The Hypocrisy of Islamic Debt

The IHT reports that Malayan Banking's first bond offer that complies with Islamic principles was a huge success. $300 million in securities were sold, but interested parties offered to buy as much as $2.4 billion.

Bonds are big business and the Islamic world is a traditionally under served market. And its not because rich Middle Eastern oil magnates haven't been offered the finest financial products conceivable. The reason is that Islam rather specifically forbids charging interest. A true believer in Islam is never going to buy any financial asset based on charging interest, but that didn't stop Malayan Banking.

The Islamic debt sold by Malayan Banking is based on a carefully created fiction. A borrower creates a separate holding company that issues securities to investors and rents the assets to the borrower. The rental income is paid instead of interest. At the end of the contract, the borrower buys back the assets at a guaranteed price and the principal is returned to investors.

An important point about Islamic debt is that it requires the complicity of prominent religious figures who must check to see the whole deal doesn't violate Islam. Why would someone who has dedicated their life to a religion bless a deal that is so blatantly against the basic precepts of that religion? Giant kickbacks. Pay the imam enough money to build a bunch of new mosques and he'll sign off on anything.

Of course, beyond the religious liberalism being demonstrated by Islamic, the whole region is likely to benefit enormously from the practice. Companies that have access to more capital are capable of expanding much faster than companies that have to rely solely on organic growth. Investors throughout the Islamic world have accepted returns that are significantly less than they could have attained because of deference to Islam.

True believers in Islam should be appalled by Islamic debt, but everyone else should be happy that the Islamic world has finally decided to enjoy the benefits of modern capital markets.