Affordable Housing Institute : US

[Continued from the previous Part 1 and Part 2.]

 

Previously we’ve seen that Malaysia pioneered Islamic finance, leading both to its own wealth and success and also to a hotbed of new financial products that very clever people in tall buildings have managed to reverse-engineer ever closer to mortgage and debt-equivalents. Each such innovation requires a further adjudication of its compliance, for clarity and consistency of guidance is essential to a functioning market; ordinarily, these are provided by government. This creates a problem when religion appeals to a higher power than government, which is why church and state so often work out a modus vivendi.

 

Give me what I want, or I’ll dissolve all your monasteries

By contrast, Malaysia is promoting its vision through a centralized religious regulator, the Shariah Advisory Council of the central bank, Bank Negara.

In other words, Malaysia has appointed a single clerical body as its Supreme Court of shariah lending. Any other solution would permit competing legally or theologically binding opinions of compliance, and would defeat the entire purpose of a market.

 

Last year, this clerical body — which must approve all Islamic financial products — bestowed its blessing on:

· Islamic real-estate investment trusts

· Structured dual-currency derivatives

· Islamic stock index funds and

· Shariah-compliant single-stock futures

 

These are some smart imams.

More innovation is in the pipeline. “The nomenclature may be suspicious — hedge funds, derivatives — and sounds very Western, but we have to make these products Islamic,” says the Shariah Advisory Council’s chairman, Mohamad Daud Bakar, 43, who wears a dark suit and a tie and holds a doctorate from the University of St. Andrews in Scotland. “We need to be able to protect from risk.”

 

Workarounds become think-arounds, which become think-changers.

 

Free your money/ and your debts will follow

Dr. Daud is unapologetic about the fact that many recent Islamic financial products, while technically based on lease or trade contracts, have become virtually indistinguishable from those offered by interest-driven Western finance.

 

Numbers are their own reality; words are a descriptor. The same set of payments can be called a lease, a swap with rights to re-swap, a structured equity investment, or a loan. If one set of words addresses the doctrinal problem, then that set of words is adopted. But it’s all the same numbers, the same finance.

“It’s all about the journey you take to that destination,” he says, drawing a parallel between financial gain and sex.

 

A seeker of sexual pleasure, he explains, can get married or fornicate on the side — just as a seeker of financial gain can profit from an Islamic sukuk or a conventional bond.

 

I wonder if it’s permissible?

“You’ll have enjoyment in both cases,” Dr. Daud chuckles, “but one is halal [permissible] and the other is not.”

Malaysia’s comparatively liberal approach, as championed by Dr. Daud’s council, has often earned the country criticism from Islamic clerics in the Middle East and Pakistan.

 

In much the same way that some evangelicals in the United States (or, for that matter, within the Catholic Church) have their doubts about sex whose purpose is other than procreative.

Dr. Daud, who also studied in Kuwait and speaks fluent Arabic, says he frequently engages in “heated” discussions with Arab scholars when traveling to the Gulf.

 

Yes, I expect he would.

This continuing doctrinal discord means that most sukuk denominated in Malaysia’s currency, the ringgit, are still considered unacceptable in the Middle East, as are some lending practices widely used by Malaysian banks. The Arabs “are treating us as small brothers,” complains Mohamad Bakir Mansor, a Malaysian scholar of Islamic finance who advises Bank Islam and Takaful Malaysia on Shariah. “They consider themselves senior and have an attitude.”

Cultural snobbery tends to persist for a while — the Jews in Europe experienced its virulent form for centuries, and the South African Indians have had a long road too.

 

I’ve got ideas about British law

Aware of this attitude, Malaysian banks in recent years have concentrated on crafting new structures based on leasing contracts, known as ijara, for global dollar-denominated sukuk marketed to Arab investors.

 

Isn’t it nice to know that whereas the Malaysian ringgit may be considered questionable, that good old American dollar is better?

 

I don’t know about these …

Here’s an expanded description:

How it works:

· You identify the property you wish to buy and agree the purchase price with the seller in the normal way.

· You approach us for assistance and complete an application form (see section ‘do I qualify’)

· If we are able to help, AUB (UK) will buy the property in its name, after solicitors have confirmed that everything is in order.

· We will then sell the property to you as detailed in an agreement titled ‘Promise to Purchase’. The purchase price between AUB (UK) and yourself is the same price as the original purchase price.

· At the same time you will enter into a lease with AUB (UK) which details your rights to occupy the property.

· Once the property is purchased you will make monthly payments to AUB (UK). These will be claimed by Direct Debit automatically from your normal bank account.

· Each monthly payment is calculated so that part is applied towards the purchase of the property from AUB (UK) and part of it is rent.

· The payments are fixed every 12 months, April to April. At the beginning of April each year, we will reassess the rent and payments are likely to vary.

· You may purchase the property from AUB (UK) at any time by paying us the balance of the purchase price.

