Usury, Interest and Islamic Banking

Pervez Hoodbhoy in The Dawn

FINANCE Minister Ishaq Dar has taken on the ungodly, un-Islamic, interest-charging banks of Pakistan. Your days are numbered, he thunders, because our government will implement the Federal Shariat Court’s ruling to end bank interest by Dec 31, 2027. On his orders, appeals challenging the FSC judgement made by the State Bank and National Bank will be withdrawn.

Some will applaud Mr Dar’s new-found religious zeal; others will find this crass opportunism. With national elections around the corner — and with PML-N’s arch-rival Imran Khan having pushed politics rightward — this smells of one-upmanship. Every politician in the government or opposition, clean or corrupt, wants to prove his sainthood.

But most readers will simply yawn — they’ve heard it before. Way back in 1991, the FSC had ordered Pakistan’s economy to dump interest within 12 months. Nothing happened. So recycling an order from 30 years later is no big deal.

Let’s imagine that Dar wins. Rewards or penalties for him in the Hereafter cannot, of course, be known. But this will not end ideological bickering on what interest-free banking actually is. Its two versions, soft and hard, are totally incompatible opposites. 

In the first, at the end of a stipulated period the depositor expects — and receives — a sum exceeding his initial deposit. In another country, the excess is known as interest but in Pakistan they call it profit.

The depositor is clueless about wheeling-dealings inside board rooms and management offices. Nevertheless, heavy use of Arabic words and absence of ‘interest’ gives an Islamic veneer to the bank.

The hard version is uncompromising. In 2014, the top ulema of the Fiqhi Majlis declared that so-called Islamic banking merely re-labels interest as profit and so is hiyal (legalistic trickery).

They point to the explicit Quranic injunction: “Allah has permitted trade and has forbidden interest” (2:275). ‘Forbidden’, they say, is not negotiating low or middle or high. Forbidden means zero — haram is haram and interest is usury.

The influential Maulana Taqi Usmani, among others, takes this position. Bangladesh’s finance minister Dr Abul Muhith is blunter. He says Islamic banking deceives Muslims and is ‘all fraud’.

Early Muslim scholars thought similarly and had equated interest with usury. Since banks rely on income, banking in Muslim lands was absent until very recently. This impeded industrialisation, leaving Muslim countries far behind Europe. Eventually, realising that global trade and commerce are impossible without these Western innovations, Turkish and Egyptian rulers soft-pedalled religious restrictions.

The very first bank in a Muslim country was the Imperial Ottoman Bank (1856) followed by the Egyptian Arab Land Bank (1880).Pragmatic rulers first sought muftis willing to rubber-stamp European-style banking. Else they found those who could invent new definitions or rules.

Pakistan is doing similarly. Commercial banks repackage global financial products with some changed conditions. After a board of clerics chosen by the bank approves a product, it is advertised as Sharia-compliant.

This sanctifies credit cards, derivative products, cross-currency swaps, equity swaps, adjustable mortgages, etc. Are Bitcoin and cryptocurrency halal or haram? Believe whichever you prefer; muftis abound on either side.

One central fact, however, cannot be hidden. Commercial banks in a capitalist economy are profit-making businesses for their owners and shareholders. For this to happen, customers must be drawn into owning more cars, bigger houses, and fancy stuff. If fish could somehow pay, banks would be advertising deals for underwater TVs with 60-inch plasma screens.

Hence a much larger question: is it morally right for a bank to encourage conspicuous consumption amidst an ocean of poverty? The poorest and richest Pakistanis are denizens of different worlds that are poles apart in literacy levels, health outcomes, and living standards.

Urban slums reeking in misery stand in stark contrast to DHAs for the ultra-rich or those just out of uniform. When banks — Sharia-compliant or otherwise — persuade people to borrow more and consume more, does it signify devotion to God?

The answer, of course, should be an emphatic ‘no’. Indeed, the larger FSC judgement states that Pakistan as an Islamic state must have “an equitable economic system free from exploitations and speculations”. But what on earth does riba have to do with present-day inequities of wealth? Even as it flaunts religious symbols, Pakistan’s rapacious elite enriches itself through state capture.

According to the 2021 UNDP report, insider dealings yielded a staggering $17.4bn in the form of subsidies to the military, corporate sector, property developers, feudal landlords, and the political class.

