The Shariah-Compliant Finance Myth
We are very pleased to bring to SFW readers a submission from a financial insider who has seen the world of Shariah-Compliant Finance up close and personal, David Clark.
David has spent several years structuring Shariah compliant finance deals. In this time he had access to the leading Islamic scholars and Shariah boards and learned just what a joke “Islamic finance” would be if it weren’t such a terrifying threat. On his return to Australia he has chosen not to promote Islamic finance. We hope to bring more of David’s insights to our readers in the future, either through original works such as this, or from other blogs and web sites. We believe that David will be an invaluable addition to the movement to stop the march of Shariah…
“The Islamic Finance myth”
by David Clark
Austrade’s recent publication “Islamic Finance” sets out the case for Australia embracing the Sharia compliant finance juggernaut. As a result many banks, law firms, financial consultants, Universities and assorted quick buck-chasers are falling over themselves to get a piece of this sector. If they’d thought it through properly (or cared) they might realise that they are merely pawns in the Islamisation process, ‘useful idiots’ in the demise of our democracy.
What is Islamic finance? The proposed rationale behind Islamic finance is that money itself has no inherent value and the charging of interest (usury or riba) is not permitted. There is also a moral premise, Islam needing to guide us Aussies on how to behave properly in this world.
The first myth for busting is that Islamic financing ideals are rooted in Islamic culture and history. The Jews actually developed the ‘no usury’ concept and the Christians followed. Islam followed too but largely ignored it to now. The concept evolved and, for example, at one point Jews lent to Christians with interest and vice versa but not to themselves. Eventually, with a better understanding of the time value of money and that risks should be priced, usury became ‘excessive interest’ and not interest itself. By the Reformation the traditional financing structures (developed largely by the Christians in the 5th century) had been dispensed with.
Islamic finance has simply revived and appropriated these structures, their Arabic names making them appear Islamic constructs. This idea emerged in the 1970’s in Egypt by people closely associated to the Muslim Brotherhood and pursuing their goal of the world caliphate. By no coincidence it has been the last ten years that has seen the greatest growth of this sector as the Western world grapples with an increasingly hostile Islamic presence. Along with various other stealth and violent jihad weapons it is an increasingly important part of achieving Islam’s end game.
With this in mind the abhorrent actions of the Australian Government in supporting and promoting the Sharia, and their foolish belief that it has many merits if you can just look past the stonings, defies belief. Combined with the madness of self-loathing, trecharous intellectuals who silence free speech on Islam we now have an explicit acceptance of the Sharia in our society.
There is no greater acceptance than changing our laws. Current tax laws make the sector unviable and the financial regulatory regime does not accommodate Islamic Banks operating here. “Don’t worry about that, we’ll sort that out” is the message from Canberra.
Don’t worry? Were Australians consulted on this and if Australia’s democracy is for sale then are we getting the best price? What did China bid? There is a fundamental issue here that the Government is trying to quietly slip past the Australian people. Australian laws are flexible, Sharia is not, therefore as we want Sharia we will change for Sharia. The Sharia is now entrenching itself in Australian law and the day these tax law amendments are passed may just go down in history as the beginning of the capitulation to Islam.
On that note, let’s see what we’re really getting then. The promoters of Islamic finance tell us that it is better for the economy as apparently financiers have to take more risk, will be more careful to whom they ‘lend’ to and all transactions are underpinned by a tangible asset. I will review three common structures; a Musharaka, a commodity Murabaha and an Ijara and test these claims.
In a Musharaka the financier and the borrower are ‘partners’ in a joint venture, the financier contributing the cash and the borrower the expertise, labour and any equity required. As a partner in the deal we are told that the financier is liable to share losses though dig deeper and this is not the case. Upon borrower default the financier will have the right to demand its interest in the Musharaka (or the assets forming the interest in the Musharaka) be purchased by the borrower at the price of the outstanding debt, a sort of put option. This is the usual acceleration upon default clause.
A commodity Murabaha is the preferred structure for general corporate purpose loans. The financier purchases a quantity of metal from a broker costing the amount of the loan, sells it to the borrower for an increased price on deferred repayment terms and the borrower then sells it to another broker at the financier’s original purchase price. This all happens instantaneously. What has happened here? The borrower ends up with a loan for utilising as it pleases, a random selection of metal has basically gone nowhere and we are expected to believe that this is ethical lending.
An Ijara is an arrangement where the financier will purchase an asset from the borrower and lease it back. It is common for home loans or other asset financing. The rental terms will match those of a conventional repayment schedule including the ability to change the rental to reflect interest rate movements. The financier wont need to take legal title, an equitable interest through some contrived sale and lease back contract will do and the financier takes a mortgage. So we have a financier who provides money to someone to buy a home, gets the money paid back with profit and takes a mortgage as security. Pretty novel stuff.
Make no mistake, it is the job of the Islamic finance industry to turn “Islamic finance” into conventional financings or else no Bank will touch them. Usual security is always taken by the financier and the covenants and defaults in the finance contracts are the same. Accordingly the commercial risk profile is identical even if there needs to be ‘side agreements’ to circumvent any inflexibilities.
