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Banking on Sharia

Sharia banking is growing fast and the mainstream banks are starting to offer Islamic accounts. Its

Sharia-compliant, or Islamic, finance is committed to promoting goals any proud progressive would recognise: equity, moderation, social justice. It is a system that revolves around prudent lending, the reduction of risk, the sharing of profits and an absolute ban on speculation and the short-selling of stocks. Debt is actively discouraged and so dealings with any organisation that has a balance sheet more than a third of which is debt (which is to say, all banks!) are forbidden, as are investments in enterprises deemed unethical by Islamic scholars, such as casinos or weapons factories.

Perhaps the rarest feature, however, is the prohibition of interest - or making money out of money. As it is not permissible for banks to charge interest on their loans, sharia-compliant deals are usually structured so that the bank ends up leasing the property to the homeowner, who essentially ends up paying rent until ownership is transferred. Critics charge that the rent seems suspiciously similar to interest payments. They also point out that it ends up costing homeowners more to set up and pay off Islamic mortgages than conventional products, like with all other niche products and, in particular, ethical investments: the so-called "piety premium".

Islamic financiers disagree, stressing the joint-ownership and profit-sharing aspects of the sharia model. "The relationship between us and the customer is based on sharing risk and sharing the rewards from the financing and investments we make on their behalf," says Sultan Choudhury, commercial director at the Islamic Bank of Britain, this country's only stand-alone, sharia-compliant retail bank. "The returns are based on the amount of profit realised from each transaction."

Let me declare an interest here (in case you had not already noticed the name on the byline): I am a Muslim myself, a practising, believing Muslim. Yet, to my shame perhaps, I own not a single sharia-compliant financial product or asset. Until the recent implosion of the banking system, I had paid very little attention to the Islamic finance industry, assuming it was simply a niche activity at best, or a gimmick at worst. As a result, my own current account, pension, mortgage, loans and credit cards are all as traditional, conventional and mainstream as the next (non-Muslim) man.

Islamic finance marries the freedom of the market economy to the fairness of social democracy

Yet the reality is that Islamic finance is growing faster than any other subset of world banking, at an average annual rate of between 15 and 20 per cent. The IMF says the number and reach of sharia-compliant financial institutions worldwide has risen from one institution in one country in 1975 to more than 300 institutions operating in more than 75 countries today. Over the past year alone, sharia-compliant assets across the globe have grown by almost a third to more than $639bn, according to the latest analysis of the industry from the Banker magazine. If the current trends continue, Islamic finance will have broken through the $1trn mark by 2010.

Here in Britain, the Financial Services Authority has licensed five stand-alone Islamic banks - including the Islamic Bank of Britain, which has been reporting a significant increase in the number of non-Muslim customers applying for accounts since the start of the financial crisis. Bank officials say the numbers are growing because Islamic finance offers a "safer option" for savers and investors, regardless of faith. According to the Islamic Bank of Britain's marketing director, Steven Amos: "Our core business will always be Muslims, but the numbers of non-Muslims are really picking up. We've had increased interest and it's one of the number of reasons why we're insulated from the credit crunch."

To get an Islamic bank account you don’t have to go to the Islamic Bank of Britain only. So far, 20 major global banks have set up units to provide sharia-compliant financial services. HSBC began offering Islamic products and services to its customers in 2003; Lloyds TSB followed in 2005. The mainstream has gone Muslim.

Emile Abu-Shakra, spokesman for Lloyds TSB, explains. "We started offering Islamic financial products about three years ago and when we started out we were just in five branches around the country," he says. "Now we are in two thousand branches."

The bank has now expanded its range of products to include a current account, a mortgage, a student account, an investment fund and a business and corporate account. Its Islamic finance products are designed with Muslims in mind, but anyone can use them if they fulfil their needs.

Does Lloyds TSB believe further growth and diversification in the field are still possible? "The principles of Islamic finance could be applied to a number of different products, so there are possibilities for Islamic versions of credit cards, loans, saving accounts and asset finance as well," says Abu-Shakra. "It's just a matter of time."

The remarkable feature of Islamic financial institutions, products and assets is that, although they may have not produced fantastically high returns in any one year, they have produced consistent returns over the past decade - and continue to do so even now, in the wake of the credit crunch. This year, global markets are down by more than a third off their peak but the Dow Jones Islamic Financials Index, in comparison, has lost 7 per cent over the same period and actually rose 4.75 per cent in the most recent September quarter.

