Affordable Housing Institute : US

 

Money is like muck, not good except it be spread

– Francis Bacon, 1625

Before the Europeans arrived in the New World, the locals had no wheels; to haul heavy goods, they used toboggan or travois. There was no intrinsic reason they never used wheels, it appears that nobody thought of it or its potential utility.

 

Native culture, European import … a horse-drawn travois

For financial markets, and particularly for home ownership in an urbanized world, the wheel of commerce is the loan — debt finance, renting money on an agreed basis for a stipulated time. Without it capital is sluggish, and when capital is sluggish, so is the economy. Islam lacks the financial wheel because of some words Mohammed is said to have uttered on his deathbed. As reported in the Wall Street Journal:

 

The barrier that Islamic financial modernizers are trying to overcome is the Quranic prohibition on receiving or paying interest: “Allah permitted trading and forbade interest.” While ignored by many secular Muslims and the conventional banks that operate in most Muslim nations today, this ban has long denied the benefits of modern banking to strict believers — contributing, some say, to the Muslim world’s relative decline after interest-based bonds and loans powered the West’s Industrial Revolution.

 

For the Indians, travois were good enough — nobody had competitive advantage, and everybody got around, albeit inefficiently — until the Europeans arrived with the wheel, whereupon travois technology became instantly obsolete. In roughly the same way, Islam’s heartland in Arabia is being confronted with an import arising from outside, in this case Malaysia:

 

Six years ago, a Malaysian bank asked 80 financial institutions in the Persian Gulf for help in selling a corporate bond that complied with Islamic prohibitions on interest.

The corporate bond is a work-around — an object reverse-engineered around an obstacle, in this case the Quranic prohibition — to achieve the same results indirectly as if the obstacle were absent.

 

For legal purposes, that’s a straight line

As is so often the case, the new initiative was greeted with skepticism:

All but one declined to participate, branding the novel security “haram,” or banned by Islam.

Just a few months after the $150 million offering proved a success, however, many of these doubters shelved their theological qualms and came up with similar Islamic bonds of their own.

 

No fools they, the native Americans enthusiastically adopted the European invention (and the accompanying imports of horse and firearm), integrating them into their culture. Something similar is taking place within the Islamic world:

 

The global Islamic bond market that has developed since then is now worth an estimated $50 billion in securities outstanding, part of a burgeoning Islamic financial industry that’s fast approaching $1 trillion in assets. The torrents of cash that fuel this boom mostly come from the Persian Gulf’s oil bonanza.

Money is like muck, Francis Bacon sardonically observed, not good unless it be spread.

 

Bacon liked to spread it around

All that capital piling up, as currency, in Persian Gulf bank accounts, is a wasting asset unless invested. And there is not enough equity in the world to soak up that liquidity, so much of the capital demands to become debt. Pragmatism and faith collide, and where faith and dogma can be absolute, pragmatism is accommodating and flexible, especially if innovation can occur in a safer environment:

 

But it is distant Malaysia, thousands of miles to the east, that has emerged as the industry’s unlikely trailblazer.

 

South of China, north of Indonesia (the world’s most populous Muslim nation)

Innovation thrives when they are parallel experiments.

 

Give me enough time and I’ll invent new financial technology

“Malaysia is the catalyst for change,” says Faiz Azmi, Kuala Lumpur-based global head of Islamic finance at PricewaterhouseCoopers, the accounting and consulting firm. Much of what is now considered conventional in the industry, he explains, was test-driven here first — often against the objections of conservative clerics in places like Saudi Arabia.

 

Azmi likes thinking up new financial forms

Innovation also demands reality-based inquiry, free expression, and respect for property rights.

Now such innovations are not just commonplace in the Gulf, but also have become an important revenue source for Western financial giants with Islamic-banking divisions, such as Citigroup Inc. and HSBC Holdings PLC.

 

It’s probably a bit much to suggest that financial innovation represents the Reformation of doctrinaire Islam, but it’s worth noting that, as comprehensively and insightfully discussed by Fernand Braudel, Martin Luther’s 95 Theses arose in the context of a merchant banking revolution taking place in sixteenth-century Germany.

Literacy, good clothing, wealth … and a challenge to orthodoxy

Malaysia’s impact on the financial industry showcases a shift in the Muslim world’s balance of power.

Keep your eyes on this; in the long run, a market society is a property society, and a property society tends to be a civil society. If we are to save the world, the easiest path is to make the whole world rich.

 

For centuries, religious and cultural knowledge streamed from the Middle Eastern core to the Muslim periphery, as converted peoples in South and Southeast Asia adopted the Arabic script, traditions and mores.

 

Not only are the forms of capital finance a driver of change, so is the pace of expression.

But now, increasingly sophisticated Muslim communities in fast-growing Asian countries such as Malaysia are beginning to influence the Arab heartland, offering a vivid example that an embrace of the global economy can coexist with Islam.

 

A faster OODA loop is possible when more people can communicate, so migration to a flexible, accessible alphabet and language contributes to reform. Slower-moving innovators cannot keep up. Finance, therefore, forces cultural change, and not simply because finance makes people rich:

 

Malaysia’s cosmopolitan capital of Kuala Lumpur, a metropolis of glittering skyscrapers connected by futuristic monorail trains, is teeming these days with Arab tourists who gawk at the Petronas Towers, until recently the world’s tallest buildings. (They were eclipsed by the Taipei 101 tower in Taiwan.)

 

No bucks, no big towers

Unlike oil-rich Gulf monarchies that rely on guest labor, Malaysia derives its prosperity from an educated work force and cutting-edge manufacturing. Electric and electronic goods such as mobile phones, semiconductors and computer parts account for about half of its exports.

Peaceful Malaysia, so far spared the terrorist attacks that have rocked neighboring Indonesia, Thailand and the Philippines, also boasts a relatively liberal political system.

 

Cause, effect, or something else; does capital civilize? It seems so.

The latest ranking of political rights and civil liberties by Freedom House, a New York think tank, puts it ahead of all Arab nations.

The Malaysians think so too:

 

At home and abroad, Malaysia’s prime minister, Abdullah Ahmad Badawi, promotes his vision of “Islam Hadhari,” or civilizational Islam — stressing economic development, mastery of sciences, and respect for diversity as core values of the faith.

Reconciling modern finance with Islam is a key part of that vision. “Islamic finance is not just for the benefit of the Muslims,” Prime Minister Abdullah told a conference of Islamic bankers in Kuala Lumpur last month. “Its significance is far wider, and needs to be seen in the context of global peace and prosperity.”

Amen to that, brother.

 

Let’s make everybody rich!

 

In Malaysia, Muslim distrust of conventional finance has also helped cement the historic domination of the country’s economy by non-Muslim ethnic Chinese.

Many religions have regarded lending as synonymous with usury; Catholicism certainly did. Since money lending was denied to Christians, the role was filled by the Jews.

 

It’s a living

The same thing happened with Indians in South Africa. In all three cases, the immigrant minority is educated, hard-working, ethnically distinct (and not necessarily by its own choice), financially successful, and as such resented.

Which came first, the money lending or the hard work?

 

As Malaysia’s government sought to lift the Malay majority out of poverty and promote native entrepreneurship, it focused on creating an Islamic financial alternative.

 

Having noticed that abjuring money lending meant that the Chinese became rich and the Malaysians stayed poor, the Malaysians asked themselves, Is our own doctrine hobbling us?

 

Hard to achieve any velocity

[Continues tomorrow in Part 2.]

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