Even this enormous figure pales before the vast wealth of Pakistan’s real estate, estimated at around $300-400 billion. Much of this came from kicking peasants off the lands they once tilled. Land reforms promised by Ayub Khan and Zulfikar Ali Bhutto never happened.

The FSC drove the final nail in the coffin in March 1990. Decreeing that land reform violates Islamic principles, it asserted the absolute right of a Muslim to limitless wealth. This flatly contradicts its own ruling on creating “an equitable economic system”.

Mr Dar’s victory will open another question: how is Pakistan to deal with the outside world after Jan 1, 2028? The FSC judgement is explicit: “the government is directed to adopt Sharia-compliant modes in the future while borrowing either from domestic or from foreign sources.”

Realistically, can Pakistan actually choose who to borrow from? For a country teetering at the edge of default, the answer is no. FSC’s religious scholars optimistically say, “China is also willing to utilise the Islamic mode of financing for CPEC projects”. But do they know how intensely China dislikes Islamic symbols? And that it is deliberately erasing the Islamic identity of Uighur Muslims?

To conclude: Mr Dar’s jihad to eliminate bank interest is a bid to distract from the grimness of the present economic landscape and the damning inequities therein. In fairness to him, fixing fundamental problems such as the small tax base, high indirect taxation, and heavy consumption of imported luxury items is beyond his pay scale. But such posturing could further embolden those — such as the fast rising TTP —who seek to dismantle Pakistan and recreate it as a theocratic state. As such it is a step backward.

Halal economy. How it works? What effects on society? Who gets its benefits?

 

Trashing the planet and hiding the money isn’t a perversion of capitalism. It is capitalism

George Monbiot in The Guardian


‘A few decades after the Portuguese colonised Madeira, in 1420, they developed a system that differed from anything that had gone before.’ Photograph: Thomas Pollin/Getty Images
Wed 6 Oct 2021 13.00 BST


Whenever there’s a leak of documents from the remote islands and obscure jurisdictions where rich people hide their money, such as this week’s release of the Pandora papers, we ask ourselves how such things could happen. How did we end up with a global system that enables great wealth to be transferred offshore, untaxed and hidden from public view? Politicians condemn it as “the unacceptable face of capitalism”. But it’s not. It is the face of capitalism.

Capitalism was arguably born on a remote island. A few decades after the Portuguese colonised Madeira in 1420, they developed a system that differed in some respects from anything that had gone before. By felling the forests after which they named the island (madeira is Portuguese for wood), they created, in this uninhabited sphere, a blank slate – a terra nullius – in which a new economy could be built. Financed by bankers in Genoa and Flanders, they transported enslaved people from Africa to plant and process sugar. They developed an economy in which land, labour and money lost their previous social meaning and became tradable commodities. 

As the geographer Jason Moore points out in the journal Review, a small amount of capital could be used, in these circumstances, to grab a vast amount of natural wealth. On Madeira’s rich soil, using the abundant wood as fuel, slave labour achieved a previously unimaginable productivity. In the 1470s, this tiny island became the world’s biggest producer of sugar.

Madeira’s economy also had another characteristic that distinguished it from what had gone before: the astonishing speed at which it worked through the island’s natural wealth. Sugar production peaked in 1506. By 1525 it had fallen by almost 80%. The major reason, Moore believes, was the exhaustion of accessible supplies of wood: Madeira ran out of madeira.

It took 60kg of wood to refine 1kg of sugar. As wood had to be cut from ever steeper and more remote parts of the island, more slave labour was needed to produce the same amount of sugar. In other words, the productivity of labour collapsed, falling roughly fourfold in 20 years. At about the same time, the forest clearing drove several endemic species to extinction.

In what was to become the classic boom-bust-quit cycle of capitalism, the Portuguese shifted their capital to new frontiers, establishing sugar plantations first on São Tomé, then in Brazil, then in the Caribbean, in each case depleting resources before moving on. As Moore says, the seizure, exhaustion and partial abandonment of new geographical frontiers is central to the model of accumulation that we call capitalism. Ecological and productivity crises like Madeira’s are not perverse outcomes of the system. They are the system.