Such statistics make me truly wonder whether Islamic banking, with its antipathy towards excessive risk, debt and interest, and with its emphasis on linking deposits and investments to real, underlying assets, could have saved us from the credit crunch.

"Had the Islamic financing principle of fairness and the concept of investing in partnership been slightly more prevalent in conventional banking of late, events may have turned out a little differently," says Dan Taylor, head of banking at the accountancy giant BDO Stoy Hayward. "The Islamic principle of requiring securities to be backed by assets means that the use of, say, collateralised debt oblig a tions, or CDOs, would not have been allowed by sharia-compliant institutions."

Professor Rodney Wilson, who teaches Islamic finance at Durham University, agrees. He mentions that not a single sharia-compliant financial institution has failed since the start of the current crisis. Why? "Islamic banks follow a classical model of funding from their own deposits rather than borrowing from wholesale markets."

Excessive leverage is therefore not an option for a sharia-compliant bank - as opposed to conventional banks, which in this country by 2008 were lending out roughly £700bn more than they took in deposits, betting that the good times would go on for ever and tomorrow would never come.

Well, it did: the conventional banking sector is now on the verge of collapse. Meanwhile, Islamic institutions here in Britain continue to make money. The European Islamic Investment Bank, a UK AIM-listed sharia-compliant investment bank, reported revenues up 14 per cent in June 2008 interims. On the retail side, the Islamic Bank of Britain reported 5.5 per cent growth in customer numbers and 7.2 per cent growth in customer deposits in the six months to June.

So, it is no wonder that the British government - despite distancing itself from the Archbishop of Canterbury's ten tative support for sharia law courts - has been proactively encouraging the proliferation of sharia-compliant financial institutions for several years now. When he was chancellor, Gordon Brown repeatedly urged the City of London to become the "gateway to Islamic finance".

Just late last month, the government announced the launch of the first sharia-compliant pension funds, and officials are now even considering using special interest-free, asset-backed Islamic bonds, or sukuks, to help fund the building of the athletes' village for the London 2012 Olympics.

 

In America early last month, the US treasury

department hosted a course for policymakers called “Islamic Finance 101”. This followed a visit to Saudi Arabia by the treasury deputy secretary Robert Kimmitt, during which he confirmed that sharia-compliant finance is now firmly on his country’s agenda. “The US government is studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis,” he said.

The Islamic finance industry is entering a brave and surprisingly welcoming new world - but obstacles remain. Determining exactly what is or isn't sharia-compliant, for example, can be difficult. Banks such as HSBC and Lloyds TSB have their own sharia advisory boards, made up of senior Islamic scholars, but one board's interpretation of compliance with the sharia is not necessarily the same as another's. Standardisation of rules and regulations across the sector is vital, but could take some time.

It could also be a while before we even have enough scholars to carry out the standardising - right now, according to one survey, there are only about 260 Islamic scholars worldwide who have the requisite knowledge, business savvy and linguistic skills.

However, others, like Professor Wilson, are more sanguine. "The shortage of qualified and experienced scholars should not be a problem in the longer run, as there are aspiring British Muslim scholars studying for higher degrees who have a good knowledge of both Islamic law and modern finance."

So Islamic banking is here to stay. It is a practical, viable and resilient alternative. To borrow a phrase from the Archbishop of Canterbury, the spread of sharia finance, if not sharia law, now "seems unavoidable".

I have even convinced myself: I now intend to invest in a sharia-friendly sukuk and to try to switch my interest-only conventional mortgage to an interest-free Islamic version. In this era of financial crises and economic chaos, it may be time for all of us - Muslims and non-Muslims, investors and savers alike - to join the halal banking revolution.

It may be our only hope.

Mehdi Hasan is news and current affairs editor at Channel 4

Mehdi Hasan is a contributing writer for the New Statesman and the co-author of Ed: The Milibands and the Making of a Labour Leader. He was the New Statesman's senior editor (politics) from 2009-12.

This article first appeared in the 15 December 2008 issue of the New Statesman, The power of speech

Jeremy Corbyn. Photo: Getty
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Lexit: the EU is a neoliberal project, so let's do something different when we leave it

Brexit affords the British left a historic opportunity for a decisive break with EU market liberalism.

The Brexit vote to leave the European Union has many parents, but "Lexit" – the argument for exiting the EU from the left – remains an orphan. A third of Labour voters backed Leave, but they did so without any significant leadership from the Labour Party. Left-of-centre votes proved decisive in determining the outcome of a referendum that was otherwise framed, shaped, and presented almost exclusively by the right. A proper left discussion of the issues has been, if not entirely absent, then decidedly marginal – part of a more general malaise when it comes to developing left alternatives that has begun to be corrected only recently, under Jeremy Corbyn and John McDonnell.

