 20% and are set to hit $2 trillion in 2010 from the current $900 billion, literally fuelled by us who create flood in the desert of petrodollars, which by extension folks, means the import -- forced through business conditions or voluntarily - of some of these principles and philosophies to western banking circles.
In the Gulf and Asia, Standard & Poor's estimates that 2 out of every 10 banking customers would without thinking about it, choose an Islamic loan package for housing and business financing over a conventional one even if it had a similar risk-return profile.
Yeah, Yeah, Yeah you say, "what does this have to do with me?"
Nothing much right now. However, there is a coorelation between the growth of Islamic finance and high oil prices. Where do you think they get their money? Date farming? Sand? Manufacturing? I think not.
And you should know that Oil-rich Middle Eastern and Central Asian sovereign wealth funds are large shareholders of many foundering Western banks who are in dire need of capital because of exposure to the interest-bearing and complex loan packages that created the subprime meltdown. This could mean that one day soon, some of these large shareholders will demand an entry into profitable and growing markets. Again enter the Sukuk.
Not withstanding events that are beyond our control, at present, the equation is simple -- albeit with many variables.
Oil Prices = High Gas Prices = Mega Petrodollars = Expansion X More Petrodollars + More Money in Islamic Banks = Growth of Islamic Finance + Stakes Acquired in Non-Islamic Banks+Islamic-Style Banks Having a Say in the Expansion of Western Banks which will one day offer yes: Islamic Sukuks.
An "Interest-ing" History
Charging a vig on a loan (interest on credit) has its roots in the Roman Empire's coin-based economy that was backed by vast amounts of resources in the treasury. The concept of interest became a staple during the rise of mercantilism during the Italian and European renaissance. Merchant of Venice anyone?
And before any xenophobia sets in, it's important to note that speaking out against the concept of interest-based financing is not solely a Muslim thing. In fact, St. Thomas Aquinas of Catholic fame was said to have espoused that the charging of interest was morally wrong because it amounts to usury, i.e., charging for both the amount and the use of the amount. But the concept still took shape during the industrial revolution and has been trucking along ever since and remains a matter of life and debt for our country.
So now the equation is this: Our paper money, for their black gold, means we have to borrow more paper money from them to buy more black gold, while they use the proceeds of our black gold purchases to build their own infrastructure, capitalize their own banks, buy shares in our banks and the rest is history or our potential future at the very least.
Hence it's not inconceivable that some of us -- especially of the international traveler persuasion -- will be taking out interest-free loans sometime in the future and on a larger level this is a subset of the clash of civilizations. Credit isn't going anywhere mind you, as it goes so do we but the thing question is: Will we some day be at an economic disadvantage because of credit-tinged opulence when other white-hot economies are playing it straight up? Or is it straight up? Is the concept as it is with the sukuk, of renting your loan amount instead of essentially paying down a principal amount plus interest more viable?
One Islamic finance scholar, a Rice University Prof. Mahmoud El-Gamal ,has famously suggested that there has been no major test case for the sukuk yet to ensure that Shariah-compliant loans can work, or for that matter be deemed as anything other than a way to market to religious sensibilities.
In an August 2007 blog posting, he wrote:
"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!"
Given that, what are your thoughts on a world where you have to buy what you can buy with legal tender and not be able to get by on credit? Do we have a moral obligation to fix our financial system and change our attitudes about spending and consumption while recognizing the bubbling competition?
What do you think?
Interest or no interest?
What do you believe in?