CHAPTER 22 ISLAMIC BANKING AND FINANCE ALTERNATIVE OR FACADE?伊斯蘭銀行業和金融業的替代或門面嗎?

AARON Z. PITLUCK¹

Islamic banking and finance (hereafter IBF) is a market in formation with factious voices claiming certain economic activity as “Shariah-compliant” or “Islamic” while other voices claim the same economic activity to be outside of, if not contrary to, Islam. Describing Islamic finance as a discordant chorus is a trivial ontological claim. After all, Islam is not a centrally organized hierarchical religion, and for 40 years Islamic scholars have engaged in print in intense debates regarding how to interpret contemporary financial practices (Siddiqi 2007). However, this is a useful epistemological claim, for in the presence of such factious voices making contradictory moral and theological claims, Abend (2008) counsels the sociologist to be metaphysically agnostic. By analyzing these competing conceptions of control (Fligstein 1996), we can empirically investi­gate the ambiguity and internal dissent regarding what constitutes IBF, and see that the future of finance —both “conventional” and “Islamic” — is subject to dispute and change (de Goede 2005).

Social scientists normatively invested in critiquing financialization (the distancing of credit or capital gains from real assets), usury (exploitative banking relationships), or the ontological presuppositions of conventional finance have investigated contempo­rary IBF as a potential alternative financial system. Many are disappointed by what they discover. This chapter argues that although isomorphic social mechanisms push IBF to resemble conventional finance in numerous complex and subtle ways, IBF remains a substantively distinctive and valuable intellectual project. For social scientists, the case of IBF demonstrates the possibilities and constraints facing activists in reducing finan- cialization and exploitation in economic relationships.

Before making this argument, a few preliminary remarks are necessary. IBF origi­nated in the early 1970s and postdates the conventional banking sector. The origins and diffusion of IBF are intertwined not with terrorism but with the slow shifting of the world’s hegemonic center from a North-South axis to a multi-polar East-South arrangement (Imam and Kpodar 2010; Nederveen Pieterse 2011; Pollard and Samers 2007).³

432 AARON Z. PITLUCK

With few exceptions, Islamic financial institutions (hereinafter IFI) compete in a mar­ket dominated by conventional finance.⁴ Measuring the scale of the IBF industry is par­ticularly challenging because countries and firms differ in what financial products and assets they define as Islamic. Moreover, many IFIs are nontransparent.⁵ The global size of the industry is estimated to be between $822 billion (Timewell and DiVanna 2009: 2-3; also see Imam and Kpodar 2010) and $1.3 trillion (Warde 2010: 1). There are approximately 456 IFIs and 199 conventional banks with segregated so-called “Islamic windows” (Caplen and DiVanna 2010). Table 22.1 provides a rough geographical break­down of Shariah-compliant assets (defined in the next section).

Table 22.1 Top 25 Countries Ranked by Shariah-compliant Assets in 2010 Rank Country Shariah-compliant Assets ($m) 1 Iran 314,897.4 2 Saudi Arabia 138,238.5 3 Malaysia 102,639.4 4 United Arab Emirates 85,622.6 5 Kuwait 69,088.8 6 Bahrain 44,858.3 7 Qatar 34,676.0 8 Turkey 22,561.3 9 UK 18,949.0 10 Bangladesh 9365.5 11 Sudan 9259.8 12 Egypt 7227.7 13 Indonesia 7222.2 14 Pakistan 6203.1 15 Syria 5527.7 16 Jordan 5042.4 17 Brunei 3314.7 18 Yemen 2338.7 19 Thailand 1360.8 20 Algeria 1015.1 21 Mauritius 992.2 22 Switzerland 935.5 23 Tunisia 770.1 24 Singapore 725.0 25 Palestine 612.5

Source: Caplen and DiVanna (2010).

The chapter’s argument is organized as follows. The first section explores the defini­tional anxiety surrounding IBF. The second surveys and critiques the social science lit­erature. I then explain why IBF so closely resembles conventional finance, followed by a brief conclusion.

What is Islamic finance, really?

什麼是伊斯蘭金融，真的嗎？

“What is Islamic finance?” To answer the question is to join a contested discourse regarding how to interpret contemporary finance from the perspective of the Shariah (divine law). As a preliminary definition of IBF:

1)    Financiers must attend to the objects being financed. IFIs must not purchase equity in or provide credit to products and activities prohibited by the religion.

2)    Riba and gharar are prohibited. Elucidating riba is the principal exercise of this chapter. As a working translation, riba is associated with interest, usury, and financial transactions untied to the nonfinancial economy. Gharar is associated with unproductive risk and exploitative information asymmetries.

3)    More broadly, Shariah discourages asceticism and encourages the enjoyment of worldly goods from profitable trading, so long as trades are by mutual consent and do not involve products prohibited by the religion (e.g., alcohol or pork). Charity is obligatory. Debt is permissible so long as it is for lawful purposes, out­lined above (Vogel and Hayes 1998: 53-69).

There is considerable definitional anxiety among practitioners of IBF. Bill Maurer (2005: 40) notes an almost ritualistic exegesis in “almost every Islamic banking speech act or text” of what constitutes Islamic finance and how it is or is not distinguished from what this chapter will term “conventional” finance. This definitional anxiety is heightened by the perception by many—both within and outside of the field—that IBF is simply con­ventional finance dressed in Islamic garb. As a consequence, for some the question becomes, “What is Islamic finance, really?”