The effect of the structuring is that Islamic financings are even more expensive to the borrower. Even if the ‘interest’ rate is the same (although it’s often higher) the additional compliance, agency, broker, legal and administrative fees leave less money for the borrower or a higher burden to finance the same thing. Further to this, given the inflexibility of most structures, it has the effect of not applying resources where required nor in the most efficient manner.
The “no interest” claim is simply a fools paradise. Islamic finance only reinforces in Muslim minds that they are different (more moral), believe in different things and do things differently. Does the Government really want to keep promoting this idea? Contrary to the Government’s claims that this finance will ‘foster social inclusion’ it actually fosters social and economic exclusion by ensuring that Muslims only have access to more expensive financial products offered by fewer participants. They must remember too that the Islamic finance scholars who promote and sign off on these deals make a good living from it.
As for no speculation allowed in the deals are we just going to ignore the state of many UAE Islamic Banks who ploughed billions into the Dubai property boom amongst other folly worldwide pre GFC? How about the Nakheel sukuk that was due last December, does all Islamic financing come with a guarantee from the Abu Dhabi Government? Perhaps the paper which an ‘off the plan’ apartment was purchased from can be used to make a roof over borrowers’ heads. Thousands upon thousands of ‘tangible assets’ in Dubai will never make it off the plan and the Bank and borrower’s money left the UAE in suitcases.
There is also the socially responsible investment argument. No breweries, pig farms or casinos but jihad is a part of Islam isn’t it? Are we allowed to say that still? If not then it’s offensive my Government is suggesting I’m unethical for having a bacon sandwich over a cold one at Crown casino. I wonder if the U.S. is halal these days? Israel sure isn’t.
Now for the real nasty bit, the terrorist funding.
All Islamic Banks or Banks from an Islamic country operating in Australia will be required to pay the zakat, the 2.5% tax on profits that must go to “Islamic charities”.
There is also payments to Islamic charities hidden in the deal itself. Late payment amounts (after any actual loss) as well as profits made from non-compliance with the agreed structure will go to “Islamic medical, charitable or scientific organisations at the discretion of the Sharia supervisory board” or a similar variant to this. This will ‘cleanse’ the money and these payments are made by all financiers, Islamic institution or not.
Seems like the Government isn’t concerned. They could though insist on any “organisations” and their beneficiaries being named in the contract to get the necesssary tax waivers. This is not hard, the scholars review every sentence of these contracts and can determine if the charities are Sharia compliant. Must they even be Islamic charities? Do secular Australian charities miss out because they are not Islamic? I assume saving infidels lives is Sharia compliant too or perhaps not. Including only Islamic charities only enforces the idea of ‘us’ and ‘them’ and Muslims get the benefit of all secular Australian charities.
The Government must also ensure that anyone on “Sharia boards” are fully screened by ASIO. There is evidence (most notably in the US, Al-Qaradawi anyone?) that money through Islamic finance has gone to terrorists on the basis of money going to “Islamic charities”.
I’m genuinely surprised that the Government hasn’t even considered the terrorist funding issue properly. Despite anti-terror and anti-money laundering laws it is inevitable unless additional pro-active steps are taken. If not, Australians need to be warned. The Government also needs to come clean on this being an unambigous promotion to boycott Israel.
So all self-delusion, smoke and mirrors aside, what does Islamic finance bring to the table that’s new? Is there anything that Islamic finance can do which conventional finance can’t? The answer is simply Nothing and No. You can set up a conventional investment fund that chooses not to invest in breweries and casinos or Israel if you please. You can loan for infrastructure and other tangible assets conventionally yet still carefully analyse the risk profile. You can easily not invest in derivatives or intangibles, you just don’t.
Islamic finance means following two sets of rules, the Australian law and Sharia law (to the extent there is a difference for now), whilst for conventional finance you only need to follow Australian law. We’re pretty flexible on the Aussie law front, just don’t contract for anything illegal or force anyone into the contract and you’re probably OK. Following the Sharia as well will make the financial system slower, worse off, less respondent and more inflexible.
It astounds me just how gullible and greedy so many non-Muslims are by promoting the Sharia. This needs to stop and our Government needs to remember what century we are in and what sacrifices have been made to get us here.
Great article! Which I saw just as I was finalising a letter to Simon Crean. I used to be a senior guy in Austrade and knew Crean then. I don’t hold any sway now, but they will tend to give a reading to something from one of the “old guard”.
I wonder if you would have a look at my draft (it’s five A4 pages). You can get it by pdf if you send me email to [email protected]
My plan is to finalise it, send it to Crean, the new Austrade MD (Peter Field), some of my old colleagues in Austrade who may stil be there, to some guys in DFAT, Treasure, etc, and also to the Opposition. Maybe also make it an “open letter” and try to get some other MSM media coverage.
Islamic Finance is a CON!
This finance is one of the alternatives for getting the funding that is needed. Invoices takes time before they are settled. Sometimes, the funds of a business is all tied up to their invoices. Invoices sometimes takes 30 to 60 days before they are paid. During the waiting period; the enterprise cannot spend or use the money. Invoices should be considered as assets, not always as liabilities. The concept of invoice factoring comes in here.