The London School of Economics and Political Science Banking on the Divine: Everyday Islamic banking practices in Malaysia Michaela Muscat A thesis submitted to the Department of Sociology of the London School of Economics for the degree of Doctor of Philosophy, London, January 2015 Declaration I certify that the thesis I have presented for examination for the MPhil/PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. This thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my belief, infringe the rights of any third party. I declare that my thesis consists of 99,377 words. I can confirm that my thesis was partly copy edited for conventions of language, spelling and grammar by Isla Rosser-Owen. 2 Abstract Islamic banking, a niche financial sector that has captured the imagination of the financial elite and ordinary consumers alike, is unique in its regulation through the shariah. Primarily, it presents an added-value derived from its prohibition of riba (interest) in favour of profit from trade (al Bay) or leasing (ijarah). This thesis aims to explain Malaysia’s success in promoting Islamic banking products to a critical mass of consumers. More specifically, it seeks to explain the development and growth in everyday Islamic banking practices amongst the Malay community in Kuala Lumpur. The thesis is based on a sociological framework that does not aim to explain the development and growth of Islamic banking in terms that are principally about religion. I argue that the development of Islamic banking in Malaysia is the result of a top-down strategy driven by the economic and political interests of Malaysia’s ruling elites. Following the crisis of trust in the political-economic model of development deployed up to the crisis of 1997-1998, Islam’s vast repertoire of ideas, language and symbols are a powerful and dexterous foundation of a strategy that simultaneously problematises ‘conventional’ banking and offers an alternative course through Islamic banking. Nevertheless, Islamic banking practices are not given and cannot be taken-for-granted. Thus, in seeking to understand why increasingly consumers trust Islamic banking’s promise of economic advantage with the added value of religious compliance, the study seeks to interpret Islamic banking practices from the perspective of the ‘ordinary’ consumer. Everyday Islamic banking practices are viewed in this thesis, as embedded within broader, historically determined, closely intertwined, social, economic, cultural and political circumstances. This study views the aforementioned circumstances that consumers find themselves in, on the one hand, and the banking practices they participate in, on the other, as interacting elements of a socially determinate whole. Trust, I suggest, is the common thread underpinning the everyday banking practices within the interacting elements of a socially determinate whole. Three ideal types that emerged from the data, the virtuoso, pragmatist and sceptic, are a used as a heuristic device to characterise the various interests driving trust in Islamic banking, and illustrate the heterogeneity of Islamic banking practices. More specifically, based on an analysis of the consumers’ account of their Islamic banking practices, the choice of Islamic over ‘conventional’ banking is based on two important factors. First, for those who perceive and are attracted to the added value of Islamic banking, trust in the shariah regulation and expertise, as underwritten by the state, is the first condition to their choice. Trust lubricates their choice by reducing complexity, mitigating risk and bridging the gap between knowledge and faith. Second, the personalised trust that characterises thick social ties bolsters confidence in Islamic banking. In rating Islamic banking as the most socially acceptable choice, family and peers are signalling confidence in the value and values of Islamic banking and are unwitting allies of the state and banks. Last, the study notes that shariah regulation has contradictory corollary effects: it is both functional and dysfunctional. Whilst it functions in enabling the growth of Islamic banking, it also contributes to social fragmentation within Malaysian society. 