This section argues that a defining distinction between conventional finance and the ideal-type of IBF is riba and gharar. However, the interpretation of these two prohibi­tions with respect to contemporary finance remains contested because of the social organization of the religion and of the IBF industry. This contestation surrounding how to interpret riba and gharar in the contemporary economy largely explains the existing ambiguity regarding what is and what is not IBF.

Delimiting IBF: the social organization of Islam
劃定伊斯蘭銀行和金融的界限:伊斯蘭教的社會組織

Islam is not monolithic. The Islamic world is diverse, with numerous traditions— Indonesian/Malay, Indo-Pakistani, Persian, Turkic—that have little in common with the experience of the Arabian Peninsula.⁶ There is therefore a great deal of geographic heterogeneity in how Islam is practiced and how communities interpret Shariah (Warde 2010).

Islamic finance is less diverse; nevertheless it is an “elusive, contested, evolving and heterogeneous set of practices that defies simple description or conceptualization” (Pollard and Samers 2007: 314). Sunni Islam has four distinct schools of interpretation of Shariah. Legal interpretations (fiqh) evolve as Shariah scholars draw on the consensus interpretations within particular schools and time periods (ijma), interpret via careful reflection and devout effort (ijtihad), reason by analogy from primary sources (qiyas), or depart from tradition because of local custom (‘urf), public interest (maslaha), or overriding necessity (durura) (Vogel and Hayes 1998: 23-47). As a consequence, when a Shariah scholar or Shariah supervisory board issues a fatwa (authoritative legal opin­ion) that permits transaction X,

one should not conclude that transaction X is “Islamic” for all parties and for all time. The ijtihads of different scholars may legitimately vary. Moreover, if the fatwa is based on utilitarian choice, assessments of utility can change with place and time. And lastly, a fatwa might rest on nothing more than temporary, and changeable, necessity. (Vogel and Hayes 1998: 41)

Broadly speaking, across diverse schools of interpretation, virtuous profits are derived by receiving money in exchange for providing a real asset or service. In contrast, one may not make money by exchanging money. As a consequence, the only moral loan is as an act of charity, where a loan is given without interest, and a needy debtor is absolved if he or she cannot repay. One such loan is qard hasan, literally a “good loan.” Such charita­ble lending is argued to be superior to charitable giving, since a needy borrower retains his or her dignity, and loans repaid can be given out to others as additional charity. Such loans are understood as charitable because Islam recognizes that the lender of money is sacrificing the time value of lent money, and the lender of property is sacrificing rent (El-Gamal 2006: 57; Maurer 2005; Usmani 2002: 4; Vogel and Hayes 1998: 105-6; Warde 2010: 139).

When one makes money from money (i.e., receives money in exchange for money of the same currency, rather than in exchange for a real asset), this is conceived of as “riba” literally meaning “increase,” and is forbidden. There is a strong consensus among IBF practitioners that riba is a core prohibition in economic activity and a central criteria distinguishing Islamic finance from conventional finance. Nevertheless, since the reli­gion’s origins in the Arabian Peninsula, there has been debate regarding what activities are and are not riba, as well as why riba is prohibited. This debate regarding riba has intensified in Islamic economics journals since the mid-1970s, the period coinciding with the birth of the modern IBF industry (Siddiqi 2007; Warde 2010). Although riba is often equated with “interest” or “usury,” for most IBF scholars this is either an exces­sively narrow understanding of riba, or an eccentrically broad understanding of “interest” or “usury” (El-Gamal 2003, 2006, 2007; Maurer 2001: 9, 2005; Vogel and Hayes 1998: 72-87; Warde 2010).

Gharar is less controversially defined, but interpreting its presence or absence in con­temporary finance is often contentious, particularly in insurance products and deriva­tive instruments. Gharar is a prohibition against speculative transactions on uncertain or contingent objects, both to prevent gambling on aleatory promises, and to eliminate exploitative information asymmetries (El-Gamal 2001; Vogel and Hayes 1998: 87-93, especially 90). Al-Zarqa defines gharar as “the sale of probable items whose existence or characteristics are not certain, due to the risky nature which makes the trade similar to gambling” (quoted in El-Gamal 2001: 5). Although there is great debate among Shariah scholars in how to apply gharar to contemporary finance, “[the] majority positions of classicalfiqh seem antithetical to a great many modern financial transactions, since they presumptively ban all sales of goods not already both owned and in the possession of the seller, not to mention goods that do not yet exist” (Vogel and Hayes 1998: 93). The con­tested nature of how to interpret riba and gharar in contemporary finance is therefore a fundamental cause for the continued debate on what is or is not Islamic finance and banking.

