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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It's time the SNP's terrible record in government was exposed

Do not expect the SNP to apologise for these failings anytime soon. They do not really need to, so successful have they have been in creating a new paradigm in Scottish politics.

The only suspense in Scotland’s elections lies in who comes second. So complete is the Scottish National Party’s dominance that the Scottish Conservatives’ manifesto is called ‘A Programme for Opposition’, summing up a campaign in which the Tories and Labour scrap for second while the SNP waltz to victory.

Nicola Sturgeon says it is a matter of when, not if, there is another referendum on Scottish independence; should the UK vote to leave the EU in June, the SNP is likely to push for another independence vote. But all the debates over constitutional questions miss a bigger point: Scotland already has one of the most powerful devolved administrations in the entire world. The SNP has ruled in Holyrood for nine years, and had a majority for the last five. Yet the SNP’s record, particularly for the most disadvantaged in society whom it claims to speak for, is dire.

Let’s begin with higher education. This, after all, is the area in which the SNP are proudest. Five years ago, Alex Salmond declared: “The rocks will melt with the sun before I allow tuition fees to be imposed on Scotland’s students.” He was so enamoured with the SNP’s policy of maintaining free tuition north of the River Tweed that he unveiled them on a commemorative stone at Heriot-Watt University on his last day as First Minister in 2014.

Scotland is by far the worst country in the UK to be a disadvantaged student. The richest Scottish students are 3.53 times more likely to enter university at age 18 via UCAS than the poorest ones, compared with 2.58 in Northern Ireland, 2.56 in Wales and 2.52 in England. Fewer than one in ten young people from the most disadvantaged areas begin to study towards a degree by the age of 20. And the problems are actually getting worse: just 8.4 per cent of entrants to Scotland’s elite universities came from the poorest communities in 2014/15, down from 8.8 per cent the previous year.

Rather than being beneficiaries of free university tuition, poor Scots have actually been victims of it. Protecting Scottish students from university tuition fees has resulted in a £20 million transfer from disadvantaged students to middle-class ones, according to the policy analyst Lucy Hunter Blackburn. Free tuition has been funded by cutting student grants. And, for all Sturgeon’s disingenuous rhetoric that she would not have been able to afford university with the tuition fees south of the border, protecting Scottish students from tuition fees has been funded by loading debts onto the poorest Scottish students. There is an iron law in Scottish universities: poorest kids graduate with the most debt. Students from households earning less than £34,000 typically graduate with between £4,000 to £5,000 more debt than those from families earning more.

The situation in primary and secondary schools is little better. The Scottish Survey of Literacy and Numeracy shows standards of reading, writing and numeracy for 13-14-year-olds all declining since 2011. As if that wasn’t bad enough, the biggest decrease in both writing and numeracy attainment aged 13-14 has been among disadvantaged students.

Educational inequality cripples Scotland from an early age. At the age of five, the vocabulary of the poorest quintile of students is 13 months behind the richest quintile in Scotland. Poor children aged five perform worse than those in England; the gap in cognitive development between children from less well-off backgrounds and others is also bigger in Scotland. Disadvantaged children are the real victims of the SNP’s failure to make good on its pledge, in 2007, to reduce average class sizes in primary schools to 18; they are now 23.3. And this, in turn, can be traced back to the political choice to prioritise spending on free tuition fees over other areas that would help disadvantaged children far more. Between 2010 and 2013, school spending in Scotland fell by five per cent in real terms from 2010 to 2013 while, in England, it rose by three per cent in real terms between 2010 and 2015. Perhaps that explains why, after Easter, 17 schools in Edinburgh  remained closed because of safety concerns, leaving pupils to be taught in other schools and temporary classrooms instead.

The SNP is not only failing Scots in schools and universities. The number of working age adults living in absolute poverty (after housing costs) rose by 80,000 between 2010/11 and 2013/14; the number of children living in absolute poverty also rose by 30,000, and the number of pensioners by 20,000. Pockets of crippling intergenerational deprivation remain too frequent in Scotland: life expectancy in Glasgow is a year lower than in any other part of the UK. Indeed, life expectancy across Scotland is almost two years younger than the rest of the UK, even though Scotland has the highest health expenditure per head of any UK country.

It is a microcosm of wider problems with NHS Scotland. The SNP’s targets for waiting times for hospital admission have been repeatedly missed, including its “guarantee” of a 12-week maximum wait for planned treatment for inpatients. Patients are more likely to have to wait over 31 days for cancer treatment in Scotland than England, and the percentage waiting so long in Scotland has been rising since 2014. There are also grave health inequalities: those in most deprived areas are 2.4 times more likely to have a heart attack than those in the most affluent areas.

Yet perhaps the most shameful part of Scotland’s health record lies in mental health. Patients are 8 per cent more likely to have to wait over 18 weeks for psychological therapy based treatment than in England. Since July 2014, NHS Scotland has also repeatedly missed its targets on children’s mental health.

Do not expect the SNP to apologise for these failings anytime soon. And they do not really need to, so successful have they have been in creating a new paradigm in Scottish politics, in which the independence debate is the only game in town. But none of this should obscure the truth that the SNP have been in government, and with huge power, for nine years. They have floundered - and underprivileged Scots have been the biggest victims of all.

Tim Wigmore is a contributing writer to the New Statesman and the author of Second XI: Cricket In Its Outposts.