By Alyssa A. Lappen
Wednesday, February 04, 2009
A teller at the Islamic sharia unit of state-controlled Bank Negara Indonesia (BNI) counts rupiah banknotes in Jakarta April 8, 2008. (Reuters)
Indonesian sukuk buyers may sink in the same ship with the dupes heeding Western headlines and Islamic gurus since the Bernard Madoff scandal broke last December. These financial product pushers have increasingly exaggerated the “safety” of Islamic finance securities to offset “the cancer of interest-bearing debt.” Investors are now snapping up three-year Indonesian bonds that will supposedly hold their full value and make money---an astronomical 12%---while paradoxically avoiding speculation, alcohol, gambling, interest, and other “haram” activities forbidden under shari'a law.
Granted, Bernie Madoff's “hedge fund” investors did not expect to be robbed blind. But they knowingly exchanged high risk for high returns. Indeed, alternative funds are so risky that U.S. securities laws limit their sale to investors with at least $2 million in financial assets---in other words, enough to protect them against being totally wiped out.
But even folks who should know better don't grasp the risks of Islamic finance. London's Financial Times, for example, touted the Amana Trust “Islamic” Income fund, based in Washington state, for “losing only 25.8 per cent” in 2008---“half [sic] the average 44% loss for US stock funds.” Likewise, an SEI Investments company analyst recommended Islamic mutual funds as protection from the stock and bond markets' “extreme ups and downs,” despite their substantial losses in the last quarter of 2008.
Odds are, the average Muslim “Mohammed Sixpack” doesn't understand the financial risks of 12% Indonesian sukuk bonds either. High yields---for example 12%, when the U.S. Federal Reserve lends “overnight” to banks at rates close to zero---are usually called “junk.”
Unfortunately, these bonds are also backed by “assets” carved up like pie and “securitized.” Meaning: they can head south in a hurry, just like the sub-prime mortgages that sank the U.S. economy, which were also also backed by assets and securitized, not to mention the mortgage-backed issues that unraveled dozens of huge bond, pension and public institutional funds in 1994. In 1637, Dutch tulip bulb contracts sold for over 20 times the annual wages of a skilled craftsman---until their “solid” value withered overnight in the first financial crash in recorded history. 
Islamic finance carries many other risks besides.
The Thomas More Law Center in Ann Arbor, Mich. in December sued former Treasury Secretary Henry Paulson and the Federal Reserve Board to stop $40 billion in U.S. bail out aid from reaching American International Group (AIG). The insurance giant devotes an entire division to shari'a finance products, which Thomas More considers unsafe, unconstitutional and anti-American.
The suit zeros in on statutes fundamental to shari'a law, such as funding jihad warfare. It also focuses on AIG's “supervisory committee” members---Bahraini Sheikh Nizam Yaquby, Saudi Mohammed Ali Elgari and Pakistani Muhammed Imran Ashraf Usmani, a “devoted disciple” of his father Mufti Taqi Usmani. The latter Shari'a-compliant finance authority directs Western Muslims to aggressively pursue violent jihad against the their governments.
AIG is not alone.
As I've often previously noted, the shari'a finance boards setting “Islamic banking” standards themselves employ highly objectionable “authorities.” Both the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and Islamic Financial Services Board (IFSB), for example, include many representatives of nations, banks, and organizations implicated in terror-funding.
Atlas Shrugs recently comprised a more inclusive list of hot shot shari'a personalities. Apart from Taqi Usmani---a Pakistani shari'a court justice since 1982, shari'a director of the Saudi Al Baraka Investment Corp. implicated in 9/11 financing and until recently an advisor to Dow Jones Islamic Indexes---shari'a boards include other graduates of the most radical Saudi and Pakistani Islamic universities and madrassas that duplicate Usmani's wish to impose shari'a law globally.
Shari'a finance still retains Western adherents. A Jan. 16, 2009 Hedge Funds Review article for example advises forlorn, out-of-work money managers, “Don't forget Islamic finance.”
Several readers disagree. “Forget Islamic finance.... It won't make it through the crisis,” a private equity venture capitalist comments. Islamic finance itself is “flawed in principle,” since “charging more than you loaned is called 'interest',” adds an investor relations man. As these Hedge Funds Review subscribers avow, the industry cannot possibly elude the financial risks that now face every other bank and investment house in the world.
