Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

Malaysia’s flag: modeled after the Stars and Stripes, but with a conspicuous symbol of Islam

Yesterday we saw that Malaysia’s educated workforce and liberal political leadership began asking themselves if their adherence to a literal Quranic interpretation was preventing Malaysia’s economy from growing, and hence impoverishing Malays.

Initial ideas came from Muslim revivalists in places like Egypt or Pakistan, who began Islamic banking experiments in the 1960s, often meeting opposition from secularist regimes.

 

As we saw in my five-part series on Turkey, capital liquidity triggers an economic boom, and as a result affordable housing becomes a rising political imperative. Innovation begets wealth which begets capital, which begets more innovation:

 

The financial innovations came in two by two

Malaysia’s government, by contrast, encouraged banks to replace interest-based transactions with arrangements that, while benchmarked to interest rates, are technically based on profit-sharing, leasing or trading — all activities permissible in Islam because they involve entrepreneurial work rather than simply money-lending.

 

Of course, lending is fraught with risk too.

Work-arounds begin as rough approximations and gradually improve, as their presence encourages symbiotic growth of the financial ecosystem, such as the enabling environment for capital (one of the four housing-finance roles of government):

 

The first step, in 1983, was to pass an Islamic banking law and set up Bank Islam, which gave out the nation’s first Islamic loans.

In the Islamic countries where I’ve worked, lack of mortgage finance has been a recurring problem. Turkey has just enacted a mortgage finance law, which will cause a housing and property boom. Egypt lacks a mortgage-finance infrastructure, which is inhibiting homeownership and distorting the rental and ownership markets. Malaysia’s success shows that while a

 

mortgage-finance or banking law is no oversight cure, give it two decades and the results are breathtaking.

An Islamic insurance company, Takaful Malaysia, was created the following year, and the country’s religious scholars issued a fatwa to spur stock-market investment — more than a decade before Saudi clerics followed suit.

 

Insurance for the globe-trotting Muslim

The political and theological endorsements are critical. Law, government, institutions, capital markets, consumer confidence — they all move together, they all reinforce one another. That’s why creating democracy out of the ruins of psychotic dictatorship is so difficult; you have to change so many things simultaneously, and some of them simply take a while to work.

 

In the 1990s, as Malaysia’s conventional banks were encouraged to open “Islamic windows,” the industry became a testing ground for big Western lenders.

I’ve previously posted about capital’s skittishness and the slow waltz between capital and property. Bankers have no recourse against the unbindable sovereign except to flee, taking their capital with them. When capital is sunk in real estate property, the property cannot flee, so capital is understandably cautious.

 

I’m not sure I want in

HSBC began Islamic banking in Malaysia in 1994, years before establishing its international Islamic franchise. Malaysia also introduced the first sukuk, or Islamic bonds, years before Middle Eastern clerics accepted the practice.

 

The bonds of commerce

It’s so much easier to innovate when undisturbed by jeremiads from central authority.

Though rival Islamic banking and capital-markets centers have since sprung up in Dubai, Bahrain and London, Malaysia still accounts for two-thirds of the world’s Islamic bond issuance.

 

First-mover advantages, followed by intellectual gravitic effect. In a very Michael-Porter-style evolution, all the smartest Islamic banking brains flocked to Malaysia, because that was where the action was, and the result is that Malaysia has become Islam’s banking laboratory.

 

Is it working yet?

The rough approximations have become asymptotically improved work-arounds, replicating the economics capital understands, in the shariah terms that strict Islam requires.

The country has achieved “the closest possible replication of conventional finance while giving it an Islamic label,” says Mahmoud El-Gamal, Egyptian-born chair of Islamic finance and economics [And financial blogger! — Ed.] at Rice University in Texas.

Invention has led to banking and trading, also in the same locales:

 

Some 80% of shares traded on Bursa Malaysia, the country’s stock exchange, are designated as compliant with Islam, while 12 Islamic banks and six Islamic units of conventional banks operate in Malaysia today, accounting for about 12% of total banking assets. The government expects the Islamic sector’s share to reach 20% of assets by 2010.

 

It should be no surprise that work-arounds are swiftly accepted by a country’s educational and economic elite; plutocrats always can rationalize their self-interest. But what about the ordinary customers, how do they feel about availing themselves of these newfangled innovations?

 

“No, really, it’s fully compliant”

Not surprisingly, those who use it like it:

One beneficiary is Azrulkhakim Suradi, the 31-year-old owner of a herbal-medicine business in the town of Shah Alam outside Kuala Lumpur. Mr. Azrulkhakim, who sports a shaggy beard and whose wife is shrouded in a black abaya, is a fervent Muslim believer and considers paying or receiving interest a grave sin.

Thanks to the availability of Islamic finance, Mr. Azrulkhakim became the first in his family to accept a bank loan. He has borrowed $43,000 from one Islamic bank to buy his dream car, a Mercedes-Benz C 200. He owes another Islamic bank $27,000 on a mortgage, and has just arranged financing for a second home. “I can sleep well at night,” Mr. Azrulkhakim beams, “because I can be sure that everything my bank is doing conforms with the way of Islam.”

 

Now I feel all better

Not every Muslim scholar would agree. One of the biggest issues in the industry is what exactly can be called Islamic. In the Middle East, the final answer usually lies with advisers on Shariah, or Islamic law, that every Islamic bank keeps on payroll. A few of the most senior clerics counsel dozens of institutions, and they often compete against each other in theological purity.

When God and Mammon butt heads, what’s a customer to do?

 

[Continues tomorrow in Part 3.]

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