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Friday, November 01, 2013

UK Sharia Bonds - ?

As part of the government's blitz of 'look what we're doing' announcements, we now have "Britain to become first non-Muslim country to launch sharia bond: David Cameron to unveil £200m Sukuk".  So what's going on here ?


a.  Political Significance

A couple of weeks ago I posted about how the UK is kow-towing to the Chinese as part of our economic escape plan.
"This is a particularly acute risk for the UK ... In our semi-detatched euro-positioning, our vulnerability to having the City isolated by jealous continental and American financial authorities, and our commendable centuries-old willingness to roam the high seas, we will always be inclined to 'trade our way out of trouble'. Now true commercial trade is a great thing and would indeed be the ideal way forward. But increasingly what we see is a baser trade: the prostituting of our institutions to the whim of Russian and Chinese wealth. If they want to lavish their money on our libel courts or Mayfair shops, that's one thing. But it won't be ending there. Today we see the first of the mega-bargains our desperate UK politicians will enter in order to engineer short- and medium-term relief from our woes. Faustian is just one way to describe it."
There, I was writing about the nuclear deal, but of course that was part of Osborne's Sino-package that included a putatively huge and strategic banking 'n' finance deal.  These are the kind of moves that can leave green-eyed Frankfurt and New York grasping vainly at thin air, reinforcing London as "the undisputed capital of the world".  At least, that's how the dream story-line runs.  Brown hoped to do the same, but Osborne is acting more decisively.

The sharia leg of this burgeoning development causes nervous murmurs on the home political front - see this piece at ConHome.  Should it ?  Given that in technical terms the distinguishing  features of sharia finance are, to the unbeliever, quirky to the point of quaint (see below), objectively the whole thing is a bit like the 'ethical investment' industry: why not let anyone who wishes to cut themselves off from the full range products, do so if they choose?

But obviously there is a heavyweight cultural overlay to this, and maybe objectively speaking is not enough.  I am 'relaxed' about all sorts of 'alien' business influences and ownerships in the UK.  To me it is part and parcel of what I take to be a very traditional British openness to trade and cultural curiosity (which, by the way, is only one strand of British tradition as I know full well).

But I am not remotely relaxed about the rule of UK law and for me there is a simple bottom line.  Provided all this UK sharia stuff is subject to the same banking regs as everything else (and these are enforced with the full force of law, see C@W  passim), let's go for the money and leave Frankfurt and New York fuming.  This proviso is not trivial, and not just because enforcement of banking regs had become a sick joke.  It must surely be the case that hawala transfers are routinely used to dodge western banking regulations (not to mention money laundering); and bringing any such system into mainstream scrutiny must be a highly desirable goal of policy - nay, even an imperialistic power-grab!

b.  Financial Aspects

Sharia finance properly analysed is a subset of general Finance-with-a-capital-f, delineated by some strict rules around interest-payments which must not feature in the story of what A pays to B.  Recalling the informal definition of a Swap - the exchange of cash flows between consenting adults - most sharia-compliant deals are what are known in the real world as total return swaps (TRS), and there is nothing scary or alien about them per se. Of course, they are a bit more complicated than plain vanilla loans etc - but so what?  Lots of financial instruments are.

Far from scary, putting aside the political stuff I'd say the whole thing is pretty amusing.  The restrictions that make these deals sharia-compliant remind one of nothing so much as the crazy, tortuous tax regulations which make certain kinds of (e.g.) UK film investments qualify for attractive tax breaks.  In other words, they are an adventure-playground for shyster tax-lawyers, and sharia will be just the same**.  The arguments over what counts as what; the twisted convolutions required to label interest payments as anything but interest, are hair-splitting sophistry - literally theological.  There already is a service industry around this, with "Islamic scholars" getting good money for certifying individual deals.  The People of the Book know all about this stuff, too, and what a gravy-train for the City it promises to be !
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** Just as with 'ethical investments', one imagines there are disappointments ahead for those who place great store by what they are being sold truly complying with the advertised principles.  I suppose that in some countries, anyone caught playing fast and loose with the sharia interest rules might have their parts cut off  ... a risk that the City boys will need to factor in for themselves, eh?  


This post first appeared on the Capitalists@Work blog

 
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1 comment:

Sackerson said...

Up to now I had misunderstood the law relating to usury in France. Apparently it was not illegal to charge interest on loans before 1789, the rate was merely limited, to between 2 and 5 per cent in the early 1700s according to Adam Smith:

http://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book01/ch09.htm

and it seems that at least in 2002, French law continued to place limits on interest rates, that it was claimed, were stifling the bond market:

http://corporate.findlaw.com/finance/conflict-of-laws-in-international-loans-to-french-corporations.html

I'd be interested to learn what the ancient laws and customs in Judaism and Islam were, on this subject.