LEGAL OPINION by John King
In the West we have, over many years, created a range of financial instruments to meet the needs of business, of investors and of the man and woman in the street. In the recent past, institutions in the Islamic world have developed a parallel set of instruments which seek to fulfil those needs in a way which is consistent with sharia law.
Modern Islamic finance as we now know it today, having its origins in 1960's.
To the extent they think about such things at all, it is probable that many in the West regard Islamic finance as a harmless eccentricity. Some may see its arrival in Europe and North America as an unwelcome intrusion. Few would ever take the time to examine its underlying principles.
In the decades which followed the Reagan revolution, we came to think that markets, including financial markets, could, by and large, look after themselves. Since the onset of the global financial crisis, many in Europe and America have come to believe we need to apply a new ethic to the conduct of financial markets. However, in the West, where public morality is divorced from revealed religion, there is as yet no consensus as to what form this should take.
In the Islamic world, the problem is different. To pious Muslims, it is self-evident that financial markets should be organised in accordance with sharia law, which reflects the truths revealed in the Koran, and the example set by the prophet in the Sunnah.
Most of us are aware that Islam prohibits usury and few would be surprised to learn that a Muslim should not profit from the sale of alcohol or from the distribution of pornography.
What most of us do not know is that the sharia presents a positive vision, based on principles of equity, as to how business should be carried on. In a financial transaction, the person who brings the money should share risk with the person to whom it is brought.
An investment should normally be backed by a tangible underlying asset. One should make an investment only if it is reasonable to suppose it will bring a return.
How are these principles applied in practice? Some conventional instruments, including many of the more exotic creations of Wall Street, are so irremediably unIslamic that no amount of ingenuity could produce an equivalent which was sharia-compliant.
Into this category would fall the high-risk products of casino capitalism and instruments which derive their value not from assets but from algorithms.
Other, more familiar, financial products have their Islamic equivalents. A Western bank pays a saver interest by reference to the “time value of money”. A depositor in an Islamic bank shares in the profit and losses which the institution generates when it puts the deposit to use. An Islamic institution cannot grant a mortgage but it may lease a property to its customer.
In the Christian (or post-Christian) West, Islam can resonate negatively. We often focus on aspects of that civilisation which are foreign and threatening to us and ignore features of Muslim life and beliefs which we might consider more benign.
Our Government is anxious that Dublin should develop as a centre for Islamic finance and, with that in mind, we have amended our tax code so as to create a level playing field for conventional and Islamic financial instruments. So where a bank depositor receives a share in the profits (and losses) generated from, for example, the deposit, the Revenue Commissioners will treat such return as if it was interest.
Opinion in the West is often suspicious of, or antagonistic towards, sharia. Is it right then that our law should accommodate practices which are informed by that code?
In the US housing bubble of 2005-2006, unscrupulous institutions lent money to poor people on the security of their homes. By some form of financial alchemy, investment banks converted these mortgages into triple A securities which they then sold on to fund managers. Some shrewd investors could see this market was heading for a fall and placed their bets accordingly. In the resulting debacle, the global economic system received a shock from which it has not yet recovered.
Nothing remotely like this could have happened if the actors in this drama had been constrained by sharia principles, so we should not be surprised that many Muslims feel that, in the era following the collapse of Lehman Brothers, we might when we come to regulate financial markets consider taking a leaf out of their book.
By John King, a partner in Ivor Fitzpatrick Company Solicitors, where he specialises in media and commercial law.
(Irish Times.Com / 21 May 2012)
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