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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

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The Catalan cauldron

The prospect of the break-up of Spain poses yet another challenge to Europe.

As Britain prepares to mark the centenary of the bloodiest battle in the First World War, the Somme, in July, Spain is bracing itself for an even more traumatic anniversary. In July 2016 it will be 80 years since the start of a civil war that tore the country apart and continues to divide it today. In the four decades since the return of democracy in the mid-1970s, Spaniards slowly inched towards rejecting the extreme violence of the Francoist right (and elements of the opposing left) as well as acceptance of various federal arrangements to accommodate the national sentiments of the Basques and Catalans, whose aspirations Franco had so brutally suppressed. In recent years, however, this consensus has been called fundamentally into question, with severe potential consequences not only for the unity of Spain, but the cohesion of the European Union.

On 27 October 2015, after the Catalan elections, the new parliament in Barcelona passed a declaration requesting the start of a formal secession process from Spain, to be in place in 18 months. The immediate reaction of Spain’s prime minister, Mariano Rajoy, was to announce that the state was entitled “to use any available judicial and political mechanism contained in the constitution and in the laws to defend the sovereignty of the Spanish people and of the general interest of Spain”. The preamble to the constitution proclaims the Spanish nation’s desire to “protect all Spaniards and the peoples of Spain in exercising their ­human rights, their cultures and traditions, languages and institutions”. Probably the most disputed articles are 2 and 8, which state, respectively, that “the constitution is based upon the indissoluble unity of the Spanish nation, common and indivisible patria of all Spaniards” and that “the army’s mission is to guarantee the sovereignty and independence of Spain, to defend its territorial integrity and the constitutional set-up”. Rajoy’s implication was clear: the unity of the country would be maintained, if necessary by military means.

It was Madrid, however, that broke with the federal consensus some years ago and thus boosted secessionist sentiment in Catalonia. José María Aznar’s government (1996-2004) failed to respond to demands for greater autonomy for Catalonia, at a time when secession was not even mentioned. This led to an increasing awareness among Catalans that the federal transfer system within Spain left them with an annual deficit of 8 per cent of Catalonia’s GDP because of the financial arrangements established by the Spanish state, an issue aggravated by the effect of the global financial crisis. Catalan nationalism thus became a matter of not only the heart, but also the pocket. Even more important was the Spanish legal challenge to the Statute of Autonomy of Catalonia 2006 and its subsequent dilution, after it had been sanctioned by the Catalan parliament, and by both the Spanish congress of deputies and the senate, not to mention the Catalan people in a legally binding referendum.

According to the Spanish high court of justice, some of the statute’s content did not comply with the Spanish constitution. This outraged many Catalans, who could not understand how the newly approved statute – after following all the procedures and modifications requested by Spain’s political institutions and constitution – could still be challenged. Four years later, the Spanish high court finally delivered its verdict on 28 June 2010. It removed vital points from the Statute of Autonomy 2006 and declared them non-constitutional. All this led to a revival of Catalan nationalism, culminating in a symbolic, non-binding referendum in November 2014, which was boycotted by opponents and produced a majority of 80 per cent in favour of independence.

The roots of this antagonism go deep, to the civil war that broke out on 17-18 July 1936 when some sectors of the army rebelled against the legitimate government of the Second Republic. The rebels rejected democracy, the party system, separation between church and state, and the autonomy of Catalonia, the Basque Country and Galicia. Their primary objective was to re-establish “order” by eliminating all vestiges of communism and anarchism, then quite strong in some parts of Spain.

High on the list of General Franco’s targets was Catalan nationalism, which had been growing since the late 19th century. The industrialisation of Catalonia and the Basque Country left the most economically developed parts of the Spanish state politically subject to the less prosperous Castile. By the end of the 19th century and influenced by German Romanticism, la Renaixença – a movement for national and cultural renaissance – prompted demands for Catalan autonomy, first in the form of regionalism
and later in demands for a federal state.

Catalan nationalism did not emerge as a unified phenomenon. Diverse political ideologies and cultural influences gave rise to various types of nationalism, from the conservative nationalism of Jaime Balmes to the federalism of Francesc Pi i Margall, to the Catholic nationalism of Bishop Torres i Bages and the Catalan Marxism of Andreu Nin, among others. Catalonia enjoyed some autonomy under the administrative government of the Mancomunitat or “commonwealth” from 1913 onwards. This was halted by the 1923 coup d’état of the dictator Miguel Primo de Rivera. Autonomy was granted again during the Second Spanish Republic from 1931-39 – but abolished by Francisco Franco’s decree of 5 April 1938.