Delimiting IBF: the social organization of the Islamic finance industry
劃定伊斯蘭銀行和金融的界限:伊斯蘭金融業的社會組織

A second source of the ambiguity regarding how to interpret riba and gharar in the con­temporary economy is the decentralized and opaque structure of the IBF industry. There is no worldwide centralized Shariah board that can impose interpretations of Shariah. Some states do have a national Shariah body that could potentially standardize interpre­tations of Shariah in the field of finance, but few countries have sought to do so, with the notable exceptions of Malaysia, Kuwait, and Pakistan (Grais and Pellegrini 2006: 16, 33). As a consequence, every IFI must form its own Shariah supervisory board. Applications of Shariah to financial products and instruments therefore can and do vary between firms even within the same country.

Shariah supervisory boards in corporations serve two functions: appraising the IFI’s proposed new financial products and instruments to determine whether they are per­missible, and auditing ongoing operations for Shariah-compliance. These functions can be subverted by weak corporate governance (Chapra 2007; El-Hawary, Grais, and Iqbal 2004; Grais and Pellegrini 2006; Kahf 2005; Nienhaus 2007; Safieddine 2009). In con­trast to external auditors in the conventional finance industry, Shariah supervisory board members typically may hold an equity stake in the companies they supervise. Even the AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) guidelines for Shariah supervisory boards merely prohibit scholars from holding “significant shareholdings” rather than any equity stake (for an excerpt of the AAOIFI guidelines, see Nienhaus 2007: 136). To preserve the Shariah scholars’ inde­pendent judgment, ideally their remuneration would be determined at annual share­holders’ meetings rather than by the IFI’s management or Board of Directors. 

436 AARON Z. PITLUCK

However, in practice remuneration is often delegated by shareholders at such meetings to the Board of Directors or to management, thereby short-circuiting the scholars’ insulation from influence. Strangely, the AAOIFI guidelines permit this.7

This weak corporate governance is compounded by an opaque decision-making process. In the early years of the IBF industry, the fatwas of IBF scholars were publicly accessible. Since the 1980s, fatwas are increasingly treated as proprietary information (akin to paid legal advice) and are therefore not shared with the public or shareholders.

As a consequence, clients and external Shariah experts can observe an unknown frac­tion of decisions made by a firm’s Shariah supervisory board, but often the process and reasoning is hidden, and fatwas that conflict with the firm’s economic interests are unpublicized and unavailable (Siddiqi 2007). Such opacity is particularly problematic in firms with weak or nonexistent external auditing of Shariah-compliance (Chapra 2007).

An evolving counterpoint to the opaque decision-making of decentralized Shariah supervisory boards is the work by intergovernmental and transnational organizations to create standard interpretations of Shariah in the IBF sector. The two perceived as most influential are the Islamic Fiqh Academy in Jeddah created by the OIC (Organization of the Islamic Conference), and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in Bahrain (Warde 2010: 234-7). Although the IBF industry resists such regulatory interventions (Ghoul 2008; Grais and Pellegrini 2006), this institutional glue may become helpful to identifiably demarcate IBF from the con­ventional financial services industry (Fligstein 1996; White 2002).

What does the IBF field encompass?(p.436)
什麼是伊斯蘭銀行和金融的領域？


This section has argued that the considerable definitional anxiety regarding what finan­cial products are and are not “Islamic” can be traced to the social organization of Islam and the decentralized and opaque structures determining and monitoring Shariah- compliance. In the contemporary IBF field, the least controversial products and finan­cial instruments involve risk capital or credit for the purchase of a productive asset. Both practices can be interpreted as tethering finance to the real economy and are described in detail in the next section.

Also widely “accepted” as IBF is the Shariah-compliant slice of conventional equity markets and the fund management industry, at least as perceived by a “consensus” docu­ment produced by the Islamic Development Bank and two influential transnational indus­try organizations (IDB, IRTI, and IFSB 2007: xi, 41). Stock represents equity in corporations, and is therefore permitted to be purchased and sold, both in primary and secondary markets, as long as the corporation’s principal lines of business are Shariah- compliant (for details see Pitluck 2008). Pension funds and the fund management indus­try are compliant as long as firms invest in Shariah-compliant assets and store liquid capital in the IBF sector. Worldwide, there are approximately 700 Shariah-compliant asset man­agement funds, located primarily in Saudi Arabia, Malaysia, and the Cayman Islands, with approximately half of funds domiciled in Saudi Arabia (Ernst & Young 2010a: 7, 52-3).

Presently there is considerable debate regarding whether Islamic bonds and insur­ance products are Shariah-compliant (IDB, IRTI, and IFSB 2007: 41). Over the past dec­ade IFIs have raised over $136 billion in corporate and sovereign Islamic bonds (sukuk) designed to elude riba (IIFM 2010: 6, 14, 19). Symptomatic of the contested legitimacy of sukuk, in February 2008 the AAOIFI’s Shariah board ruled that the majority of existing sukuk issues were not Shariah-compliant, although the board chose to enforce its ruling only for new sukuk issues (IIFM 2010; Rethel 2011). Insurance is even more contentious, as it was once viewed as self-evidently containing gharar. However, by 2008 there were approximately 158 takaful companies spread across the Middle East, North Africa, and Southeast Asia claiming to offer Shariah-compliant life and general insurance, with an additional 36 conventional institutions in Indonesia offering “takaful windows” (Ernst & Young 2010b: 37). Nevertheless, the industry itself acknowledges that worldwide, “[t]he fiqhi [interpretations of Shariah] differ widely, often challenging even the basic concept of takaful” (IDB, IRTI, and IFSB 2007: 36).

