Growing state of Islamic finance

Over $100bn Sukuk, or Islamic bonds, are set to be issued this year

The Economist's Graphic Detail blog has a post up graphing the rise of sukuk, Islamic bonds, which are a subset of the $1.3trn market for Islamic finance.

They write:

According to the latest quarterly report from Zawya, a business information firm, global sukuk issuance in the first quarter of this year was $43.3 billion, almost half the total for the whole of 2011. The withdrawal of European banks lending to the Gulf Co-operation Council (GCC) region is thought to have contributed to this rise. Total issuance could reach $126 billion this year, continuing the growth trend (aside from a brief decline in 2008 associated with the global economic slowdown).

Their post also addresses the global spread of such bonds, which are concentrated in Malaysia.

Sukuk (singular sakk, which has the same Persian root as the word "cheque") are financial instruments issued to be compatible with Islamic law, sharia.

The problem is that sharia prevents a lot of practices usually considered crucial for finance. Chiefly, there is the prohibition against riba, or interest. Similar to early Christianity, Islam regards interest as unearned and unjust income, creating money from money with no services provided. For instace, the Qu'ran states:

Allah has permitted trade and has forbidden interest.

And riba is held to be one of the seven greatest sins in Islam, along with murder and believing in Gods other than Allah.

Unfortunately, most of the financial world works on credit and debt, which is hard to give and receive without some compensation. This is where Islamic finance in general, and sukuk in particular, steps in.

Operating in a similar manner to Islamic mortgages, but on a much larger scale, a sakk replaces loans and interest with part-ownership and rent. For a business, for instance, the normal practice may be to borrow money needed to finance an expansion, then an annual coupon on that money at the market rate for a decade before paying back the capital in one lump sum.

The Islamic method would be to split its proposed expansion into chunks, sell each of those bits to new owners, and rent them back from the new owners until the time came to buy back the whole thing. The rental rate is usually conveniently close to the market interest rate – and occasionally explicitly pegged to a rate like LIBOR, although being this explicit is still frowned upon by many scholars.

A further complication is introduced by the fact that while assets are tradable, debts – which are not considered to hold any inherent value – aren't. So a bond issued in the above example would be tradable if it were used to finance an expansion, but not if it merely paid for day-to-day business. In the former case, it could be denominated in fractions of the new asset, but in the latter it would have to be debt.

As the market grows, the edge cases are pushing ever harder at the limits of what is acceptable under sharia. Some progressive scholars are using the concept of maslaha, which states that decisions about prohibition should take into account the public interest, to argue that activities which are necessary but tricky to condone should nonetheless be allowed.

When religious law meets the pressures of the modern day, strange contortions are often the result (look at things like the Los Angeles eruv), but if the sukuk market grows at the rate it has been, it won't remain a novelty for much longer.

Malaysia's Petronas Towers. The country is home to most sukuk trading. (Getty)

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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Want to beat Theresa May? First, accept that she's popular

The difficult truth for the centre and left, and advocates of a new party, is that people don't "vote for the Tories reluctantly".

An election campaign that has been short on laughs has been livened up by a modest proposal by an immodest man: the barrister Jolyon Maugham, who used to write about tax for the New Statesman as well as advising Eds Miliband and Balls, has set out his (now mothballed) plans for a new party called Spring.

The original idea was a 28-day festival (each day would be celebrated with the national costumes, food and drink of one of the European Union’s member states) culiminating in the announcement of the candidacy of Spring’s first parliamentary candidate, one Jolyon Maugham, to stand against Theresa May in her constituency of Maidenhead. He has reluctantly abandoned the plan, because there isn’t the time between now and the election to turn it around.

There are many problems with the idea, but there is one paragraph in particular that leaps out:

“Like Sherlock Holmes and Moriarty, Labour’s left and moderates are bent on one another’s destruction. No one knows what the Lib Dems are for – other than the Lib Dems. And we vote for the Tories reluctantly, lacking an alternative.”

Even within this paragraph there are a number of problems. Say what you like about Sherlock Holmes and Moriarty but it seems hard to suggest that there is not a fairly large difference between the two – regardless of which one you think is which – that might perhaps be worth engaging with. There are fair criticisms of the Liberal Democrats’ uncertain start to this campaign but they have been pretty clear on their platform when they haven’t been playing defence on theological issues.

But the biggest problem is the last sentence: “We vote for the Tories reluctantly, lacking an alternative”. A couple of objections here: the first, I am not sure who the “we” are. Is it disgruntled former Labour members like Maugham who threw their toys out of the pram after Corbyn’s second successive leadership victory? If you are voting for the Tories reluctantly, I have invented a foolproof solution to “voting for the Tories reluctantly” that has worked in every election I’ve voted in so far: it’s to vote against the Tories.  (For what it’s worth, Maugham has said on Twitter that he will vote for the Liberal Democrats in his home constituency.)

I suspect, however, that the “we” Maugham is talking about are the voters. And actually, the difficult truth for the left and centre-left is that people are not voting for Theresa May “reluctantly”: they are doing it with great enthusiasm. They have bought the idea that she is a cautious operator and a safe pair of hands, however illusory that might be. They think that a big vote for the Tories increases the chance of a good Brexit deal, however unlikely that is.

There is not a large bloc of voters who are waiting for a barrister to turn up with a brass band playing Slovenian slow tunes in Maidenhead or anywhere in the country. At present, people are happy with Theresa May as Prime Minister. "Spring" is illustrative of a broader problem on much of the centre-left: they have a compelling diagnosis about what is wrong with Corbyn's leadership. They don't have a solution to any of Labour's problems that predate Corbyn, or have developed under him but not because of him, one of which is the emergence of a Tory leader who is popular and trusted. (David Cameron was trusted but unpopular, Boris Johnson is popular but distrusted.) 

Yes, Labour’s position would be a lot less perilous if they could either turn around Jeremy Corbyn’s popularity ratings or sub him out for a fresh, popular leader. That’s one essential ingredient of getting the Conservatives out of power. But the other, equally important element is understanding why Theresa May is popular – and how that popularity can be diminished and dissipated. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.

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