Franco’s victory led to the suppression of Catalan political institutions, the banning of the Catalan language and proscription of all the symbolic elements of Catalan identity, from the national flag (the Senyera) to the national anthem (“Els Segadors”). In February 1939, the institutions of the autonomous Generalitat went into exile in France. In 1940 the Gestapo arrested the president of the Generalitat, Lluís Companys, and handed him over to Spanish officials. He was interrogated and tortured in Madrid, then sent to Barcelona, where he was court-martialled and executed at Montjuïc Castle on 15 October 1940. The most important representatives of the democratic parties banned by the regime went into exile, or were imprisoned or executed. The authoritarian state designed by Franco crushed dissent and used brute power to suppress the historical nations included within its territory. The regime’s aim was to annihilate the Catalans and the Basques as nations.

***

After almost 40 years of Franco’s dictatorship, Catalonia recovered its government, the Generalitat, in 1977 – before the drafting of the Spanish constitution in 1978 – and sanctioned a new statute of autonomy in 1979. The 2006 statute was expected, at the time, to update and expand Catalans’ aspiration for further devolution within Spain: never secession.

At present, a renewed nostalgia and enthusiasm for Francoism can be found among some sections of the Spanish right. One of the main challenges of the newly democratic government from the mid-1970s onwards was to get rid of the symbols of Francoism that had divided Spaniards between “winners” and “losers” in the civil war. It was only in 2007 that the then prime minister, José Luis Rodríguez Zapatero, guided the Law of Historic Memory through parliament with the aim of removing hundreds of Fascist symbols reminiscent of the Franco era from public buildings. It also sought to make reparations to victims of the civil war and the ensuing dictatorship.

There still exist hundreds of other references to the Fascist regime, however, with streets, colleges and roads named after Franco and his generals. The most controversial of these is the Valle de los Caídos (“Valley of the Fallen”), near Madrid, commissioned by Franco as his final resting place. It supposedly honours the civil war dead, but is primarily a monument to the general and his regime, housing the graves of Franco and José Antonio Primo de Rivera, the founder of the fascist Falange political party. Roughly 450,000 people visit it every year, and while most of them are foreign tourists, groups of Falangists and supporters of the old regime who come to pay tribute to the dictator have frequented it. Nostalgics for Francoism, though still a small minority within modern Spain, are becoming vociferous. They find common ground with far-right-wing conservatism, particularly in their shared aversion to federalism.

On 3 August last year Artur Mas, the then president of Catalonia, called an extraordinary parliamentary election after all attempts to negotiate and agree on a legally binding referendum with the Spanish government failed. Supporters of independence immediately announced that the forthcoming Catalan elections would be regarded as a plebiscite on independence.

On a turnout of more than three-quarters of the electorate, supporters of outright independence gained 48 per cent of the vote, while those backing a unitary state secured 39 per cent. On 9 November 2015 the Catalan parliament formally declared the start of the process leading to building an independent Catalan state in the form of a republic. It also proclaimed the beginning of a participative, open, integrating and active citizens’ constituent process to lay the foundations for a future Catalan constitution. The Catalan government vowed to move forward with its secession process. Immediately, the Spanish Constitutional Court suspended the Catalan law setting out a path to independence and warned that defiance could lead to criminal charges.

Worse still for Madrid, secessionism is gaining strength not only in Catalonia but also in the Basque Country, whose premier, Iñigo Urkullu, demands a “legal consultation” on the northern region’s future in Spain. He supports a new statute for the Basque Country and defends its status as a nation in the EU. Similarly to Catalonia, the Basque Country has a distinct language and culture, and benefits from the so-called concierto económico, an advantageous financial deal with the Spanish state.

***

The Spanish government’s refusal to engage constructively with Catalan nationalism contrasts markedly with London’s more relaxed and ultimately more successful response to Scottish nationalist aspirations. The “Edinburgh Agreement” between the British Prime Minister and the then first minister of Scotland to allow a binding referendum on Scottish independence stands in sharp contrast to the Spanish government’s outright opposition to a similar vote in Catalonia. Basques and Catalans find deaf ears regarding further devolution and binding referendums on self-determination. This highlights the distance between various conceptions of democracy that coexist inside the European Union, rooted in the diverse political cultures of nations with varying historical backgrounds.