Madeira soon moved on to other commodities, principally wine. It should come as no surprise that the island is now accused of functioning as a tax haven, and was mentioned in this week’s reporting of the Pandora papers. What else is an ecologically exhausted island, whose economy depended on looting, to do?

In Jane Eyre, published in 1847, Charlotte Brontë attempts to decontaminate Jane’s unexpected fortune. She inherited the money from her uncle, “Mr Eyre of Madeira”; but, St John Rivers informs her, it is now vested in “English funds”. This also has the effect of distancing her capital from Edward Rochester’s, tainted by its association with another depleted sugar island, Jamaica.

But what were, and are, English funds? England, in 1847, was at the centre of an empire whose capitalist endeavours had long eclipsed those of the Portuguese. For three centuries, it had systematically looted other nations: seizing people from Africa and forcing them to work in the Caribbean and North America, draining astonishing wealth from India, and extracting the materials it needed to power its Industrial Revolution through an indentured labour system often scarcely distinguishable from outright slavery. When Jane Eyre was published, Britain had recently concluded its first opium war against China.

Financing this system of world theft required new banking networks. These laid the foundations for the offshore financial system whose gruesome realities were again exposed this week. “English funds” were simply a destination for money made by the world-consuming colonial economy called capitalism.

In the onshoring of Jane’s money, we see the gulf between the reality of the system and the way it presents itself. Almost from the beginning of capitalism, attempts were made to sanitise it. Madeira’s early colonists created an origin myth, which claimed that the island was consumed by a wild fire, lasting for seven years, that cleared much of the forest. But there was no such natural disaster. The fires were set by people. The fire front we call capitalism burned across Madeira before the sparks jumped and set light to other parts of the world.

Capitalism’s fake history was formalised in 1689 by John Locke, in his Second Treatise of Government. “In the beginning all the world was America,” he tells us, a blank slate without people whose wealth was just sitting there, ready to be taken. But unlike Madeira, America was inhabited, and the indigenous people had to be killed or enslaved to create his terra nullius. The right to the world, he claimed, was established through hard work: when a man has “mixed his labour” with natural wealth, he “thereby makes it his property”. But those who laid claim to large amounts of natural wealth did not mix their own labour with it, but that of their slaves. The justifying fairytale capitalism tells about itself – you become rich through hard work and enterprise, adding value to natural wealth – is the greatest propaganda coup in human history.

As Laleh Khalili explains in the London Review of Books, the extractive colonial economy never ended. It continues through commodity traders working with kleptocrats and oligarchs, grabbing poor nations’ resources without payment with the help of clever instruments such as “transfer pricing”. It persists through the use of offshore tax havens and secrecy regimes by corrupt elites, who drain their nation’s wealth then channel it into “English funds”, whose true ownership is hidden by shell companies.

The fire front still rages across the world, burning through people and ecologies. Though the money that ignites it may be hidden, you can see it incinerating every territory that still possesses unexploited natural wealth: the Amazon, west Africa, West Papua. As capital runs out of planet to burn, it turns its attention to the deep ocean floor and starts speculating about shifting into space.

The local ecological disasters that began in Madeira are coalescing into a global one. We are recruited as both consumers and consumed, burning through our life support systems on behalf of oligarchs who keep their money and morality offshore.

When we see the same things happening in places thousands of miles apart, we should stop treating them as isolated phenomena, and recognise the pattern. All the talk of “taming” capitalism and “reforming” capitalism hinges on a mistaken idea of what it is. Capitalism is what we see in the Pandora papers.

Hawala explained

By Shahid Mehmood in The Friday Times

Hawala and Hundi are two of the most familiar terms in Pakistan’s economic landscape. Put simply, these are synonymous with informal channels through which money flows in or out of the country. It has been on the policymakers’ radar for a long time but there has not been any significant success in terms of curbing its workings. These days, there is a new urgency to tackle it as Pakistan finds itself on the Financial Action Task Force’s (FATF) Grey List.

It is a good time to peek into the nature, history and workings of this system in order to understand its continued sway and why it became popular in the first place. Hawala basically denotes a system made up of money lenders and businessmen around the globe. What distinguishes it from the formal exchange channels (like banking) is that it works largely on repute and trust rather than formal contracts. It comes with its advantages, anonymity being the primary one. The other primary advantage comes in the form of avoiding expensive formal channels of finance and exchange. Anonymity, however, comes with a heavy price tag for countries like Pakistan as this particular characteristic has been mercilessly exploited by smugglers, drug peddlers and terrorism financiers. No wonder Pakistan finds itself on the FATF radar.

