A Secular Market Nightmare
By: Alyssa A. Lappen
FrontPageMagazine.com | Friday, May 09, 2008
The global sub-prime mortgage mess would have been “unthinkable in the Islamic capital markets sector,” Malaysian Islamic finance scholar Mohammed Mahmud Awan told Arab News on April 24; Islamic law, or “shari'a principles” would prohibit selling “a debt against a debt,” Awan said at a Bahrain university globalization conference. Trading trillions of dollars in debt without assets backing them caused the crisis, Awan claimed, adding that the “Islamic finance model...would have easily prevented the current economic crisis.”
Others disagree. All “Islamic finance today is interest based,” notes Rice University Islamic economics, finance and management chairman Mahmoud el-Gamal in the Financial Times. Islamic banking, merely “shari’a arbitrage,” is “first and foremost about religious identity,” el-Gamal says.
Indeed, Islamic finance debt instruments are no better than Western mortgage securities, and probably worse. Islamic sukuk al-ijara (shari’a bonds) are merely reverse-engineered structured finance instruments. Many grave secular risks accompany the growing foothold of shari'a finance in the West.
Despite claims of their superior safety by International Center for Education in Islamic Finance professor Awan, Islamic financial institutions manufacture “special purpose entities” (SPEs)---which coincidentally helped destroy Enron. Islamic financial engineers merely renamed the prickly SPEs “special-purpose vehicles (SPVs)”---legal devices to “restructure interest-bearing debt, collecting interest [as] rent or [a] price mark-up,” el-Gamal observes.
Here's how they work: sukuk bond issuers sell real estate or assets to SPVs, which then capitalize their investment by selling share certificates. In turn, the SPVs then lease back the assets they purchased to the sukuk issuers, collecting principal plus interest, which they pass on to sukuk investors as “rent.” When the sukuk matures, the SPVs sell or return the property to the sukuk issuers. Supposedly safe “alternative” Islamic finance instruments that claim to avoid usury, in short, use Western structured finance tools---“some of the most complex ever created.”
Repeat. Using Western securitization technology, shari’a finance banks now transform liquid, traceable cash flows from interest-bearing debt---that is, real interest-bearing assets---into illiquid assets.
“Junk” synonymous with high yields
Shari'a finance is an “invented tradition” empowering Islamic radicals, writes USC King Faisal Professor of Islamic Thought, Timur Kuran, in Islam and Mammon: “Neither classical nor medieval Islamic civilization featured banks in the modern sense, let alone ‘Islamic banks’.” Thus, the Muslim Brotherhood (forefathers of current political Islam) heavily used modern Western securitization technology to advance MB founder Hassan al-Banna’s shari’a banking invention.
The messy sub-prime mortgage market---which some astute observers consider a mere extension of opaque Enron-era mark-to-fairly-tale accounting---could end tame compared to the 20th century-hatched shari'a banking boondoggle: The latter has far fewer regulatory or monitoring protections against abuses than the mortgage market. Even staunch Islamic banking purveyors admit: The industry's “documentation is not standardized,” its “inter-creditor agreements can be complex,” it frequently employs “off-balance sheet financing,” it's preferred by “certain corporate (sic) and individuals” --- and “Shari’a regulations can override commercial decisions.”
Western markets are now dangerously in “panic mode.” And as frequent experience demonstrates, the bigger the financial innovation, the greater the “unforeseen consequences”---i.e. market declines. In the 1987 equity market crash, “portfolio insurance” played a key role; in 1994, mortgage-backed bonds wiped out $1 trillion in value---then roughly 10% of the U.S. bond market. They whacked huge pension funds, municipalities and institutional investors---and beached a few hedge funds like dead whales.
Secular market risks of shari’a finance show in above-market sukuk interest rates---oops---rents. Despite Western central banks’ historic 2007 rate cuts to limit losses feared equal to the 1986 to 1995 savings and loan crisis, a sukuk index with a mere 3.8 year duration on Nov. 30, 2007 sported 6.2% “coupon.” In mid January 2008, intermediate Treasury yields were 2.89%---and the Lehman Brothers intermediate U.S. corporate bond index yielded just 5.25%. Only long-term U.S. corporate debt then paid above 6.5%.
