By Alyssa A. Lappen
The very expectations of glittering shari’a finance (Islamic banking) profits hypnotize financial institutions, securities exchanges, and banks–and there are few regulatory or monitoring protections against abuses. So why did United Arab Emirates (UAE) government IP address 184.108.40.206 send some 30,000 to 40,0000 spam messages on December 8, 2007, soliciting Islamic finance clients among U.S. citizens and small businesses?“Need assistance,” the spam asks, soliciting inquiries to firstname.lastname@example.org, registered to Emirates Telecommunications Corporation at UAE’s federal domain authority.Maybe gorging on U.S. strategic assets increases UAE appetite–even though, the lower stocks go, the more prime U.S. investment companies Middle East investors scoop up. Maybe UAE spammers may want to lasso U.S. credit crunch victims desperate for cheaper home or small business loans.Let’s hope U.S. consumers and U.S. presidential candidates–unlike those U.S. financiers falling like flies before UAE sheiks–will carefully scrutinize the entire Islamic banking scam. The UAE email solicitation purports that Islamic finance provides four “attractions:” * Good alternative source of funds * Risk perceptions of Islamic financiers * Off-balance sheet financing * Preferred mode of financing for certain corporate (sic) and individualsMany grave secular risks accompany shari’a’s growing foothold in Western markets. With wife-beating, stoning women, dismembering thieves, hanging homosexuals, supremacist ideology and an annual head tax (jizya) on non-Muslim subjects–shari’a also orders Muslims to fund jihad (financial jihad—al Jihad bi-al-Mal). As in Qur’an 61:10-11, “strive for the cause of Allah with your wealth and your lives….” and Qur’an 49:15. “Financial Jihad [is]…more important…than self-sacrificing,” says Saudi cleric and Muslim Brother Hamud bin Uqla al-Shuaibi.Consider the four purported advantages.First, the Saudi-favored shari’a finance “alternative,” as noted in FrontPageMagazine earlier, is a 20th century construct without basis in Islamic history–and often funds destruction. It’s 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…”Muslims expect “humanitarian” Islamic finance to buy their “reward in the Hereafter.”Conversely, Americans expect alternative “ethical” and “socially responsible” investing to build human rights in southern Sudan, common shareholder rights, and good corporate governance and transparency–terms not in the shari’a finance lexicon.Then take “risk perceptions of Islamic financiers.”Evidently bankers have forgotten to whom the advantage of this second bogus UAE-invoked “attraction” accrues: Citibank’s Islamic financiers in 1955 launched its Saudi American Bank subsidiary in Jeddah and in 1966 opened a Riyadh branch–without presenting due diligence on the risks of operating under shari’a law, which include sudden confiscation. So Citibank discovered in 1980, when the Saudis seized SAB by royal decree, denied Citi any future profits, and ordered the bank to train Saudis staffers.Likewise, the “risk perceptions of Islamic financiers” apparently aided criminals at the Bank of Credit and Commerce International (BCCI), which was founded as an Islamic bank. BCCI perpetrated the largest fraud in banking history, costing depositors and investors at least $21 billion before U.S. prosecutors closed it in 1991. BCCI was also established “to help the world of Islam, and [as] the best way to fight the evil influence of the Zionists,” as Rachel Ehrenfeld noted in Evil Money (Harper Collins, 1992, pp. 160, 164-5, 169-70). Thus under UAE president Sheikh Khalifa Bin Zayed Bin Sultan Al-Nahayan’s late, terror-financier father, BCCI funded such “alternative” organizations, states and projects as Hezbollah, al Qaeda, Syria, Iran and Pakistan’s nuclear bomb manufacturing.And Islamic banking’s third “advantage”–its off-balance sheet financing–most readily explains its fourth: the domain’s preference by “certain corporate (sic) and individuals.”But even the Finance and Accounting Standards Board (FASB), which sets standards for the self-regulated accounting industry, would agree with a Government Accountability Office (GAO) report released in December 2007, calling for more and better market and banking oversight–not less.And t
Taking monumental risks does not even eliminate usury. All “Islamic finance today is interest based,” complains Rice University Islamic economics, finance and management chairman, Mahmoud el-Gamal, in the Financial Times. Disparaging Islamic banking as “shari’a arbitrage,” el-Gamal calls it “first and foremost about religious identity.” And the “forefathers” of so-called “political Islam” intended precisely that in their conception of this 20th century financial concoction.
In reality, “innovative” Islamic financial securities involve enormous risks, which may be an intended prong of the Muslim Brotherhood’s strategic financial jihad.Sukuk issues entice investors with yields much higher than Western bonds. While central Western banks orchestrate historic, simultaneous rate reductions to contain losses feared to equal those of the 1986 to 1995 savings and loan crisis, a sukuk index with a mere 3.8 year duration sported 6.2% “coupon” on Nov. 30, 2007. Meanwhile, in mid January, yields were only 2.89% on intermediate Treasuries–and just 5.25% on the Lehman Brothers intermediate U.S. corporate bond index. Only long term U.S. corporate debt yielded more than 6.5%. No wonder sukuk issues have been fully subscribed.But two key determinants of bond quality remain–the surety of payments for the scheduled life of the loan, and the certainty that, on maturity, investors will recover 100% of their principal.Simply believing Islamic sukuk to be inherently safer than Western bonds doesn’t improve their quality of their higher interest rates–oops–“rent.” Islamic or not, buying a sukuk makes its purchaser a creditor. And for the same reasons “junk” is synonymous with high-yield bonds, larger returns carry greater risks.
Which says nothing of the dubious underlying “profit and loss sharing” Islamic finance philosophy. Investors should look doubly hard at whether to expect profit or loss when a sukuk matures–that is, whether recouping the loan’s entire “face value” is even in the cards. That might depend on the values of underlying properties or assets at maturity. But then, “Shari’a regulations can override commercial decisions,” and so on.
In 1983, my esteemed colleague, former Forbes senior editor Howard Rudnitsky, warned in a booming real estate tax-shelter market, “heavy leverage involves risks, and if the market turns bad, the top-heavy financing could wipe out the equity. The creditors would get the property back, the syndicator would keep his fees and the investor would get the shaft.” Not to mention the back taxes, interest and penalties if the Internal Revenue Service ruled the enterprise “uneconomic.”
The same principles apply here. With or without spam, better, safer and fairer for government and IRS regulators, banks, markets–and investors–to take all finance, unIslamic.
Alyssa A. Lappen, a senior fellow at the American Center for Democracy, is a former senior editor of Institutional Investor, Working Woman and Corporate Finance. Her website is http://www.alyssaalappen.org.
article can be found at www.frontpagemagazine.com