 

The ijara loan is structured as a lease with a purchase option, and all the payments (of both lease and repurchase) are fixed ahead of time, so that they look just like a home loan.

 

Look like a duck, walk like a duck …

The ijara principle was pioneered in corporate bonds in 2001, when Malaysian plantation company Kumpulan Guthrie issued the $150 million sukuk that were so controversial at the time. These days, almost identical ijara sukuk are commonplace in the Gulf.

 

Thus it took only six years for the Gulf States to embrace the financial innovation. Very rapid cultural assimilation indeed.

“If we persevere in educating the markets, eventually the markets will understand,” says Badlisyah Abdul Ghani, the chief executive of CIMB Islamic Bank, one of Malaysia’s largest. Mr. Badlisyah helped arrange the pathbreaking bond as an investment banker at Bank Islam.

 

Algebra and integrals are shariah-compliant

Eager to educate oil-rich Gulf investors about such financial novelties, Malaysia’s central bank, Bank Negara, is spending $57 million to invite Islamic scholars from around the world to Kuala Lumpur for a “Shariah dialogue” program. “To be an international financial center, you must allow a diversity of interpretations,” says Bank Negara Deputy Governor Razif Abdul Kadir. “This is our strength.”

The proselytizing power of the marketplace.

 

As part of its drive for diversity, Bank Negara has also issued Malaysian banking licenses to three Islamic banks from the Gulf, including Saudi Arabia’s Al Rajhi, which labels itself as the world’s largest Islamic financial institution.

First they ignore you, then they scoff at you, then they apply for your license.

 

For Al Rajhi, this was the first venture overseas — and the Saudi giant spared no effort as it rolled out a Malaysian network of 12 glass-and-marble branches, with 38 more on the way. Plastering Kuala Lumpur with blue advertising billboards, Al Rajhi stressed its pristine Islamic credentials and promised to deliver the Saudis’ “Just Values” to faithful Malaysians.

 

Moving into the go-go world of Malaysian banking means you have to compete, not just theologically but also economically, and that changes the home-grown business practice:

 

Since beginning operations here last October, however, Al Rajhi has had to adapt to Malaysian reality. “In Saudi Arabia, those religiously inclined would keep their funds with Al Rajhi and expect nothing in return,” says Al Rajhi Bank Malaysia’s chief executive, Ahmed Rehman, a Pakistani citizen who came to Kuala Lumpur after a career with Britain’s Stanbic. Customers in Al Rajhi’s Saudi operation have stashed some $18 billion in no-return checking accounts; because of concerns about illicit interest, savings accounts do not exist there, says Mr. Rehman.

 

What happens long-term if you invest at zero interest

 

In Malaysia, this was clearly a nonstarter, he realized. “At the end of the day you have to have deposits, which means you have to come up with the products…and give an element of return,” he says.

That’s going to wreak profound change back home in Saudi Arabia as well. Once you can get a Shariah-compliant yield, dollar-denominated, simply by placing your funds on deposit in Malaysia, why would you keep them in a non-interest-bearing account in Riyadh?

 

To keep the money there, you’ll have to offer interest

The capital’s going to flow east, and rapidly, unless Al Rajhi and the other Saudi banks follow suit.

After much soul-searching, Al Rajhi decided to introduce a Malaysian savings account of its own. As the bank’s local Shariah board — composed of two Saudi clerics dispatched from headquarters and two Malaysians — discussed the product, theological complications arose. Technically, the return on savings accounts in Malaysia’s Islamic banks comes from a profit-sharing contract with the bank. That, however, could cause big fluctuations if the bank posts a loss or higher-than-expected profits. Mitigating the risk for account-holders, the Malaysian banks use a special profit reserve that allows them to keep these payouts relatively steady and similar to conventional interest rates.

 

Though Mr. Rehman and Al Rajhi’s Shariah experts entertained grave reservations about such arrangements, they went ahead nevertheless, citing the need to comply with Malaysian regulations. Customers flocked in response, and the bank now boasts some 8,000 Malaysian accounts. The savings account, as plasma-screen displays advertise in Al Rajhi’s branches, was last offering a “profit” of an annualized 3.1% on one-month deposits, in line with interest rates in the industry.

 

Purity of doctrine does not succumb to forcible assault; instead, tolerance arrives by tiny stages, insinuating its way into the boundary between emotion and reason, changing minds one bank account at a time.

 

Now, Al Rajhi is thinking of bringing such savings accounts, and other financial novelties it’s testing in Malaysia, to consumers back home in the Saudi kingdom, Mr. Rehman says. “In terms of products, the market is much more sophisticated here than in the Middle East,” he says. “Here, you have to work for your money. And it brings out innovation.”

 

Innovation flows two ways, and ideas, once unleashed, never come back.

 

No vaccination against knowledge

Efficient technology is like the flu; sooner or later everybody gets it.

— Science fiction author Alexander Jablokov

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