October 2009 - Anthropology News

13
I N F O C U S
I N F O C U S
Islamic Banking in the Global Financial Crisis
The Value of Banking Rightly
In addition to prompting discussion among scholars, politicians and the media, the current economic crisis has also dramatically impacted daily
life around the globe. Here we present a series of case studies examining how particular populations are experiencing the economic crisis, what
we can learn from past crises, and how local situations relate to broader discussions about rethinking contemporary understandings of how
economic systems can, do and should (or should not) work.
E C O N O MI C C R I S I S : C A S E S T U D I E S
Svn Tovi
Bos1o U
In late 2008, the US Treasury
Department hosted the first
training seminar for US government
employees on Islamic banking.
A few months later, the Vatican
newspaper, LOsservatore Romano,
indicated that conventional banks
should look to
Islamic banks
in order to
restore confi-
dence among
their clients
in this time
of economic
crisis. Most
recently, French Finance Minister
Christine Lagarde announced
Frances intention to make Paris
the capital of Islamic finance.
These unexpected events reflect
a heightened attention to Islamic
banking, advanced by the intersec-
tion of the economic crisis with
ongoing Muslim reconsiderations
of piety and religious observance.
During my fieldwork in Amman,
Jordan, from September 2007
to June 2009, the effects of the
current economic crisis hit world-
wide, and the Islamic banking
sector appeared to have suffered
fewer negative outcomes than
competing commercial banks. The
primary factor that gives Islamic
banks their proclaimed resilience
in this economic crisiswhile
providing services that are strik-
ingly similar to those offered in
competing commercial banksis
a series of Islamically-informed
guidelines that create a more
ethical and less-leveraged invest-
ment approach than conventional
banks, thereby limiting their expo-
sure to the kinds of investments
that have been heavily hit in this
economic crisis.
According to contemporary
interpretations, the most vital
criteria that the Islamic banking
and finance industry must adhere
to is an oft-repeated, and strongly-
worded Quranic injunction against
receiving or paying interest: God
has permitted sale and forbidden
interest [T]hose who repeat [the
offence of interest] are compan-
ions of the fire. They will abide
therein (2:275). Additionally,
there are prohibitions against
speculative lending, which effec-
tively limit the kinds of invest-
ments you might find in deriva-
tives or futures markets. Finally,
within each Islamic bank is the
presence of an Islamic law, or
Shariah, committee typically
comprised of Islamic scholars.
The aim of the committee is to
implement Islamic law in banking
methods and services as well as in
the general ethics of investments,
avoiding items and services anti-
thetical to contemporary inter-
pretations of Islam such as invest-
ments in pork, alcohol, gambling,
pornography, tobacco and weap-
onry. In this way, Islamic banking
moves from a financial institu-
tion practicing lower-risk invest-
ments to a moral institution that
promotes a certain ethos of correct
practice for Muslims.
Within the current atmo-
sphere of uncertainty and inse-
curity prompted by the finan-
cial crisis, the success of Islamic
banks is attributable to a gener-
alized risk-aversion in the tech-
nical arrangements of banking and
financial organization as well as in
terms of investment. At the same
timeand most notablythese
successes have become testaments
to the preeminence of Islam for
some people. Islamic banks, their
employees and their customers
now hold up the promoted resil-
ience of Islamic banking as
powerful evidence of the value
of banking rightly. This position
provides a platform for the legiti-
mation of Islam as guiding both
the best (most successful) way and
the right (most ethical) way of
living in contemporary society.