Outside of the above areas, contemporary interpretations of riba and gharar interpret most modern financial instruments—particularly derivatives—as antithetical to IBF (IDB, IRTI, and IFSB 2007: 41). As a consequence, although complex Islamic financial instruments are built using contemporary techniques of structured finance (El-Gamal2005), the IBF sector was remarkably stable during the global financial crisis of 2007-8 (Hasan and Dridi 2010). Shariah supervisory boards had generally not permitted IFIs to purchase securitized financial instruments such as mortgage-backed securities, as this would entail the sale of debt. Similarly, they were generally prohibited from trading credit default swaps, because the sale of promises entails gharar (Warde 2010: 88-9). As a consequence, IFIs didn’t face counterparty risk from failing conventional financial institutions. In subsequent years, growth in the IBF sector stalled not from financial contagion, but because of reduced North-South trade and production in the North’s real economy (e.g., Dubai’s debt crisis).⁸

Social scientists seeking alternatives are disappointed

尋求替代品的社會科學家們感到失望

In recent years, a number of social scientists have examined IBF for its emancipatory potential in restructuring the global financial architecture. With few exceptions the exercise has left them disappointed, leading them to make one of two arguments. Firstly, analysts discover that the paragon forms of financing in IBF—profit and loss sharing—is rarely practiced, and they therefore conclude that IBF fails on its own terms. Second, analysts argue that the most common forms of financing in IBF—sales-based and leas­ing contracts—are substantively identical to conventional finance, and therefore IBF is merely a facade for conventional banking practices. In this section I outline both argu­ments and critique the second.

The ideal-type of IBF is rarely practiced
伊斯蘭銀行和金融的理想类型的很少

Although IBF is composed of dissonant voices, throughout the world one form of financing—profit and loss sharing—is widely accepted as the paradigmatic form of the IBF sector (Chapra 2007; Chong and Liu 2009; ElGindi, Said, and Salevurakis 2009; Kamla 2009; Khan 2010; Kuran 2004; Mirakhor and Zaikdi 2007: 57; Nienhaus 2007; Zaher and Hassan 2001). “It is an ideal alternative for the interest-based financing with far reaching effects on both production and distribution” (Usmani 2002: 1, also see 41). This preference extends to retail customers. In interviews with Muslim Americans regarding Islamic mortgages, Maurer (2006: 75) finds that they have a “fondness” for profit- and loss-sharing contracts. From the perspective of normative social science, in contrast to conventional interest-based financing, profit- and loss-financing creates

a close coupling of the financial and the “real” economy. Financiers are encouraged to invest in promising projects, to share profits and losses with entrepreneurs and, in so doing, promote development. Money is to be tied to real (material) assets to make them grow; it cannot be used as a commodity in and of itself or used as col­lateral. (Pollard and Samers 2007: 314)

IBF practitioners attempt to create contemporary “Islamic” variants of conventional banking products and financial instruments by drawing on, modifying, and concatenat­ing historic financial contracts that classical fiqh scholars had judged to be permissible. One of these classical contracts is musharaka, Arabic for “sharing.” In IBF, a musharaka contract creates a joint enterprise in which a bank and a firm are partners who share the profits or losses arising from the joint venture. The most commonly practiced profit- and loss-sharing contracts in the IBF industry are mudaraba contracts where one party (the bank) invests capital in an entrepreneur’s business, thereby becoming a limited lia­bility partner. Both contracts are typically written so that the bank withdraws from the partnership gradually, or upon the fulfillment of specific conditions. If both partners successfully satisfy the contract, at the contract’s end the entrepreneur is the sole owner (Usmani 2002: 12-17; Warde 2010: 145-9).

Despite the theological and ideological importance of IFIs entering profit- and loss- sharing arrangements with clients, it is well documented that very little of the IBF sec­tor’s capital is invested in such products. As early as 1984, only 14 percent of Pakistan’s Islamic banks held assets categorized as mudaraba or musharaka. In 1986, the Central Bank of Iran reported that mudaraba and musharaka accounted for 38 percent of assets (Kuran 2004: 9). An examination of assets in the ten largest Islamic banks, between 1994 and 1996, revealed that on average they held only 14 percent of assets in profit- and loss- sharing arrangements (Khan 2010: 809). In an analysis of 81 private Islamic banks between 1994 and 1995, Yousef (2005: 65) found that the percentage of financing made up of profit- and loss-sharing contracts averages 14 percent in the Middle East and North Africa, 30 percent in East Asia, 8 percent in South Asia, and 44 percent in sub-Saharan Africa. Yousef also noted that variation within countries and between countries in the same region is small. To the degree that we equate such activity with the idea of financial

institutions forming partnerships with entrepreneurs in the real economy, and therefore as a contrast to financialization in the economy, even the above figures may be overstat­ing the size of profit- and loss-sharing activities in the IBF sector. This is because many IBF institutions categorize portfolio management as mudaraba transactions, even though this “investment” is channeled not to businesses in the real economy but into secondary asset markets such as Shariah-compliant stocks (Warde 2010: 149).