Transfer of financial resources using a Hawala type system, based on trust, is a very old practice. Robert Sobel, in his magisterial The Pursuit of Wealth, has traced the system back to the dawn of commerce and trade (he does not explicitly mention Hawala, though). Babylonian and Sumerian merchants, for example, relied heavily on people of reputation (including priests) for acting as clearing houses and money transfer intermediaries/channels providing a valuable service to citizens. Instead of taking the substantial risk of carrying money and valuables themselves, they were deposited with these individuals who in return would give them an acknowledgment receipt (with their particular stamp or insignia). When merchants would reach their destination, they would redeem the amount by presenting the receipt to the Hawala dealers of that particular place. Thus, a transaction was settled with minimum of fee and administrative requirements. Moreover, the existence of such a valuable service oiled the wheels of commerce as it took away the many risks that merchants faced while carrying money themselves.

If looked at in modern parlance, Hawala is a decentralised system based on competition. There is little requirement for meeting statutory obligations and cumbersome procedures that exist under a modern, centralised banking system. Historically, money lenders under Hawala have charged just a fraction of what formal transfer channels charge from consumers. A question may arise as to the profitability of such a service when the charged fees are low. But that aspect has, historically, been taken care of by realising economies of scale: lower charges on transfers have attracted enough customers to ensure a healthy return.

Since the dawn of commerce and trade, this system has persisted despite challenges. It was quite common in the Middle Ages, as has been documented extensively by the economist Avner Grief’s research. For example, 8th century China under the Tang dynasty had a similar system called fei-ch’ien (flying money). The need for such a system arose due to the dangers encountered in physically transferring tax money and valuables to the empire’s capital. The operation of that particular system ameliorated that risk to a large extent. Formidable challenges to this informal, decentralised authority rose with the rise of nation states, powerful central governments and central banking authority. Yet, the system refuses to vanish.

What, then, are we to make of global efforts to clamp down and curb Hawala type transactions? Specifically, one has to look at the social and economic benefits of doing away with such a system. In hindsight, this may seem odd since the official version foisted upon our imaginations is one of a system that causes substantial damage to the economy. This version stands vindicated if we were to limit the system’s workings to facilitating money borne out of drug peddling, terrorism financing and other such harmful activities.

But one has to be careful in limiting their imagination to only these activities. The fact of the matter is that a Hawala like system offers many socially beneficial incentives that tend to get lost in the fog of official versions. It tends to discount the benefits accrued to consumers. I have already narrated its extremely beneficial role in facilitating trade and commerce in the earliest known civilizations. Aside from this facilitation, there are other advantages that such a system confers upon the society. Specifically, its presence ensures lower transaction costs to its subscribers.
Banks illustrate this point. They charge various types of fees from customers under the garb of different heads and make a healthy profit based on the deposits of customers. On net, the benefits accrued to customers are either cancelled or are inferior to what they are charged for the service. But when these kinds of institutions fail (largely based on their actions), they are usually bailed out using taxpayer money (the ‘too big to fail’ phenomenon). If you think about it, it is akin to a heist! And the only remedy available against such excesses are courts, which again exact a heavy cost from society due to the time, duration and financials involved. In a country like Pakistan, given the state of affairs of courts, it is advisable to stay away from them and save time plus money.

Consumers are usually saved that predicament in an informal, decentralised system like Hawala. Once a reputation of operator is tarred, its curtains for that business and no amount of running around can recoup the lost repute. More importantly, there is little possibility of ‘too big to fail’ phenomenon, to be bailed out using taxpayer money. Thus society not only benefits in terms of saving money (very low transaction fees), but also in terms of a decentralised system that weeds out inefficient, unproductive and corrupt operators without the need for a central authority or courts.