Interpreting Religious
Authenticity
In this contemporary context
Islam is understood as a total way
of life, which includes prescribing
a moral code for financial prac-
tices. With the relative success of
Islamic banking in the midst of the
economic crisis, the
notion of Islamic law
as the means for prof-
itable bankingboth
financially and spiri-
tuallyhas become
elevated. Shariah
committees guidance
of Islamic banking is
upheld as enabling
banks and their clients
to avoid the current
crisis, due to their
moral and religious
purity. As one infor-
mant stated plainly,
The Islamic banks
are doing well because
they are following the
laws of Allah and the
real Islam. Any fail-
ures on the part of Islamic banks
are attributed to failure in prac-
ticing the religion in its authentic
form. Furthermore, given Islamic
banks combined esoteric knowl-
edge of finance and highly revered
knowledge of Islamic law, average
Muslims can feel compelled to
become clients to elevate their
own religiosity, even if they
are uncertain about how the
banks work. As one informant
described, They [Islamic banks]
say theyre Islamic so thats it,
they are. However, the accep-
tance and promotion of Islamic
banking as better banking is not
without negotiations, complica-
tions and criticism.
Islamic banks in Jordan, and
throughout the Middle East,
present themselves as providing
services for Muslims who seek to
fulfill religious obligations through
everyday economic practice.
The publics they serve perceive
them in a variety of ways, from
providing a discursive justification
for religiously satisfactory banking
to having the power to end poverty
on a large scale. The banks meet
client demand for most finan-
cial services by Islamicizing the
same kinds of services and prod-
ucts clients receive at conventional
banks, with methods as basic as
taking on an additional, contrac-
tual risk for a fraction of a second.
Additionally, as risk-averse finan-
cial institutions, Islamic banks
often rely on well-established,
well-financed clients rather than
provide new opportunities for the
poor, causing some to question
whether they are really Islamic.
One of the most problem-
atic aspects is the fact that each
Islamic bank has its own Shariah
committee, which prevents
the establishment of system-
wide standards and regulations.
C O MME N T A R Y
With the relative success of
Islamic banking in the midst of
the economic crisis, the notion
of Islamic law as the means
for profitable bankingboth
financially and spirituallyhas
become elevated.
See Islamic Banking on page 14
Anthropology News - October 2009
14
I N F O C U S
Individual banks in this decen-
tralized network must indepen-
dently determine how to best
meet their own needs, to both
compete against other Islamic
and conventional banks and
meet localized understandings of
Islam. Shariah committees regu-
larly legitimate new banking and
finance methods as Islamic in
order to meet client demand for
services. For example, Islamic
banks in Jordan are considered
to be more conservative than
those in Dubai, as the Dubai
banks have devised methods to
lend cash to clients and other
liquidity-raising activities that
Shariah committees in Jordan
have deemed not sufficiently
Islamic. Further, Dubai Islamic
banks have allowed the creation
of secondary bond markets,
which the Shariah committees
of Jordanian Islamic banks have
also prohibited due to localized
understandings of speculation.
In this second year of the finan-
cial crisis, the attention that
Islamic banking has received ulti-
mately speaks to the hope for a
kind of banking that can effectively
manage client accounts and port-
folios in a crisis. Balance sheets
aside, however, Islamic banks have
also provided a means for some
Muslims to find a kind of spiritual
satisfaction and fulfillment in their
economic practices. Furthermore,
the financial crisis has created a
space in which the relative success
of Islamic banks (compared to
conventional banks) is justified in
both financial and religious terms,
and serves as a springboard for
the further growth of Islamized
practices in fora and institutions
previously perceived as outside the
realm of religion. As this economic
crisis resolves, it will be impor-
tant to observe how Islamic banks
and their proponents will carry
this new moral opportunity (and
burden) into the future.
Sarah Tobin is a PhD candidate
at Boston University (degree antici-
pated in 2010). She conducted her
fieldwork in Amman, Jordan, from
September 2007 through June 2009,
focusing on Muslim identity in the
economy, particularly in Islamic
banking, finance and consumption.
