The value(s) of money: Islamic finance and its plural market

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1 Business Law Course Seminar on Islamic Finance, Pluralism and Business Law, Class 1 University of Siena, 15 November 2017 The value(s) of money: Islamic finance and its plural market Dr. Valentino Cattelan The concept of PLURALISM In sociological research, the notion of pluralism holds both a descriptive and normative dimension. From a descriptive perspective it refers to the co-existence of multiple communities within a given society; from a normative approach, it relates to the recognition of these identities. >>> LEGAL PLURALISM From a descriptive perspective, it refers to multiple legal orders co-existing within a given society or geographical region (e.g. in former colonies, where indigenous law has been replaced by colonial law, but its practice is still in force at a community level). From a normative viewpoint, legal pluralist scholars, in dealing with situations of polycentric law and potential conflicts between overlapping legal systems, on the one side, work on tools of legal integration and harmonization; on the other side, by highlighting the cultural distinctiveness of each legal tradition in a given social reality, emphasize the need to consider diversity in law in order to reach more efficient and legitimate policy-making when law is put in practice. >>> BUSINESS LAW & FINANCIAL PLURALISM? >>> issues of stability, governance and regulation to foster a level playing field among the actors operating in the market. PLURALISM AND ISLAMIC FINANCE Standard definitions usually concentrate on Islam / Islamic law / Islamic economics. Islamic finance denotes financial transactions in compliance with Islamic principles. It is a business practice guided by Islamic law that has evolved in the context of global financial markets and it the most important application of Islamic contract law today. Moreover, it is the key area where the propositions of Islamic economics, in particular the ban of interest, are put into practice. In 2011, an aggregate of USD 1.3 trillion [today 2.0/3.0 trillion] were reported to be under management in accordance with Islamic principles, with an expected annual growth rate of 17% (Ernst & Young). [Encyclopedia of Islam, K. Bälz] 1

2 Islamic finance should be regarded as a global socio-economic movement linked to capital flows where moneybecomes vehicle of value(-s) which is differently(re-)formulated by multiple actors in the light of concurrent, complementary and/or conflicting identities and expectations about how a good market should work as a functioningsocio-legal space. Accordingly, these concurrent, complementary and/or competing values differently interact in the formation of the law of Islamic finance, where a variety of (potentially conflicting) interests are reconciled by combining norms of Islamic law, state law, social practice and the global lex mercatoria. Considering the inherently plural nature of identities, values and expectations involved in Islamic finance, the issue is how to recognize / regulate this pluralism in the global economy in-between law, economics and business practice. (1) What is Islamic finance? Islamic finance is a transnational market currently growing at a global stage geographically localized within some major financial hubs / nation states, that have invested in a facilitating legal, fiscal, regulatory framework, whose socialpractice involves a multiplicity of actors and interests, both international and local, public and private, as well as Muslim or non-muslim differently referring to Islam / Islamic economics / law / shari ah / the Muslim world / Muslim minorities to foster / justify /uphold an alternative / ethically-oriented / inclusive / diversified / multicultural capitalism characterized by >>> the focus on real economy (asset-based or -backed: goods and services production) >>> ethical criteria (religion, diversity, social inclusion, ) / purpose-oriented capitalism >>> ban of interest >>> profit-loss sharing and / or risk-sharing the coreof ISLAMIC FINANCE MONEY 2

3 ISLAMIC FINANCE MONEY globalisationprocess nationalpolitical economy / state legitimacy socio-economic practice at a local / national/ global level Islam and alternative capitalism The square of value(s) embedded in IF money (global) capitalism Islam shari ah compliant shari ah based religious profitable standardised real economy; ethicalcriteria; profit-loss and risksharing stable efficient regulated consumer oriented state social responsible/ impact oriented inclusive diversified local development oriented socio-economic(local) practice A map of Islamic finance products/actors (global) capitalism Islamicindexes Islamicfintech sukuk rating agencies sovereignsukuk Islamic crowfunding transnational investmentfunds Islam zakat takaful Islamic banking zakat NGOsprojects migrantbanking Islamic waqf crowfunding local banking microfinance state socio-economic(local) practice 3

4 The piazza of Islamic finance as social space (global) capitalism Islam state socio-economic(local) practice The value of money in Islamic finance is (re-)formulated according to multiple identities and expectations. Sukukare defined by AAOIFI as certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity. How the meaning of sukuk can change... - Malaysia: sukuk market as an instrument of political economy, gov t legitimacy, social control, geoeconomic identity -Saxony-Anhalt sovereign ijarasukuk ( ; 100 million euro; 60% investors from Bahrain and UAE): local public debt; attraction of foreign investors; prove of inclusive society; -UK sovereign ijarasukuk ( ; 200 million GBP): strengthening of the hub of London as undisputed centre of the global financial system ; -French Orasissukuk, the first green sukuk in existence (launched in 2012; ijara): new trend in favour of sustainable development; ecological and social responsible investments; plus with rising electricity prices and falling technology costs, investments in renewable energy is also becoming more profitable... How to explain Islamic finance money? Islam or global capitalism? To a certain extent, Islamic finance money proves to be functional to the reinforcement of a global discourse about the unity of the Ummah, that is currently facilitated by new technological instruments. e.g. Islamic crowdfunding: social impact investing for everyone e.g. Create your own waqf with only $10 Make waqf today. For tomorrow, till eternity Crowdfunding for the Ummah 4

