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.

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The problems with ending encryption to fight terrorism

Forcing tech firms to create a "backdoor" to access messages would be a gift to cyber-hackers.

The UK has endured its worst terrorist atrocity since 7 July 2005 and the threat level has been raised to "critical" for the first time in a decade. Though election campaigning has been suspended, the debate over potential new powers has already begun.

Today's Sun reports that the Conservatives will seek to force technology companies to hand over encrypted messages to the police and security services. The new Technical Capability Notices were proposed by Amber Rudd following the Westminster terrorist attack and a month-long consultation closed last week. A Tory minister told the Sun: "We will do this as soon as we can after the election, as long as we get back in. The level of threat clearly proves there is no more time to waste now. The social media companies have been laughing in our faces for too long."

Put that way, the plan sounds reasonable (orders would be approved by the home secretary and a senior judge). But there are irrefutable problems. Encryption means tech firms such as WhatsApp and Apple can't simply "hand over" suspect messages - they can't access them at all. The technology is designed precisely so that conversations are genuinely private (unless a suspect's device is obtained or hacked into). Were companies to create an encryption "backdoor", as the government proposes, they would also create new opportunities for criminals and cyberhackers (as in the case of the recent NHS attack).

Ian Levy, the technical director of the National Cyber Security, told the New Statesman's Will Dunn earlier this year: "Nobody in this organisation or our parent organisation will ever ask for a 'back door' in a large-scale encryption system, because it's dumb."

But there is a more profound problem: once created, a technology cannot be uninvented. Should large tech firms end encryption, terrorists will merely turn to other, lesser-known platforms. The only means of barring UK citizens from using the service would be a Chinese-style "great firewall", cutting Britain off from the rest of the internet. In 2015, before entering the cabinet, Brexit Secretary David Davis warned of ending encryption: "Such a move would have had devastating consequences for all financial transactions and online commerce, not to mention the security of all personal data. Its consequences for the City do not bear thinking about."

Labour's manifesto pledged to "provide our security agencies with the resources and the powers they need to protect our country and keep us all safe." But added: "We will also ensure that such powers do not weaken our individual rights or civil liberties". The Liberal Democrats have vowed to "oppose Conservative attempts to undermine encryption."

But with a large Conservative majority inevitable, according to polls, ministers will be confident of winning parliamentary support for the plan. Only a rebellion led by Davis-esque liberals is likely to stop them.

George Eaton is political editor of the New Statesman.

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