Ceding Brexit to the right was very nearly the most serious strategic mistake by the British left since the ‘70s. Under successive leaders Labour became so incorporated into the ideology of Europeanism as to preclude any clear-eyed critical analysis of the actually existing EU as a regulatory and trade regime pursuing deep economic integration. The same political journey that carried Labour into its technocratic embrace of the EU also resulted in the abandonment of any form of distinctive economics separate from the orthodoxies of market liberalism.

It’s been astounding to witness so many left-wingers, in meltdown over Brexit, resort to parroting liberal economics. Thus we hear that factor mobility isn’t about labour arbitrage, that public services aren’t under pressure, that we must prioritise foreign direct investment and trade. It’s little wonder Labour became so detached from its base. Such claims do not match the lived experience of ordinary people in regions of the country devastated by deindustrialisation and disinvestment.

Nor should concerns about wage stagnation and bargaining power be met with finger-wagging accusations of racism, as if the manner in which capitalism pits workers against each other hasn’t long been understood. Instead, we should be offering real solutions – including a willingness to rethink capital mobility and trade. This places us in direct conflict with the constitutionalised neoliberalism of the EU.

Only the political savvy of the leadership has enabled Labour to recover from its disastrous positioning post-referendum. Incredibly, what seemed an unbeatable electoral bloc around Theresa May has been deftly prized apart in the course of an extraordinary General Election campaign. To consolidate the political project they have initiated, Corbyn and McDonnell must now follow through with a truly radical economic programme. The place to look for inspiration is precisely the range of instruments and policy options discouraged or outright forbidden by the EU.

A neoliberal project

The fact that right-wing arguments for Leave predominated during the referendum says far more about today’s left than it does about the European Union. There has been a great deal of myth-making concerning the latter –much of it funded, directly or indirectly, by the EU itself.

From its inception, the EU has been a top-down project driven by political and administrative elites, "a protected sphere", in the judgment of the late Peter Mair, "in which policy-making can evade the constraints imposed by representative democracy". To complain about the EU’s "democratic deficit" is to have misunderstood its purpose. The main thrust of European economic policy has been to extend and deepen the market through liberalisation, privatisation, and flexiblisation, subordinating employment and social protection to goals of low inflation, debt reduction, and increased competitiveness.

Prospects for Keynesian reflationary policies, or even for pan-European economic planning – never great – soon gave way to more Hayekian conceptions. Hayek’s original insight, in The Economic Conditions of Interstate Federalism, was that free movement of capital, goods, and labour – a "single market" – among a federation of nations would severely and necessarily restrict the economic policy space available to individual members. Pro-European socialists, whose aim had been to acquire new supranational options for the regulation of capital, found themselves surrendering the tools they already possessed at home. The national road to socialism, or even to social democracy, was closed.

The direction of travel has been singular and unrelenting. To take one example, workers’ rights – a supposed EU strength – are steadily being eroded, as can be seen in landmark judgments by the European Court of Justice (ECJ) in the Viking and Laval cases, among others. In both instances, workers attempting to strike in protest at plans to replace workers from one EU country with lower-wage workers from another, were told their right to strike could not infringe upon the "four freedoms" – free movement of capital, labour, goods, and services – established by the treaties.

More broadly, on trade, financial regulation, state aid, government purchasing, public service delivery, and more, any attempt to create a different kind of economy from inside the EU has largely been forestalled by competition policy or single market regulation.

A new political economy

Given that the UK will soon be escaping the EU, what opportunities might this afford? Three policy directions immediately stand out: public ownership, industrial strategy, and procurement. In each case, EU regulation previously stood in the way of promising left strategies. In each case, the political and economic returns from bold departures from neoliberal orthodoxy after Brexit could be substantial.

While not banned outright by EU law, public ownership is severely discouraged and disadvantaged by it. ECJ interpretation of Article 106 of the Treaty on the Functioning of the European Union (TFEU) has steadily eroded public ownership options. "The ECJ", argues law professor Danny Nicol, "appears to have constructed a one-way street in favour of private-sector provision: nationalised services are prima facie suspect and must be analysed for their necessity". Sure enough, the EU has been a significant driver of privatisation, functioning like a ratchet. It’s much easier for a member state to pursue the liberalisation of sectors than to secure their (re)nationalisation. Article 59 (TFEU) specifically allows the European Council and Parliament to liberalise services. Since the ‘80s, there have been single market programmes in energy, transport, postal services, telecommunications, education, and health.