In sum, building on the influential work of Kuran (2004), over the past few years social scientists such as Chong and Liu (2009), Kamla (2009), and Khan (2010) have evaluated IBF as an alternative to conventional finance, determined that IBF practition­ers perceive profit- and loss-sharing instruments as paradigmatic Islamic transactions, and then documented that the contemporary IBF sector engages in few of these transac­tions. All depart disappointed.

IBF as practiced is substantively identical to conventional finance

伊斯蘭銀行和金融實務上和傳統金融實質上是相同的

The majority of IBF financing is conducted not on the basis of profit and loss sharing, but as a finance component in a sale or lease. The most common such sale-based instru­ment is murabaha (Khan 2010). Historically, a murabaha contract was a spot market negotiation between a buyer and seller over the seller’s profit, rather than a negotiation over the price itself. This “cost plus” transaction would allow buyers ignorant of a good’s cost to negotiate on equal terms with the seller (Warde 2010: 140).

In the contemporary IBF industry, this contract has been adapted to become a mode of financing. A client requests her bank to purchase an asset on her behalf, and then the client purchases the asset from the bank in installments. The bank is interpreted as improving the asset by giving it a new characteristic—the ability to purchase it using a deferred payment. This improvement of the asset, being of value to the client, permits the bank to charge a higher price (Usmani 2002: 46). This transparent increment above cost is often called “profit” or “service charge,” but never “interest.” A second sale-based form of financing is ijara, which is “virtually identical to conventional leasing: the bank leases an asset to a [client] in exchange for a specified rent.” (Warde 2010: 144).

Both murabaha and ijara involve the purchase or use of an asset (not money), and are therefore understood to avoid riba, in the sense of money paid for money lent (Warde 2010; Wilson 2008). Murabaha is interpreted as permissible because it

link[s] extension of credit to a unique transfer of goods from a third party to the customer, and in doing so they make a meaningful connection with a credit sale of goods . . . A conventional loan, by way of contrast, need have no connection with any economic or legal event beyond the customer’s undertaking to repay. (Vogel and Hayes 1998: 143)

Both murabaha and ijara are argued to resist financialization—the distancing of credit or capital gains from real assets.

Although murabaha financing is widely approved by Shariah supervisory boards, its legitimacy has become paper thin because, in practice, these contracts often have only a tenuous connection with the trading of a real asset. The connection may be frayed in two ways. The first is the connection between the bank and the asset. Murabaha loans inherently have two risks above and beyond that of a conventional loan: a) the risk to the bank of purchasing an asset that a client might decide not to repurchase, and b) the risk that the asset is damaged prior to the sale to the client. To minimize these two risks, some (but not all) Shariah supervisory boards allow banks to delegate the client as their purchasing agent. The client as agent purchases the asset on behalf of the bank and then immediately (as an agent) sells the asset to himself. As a consequence, the bank plays no entrepreneurial role in selecting or buying the asset, and “owns” the asset for mere sec­onds before “selling” it. In such common contracts, the connection between the bank and the asset is tenuous (El-Gamal 2006; Usmani 2002; Vogel and Hayes 1998).

Second, the asset’s connection to the client can be even more tenuous. Consider a sce­nario in which a client wants cash and does not want or need an asset, so that the asset is only a ruse to get Islamic financing. For example, a client in need of $10,000 can request the bank to purchase an asset worth $10,000 and then make a deferred sale of the asset to the client for $10,000 plus the profit markup. The client can then immediately obtain the desired cash by selling the asset for $10,000 minus transaction costs (Vogel and Hayes 1998: 142-3, 177).⁹ When assets are wholly liquid and fungible, and can be cheaply bought and sold, such as silver, or more controversially, stock in a corporation, the con­nection between the client and the asset can be quite tenuous—the client never takes physical possession of the asset, and may “own” it for mere seconds before selling it for nearly the same price as the bank had (for mere seconds) “purchased” it. In such a strata­gem, murabaha becomes “only a device to escape interest and not the ideal instrument for carrying out the real economic objectives of Islam” (Usmani 2002: 41).

Noted critics of IBF, such as Timur Kuran (2004), have called murabaha financing an “ancient ruse” (15) and merely a “semantic difference” (10) where debt contracts are Islamicized by using Arabic terms and replacing the word “interest” with terms such as “service charge,” “administrative fee,” “markup,” or “profit.” The “semantic difference” between Islamic and conventional finance is also demonstrated by comparing numbers generated by conventional and Islamic products. Maurer (2008: 70) asks, “Why is an Islamic mortgage ‘Islamic’ if the calculation of the payment structure and schedule is identical to that of a conventional interest-based mortgage?” Both Maurer (2006: 37; 2008) and Khan (2010) use amortization tables of Islamic and conventional mortgages in order to demonstrate them to be materially identical. Such similar calculations are generated because many Islamic banks benchmark their service charges to an interna­tional benchmark interest rate (Libor) or to the interest rates charged by competitors (El-Gamal 2006: 74-80).

Taken together, these observations have led many social scientists, IBF practitioners, and prospective and current IBF clients to argue that Islamic finance is merely a facade for conventional finance (Chong and Liu 2009; Kamla 2009; Khan 2010). A variant of this line of thought argues that Islamic finance products are nearly identical to those in conventional finance, except that they are economically inefficient, have high transac­tion costs, and bear additional economic and legal risks (El-Gamal 2006, 2008; Kuran 2004). Similar debates take place among Islamic economists and IBF practitioners (Maurer 2005, 2006, 2008; Siddiqi 2007; Wilson 2008: 192).

