Beyond Debt

Islamic Experiments in Global Finance

The University of Chicago Press

Contents

An Infrastructure for Islamic Finance

Logos for Islamic financial services firms, such as Bank Islam and the Islamic insurance firm Etiqa, prominently adorn the crowns of buildings that soar above the public park and shopping mall in Kuala Lumpur City Centre adjacent to the Petronas Towers, the world's tallest twin office buildings (see figure 3). Kuala Lumpur City Centre is one of the most popular business and leisure destinations for both Malaysian citizens and foreign visitors to Malaysia, and the advertising for Islamic financial institutions above the park is no coincidence. To achieve its goal of making Kuala Lumpur into the central node in a transnational network of Islamic financial centers, the Malaysian state has fostered a critical mass of key institutions in an effort to develop Islamic finance in the country and create the infrastructure necessary to make the country a "hub."

Anthropologists have recently emphasized the centrality of infrastructure in facilitating networks of experts and citizens and in facilitating flows of capital, commodities, and knowledge (Gürsel 2012; Harvey and Knox 2015; Mains 2012; Xiang and Lindquist 2014). I build on these approaches to show how the production of expertise about Islamic finance in Malaysia has been facilitated by the state's efforts to create an infrastructure conducive to such knowledge production. I argue that broader recognition of Malaysia as a central site for global Islamic finance has been the comprehensive approach that planners have taken, both in drawing on Malaysia's Islamic finance history and promoting experimentation and innovation to develop expertise in the sector. In this chapter a chronological view of the creation of this infrastructure reveals a transformation in the state's Islamic finance project, from its initial goal of resolving a specific problem for Muslim citizens seeking to undertake the hajj pilgrimage to a coordinated development strategy of the postcolonial state.

The key institutions developed by the Malaysian state to provide the infrastructure for Islamic finance include special offices within the Central Bank, research centers and think tanks, and educational institutions. In addition, the Malaysian government successfully lobbied to have the Islamic Financial Services Board, an international standard-setting organization that develops global standards and guiding principles for Islamic financial institutions, located in Kuala Lumpur. Furthermore, the state has offered incentives to conventional banks to establish Islamic operations, thus encouraging private firms located both inside and outside Malaysia to establish an Islamic banking infrastructure.

Challenging the Secularity of Development

After Malaysia's independence in 1957, the country's extant political, legal, and financial systems had all been inherited from the British (Peletz 2002, 38–47). The absence of any alternative to conventional interest-based finance precipitated a moral quandary for those saving to embark on the hajj pilgrimage. Due to the Qur'anic prohibition of interest, pious Muslims in Malaysia had refrained from participating in the interest-based banking system. The hajj is one of Islam's five core rituals alongside the confession of the faith, daily prayer, fasting during Ramadan, and paying alms, or zakat. Most Muslims aspire to undertake the pilgrimage, and for many it transforms their sense of religious identity and their sense of self (Hammoudi 2006). Given the great expense of travel to the Arabian Peninsula, Muslims at the extremities of the Islamic world would often have to save for many years to afford passage and thus fulfill one of the religion's central obligations (Tagliacozzo 2013). When the opening of the Suez Canal and the advent of the steamship made pilgrimage increasingly possible, the absence of any institutional alternative to conventional interest-based finance left prospective pilgrims with three choices, none of which were particularly appealing. One could deposit one's savings in a conventional bank, entrust them to a local confidant such as a religious leader, or squirrel them away at their places of residence. In Malaysia stories abound of rural inhabitants burying gold in their garden plots or stashing their wealth "under the pillow" to save for the pilgrimage while avoiding the interest economy. Conventional banking presented aspiring pilgrims with a no-win situation. Depositing savings in an interest-based bank would entail incurring interest and, consequently, one would paradoxically commit a grave sin while preparing to participate in one of the holiest rituals in Islam. The problematization of interest reveals the cultural norms implicit in finance. Interest has long been the object of ethical reflection not only in the Muslim world but in other religious traditions as well (Buckley 2000; Nelson 1949). While Christianity has gradually adapted to interest as a necessary instrument of finance, debates in contemporary Islamic finance demonstrate that interest need not be taken for granted as a constitutive feature of financial practice (Geisst 2013).