The lesson from all of this discussion, at least for policymakers, is that efforts to curb hawala type system needs an understanding of the nature and forces that propel it. If informal systems of financial transactions have endured for centuries, there are good reasons for that, some of them outlined above. A society and its inhabitants have the capacity to compare transaction costs of having a formal system against an informal system. If the former confers a lower cost, the latter would disappear without the need for state intervention (and vice versa). If this point can be grasped, then it is clear that Pakistan’s policymakers should first review the predatory nature of its functioning (specifically its taxation) plus that of its financial system, and what cost it inflicts upon the society. It also does not help that the government strongly incentivised use of such channels when it was in its interest (to finance Afghan Jihadi groups, for example), helped entrench it, and now wants to get rid of it when faced with external pressure.

Historical evidence, though, suggests that such administrative exercises are usually futile in the end since an alternative tends to rise. The rise of crypto-currencies, like Bitcoin, is an apt reflection of this fact. At its core, crypto currencies reflect the working of a decentralised exchange with meagre transaction costs, just like Hawala. How would the world curb this system? Ban computers? I don’t think so.

Prof. Werner brilliantly explains how the banking system and financial sector really work

Fatah ka Fatwa - Islamic Banking

In his victory speech Jeremy Corbyn spelled out exactly why the establishment hates him so much

Youssef El Gingihy in The Independent

Jeremy Corbyn's conference speech yesterday underlined exactly why he has been subjected to a ferocious smear campaign. We have heard an endless catalogue of critiques: That Corbyn lacks leadership; that he is not electable; that Labour has become a protest party infiltrated by the far left. Yet the real reason behind these attacks is that Corbyn is a clear and present danger to powerful, vested interests.

For the first time in a generation, a Labour leader is truly challenging the cosy political consensus extending through the Thatcher-Blair-Cameron axis. The policies taking shape represent a clean break from several decades of deregulated free market economics.

Corbyn has positioned Labour as an anti-austerity party. He emphasised that the financial sector caused the 2008 crisis not public spending. This is important as Miliband and Balls mystifyingly failed to make this argument. One can only surmise that they were eager not to offend the City of London.

Corbyn promised to reverse privatisation of public services. This would mean renationalisation of the railways. It would mean restoring a public NHS reversing its privatisation and conversion into a private health insurance system.

It would mean an end to the outsourcing of council services. It would mean returning public services into public hands. And none of this is radical. Polling shows the majority of the public, including Conservative voters, is in favour.

It is no surprise that Richard Branson and Virgin seemingly used Traingate in an attempt to discredit Corbyn. Virgin would stand to lose billions in contracts if such policies went ahead. As would many other corporate interests - the likes of Serco, G4S, Capita and Unitedhealth to name a few.

Corbyn promised Labour will build enough social housing and regulate the housing market. Again, property developers, investors and construction firms would stand to lose from the restoration of housing as a social good rather than a financial instrument.

Corbyn vowed that bankers and financial speculators cannot be allowed to wreak havoc again. Regulation of the financial sector will have the City running scared - the party may well be truly over for them. Deregulated finance has resulted in industrial scale corruption profiting a tiny elite at the expense of ordinary people. This was evident not only during the crash but in the raft of scandals since, including LIBOR and PPI.

Corbyn added that the wealthy must pay their fair share of taxes. Labour would take effective steps to end tax avoidance and evasion. This would need to start with winding down the offshore empire much of which comes under the influence of the UK and the City of London.

Corbyn highlighted the grotesque inequalities driven by neoliberalism. The result has seen millions of ordinary people abandoned by a system that does not work for them. Here, Corbyn again broke with the consensus pointing out that immigration is not to blame. Scapegoating of migrants is convenient for elites keen to distract from the damage that they are causing. Corbyn emphasised that it is exploitative corporations, which are to blame for low wages not migrants. Over-stretched public services are down to Conservative cuts not immigration. However, after years of xenophobic anti-migrant rhetoric, winning this argument will require plenty of hard work.

On the economy, Corbyn promised investment with £500bn of public spending and a national investment bank. He also promised investment in research and development, education and skilling up of the workforce.

Yet none of this is especially controversial. Much of it is increasingly accepted as common sense amongst economists.

It is Corbyn's reset on foreign policy, which is truly intolerable for the establishment.

Corbyn spoke of a peaceful and just foreign policy. There would be no more imperial wars destroying the lives of millions; generating terrorism and migration crises. Arms sales to countries committing war crimes would be banned starting with Saudi Arabia. This will have set alarm bells ringing amongst the nexus of intelligence agencies, defence contractors and corporates. Corbyn is directly challenging the Atlanticist relationship paramount to the US-UK establishment and its global hegemony, particularly in the Middle East.