Maurer (2005) briefly reviews these arguments but ultimately rejects the question of whether IBF is distinctive from conventional finance. Instead, he displaces the ques­tion by pointing out that the same debate takes place among IBF practitioners at a more sophisticated level of analysis and remains unresolved (also see Maurer 2001).¹⁰ Pollard and Samers (2007) are also wary of taking a position, in part because they worry about the “enduring, largely unconscious Eurocentrism of European and North American knowledge production” (324). They are particularly skeptical of modernist and econo- mistic discourses that conceive of Islamic finance as an inefficient, alternative, or peripheral form of finance that will ultimate replicate or be replaced by conventional finance.

Critique 批判

In the next section, I will propose an argument for why the distinctive IBF sector so closely resembles conventional finance. Before I can do so, however, I must dispose of three arguments in the social science literature that are used to argue that Islamic finance is substantively identical to conventional finance.

First, a number of authors compare the amortization schedules between conventional and Islamic products and find them to be substantively similar or identical (e.g., Khan 2010; Maurer 2006: 37; 2008). Such amortization calculations are self-evidently an important characteristic of these financial products, particularly for clients who have a choice between conventional and Shariah-compliant products. However, this argument confuses the financial products for formulas, when in fact financial products are legal contracts detailing rights and responsibilities of transacting parties to an asset. Financial products require far more of transacting parties than mere agreement to an amortiza­tion schedule.

I suggest that a superior exercise would be to compare the language of Islamic and conventional contracts. When this exercise is conducted, it is again easy to be mistaken and interpret IBF as a facade, for much of the language can be identical. For example, Islamic home mortgages in the United States can have pages of language identical to a conventional home mortgage; both contracts contain terms inimical to Islamic finance such as “loan,” “interest,” “lender,” and “borrower” (Maurer 2006: 48, 50)“ However, in contrast to conventional mortgages, Islamic mortgages include additional contractual language mandating specific actions, including a redefinition of terms such as “interest” in the accompanying mortgage document (Maurer 2006). This point is generalizable: Islamic financial products are typically more complicated than conventional financial products insofar as they constitute multiple contracts in order to create multiple sales, create special purpose vehicles, and other legal exotica (El-Gamal 2006). If financial products are understood as legal contracts, Islamic financial products cannot be con­fused for conventional financial products.

Second, the facade argument ignores the intentions and epistemologies of partici­pants (Maurer 2006; Swedberg 2007). For example, clients and prospective customers currently desire to have Islamic products closely resemble the cost structure of conven­tional products, and yet be distinctively Islamic (Elfakhani, Zbib, and Ahmed 2007). As an American Islamic mortgage company explains in its promotional brochure, “We do not change the math. We change the way we do business” (Maurer 2006: 52; 2008: 70). In interviews with Muslim Americans, Maurer (2006: 74-84) found that they valued mort­gages (and banks) approved by prominent scholars, and valued Islamic banks that treated them formally and bureaucratically, in a fashion similar to the conventional banking system, while at the same time offering a product that felt “processual, social, and collaborative” (75). Rather than perceiving Islamic mortgages as problematically similar to conventional mortgages, there is evidence that customers simultaneously desire such similarities while also craving an “Islamic difference.”

The facade argument also ignores the intentions of IBF scholars who write into Islamic financial products’ contracts required behaviors that are wholly absent in conventional finance. For example, recall that a key characteristic distinguishing murabaha contracts from interest-based lending is that the former must fund a real asset (El-Gamal 2006; Usmani 2002; Vogel and Hayes 1998). IBF scholars such as Usmani (2002: 65) therefore write into these contracts that the bank must take “all necessary steps” “to make sure that the client really intends to purchase a commodity.”¹² He provides three examples of such steps:

1.    Instead of providing funds to the client to purchase the commodity, the bank should provide funds directly to the supplier;

2.    If the client must be entrusted with the funds, the bank should require evidence that the commodity was purchased by examining invoices and similar documents;

3.    Where funds are entrusted but invoices are not available, “the financing institu­tion should arrange for physical inspection of the purchased commodity.” (Usmani 2002: 65)

My point is simply that intentions such as these, documented in Islamic financial prod­ucts, are substantively different than in conventional products. Certainly many details found in contracts—Islamic or conventional—may in practice be poorly implemented, avoided, or even unknown to signatories. How contracts are enacted is an empirical question that partly reflects the balance of power between IFIs and their Shariah super­visory boards, as well as the enforcement of contract law in the country. Unfortunately, the poor corporate governance and opacity of IFIs with respect to Shariah-compliance, discussed in the previous section, inhibits an empirical assessment of whether IFIs are or are not fulfilling their contractual obligations to be Shariah-compliant.

In summary, although the formulas and fee structures in Islamic and conventional financial products may be by design quite similar, the physical embodiment of financial instruments in words, the intentions behind those words, and some of the financial practices required of the transacting parties are substantively different. For sociologists, the efforts that IFIs and Shariah supervisory boards make to ensure that each client requesting credit “really intends to purchase a commodity” provides a demonstration of the thorny conceptual and pragmatic challenges required for any agent to prevent financialization.