In an effort to resolve the predicament of creating an institutional mechanism to facilitate saving for the pilgrimage without incurring interest, the Malaysian government supported the creation of the country's first Islamic financial institution. This corporation was the brainchild of the economist Ungku Aziz, father of the long-serving governor of the Central Bank, Zeti Aziz, and cousin of the trailblazing postcolonial scholar Syed Hussein Alatas. Aziz outlined the first scheme that enabled saving for the pilgrimage without incurring interest in a paper titled "Economic Improvement Plan for Prospective Pilgrims." This document laid the foundation for the establishment in 1963 of the Muslim Pilgrims Savings Corporation (Çizakça 2011, 207–213). This was the precursor to Tabung Haji, established in 1969, which remains the central Malaysian institution responsible for managing savings for the hajj (see figure 4). A massive corporation with an impressive hourglass-shaped office tower that forms a prominent landmark on Kuala Lumpur's skyline, by the early 2010s Tabung Haji had more than five million depositors, over three hundred branch offices across Malaysia, and deposits of $9 billion (Ishak 2011).

During the 1980s the common presumption that economic development was a strictly secular project underwent a thorough reexamination in Malaysia. In part this reflected the influence of the 1979 revolution in Iran, which saw Islamic religious authorities for the first time assume power in a modern state (Fischer 1980). This event coincided with and, some have argued, spurred a wider resurgence of Islam around the world (Esposito 1998, 309–310). In Malaysia, the growing popularity of the Islamist opposition political party Partai Al-Islam Se-Malaysia, and particularly its condemnation of the ruling United Malays National Organization (UMNO) for, in their eyes, catering to Chinese, Indian, and foreign business interests pushed UMNO to a deeper embrace of Islam (Ong 1990; Peletz 2002, 10–11). Perhaps most significantly, Mahathir Mohamad, who became prime minister in 1981, initiated a measured rejection of some of the tendencies often associated with modernization. He sought to counter the presumption that the manner in which economic development had unfolded in the West was a universal model for developing countries to follow. Mahathir launched his Look East Policy and invoked Japan as an alternative model of development, embracing so-called Asian values (Ong 1999, 73). Responding to Islamist critiques often couched in moral terms, he suggested that Malaysia did not need to abandon its cultural inheritance while aggressively pursuing economic growth (Ong 1999, 197). This led to an interpretation of Islam that represented the religion as broadly complicit with modernity and capitalist development.

Mahathir's rejection of "western capitalist blueprints" for modernization (Ong 1999, 73) entailed in part the creation of a viable financial system grounded in Islamic prescriptions for economic action. Unlike Sudan, Iran, and Pakistan, which all sought the wholesale transformation of their banking systems into full-fledged Islamic systems in the early 1980s, Malaysia "initiated Islamic banking in parallel with conventional banking on a trial basis" (Venardos 2006, 146). In 1981 the state formed the National Steering Committee on Islamic Banks, consisting of twenty experts who were tasked with outlining the development of an Islamic banking sector (Abdalla Khiyar 2005, 204). The committee's recommendations laid the basis for the Islamic Banking Act of 1983 and the establishment of the nation's first Islamic bank, Bank Islam Malaysia Berhad in the same year (Laldin 2008, 9–10).

From its inception, the National Steering Committee realized that a financial system based on Islamic principles would require a comprehensive financial network consisting not only of banks but also an Islamic money market, Islamic capital markets, and an Islamic insurance system. Experts in Malaysia and beyond point to the comprehensive nature of this system as a unique advantage of Islamic finance in Malaysia. Following the establishment of Bank Islam, the state embarked on the creation of an Islamic insurance system "based on the concept of takaful, which means taking care of each other" (Iqbal and Molyneux 2005, 57). Toward this end, in 1984 the parliament passed the Takaful Act, which facilitated the establishment of Syarikat Takaful Malaysia a year later. This was the first takaful operator to provide equity-based mudaraba contracts for shariah-compliant insurance. Takaful is analogous to cooperative forms of protecting against risk, such as mutual insurance, in which policy holders agree to insure each other against damage or loss, using a company to act on their behalf as trustee of the premium contributions of each participant. The premiums, which are invested in shariah-compliant investments, form the fund from which both claims and any surplus is paid out to policyholders based on prearranged profit-sharing ratios.

The Nationalization of Islamic Finance

Islamic finance expanded alongside Malaysia's explosive economic development through the 1980s and early 1990s. Malaysia's central bank, Bank Negara Malaysia, has played the central role in the development and growth of Islamic finance. Bank Negara granted Bank Islam the first Islamic banking license in the country under the 1983 Islamic Banking Act. This was the world's first national law specifically dedicated to the regulation of Islamic banks. Bank Negara provided Bank Islam a decade to establish its operations before subjecting it to competition from other firms. As one former CEO of an Islamic bank told me, "At that time [in the 1980s] there was one Islamic bank in Malaysia ... which effectively had a monopoly." He continued, "They were given ten years to establish themselves. ... Then Bank Negara noticed that Bank Islam was making progress and decided it would license one more Islamic bank, Bank Muamalat, and also encourage conventional banks to open Islamic windows." To further facilitate the growth of Islamic finance, the Malaysian government sought to build a network of Islamic banking institutions rather than rely on a single Islamic bank. The "dual banking system" that Malaysia established "allowed Islamic banking and conventional banking to co-exist side by side" (Venardos 2006, 146). To encourage conventional banks to participate in the Islamic system, in 1993 the central bank introduced the Interest-Free Banking Scheme (Skim Perbankan Tanpa Faedah, SPTF) (Iqbal and Molyneux 2005, 46).