Britain has long been an extreme outlier on privatisation, responsible for 40 per cent of the total assets privatised across the OECD between 1980 and 1996. Today, however, increasing inequality, poverty, environmental degradation and the general sense of an impoverished public sphere are leading to growing calls for renewed public ownership (albeit in new, more democratic forms). Soon to be free of EU constraints, it’s time to explore an expanded and fundamentally reimagined UK public sector.

Next, Britain’s industrial production has been virtually flat since the late 1990s, with a yawning trade deficit in industrial goods. Any serious industrial strategy to address the structural weaknesses of UK manufacturing will rely on "state aid" – the nurturing of a next generation of companies through grants, interest and tax relief, guarantees, government holdings, and the provision of goods and services on a preferential basis.

Article 107 TFEU allows for state aid only if it is compatible with the internal market and does not distort competition, laying out the specific circumstances in which it could be lawful. Whether or not state aid meets these criteria is at the sole discretion of the Commission – and courts in member states are obligated to enforce the commission’s decisions. The Commission has adopted an approach that considers, among other things, the existence of market failure, the effectiveness of other options, and the impact on the market and competition, thereby allowing state aid only in exceptional circumstances.

For many parts of the UK, the challenges of industrial decline remain starkly present – entire communities are thrown on the scrap heap, with all the associated capital and carbon costs and wasted lives. It’s high time the left returned to the possibilities inherent in a proactive industrial strategy. A true community-sustaining industrial strategy would consist of the deliberate direction of capital to sectors, localities, and regions, so as to balance out market trends and prevent communities from falling into decay, while also ensuring the investment in research and development necessary to maintain a highly productive economy. Policy, in this vision, would function to re-deploy infrastructure, production facilities, and workers left unemployed because of a shutdown or increased automation.

In some cases, this might mean assistance to workers or localities to buy up facilities and keep them running under worker or community ownership. In other cases it might involve re-training workers for new skills and re-fitting facilities. A regional approach might help launch new enterprises that would eventually be spun off as worker or local community-owned firms, supporting the development of strong and vibrant network economies, perhaps on the basis of a Green New Deal. All of this will be possible post-Brexit, under a Corbyn government.

Lastly, there is procurement. Under EU law, explicitly linking public procurement to local entities or social needs is difficult. The ECJ has ruled that, even if there is no specific legislation, procurement activity must "comply with the fundamental rules of the Treaty, in particular the principle of non-discrimination on grounds of nationality". This means that all procurement contracts must be open to all bidders across the EU, and public authorities must advertise contracts widely in other EU countries. In 2004, the European Parliament and Council issued two directives establishing the criteria governing such contracts: "lowest price only" and "most economically advantageous tender".

Unleashed from EU constraints, there are major opportunities for targeting large-scale public procurement to rebuild and transform communities, cities, and regions. The vision behind the celebrated Preston Model of community wealth building – inspired by the work of our own organisation, The Democracy Collaborative, in Cleveland, Ohio – leverages public procurement and the stabilising power of place-based anchor institutions (governments, hospitals, universities) to support rooted, participatory, democratic local economies built around multipliers. In this way, public funds can be made to do "double duty"; anchoring jobs and building community wealth, reversing long-term economic decline. This suggests the viability of a very different economic approach and potential for a winning political coalition, building support for a new socialist economics from the ground up.

With the prospect of a Corbyn government now tantalisingly close, it’s imperative that Labour reconciles its policy objectives in the Brexit negotiations with its plans for a radical economic transformation and redistribution of power and wealth. Only by pursuing strategies capable of re-establishing broad control over the national economy can Labour hope to manage the coming period of pain and dislocation following Brexit. Based on new institutions and approaches and the centrality of ownership and control, democracy, and participation, we should be busy assembling the tools and strategies that will allow departure from the EU to open up new political-economic horizons in Britain and bring about the profound transformation the country so desperately wants and needs.

Joe Guinan is executive director of the Next System Project at The Democracy Collaborative. Thomas M. Hanna is research director at The Democracy Collaborative.

This is an extract from a longer essay which appears in the inaugural edition of the IPPR Progressive Review.

 

 

This article first appeared in the 15 December 2008 issue of the New Statesman, The power of speech