5 (2) What is the law of Islamic finance? The law of Islamic finance (LIF) is a polycentric body of law, deriving from the interaction and interdependence between (A)transnational (/international ) global standards, (B) national law (statutory and case law), (C) business un-formalized practices (lex mercatoria), at a local/global level, (D)Islamic commercial fiqh, as performance of shari ah in contemporary times through ijtihad. The law of Islamic finance transnationalstandards/ lexmercatoria Islamic law and business ethics AAOIFI and IFSB standards Shari ah scholars certifications Shari ah boards Arbitration sndadrs Basel Accords Banking law International private law Financial law Insurance law state law (financial regulation) formvs. substance classicalfiqh Localcustoms Arbitration Lawand ethnic minorities Consumer law socio-legalpractice 5

6 Basel Accords Ijtihad AAOIFI standards UK law on IF Tahawwut Agreement OTC agreements UK / EU regulation transnational/global standards national law business practice (lex mercatoria) Islamiccommercial fiqh(shari ah) AAOIFI / IFSB Standards National laws (UK) of Islamic finance >>> English case law (1) Shamil Bank v. Beximco Pharmaceutical Ltd [2003 and 2004] Subject to the principles of the Glorious Sharia, this Agreement shall be governed by and construed in accordance with the laws of England (!) [issues of the choice of law] >>> Sharia is not the law of a country (vs. Rome Convention on the law applicable to contractual obligations, 1980): the words are intended simply to reflect the Islamic religious principles according to which the bank holds itself out as doing business rather than a system of law (2) The Investment Dar Company KSCC v. Blom Development Bank SAL [2009] The contract was expressly governed by English law, but the parties were required to conduct themselves in a Sharia-compliant manner within a master wakala contract [operational risk] >>> the court did not venture to decide whether the wakala was Sharia-compliant or not Tahawwut Master Agreement (ISDA/IFSB) (2010) (3) Islamic finance and the plural market 6

7 Integrating Islamic Finance in the EU Market Jean Monnet Programme, Grant Decision European Commission, DG Education & Culture - University of Rome Tor Vergata - period of 3 years: >>> Islamic Finance in Europe: Towards a Plural Financial System Edward Elgar Publishing (2013, ed.) How to govern/ regulate the fuzzy piazza of Islamic finance? D The Islamic side of Islamic finance: do we need for a plural financial regulation? A B 7

8 Shari ah as the right direction for commercial transactions >>> focus on real economy >>> prohibitions of riba (interest), gharar (illicit uncertainty), maysir (gambling) >>> risk-sharing as source of legitimate profit >>>>> alternative conceptualization of property rights Conventional capitalism competition / equal division of resources Islamic economy cooperation / equal sharing of resources D A B which regulation at the state / international level? >>> need for managing different financial models within the same regulatory framework UK s proactive approach to IF mln Muslims (2.8%); - more than 20 banks offering Islamic products: Islamic Bank of Britain; Bank of London and the Middle East; European Islamic Investment Bank; Gatehouse Bank; QIB UK - legal and governmental interventions, since 2000, to promote the sector: - principle of neutrality = levelled competition, level playing field; - the legislator avoids any reference to Arabic names, and simply identifies the characteristics of the transactions and regulates their substance (eg. Home Purchase Plan, instead of musharaka / mudaraba); - investment-deposit and Financial Services and Markets Act 2000; - tax reforms: - Finance Act (2003): HPP and stamp duty land tax: abolition of double taxation; - Finance Act (2005) and Finance Act (2006): fiscal regulation of Islamic product incomes (mudaraba, wakala, murabaha, diminishing muskaraka) as alternative finance arrangements ; - Finance Act (2007): fiscal treatment of sukuk (alternative finance investment bonds), equivalent to corporate bond; : evaluation by the UK Government of the emission of sovereign sukuk; - capability of London Stock Exchange and the City to attract capitals from the Middle East + role of major conventional high street banks (CityGroup, HSBC, ) in opening Islamic windows and offering Islamic products and services >>> launching of a sovereign sukuk in June C The socio-economic side of Islamic finance: the plural dimensions of contemporary capitalism 8

9 Islamic finance and contemporary capitalism: Islamicfinance conceives the market as a common enterpriseofprofit and risk-sharing, through a community-based approach to financial intermediation SHARING ECONOMY peer-to-peer models of production and consumption; collaborative agency; crowd-funding C B A (centrality of social networks) e.g. Shari ah-compliant crowdfunding : crowd-funding complements the principles of Islamic finance, building strong relationships among people, promoting the socially responsible distribution of wealth, and encouraging risk sharing in economic transactions to reduce the risk of all the parties 1. Retail banking -introducing shari ah compliant current accounts is a factor of financial inclusion to draw people into the financial system, as well as to mobilize funds for economic development 2.Microfinance and SMEs -being the majority of the population in the Muslim countries with limited disposable income, special attention should be given to a sector able to meet the demand of low-income Muslim clients asking for products consistent with Islamic financial principles, both for consumption and production 3. Islamic project finance -role of the IDB; the choice of Islamic infrastructural funds, instead of conventional, is rather favored by the nature of the governmentin power; moreover, the GCC sponsors are not likely to show any objection to the Islamic option (political economy) 4. Shari ah-compliant crowdfunding -crowd-funding complements the principles of Islamic finance, building strong relationships among people, promoting the socially responsible distribution of wealth, and encouraging risk sharing in economic transactions to reduce the risk of all the parties 5. Global sukuk market and waqf institutions -sukukare equity or equity-like securities representing a share in the ownership of an asset or an investment, in compliance with Islamic law. The current re-discovery of the institute of waqf(originally, charitable endowment ) in the Islamic financial industry could promote financial inclusion by channeling global investments towards local development projects, directing sukuk funds into philanthropic aims and a fairer distribution of wealth in the market Thank you! Q&As cattelanvalentino@libero.it LinkedIn / Academia.edu / ssrn.com 9

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