Among other Islamic market hazards are doubts on surety of payments for the scheduled life of the sukuk loans---and whether, on maturity, investors will recover 100% of their principal. Then there are the dubious underlying “profit and loss sharing” Islamic finance philosophy. And possible back taxes, interest or penalties, were the Internal Revenue Service to rule sukuk enterprises “uneconomic,” as it did innumerable similarly-structured 1980s tax-shelter schemes.
Moody's Investors Service (like other financial rating agencies) now profits by formally assessing Islamic financial instruments Yet the industry has several major risks, a 16-page Moody's analysis reported in January 2008. These include its range of asset classes, “weak position of investment account holders,” “importance of the Shari'ah supervisory board,” rate-of-return-risks, new operation risks, short track record---and foundations in third world countries where transparency, corporate governance and risk management basically don't exist.
Ideological pitfall: Once Islamic, always Islamic
Moody's missed the biggest risk of all, however---the ideological risks of shari’a, or Islamic law--- despite a significant precedent. Citibank Islamic financiers launched its Saudi American Bank subsidiary in Jeddah and opened a Riyadh branch in 1955 and 1966 respectively---apparently without due diligence on operating under shari’a. But in 1980, Citibank learned about the risk of sudden confiscation when the Saudis abruptly seized SAB by royal decree, denied Citi all future profits, and ordered the bank to train Saudis staffers---essentially because the bank was insufficiently Muslim. Evidently, it was a case where “shari'a regulations can override commercial decisions.”
Shari'a banking is not governed by secular finance law alone. And it cannot be severed from the complete body of Islamic law---statutes initiated by Mohammed and developed by caliphs, scholars and jurists over 1,400 years.
These laws grant the Islamic ummah (Muslim nation) supremacy over all others---and give them all land and property to hold in trust for Allah. Under shari’a, land or property once conquered or acquired by Muslims cannot generally revert to its original owners.
Possessions confiscated from non-believers “is a way of exacting revenge,” writes 11th century jurist Abul Hasan al Mawardi. As Qur'an 57:2 argues, “To Him belongs all dominions of the heavens and earth.” Echoes Qur’an 59:7: “That which Allah giveth as spoil [war booty] unto his Messenger...it is for Allah and His Messenger and for the near of kin.…”
Al-Mawardi (d. 1058) holds that Allah authorized the 2nd Islamic Caliph, Umar Ibn Khattab, to confiscate property in three ways---by fulfilling a trust to Islam, by force, or by ruling under Allah's law---and that it is just to take anything from nonbelievers thereby. (The Laws of Islamic Governance, 1996 Ta-Ha edition, pp. 207-251)
Consider, moreover, modern Muslim Brotherhood applications of classical shari'a law. They claim all territories ever controlled by Islam. Islam will soon reconquer Rome, “the capital of the Catholics, or Crusader capital,” just like Constantinople, Hamas “legislator” Yunis Al-Astal preached on Al-Aqsa TV on April 11, 2008.
Similarly, Islamic laws are key to shari'a finance, MB “economic reforms,” and the MB central plan, “Towards a Worldwide Strategy for Islamic Policy.” Swiss police discovered the so-called Project, penned by Qaradawi, in MB chief financial officer Yusef Nada's Lugano villa in November 2001.
The 12-point handbook rests on shari'a interpretations of MB founder Hassan al-Banna, who in 1928 envisioned a caliphate (Islamic empire) to impose shari'a law globally. To establish the universal Islamic state, the plan orders Muslims to conduct “gradual, parallel work to control local power centers ...[with] institutional work as means to this end” and create “special Islamic economic, social and other institutions,” as well as “necessary economic institutions” to fund spreading fundamentalist Islam.
Far from benefiting investors, as Islamic finance “scholar” Nizam Yaquby claimed last October, shari'a doctrine advocates a supremacist ideology, commanding Muslims to wage jihad warfare until they subdue all “infidels” and “unbelievers” into accepting universal Muslim rule.
“Holy War is a religious duty, because of the universalism of the Muslim mission and (the obligation to) convert everybody to Islam either by persuasion or force,” argues 14th century Tunisian jurist Ibn Khaldun in The Muqaddimah. Unlike other faiths, he argues, Islam is obligated “to gain power over other nations.” (trans. Franz Rosenthal, abridged, Princeton Univ. Press, 9th printing, 1989, p. 183).
