Shariah-Compliant Finance as a ‘safe haven’?

Promoters of Shariah-Compliant Finance routinely violate the trust of investors when they proclaim that investing according to shariah principles has provided a safe haven from the recent and current financial crisis.

Could any other sector get away with such lies?

The lies emanate from the entire range of shariah practitioners, from individual investors themselves all the way up to sheikhs, muftis, mullahs and heads of state. The entire World Islamic Economic Forum held in Jakarta, Indonesia in March would have made Goebbels blush. 

If you tell a lie long enough and loud enough, it will become the truth, no matter how big the lie. Not surprisingly, Osama Bin Laden’s TV network of choice, Al Jazeera, is in on the scheme:

A few comments on the Al Jazeera report: First of all, if sticking to “Islamic” standards is really the answer to heading off financial crisis, why have so many Shariah-Compliant banks and financial institutions been clobbered in the current economic and financial crisis?

Second–and this is very important–note that one of the bankers being interviewed in the Al Jazeera video encourages people to disregard the reference to “Islamic” and just think of it as “ethical.” This is a common theme among practitioners of Shariah-Compliant Finance. I attended the Harvard Law School seminar on Shariah-Compliant Finance back in April of 2008 and the possibility of removing all references to “Islam” and “Shariah” was openly discussed at the forum as a means of attracting non-Muslim customers.

In other words, they want to conceal the truth from investors in order to dupe them into investing in something they might not otherwise touch with a ten-foot pole. In some places, this is referred to as fraud.

Then there is the whole issue of “ethical” investing and I will once again point out that, if the world’s largest Shariah-Compliant Bank, Bank Melli, can be under US, EU and Australian sanctions for its activity in funding and facilitating the financing of terrorism and Iran’s weapons programs, what measure of “ethics” are these people using???

Finally, the Al Jazeera video claims that “Islamic finance” has been around since the 7th century. HOGWASH. Complete and utter HOGWASH.

Shariah has been around since the 7th century to be sure, with very little modification, especially in places like Saudi Arabia, Sudan, Iran, the Swat Valley and a few other hellholes, but “Islamic finance” or “Islamic economics” was a decidedly 20th century man-made creation.

The concept of a separate Islamic financial/economic system was first conceived by Maulana Abul Ala Mawdudi. Mawdudi spent his whole life trying to turn Pakistan into an Islamic republic ruled under shariah and he was horrified over the encroachment of Western values and culture into the Islamic world, so he called for a separate and distinct economic and financial system for Muslims to insulate them from the influences of Western wealth.

In other words, Islamic finance was a political invention right from the start, but that start was in the 1940s, not in the 7th century. Furthermore, there is a lot more to know about the father of Shariah-Compliant Finance. Check out this quote from Mawdudi and decide for yourself if you’re comfortable with the tables turning and the Jihadis exporting their ill-conceived economic/financial system over to us:

In the jihad in the way of Allah, active combat is not always the role on the battlefield, nor can everyone fight in the front line. Just for one single battle preparations have often to be made for decades on end and the plans deeply laid, and while only some thousands fight in the front line there are behind them millions engaged in various tasks which, though small themselves, contribute directly to the supreme effort.” Mawdudi further states, “A time will come when Communism will fear for its survival in Moscow, Capitalistic democracy will tremble for its safety in Washington and New York.” “The objective of Islamic Jihad is to put an end to the dominance of the un-Islamic systems of government and replace them with Islamic rule, Islam intends to bring about this revolution not in one country or in a few countries but in the entire world.

Perhaps when Al Jazeera referred to the 7th century, they were referring only to the prohibition of interest. The problem with that is, that isn’t true either. There was a great deal of controversy in the Islamic world on this issue as recently as the 1980s, with some prominent Islamic scholars claiming that there was in fact no complete prohibition of interest, only a prohibition of usury, or excessive, unfair interest.

It’s all a straw man argument anyway, because these so-called “interest-free” loans that Islamic banks are hawking are nothing more than convoluted constructs designed to replicate prevailing interest rates anyway. Heck, folks who take out “Islamic mortgages” have no problem taking the interest deduction off of their income taxes…

To summarize the video, it is simply a propaganda piece designed to do “missionary work,” which is the purpose of Islamic banking and the true mission of Al Jazeera in the first place.

But we must still address the idea that Shariah-Compliant Finance has offered a safe haven.

Here’s a typical example of misleading reporting from the financial press, which has clearly been lubricated into becoming cheerleaders for Shariah-Compliant Finance. It comes to us from the Financial Times.

Note that the whole FT article headline is dedicated to “Islamic” investors and how they are weathering the downturn. Why is FT singling out Islam? The article points out that the Islamic indexes were down sharply in the 4th quarter of 2008 and then down again in the 1st quarter of 2009.

Why was Islamic finance singled out for mythical positive performance in view of this passage from the article:

According to S&P, over the quarter, 15 markets posted positive returns, including Norway with 6.9 per cent, Brazil with 18.6 per cent, Russia with 9.2 per cent and Taiwan with 13.2 per cent.

It seems to me that the big story here is the fact that Brazil’s stock market is going gangbusters! And I have a feeling that Brazil’s excellent performance wasn’t due to adherence to Shariah…

It gets worse:

Here is a prime example. Here we have an article which perpetuates the myth that shariah-compliance provides a safe haven and then loudly proclaims that the current crisis is just the opportunity to spread shariah-compliance to new markets. That is their agenda and they will bend and break the rules to do so.

Now back to a healthy dose of reality. Are all these shariah-compliant financial institutions and products really performing as these press reports claim?

No.

Take the Iman Fund, one of the largest and most publicized shariah-compliant mutual funds in the United States. Since its inception in 2000, its average annual return is -7.00%, as of 31 March 2009. As a comparison, the S&P 500 Index benchmark, a non-shariah compliant index of shares, is down 4.93% on an annualized basis over the same time period.

In other words, the Iman Fund has underperformed the market for nearly 9 years. Adherence to shariah principles hasn’t helped a bit.

We get a similar picture when we analyze the Iman Fund’s performance over a one-year period.

For a one-year period ending on 31 March 2009, the Iman Fund has turned in a loss. It is down -39.35%. Compare that to the S&P 500, which is down -38.09% for the same period.

Again, adherence to shariah has not helped performance at all.

Each day, one can go to the internet and find examples of shariah-compliant financial institutions which are struggling in the current economic crisis:

Like Qatar Islamic Insurance Company, which posted a net loss of 56% in the recent quarter and saw its investment portfolio’s profits drop 67% as well.

Then there is Bahrain Islamic Bank, which recently saw its quarterly profit drop 40% year over year. This comes after a 9.78 million Bahraini Dinar loss in the 4th quarter.

The idea that shariah-compliance provides a safe haven is a myth and the fact that the industry keeps making that claim in the face of reality is simply more proof that they cannot be trusted.

Originally posted at Shariah Finance Watch blog.