Islamic Banking
continued from page 13
Foreshadowing Global Bankruptcy
South Koreas Credit Card Debacle
Luv C Niiso
CSU Es1 Bv
As we face a financial crisis related
to widespread credit industry
weaknesses, the experiences of
South Korea a decade ago may
provide some guidance, and even
some hope. South Korea has one
of the worlds largest and most
dynamic economies. Yet until the
mid-1990s, only a small fraction
of consumer purchases were made
with plastic; the domestic economy
was shackled to cash. This was
the result of long-standing govern-
ment policies restricting consumer
spending to encourage savings
that were channeled to support
export-oriented industrial growth
during the 1960s, 70s and 80s,
combined with market condi-
tions that allowed South Korean
financial institutions to earn more
money with commercial and mort-
gage lending than by lending to
consumers. The Asian Financial
Crisis of 1997 was the turning
point. Slammed by the crisis,
South Korea had to submit to
an IMF-funded bailout to avoid
total collapse in late 1997. The
South Korean currency, stock
market and real estate asset
values plunged; corporations were
dismantled, restructured or sold
off. Unemployment rose dramat-
ically, customary job security
promises were abandoned, and the
percentage of contingent and part-
time labor increased significantly.
With the weak job market and
eroding savings and asset values,
consumer spending contracted by
7.5% in one year.
To stimulate the domestic
economy, South Korean policy-
makers encouraged citizens to
shop. Americans may recall a
similar message in the immediate
post-9/11 period. South Koreans
are accustomed to government
marketing campaigns intended to
foster behaviors in the national
interestone of my favorites from
the early 1990s was the suggestion
to Use our national tobacco with
love, to help save the governments
tobacco monopoly after the South
Korean cigarette market opened
in 1989. Most people recognize
these campaigns as propaganda,
but this sophistication in percep-
tion has not always led to immu-
nity from their messages. Many
South Koreans believe that they
are all in the same boat. In fact,
another campaign from the 1990s
showed an image of several people
with paddles in a boat and the
warning, If one person rests, forty
million will be late. The sense that
the nation shares a single destiny
is both a threat and an ideal. So,
as several people told me, when
the government began exhorting
people to spend money to buoy the
economy, they felt that resisting
their impulse to be frugal in hard
times was the patriotic thing to do.
Creating Liquidity
Regardless of popular will to
increase spending, in the wake of
the Asian Financial Crisis many
people experienced real liquidity
constraints. To facilitate spending,
South Korean policymakers
expanded consumer credit access.
Policy changes included relaxed
restrictions on credit card issu-
ance and utilization: issuers were
not required to check the credit-
worthiness of applicants; credit
delinquencies were uncapped;
cash advances on cards were
unlimited; and restrictions on the
involvement of large corporations
(chaebl) were lifted. Beginning
in 1999, banks and other finan-
cial institutions began for the
first time issuing large numbers
of charge cards, which were
hawked like snacks treats on street
corners. Applicants were asked to
provide little other than a name
and address. Signing gifts, product
discounts and bonus points lured
consumers to enroll with multiple
corporate credit card programs
at once. By 2002, more than 100
million credit cards were in circu-
lation, a number more than twice
the population of the nation, or
approximately four cards per
working person
Up until this time, however,
South Korea lacked both the infra-
structure and the economic culture
to support credit card transac-
tions. Although stores, restaurants
and hotels catering to foreign visi-
tors or to the South Korean elite
generally accepted credit cards,
elsewhere cash was essential.
Businesses generally preferred
cash because they could selec-
tively report transactions on their
tax returns and did not have to
pay service charges to credit card
companies; customers (partic-
ularly businessmen spending
money on entertainment) appre-
ciated the anonymity of cash
transactions. To facilitate charge
card utilization, the government
offered generous tax incentives
to card users. The National Tax
Service saw plastic transactions as
a way to flush out undeclared sales
income by checking credit card
company reports against sales
reports submitted by individual
merchants, and merchants were
ordered to install card readers
or face tax audits. To further
encourage credit card utilization,
the Tax Service offered a lottery
with cash awards of up to 100
Street vendors are remnants of South Koreas pre-2000 cash-only economy.
Photo courtesy Laura Nelson