Notably, Stern School economics professor and former Treasury Department and White House advisor Nouriel Roubini, the publisher of Roubini Global Economics Monitor (RGE Monitor), also considers Islamic finance to be risky. The Islamic finance reliance on debt issues backed by assets exposes the business and investors both to “devaluation” of underlying assets (hyperbolically speaking, like wilting tulips) and the overall freeze in normal capital flows, or liquidity. The level of new Islamic bond issues worldwide fell 60% from January through October 2008, to only $15.2 billion, against that of the first 10 months in 2007. Low oil prices and Middle East liquidity troubles could also hurt demand for shari'a finance instruments throughout 2009, Roubini posits, according to the Asian Energy blog.
Yet the greatest, albeit hidden, risks of shari'a finance are unseen by even the most astute economists. By investing alone, non-Muslims actively participate in what former Malaysian Prime Minister Mahathir Mohamed calls “a jihad worth supporting,” namely an effort to impose “universal Islamic banking.” Islamic banking is not an ancient religious tradition, but a 20th century invention of the Muslim Brotherhood and their spiritual chief Yusuf Qaradawi. It was developed to subsume capitalism with Islamic finance---a prospect neither safe nor mere fantasy.
Furthermore, shari'a investors may also inadvertently support economic jihad, as mandated by Qur’an 49:15: “Strive with their wealth and their lives for the cause of Allah,” and reiterated in 61:10-11: “Shall I show you a commerce that will save you from a painful doom? ...strive for the cause of Allah with your wealth and your lives.”
Shari'a funds collect at least 2.5% of income, wealth and profits, plus arbitrarily determined “purification” levies on profits derived from those Islamically forbidden, or “haram,” activities. The Standard & Poor's Islamic indexes do list some companies that get revenues from “non-compliant activities” totaling under 5% of their gross corporate sales. In those instances, S&P applies what it calls a “dividend purification ratio,” dividing “non-compliant” revenues by the total revenues of the index. The thing is, S&P doesn't specify exactly what activities or other attributes constitute “non-compliant,” much less how or to whom it distributes zakat and purification levies. 
Flemming's Luxembourg-registered Oasis Fund, perhaps the only Islamic fund that has publicly divulged collection ratios, extracts roughly 2.3% annually from assets to cover its shari'a board, custody and audit charges, as well as an annual “purification allowance” to “purify” any inadvertent riba (interest) exposure. That astronomical tax, however, does not include additional unspecified weekly sums deducted for unspecified “un-Islamic activities,”---or portions of the 5% Oasis fee collected upon purchase or the and 0.5% fee collected on redemption. Overall, Oasis extracts an exorbitant 6% annually in “purification” costs from investors.
In addition to the potent above-noted risks, the Islamic banking industry incorporates a rigid 7th century philosophy, that remains intent upon depriving all non-Muslims of their wealth and worldly stature. Possessions confiscated from non-believers are “a way of exacting revenge,” writes 11th century jurist Abul Hasan al Mawardi (d.1058). As Qur'an 57:2 argues, “To Him belongs all dominions of the heavens and earth.” Echoes Qur’an 59:7: “That which Allah giveth as spoil [war booty] unto his Messenger...it is for Allah and His Messenger and for the near of kin.…”
Allah authorized the 2nd Islamic Caliph, Umar Ibn Khattab, to confiscate property in three ways, Mawardi writes---by fulfilling a trust to Islam, by force, or by ruling under Allah's law. Mawardi therefore concludes it is “just” to take anything from nonbelievers (The Laws of Islamic Governance, 1996 Ta-Ha edition, pp. 207-251).
Shari'a banking is but another effort to reclaim all territories that Islam ever controlled. Here's the Muslim Brotherhood view: Hamas seeks to conquer Rome, “the capital of the Catholics, or Crusader capital,” as Constantinople was once conquered, a Gaza “legislator” preached on Al-Aqsa TV on April 11, 2008.
 Robert J. Shiller, Irrational Exuberance (2005, 2nd ed., Princeton University Press). pp. 85, pp. 247-48.
 “S&P Shariah Indices: Index Methodology,” Standard and Poor's, November 2007.
Alyssa A. Lappen is a former Senior Fellow of the American Center for Democracy, former Senior Editor of Institutional Investor, Working Woman and Corporate Finance, and former Associate Editor of Forbes. Her website is www.AlyssaaLappen.org.