All this matters, not only to Spain but to the EU, because it is part of a broad trend across the continent. In mainland Europe, demands for self-determination are running strong in Flanders as well as parts of Spain. In turn, tensions between Italy and Austria over control of South Tyrol (Trentino Alto Adige, to the Italians) remain high, as do demands advanced by the South Tyrol­ean secessionist movement. Bavarian regionalism is critical of the present German (and European) political order. Further to that, modern Venetian nationalism and its long-standing demands for independence have prompted a renewal of Venetian as a language taught in schools and spoken by almost four million people.

Matters are now coming to a head. Catalonia and Spain are in flux following two inconclusive elections. In January, after a prolonged stand-off, the sitting Catalan president, Artur Mas, made way for a fellow nationalist, Carles Puigdemont. He was the first to take the oath of office without making the traditional oath of loyalty to the Spanish constitution and the king. Felipe VI, in turn, did not congratulate Puigdemont.

The new president has announced that he plans to draw up a constitution, to be voted on in a referendum “to constitute the Catalan Republic” at the end of an 18-month consultation process. Puigdemont’s strategy envisages not a dramatic unilateral declaration
of independence, but a more gradual process of disconnection in constant dialogue with the Spanish government and Catalan political parties. Let no one be deceived by this “softly-softly” approach: it is designed to culminate, in a year and a half, perhaps sooner, in a vote on establishing a separate, sovereign state of Catalonia.

Meanwhile, Spanish politics are in flux. The elections to the Cortes on 20 December 2015 resulted in a victory for Conservatism, but also the most fragmented Spanish parliament ever and, as yet, no government. Almost the only thing the Spanish parties can agree on is opposition to Catalan independence, yet even here there are divisions over whether more autonomy should be granted and what response to make to unilateral moves by the Catalans.

The stakes are high for both sides. By pressing too hard, too early, Catalan nationalists may provoke Madrid. This would be a mistake. Strategy is important and recent events in Catalonia will weaken the Catalans’ democratic, peaceful and legitimate desire to hold a referendum on independence. Likewise, a heavy-handed response from Madrid will not only destroy the residual bonds between centre and periphery in Spain, but put the central government in the dock internationally. A confrontation will also cut across the only possible solution to this and all other national conflicts within the eurozone, which is full continental political union. Full union would render the separation of Catalonia from Spain as irrelevant to the functioning of the EU, and the inhabitants of both areas, as the separation of West Virginia from Virginia proper in the United States today.

In a nightmare scenario, radicalisation and unrest could emerge in Catalonia, with division between Catalans and memories of the Spanish Civil War coming to the fore. In this context, it might become very difficult to prevent violence.

This is the last thing that Brussels wants to hear as it grapples with the euro crisis, Russian territorial revisionism, Islamist terror, the migrant question and the prospect of Brexit. A meltdown in Catalonia will create dilemmas for Europe, starting from problems with Schengen, and raise questions about continued membership of the EU. It will also work against Catalans’ expectations of receiving EU support in their quest for independence, as turmoil in Europe will prompt nation states to close ranks. The EU will not be expected to intervene, because this scenario would – at least initially – be defined as an “internal affair of Spain”. Conflict between Barcelona and Madrid would shatter one of Europe’s biggest member states.

In that event, the peninsula will become the hottest point in an emerging “arc of crisis” across the southern flank of the EU, stretching from Portugal across Spain, an Italy struggling along with everything else to cope with the flow of migrants, the troubled Balkans, to Greece, which is perpetually perturbed. This highlights yet another flaw in the EU. It has no institutional framework for dealing with Catalan demands to become a nation within the Union, or those of other populations. Merely insisting on Spanish state sovereignty will not make the problem go away for Brussels, or for Europe as a whole. This is a potential matter of life and death not only for Spaniards and Catalans, but perhaps for the EU itself.

Brendan Simms is the director of the Forum on Geopolitics at the University of Cambridge and president of the Project for Democratic Union Montserrat Guibernau is a visiting scholar in the Department of Politics and International Studies at Cambridge and a member of the Forum on Geopolitics

This article first appeared in the 21 April 2016 issue of the New Statesman, Shakespeare 400 years Iater