The MB invented shari'a banking and finance in the 20th century to implement classical financial jihad (jihad bi al-mal) and the Islamic statutes requiring it. Al Banna designed the political, economic and financial foundations that give 21st century Muslims tools to fulfill this classical form of jihad, mandated by and central to the Qur'an.
“True believers are those who strive with their wealth and their lives,” states Qur’an 49:15. “Strive for the cause of Allah with your wealth and your lives,” reiterates Qur'an 61:10-11. “Financial jihad is more important than self-sacrificing,” (suicide bombing) instructs Saudi MB cleric Hamud bin Uqla al-Shuaibi. Their sacrifices for Islam necessitates collecting money for mujahadeen, commands Qaradawi.
MB links to Saudi Arabia
Arabian King Saud bin Abdel Aziz welcomed Muslim Brotherhood exiles from Egypt in 1954, 1961 and 1964. He funded the MB’s Islamic University of Medina in 1961 to spread fundamentalist Islam, particularly to foreign students. Later, Saud and his heirs subscribed to the Brotherhood's bottom line: constructing a cornerstone global financial joint venture --- to fund charitable foundations.
The vast resulting web of “relief” organizations include the Muslim World League, Rabitta al-Alam al-Islami, and the International Islamic Releif Organization (IIRO) --- all implicated in funding al Qaeda, the 9/11 attacks, Hamas, and a vast array of other MB terrorist groups. As Qaradawi told BBC Panorama on July 30, 2006, donations constitute “jihad with money, because God has ordered us to fight enemies with our lives and our money.”
In 1969, the Saudis used MB guidelines to found the Organization of the Islamic Conference (OIC). In March 2008, President George W. Bush subserviently appointed Pakistani-born OIC “special envoy” Sada Cumber. Identifying with Texas “communities of the Muslim Umma” as much as the U.S., Cumber professes to bring to the OIC official U.S. resources to “tackle” Muslim world problems of “education, culture, the status of women, ... science and technology, ... [and] civil society...,” rather than present U.S. views there, as expected of diplomats.
More than solving problems, however, the OIC wants to “promote Islamic banking worldwide,” as with the 1973 founding of the Islamic Development Bank (IDB), which since 1975 approved over $50 billion in funding to Muslim nations. In 2001 alone, the IDB also transferred nearly $540 million from Saudi and Gulf royal telethons to fund suicide bombers and the Palestinian Authority war on Israel.
Universal Islamic banking—“a jihad worth supporting”
The MB and IDB Islamic banking architects also now control two central Islamic finance standard-setting agencies---the 1990-founded Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), and “de facto Islamic central bank,” or Islamic Financial Services Board (IFSB). Former Malaysian Prime Minister Mahathir Mohamed christened the latter in November 2002 “to absorb the 11 September shock and reinforce the stability of Islamic finance,” and support “a jihad worth pursuing to abolish ... slavery” to the West, namely, a “universal Islamic banking system.”
AAOIFI members include the Saudi Dallah al Baraka Group, al-Rajhi Banking & Investment Corporation, and Kuwait Finance House---all implicated in funding al Qaeda and other MB offspring, according to Richard Clarke, the former national coordinator for security, infrastructure protection, and counter-terrorism. Sudan and Iran---both on the Treasury Department’s Office of Foreign Assets Control (OFAC) sanctions list---are members too. Iran is also a U.S. State Department-designated terror-sponsoring nation.
IFSB members include the central banks of Iran, Sudan, and Syria (all designated state terrorism sponsors) and the Palestinian Monetary Authority (PMA), since its inception, widely documented to fund terrorism.
U.S. laws theoretically prohibit dealing with terrorists, their associates or enablers. Yet AAOIFI and its shari'a board advise many Western banks, Moody's and Dow Jones. Moreover, terror-supporting Pakistani cleric Muhammad Taqi Usmani heads AAOIFI religious advisers. In September 2007, he ordered British followers to remain “peaceful” only until they are “strong enough for jihad” and to “establish the supremacy of Islam.” Such radicals adorn shari'a boards advising U.S. banks.
Religious banks obviously cannot prevent financial crisis.Therefore, U.S. government and IRS regulators, bankers and investors should insist on keeping the best, safest and fairest secular markets in the world strictly unIslamic.
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