Why does IBF closely resemble conventional finance? 
為什麼伊斯蘭銀行和金融非常類似於傳統的金融?

Why is IBF—although distinctive—nevertheless similar in many respects to conven­tional finance? Drawing on DiMaggio and Powell’s (1983) typology of isomorphic change, I analytically identify three mechanisms promoting similarities between Islamic and conventional finance.¹³

The first mechanism is coercive isomorphism resulting from formal and informal pres­sures by other organizations, as well as broader cultural expectations (DiMaggio and Powell 1983). In our case, the strongest structurating force is a secular legal system that has coevolved with an interest-based financial services industry. Each country’s extant regulatory structure and legal precedents pose unique challenges for the IBF sector. The applied literature is filled with complex regulatory issues, but a simple illustration will suffice.

In many countries, regulators require banks to assure full repayment of account holders’ deposits; in contrast to profit- and loss-sharing banking, losses are not legally permitted. When the Islamic Bank of Britain sought a banking license, it desired to offer a profit- and loss-sharing account (mudaraba) where the customer receives prof­its and losses based on a risk-sharing formula, rather than a risk-free interest rate, as required by local interpretations of Shariah (Plews 2005). However the Financial Services Agency (FSA) requires that all UK deposit holders be assured full repayment unless the bank is insolvent. The compromise that the Islamic Bank of Britain and the FSA reached was that if the bank’s risk-sharing formula suggested that customers suffer losses, the bank would nevertheless be required to offer full repayment of the capital (in accordance with FSA regulations); however, customers may elect to accept less than full repayment and instead accept the amount determined by the risk-sharing formula (in accordance with local interpretations of Shariah) (Fiennes 2005; Plews 2005). In this putatively successful resolution, the Islamic Bank of Britain offers profit- and loss-sharing deposit accounts to depositors that legally cannot lose money without the ex post consent of depositors.^M

To date, only a few countries have sought to circumvent their national legal system’s coercive isomorphism by enacting Islamic banking laws: for example, Indonesia, Iran, Malaysia, Pakistan, Sudan, Turkey, the United Arab Emirates, and Yemen (El-Hawary,Grais, and Iqbal 2004: 26).

444 AARON Z. PITLUCK

 However, it is an empirical question whether such legislation merely reproduces the conventional banking laws with minor alterations or whether it addresses larger epistemological differences between the Islamic and conventional financial systems (cf., Rethel 2011).
The second social force encouraging Islamic and conventional finance to resemble one another is competitive isomorphism. As organizations compete with one another (and seek to minimize competition by forming market niches), the organizations within a market niche progressively resemble one another, either by learning from successful competitors and their products, or because dissimilar organizations or products do not survive market competition (DiMaggio and Powell 1983; Fligstein 1996; Hannan and Freeman 1977). A frequent argument in the literature is that the IBF sector is a small niche in a competitive industry. In order to compete for clients and meet the demands of shareholders, the fees charged to IBF clients will rapidly converge on the interest-based fees charged to clients in the conventional sector.

Yousef (2005) has made a similar point by arguing that it is unrealistic to expect the IBF sector to be primarily constituted by profit- and loss-sharing contracts when this form of financing is so costly in the conventional sector (also see Kuran 2004). Partly to insulate Islamic banks from such competition (as well as to resolve numerous cor­porate governance problems plaguing the IBF sector), Mahmoud El-Gamal (2007) has argued that the IBF sector should pursue mutualization (i.e., become cooperatively owned by its customers, for example by becoming a credit union or building society).                                        ^
A third form of isomorphic change is mimetic processes. As a consequence of uncer­tainty (and risk aversion), organizations may model themselves and their products on preexisting organizations and products (DiMaggio and Powell 1983). As a relatively new industry with rapid product innovation, there is a great deal of uncertainty regarding what clients want. For example, Maurer (2006) investigates how Muslim Americans interpret two kinds of Islamic mortgage products and finds that these interpretations are quite different than each firm’s understanding of their clients as well as their own marketing. Moreover, clients’ knowledge of financial markets is shaped by their experi­ence with the conventional banking sector, and this in turn shapes their expectations for niche markets, including the IBF sector.

An additional source of uncertainty is whether new IBF products can meet the requirements of two demanding constituencies with very different criteria: the Shariah supervisory board and market regulators. Each financial product must be crafted so that it can satisfy Shariah boards (e.g., by demonstrating that a transaction is not an interest- bearing loan). However, the same product must also satisfy regulators (e.g., by demon­strating that there is no legal difference between this product and standard interest-bearing lending) (El-Gamal 2008: 198). In all financial innovation there is a risk that the product or financial instrument will not be able to pass both constituencies.

This uncertainty — combined with the uncertainty regarding what clients desire — is a powerful mimetic process, pushing Islamic financial products to resemble conventional financial products.