3 Acknowledgements Writing a PhD dissertation is a lonely endeavor. With the exception of the exhilarating period spent in the field, doctoral students spend years in virtual solitary confinement, reading and writing. Nevertheless, completion would not have been possible without the encouragement of an outstanding supporting cast. First of all, my special thanks go to my supervisor Professor Nigel Dodd. After taking me on as a supervisee when I was still a Masters student, he encouraged me to develop my interest in Islamic finance. The result of his encouragement is this dissertation. Besides enriching my research with insightful and incisive comments, he also knew when to prod and when to comfort the fragile ego of his students. Of course, without his references and recommendations I would not have been able to obtain the funding which allowed me the privilege of conducing research for four years. I am grateful to the Association of Commonwealth Universities and the Department of Sociology, for the doctoral scholarship and studentship grants, respectively. During the last decade or so, I was fortunate enough to have Dr. Mario Vella as my mentor. It was Mario who nurtured my interest in economic sociology, political economy and sociology of development, when I was an undergraduate student at the University of Malta. Like many of his former students, I am a grateful beneficiary of his generosity of spirit and unparalleled knowledge, on the one hand, of the epistemology of sociology and economics and, on the other, of Islam, the Middle East and North Africa. Dr. Annabel Hendry’s frank counsel was invaluable. She kindly hosted me in her haven in the countryside, where we spent days discussing my data, reading my drafts and comparing our sometimes surreal experiences in the field. Mushtak Parker, Jalil Rasheed and Oliver Said were instrumental in opening doors within the Islamic finance community. I am grateful for their introductions and their willingness to spend hours discussing the prospects of Islamic finance. Friends and colleagues who read my drafts at various stages of this project, and who I owe much to are, Lilika Trikalinou, Rosalyn Velds, Simon Webster-Kogen, Dr. Mario Brincat and Dr. Peter Manning. In particular, I owe a substantial debt to Paul Shiv Spaak for being there. His loving support, limitless patience and sense of humour made the darker moments of this experience bearable. Last, this thesis would not have been possible without the enduring love of my family: Paul, Phyllis, John and Basil Muscat. Besides offering constant financial and emotional support throughout, it was all-hands-on-deck during the last couple of weeks as they cheered me across the finish line. I dedicate this thesis to them and Shiv. 4 Glossary Allah God. Bumiputera Literally Princes or sons of the earth is used to describe the indigenous Malays. Dakawah Missionary activities (literally, ‘call’). Fatwa legal opinion, ruling. Fiqh Islamic jurisprudence. Fiqh muamalat Islamic commercial and transaction jurisprudence. Gharar excessive uncertainty. Hadith prophetic traditions Haj pilgrimage. Halal lawful or permissible. Haram unlawful or forbidden. Hadiah/Hibah gift. Ijmaa consensus. Ijtihad decision in fiqh that comes about through personal jihad, independently of fiqh. Kampung village or hamlet. Madarah harm. Madhab Schools of juridical thought. The Sunni branch includes: Hanbali, Hanafi, Maliki, Shafi’i. Madrasa educational institute for religious teaching. Mafasid disutility. Manhaj methodologies used by jurists of fiqh. Masalih public interest as in public welfare. Masjid Bahasa Malay word for mosque. Maysur gambling. Qiyas reasoning by analogy or by logical inference. Qur’an Central holy book of Islam and considered to contain the word of Allah (literally ‘recitation’). Riba interest or usury (literally ‘increase’). Salafi Islamic practice revivalist movement modelled on the practices of the early ‘pious ancestors’. Usually includes the Prophet Mohammed and the first four ‘rightly guided’ caliphs. Shariah Islamic (divine) jurisprudence Shariah Board Regulatory board predominantly composed of ulema. They oversee the halal regulatory process of Islamic commodities. Shia One of the two main branches of Islam. The Shia reject the first three Sunni caliphs and regards Ali, the fourth caliph, as the Prophet Muhammad's first true successor. Sunnah legally binding precedents established by the rulings of the Qur’an and the tradition of the Prophet Muhammad. 5 Sunni Most widespread branch of Islam. Their adherence to the Sunnah gives rise Based on Generally considered the orthodox b Surau Muslim prayer room or chapel. Tajjib Wholesome and healthy. Takaful Shari’ah compliant insurance. Ulama (ulema plural) religious scholar (literally the knowledgeable or learned one). Ummah Muslim community. Usul al-fiqh legal reasoning. 6 ACRONYMS AAOIFI Accounting and Auditing Organization for