Importantly, this state-sponsored program used the word faedah rather than riba. "Faedah" can be translated as either "interest" or "benefit" and, although derived from the Arabic word fawadah, it carries less of a religious connotation, unlike the word riba, which appears in the Qur'an and is thus marked with a religious valence. By framing Islamic banking in terms of faedah, which is seldom used in religious discourse in Malaysia (for example, it is never used in mosque sermons during Friday prayers, one Islamic bank employee told me), the SPTF obscured explicit references to Islam. Employing faedah rather than riba was thus perhaps intended to make Islamic banking appear less explicitly religious and more palatable to non-Muslims, given that two out of every five citizens are not Muslim and a number of major banks were founded by and continue to be under the influence of non-Muslim Malaysians of Chinese descent. One former official of Malaysia's Central Bank told me that the bank sought to make interest-free banking appeal to all potential consumers irrespective of their religious orientation and also as something that might be offered in banks owned by non-Muslims or with large numbers of non-Muslim employees.

The SPTF program offered tax breaks for conventional banks to open Islamic "windows," which could offer Islamic financial products through a separate division that would be located under the same institutional rubric as the parent bank. Conventional banks could use their existing infrastructure to offer Islamic products under the same umbrella. The Islamic window scheme offered the most cost-effective and efficient way to "disseminate Islamic banking on a nation-wide basis, with as many players as possible, so as to be able to reach all Malaysians" (Iqbal and Molyneux 2005, 146), facilitating the rapid growth of Islamic financial firms, instruments, and products throughout the late 1990s and early 2000s.

The expansion of the number of Islamic banks and conventional banks with Islamic windows in Malaysia required the development of coordinating institutions. Most important, the emerging Islamic banking system required a mechanism to facilitate what bankers term "liquidity" to enable banks to balance their accounts on a daily basis. During the 1980s and early 1990s, one of the central problems that Bank Islam faced as the only Islamic financial institution in Malaysia was that it had no recourse to a market if it was short of liquidity. Because there was only a single institution, there was no interbank money market to enable it to balance its books at the conclusion of a business day. An interbank money market is a critical piece of infrastructure in any banking system. Bank Negara established a special government investment certificate (GIC) to provide liquidity to Bank Islam. The GIC had a three-year redemption time instead of the customary redemption time of twelve months and was based on an Islamic contract known as qard al hasan, which is a benevolent loan "given to ... needy people for a fixed period without requiring the payment of interest, profit or reward" (Hasan 2011, 594). Malaysian Islamic scholars ruled that although interest on such a loan would be prohibited (haram), it was permissible to give a gift (hibah) on such a loan. The Central Bank, ever pragmatic, concocted a device to enable the smooth operations of the country's only Islamic bank.

Hikam, an official with the Central Bank, told me that the bank investing in these products was effectively like the government borrowing from the public, because they were drawing on public funds to enable Islamic banks to operate. Hikam said that in the early years a committee was formed consisting of members from Bank Negara, the Ministry of Finance, Islamic Affairs Division of the prime minister's office, and other religious authorities near the end of the maturity date on the GICs. This committee would determine the value of the hibah to be given to the holder of the papers (see Hasan 2011, 609). The amount of hibah would be determined by comparison with the conventional system.

The hibah convention appears to be a circumvention of the Islamic prohibition on interest, but Hikam said that there was a scholarly rationale for this permission. Islamic scholars have interpreted the Qur'anic prohibition on riba as a divine injunction against any guaranteed profits. This is based on the Islamic legal maxim al-ghorm bil ghonm, or "There is no reward without risk." Scholars have interpreted this maxim to mean that profit is only permissible when an entrepreneur incurs risk. Hikam argued that the hibah paid on the GICs was deemed shariah-compliant because the amount of the gift was not predetermined, and therefore the one who provided the capital incurred risk. Whereas an interest rate was predetermined, the shariah board of the Central Bank ruled that hibah was permissible because it was variable.