Conclusion (p.445)

To return to the chapter’s title: Is the Islamic banking and finance (IBF) market a prom­ising alternative to conventional finance, or merely a religious facade to market products to the pious? I have demonstrated that the question is itself warranted. There is consid­erable definitional anxiety among academics, practitioners, and clients regarding how and whether IBF is substantively different than conventional finance. Indeed, I argue that powerful isomorphic social mechanisms push IBF to resemble conventional finance in numerous complex and subtle ways. Nevertheless, IBF as currently practiced remains a substantively and intellectually distinctive alternative to conventional financial organ­izations, instruments, and practices.

Given that the market’s global size is estimated to be between $822 and $1,300 billion, this makes it one of the world’s largest moral projects seeking to reshape economic rela­tionships. That said, sociologists must keep in mind that much of what makes IBF a dis­tinctive intellectual project (such as riba and gharar) imperfectly overlaps with our own theoretical concepts, such as financialization (cf., Alatas 2000). I suggest that as hegem­ony slowly shifts from a North-South axis to an East-South multipolar arrangement, it would be prudent for sociologists to contemplate IBF’s contested concepts within its own discourse (Imam and Kpodar 2010; Nederveen Pieterse 2011; Pollard and Samers 2007; Warde 2010). In a future, more multipolar sociology of finance, riba would be dis­cussed without translation, and Mufti Usmani might be routinely found in bibliogra­phies between Professors Swedberg and White.

Notes

1.    This research was partially sponsored by Budapesti Kozep-Europai Egyetem Alapitvany (CEU BPF). The views expressed in this chapter are those of the author and do not neces­sarily reflect the views of Central European University Foundation Budapest.

2.    In the three years following the terrorist actions of September 11, 2001, most (67 percent) articles in the mainstream media regarding IBF mentioned a link with terrorism (Ali and Syed 2010: 34), particularly through IBFs’ charitable contributions. Subsequent investiga­tions have found this characterization of the industry to be unwarranted (de Goede 2008:

227-9)-

3.    IBF originated in the early 1970s, fueled by the quadrupling of oil prices in 1973-4. Its prin­cipal intellectual and institutional support arose from debates within the Organization of the Islamic Conference (OIC) to reform the monetary and financial system to conform with Islamic ethics, as well as in larger debates within the United Nations for a New International Economic Order (Warde 2010: 70-113).

4.   Only Iran has a wholly Islamic financial system. Pakistan attempted one in 1985 before transitioning into a dual financial system over the past decade, and pre-secession Sudan attempted one between 1983 and 1986, and in the northern provinces since 1991 (Said 2005; Warde 2010: 114-25).

5.   In Caplen and DiVannas (2010) dataset, one third of IFIs do not publish financial data (nor are they required to do so by their national regulators), and those that do provide data lagged by several quarters or even years.

6.    Arab Muslims are a minority (200 million) of the estimated 1.6 billion Muslims in the world. The countries with the ten largest Muslim populations are, in descending order: Indonesia, Pakistan, India, Bangladesh, Egypt, Nigeria, Iran, Turkey, Algeria, and Morocco (Pew Research Center 2011).

7.   A 1989 survey of Shariah supervisory boards in Islamic banks found that 29 percent of board members’ remuneration were determined by the Board of Directors, and 4 percent by management (Vogel and Hayes 1998: 49).

8.   Dubai’s iconic debt crisis in late 2009 was unrelated to its bid to become an Islamic financial center. Approximately 90 percent of the debt was from the conventional sector, not from IFIs (Timmons 2009). Rather, Dubai’s insolvency was caused by the predictable collapse of a national real estate asset bubble. Significantly, it is East-South trade with India and China that is driving Dubai’s current recovery (Nederveen Pieterse 2010; Zubairi 2006).

9.    When banks knowingly use such fungible assets to provide cash to clients, this is known as a “bank tawarroq” and is widely practiced in the Gulf States. It is considered by some IBF scholars as a permissible but not advisable economic transaction (Warde 2010: 143-4).

10.    “To put it another way, the metalevel debate between [social scientists] has already been antic­ipated (and exhausted) in metalevel debates” among IBF practitioners (Maurer 2005: 71).

11.     This identical language is due to the role of agencies like Fannie Mae and Freddie Mac that standardize mortgage forms and paperwork (Maurer 2006), a nice example of coer­cive isomorphism discussed below in the main text.

12.    I have chosen to detail Usmani at length because his intentions are institutionalized in Shariah supervisory boards throughout the world. He holds the chair on the Shariah Council of three influential standard-setting international bodies: the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the International Islamic Rating Agency (IIRA), and the Central Bank of Bahrain. Additionally, he is the chair of ten Shariah supervisory boards in Pakistan, the United Arab Emirates, and Switzerland (Usmani 2011).

13.    DiMaggio and Powell (1983) also discuss a fourth form of structuration, normative iso­morphism, in which forms resemble one another because of the professionalization proc­ess. I do not observe this in the IBF industry, perhaps because the professionalization process of IBF scholars is at an early stage of development (Chapra 2007; Ghoul 2008; Kahf 2005).

14.    In practice, IFIs competing with conventional banks cannot allow even small losses without a run on the bank, and therefore IFIs typically implement so-called “profit smoothing,” so that depositors’ returns closely track competitors’ interest-based accounts rather than periodically experiencing losses. This introduces numerous corporate gov­ernance and conflicts of interest issues (see Nienhaus 2007: 130-2, 141; Safieddine 2009)

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