GETTING REAL ABOUT ISLAMIC FINANCE GETTING REAL ABOUT ISLAMIC FINANCE Dr Larry Beeferman Dr Allan Wain Director Pensions and Capital Stewardship Project LWP Fellow Labor and Worklife Program, Harvard Law School, Harvard Law School Harvard University Harvard University Head of Research and Strategy CP2 ABOUT THE CO-AUTHORS Dr. Larry Beeferman is the Director of the Pensions & Capital Dr. Allan Wain is Head of Research and Strategy at CP2 and a Stewardship Project at Harvard Law School’s Labor and Worklife LWP Fellow at Harvard Law School. Program. The Project addresses key legal, policy, and other practical issues relating to strengthening and extending retirement security for more households and practices, Prior to joining CP2 in April 2015, Allan was Head of institutions, and systems of pension fund governance, Strategic Development at Hastings. Previously Allan was an management, and investment that encourage capital markets and economics and strategy adviser to the Office of the President corporate policies to work more effectively for workers and the and Cabinet in the Middle East, Managing Director of an health and well-being of the larger community. infrastructure investment and development company, and Chief Economist at BHP Petroleum. The Project’s publications have included ones concerning pension fund investment in infrastructure, the tools for and Allan’s research interests include the meaning, relevance, practice of taking into account social factor risks in investment and application of infrastructure to pension funds and to decision-making, labor and private equity, worker voice and the society, incorporating how infrastructure is informed by and union role in the management of pension fund assets, the Dodd- is informing of societal values, employment opportunities, Frank financial markets reform legislation, and proposals for government policy, and market behaviour. He has written automatic enrolment in retirement plans. A publication on several essays investigating the social, environmental, and rethinking fiduciary duty is part of a collection of essays published investment value of infrastructure to a transitional economy by Cambridge University Press. and is the co-author of The Valuation of Benefits of Hydrologic Information (Melbourne University Press). Larry W. Beeferman received a juris doctorate from Harvard Law School and a doctorate in applied physics from Harvard Allan has studied at the University of Melbourne, Stanford University. Prior to leading the Project, he was a professor of law University, Harvard University, and Imperial College at the Massachusetts School of Law and Western New England (University of London) and has a Master of Business and PhD School of Law, headed up the Asset Development Institute at degrees, together with postdoctoral, postgraduate, and Brandeis University’s Heller School for Social Policy and undergraduate qualifications in economics, finance, and Management, and served as Associate Counsel to the engineering. Massachusetts Special Commission Concerning State and County Buildings. TABLE OF CONTENTS INTRODUCTION ....................................................................................................................... 1 PART I: THE INTEREST IN INVESTMENT IN “REAL” ASSETS, INFRASTRUCTURE AMONG THEM ........................................................................................................................................ 3 PART II: CONCERNS ABOUT “FINANCIALIZATION,” THE “REAL ECONOMY” (AND, PERHAPS, “REAL ASSETS”) .................................................................................................... 6 PART III: CONCERNS AND OBJECTIVES WHICH INFORM ISLAMIC FINANCE AND THE RELEVANCE TO THEM OF NOTIONS OF THE “REAL,” FOR EXAMPLE, “REAL ASSETS” AND THE “REAL ECONOMY” ..................................................................................................14 Generic references to the “real” .............................................................................................15 Somewhat more specific recitations of the need for a sufficient enough – direct or indirect - connection of “finance” to the “real economy” ........................................................................16 Yet more specific arguments about the need for links to the “real” .........................................17 Contracts, the “real”, and the Islamic narrative ......................................................................34 Ways of “seeing” “objects” in and the legitimacy of transactions: the case of salam ..............42 PART IV: TAKING STOCK .......................................................................................................48 PART V: OPPORTUNITIES AND CHALLENGES FOR INVESTORS ......................................51 A. OPPORTUNITIES .............................................................................................................51 The import or significance of the interest in “real assets” ....................................................53 The import or significance of the concern about “financialization” ......................................56 B. CHALLENGES .................................................................................................................57 What Islamic Finance “is” ...................................................................................................58 What are the sources of what Islamic finance is or should be? ..........................................58 The legitimacy and authority of pronouncements of institutions and individuals with respect what “Islamic finance” is and what it requires .....................................................................60 Pressures for standardization/uniformity in the face of the diversity of thought and practice in Islamic finance ...............................................................................................................61 C. EXPERIENCE WITH SUKUK AS ILLUSTRATIVE OF THE CHALLENGES ....................63 Concerns about Shariah compliance: “asset-based” as compared to “asset-backed” sukuk and the relevance of “tangibility”/tangible objects. ..............................................................65 Issues of Shariah compliance framed in terms of a requirement of “ownership” .................66 Rationales offered in relevant literature for the “ownership” rule as it relates to ijarah sukuk ..........................................................................................................................................67 The relation of an “ownership” rule for the financial lease ijarah/ijarah sukuk to the requirements for the operating lease ijarah ........................................................................73 The “ownership”/”real asset” rule in relation to requirements for the “silent partnership”/mudarabah and loans.....................................................................................76 Some operating lease ijarah rules reconsidered.................................................................78 An ongoing vs. a “one-off” relationship? .............................................................................78 Successive transfers of “objects”? .....................................................................................79 Why a contract for sale? ....................................................................................................79 Some final thoughts ...........................................................................................................82 D. RETURNING TO THE MATTER OF MONEY ..................................................................84 PART VI: RESPONDING TO THE CHALLENGES AND TAKING UP THE OPPORTUNITIES .95 APPENDIX A ............................................................................................................................98 The “Veil of Money” and the “Veil of Maya” ............................................................................98 APPENDIX B ............................................................................................................................99 The Islamic Narrative: Textual and Other Sources ................................................................99 APPENDIX C .......................................................................................................................... 102 Trade and Exchange in the Islamic Narrative ...................................................................... 102 INTRODUCTION This essay is most immediately about reliance on and the relationship among three discourses framed with reference to that which is deemed or thought to be “real”. One involves arguments within the context of pension-fund decision-making as to the potential importance of investment in “real assets,” among them, infrastructure as a real asset. Another pertains to debates about the role of “finance” in an economy, especially at the extreme insofar as it entails what some have referred to as “financialization” specifically as it is cast in terms of a problematic relationship between the sphere of finance and that of the “real economy.” A third involves discussion about investment decision-making undertaken with a conscious reference to settling upon them in light of an understanding of what Islam requires, permits, or bars – an exercise which falls under the broader rubric of “Islamic finance” – more particularly, the significance of “real assets” to that understanding. For the most part, the paper is