It is no surprise that the Conservatives and their mainstream media cheerleaders have therefore attacked Corbyn. The most damaging attacks, though, have come from his parliamentary party. The process of disentangling from the New Labour machine captured by corporate interests may still generate more damage.

As Corbyn and McDonnell have both made abundantly clear, socialism is no longer a dirty word. Corbyn's Labour - the largest party in Western Europe - is powering forward with a vision of forward-looking 21st century socialism.

Dying at 22 is too steep a price for being ‘the best’

Shobhaa De in The Times of India

My heart broke while reading the tragic account written by a devastated father on hearing about his 22-year-old son’s sudden death in a San Francisco parking lot some weeks ago. Sarvshreshth Gupta had done all the ‘right things’ ambitious Indian parents expect from their children. He was supposed to be living the Great American Dream, after graduating from the University of Pennsylvania, interning with Credit Suisse and Deutsche Bank, before landing a job as a financial analyst with Goldman Sachs in San Francisco. His young life followed the golden script written for — and sometimes by — aspiring desi students. Those who toil hard to get into the best business schools in the US, achieve great grades, repay huge loans, make their folks proud, bag high-paying jobs, work harder still… and then collapse! Like young Sarvshreshth did. The unreasonable pressure of a system that expects young people to sweat blood so as to make other people rich, finally got to the analyst — perhaps, had he listened to his father and walked out of his job a few hours earlier, he would have been alive. Fired, perhaps. But alive.

Sarvshreshth’s exchanges with his sensitive, understanding father tell their own story. And it’s a pretty common one. He writes of being severely sleep deprived, working for 20 hours a day, spending nights in an empty office, completing presentations while prepping for a client meeting early the next morning… all the while putting up with the tyranny of a senior VP breathing down his neck — pushing, pushing, pushing. Whenever his father advised him to take it easy and look after his health, Sarvshreshth would bravely reply, “Come on, Papa. I am young and strong. Investment banking is hard work.” As it turns out, the young man was not as strong as he imagined. And yes, the hard work as an investment banker is precisely what killed him.

When I came across the grieving father’s poignant online essay, ‘A Son Never Dies’, I thought about several parents and their children in similar situations. I thought about my own children and their friends… what a scary world they occupy. Look around and you will find many other Sarvshreshths — young men who are literally killing themselves in jobs that pay big bucks, but extract a gigantic price. Yes, Indians today can lay claim to being the best-educated, highest paid ethnic group in America. But, at what cost?

Right now, hundreds of over-wrought parents are undertaking pricey campus tours of various universities abroad. They believe this is their ‘duty’ since they want their kids to ‘get the best’. Is this what they mean by ‘the best’ ? We have equally good universities in India. What sort of absurd pressure is this that forces parents and students to go overseas in the hope of ‘bettering prospects’? Why not have confidence in your child’s ability to shine in India, without going through the sort of trauma Sarvshreshth suffered? Yes, we have ragging in our colleges, and no, some of our academic laurels are not as prestigious in global job markets as Ivy League degrees. So what? If you’ve got it, you will make it. Anywhere!

Just a short while before Sarvshreshth’s body was found (cause of death not officially declared so far), his father had told him to take 15 days’ leave and come home. The fatigued son’s forlorn response was, “They will not allow”. Hours later, he was dead. This sad story should act as a wake-up call for both over-ambitious parents and over-achieving children. Not everybody can take the almost inhuman pressure of the rat race. This young man was missing home-cooked food, the comfort of family and an emotionally reassuring environment. If only he’d had the courage to say, ‘To hell with it…’ and come home, his devastated father would not be writing that pathos-filled essay today.

It’s time we took a fresh look at our craze for ‘foreign degrees’ and ‘foreign jobs’. Today there are over 100,000 Indian students on US campuses. Most will think of this time as the best years of their lives. Some will stay on and be successful there. Others will return and pursue successful careers back home. But a few will crack, crumble and succumb under pressure. The system sees all kinds. But this is not about the survivors. This is about the vulnerable. Every parent wants a child to succeed. But not at the cost of their life.

I wish Sarvshreshth’s father Sunil Gupta would take this important message to many more parents still debating about their child’s future. Earning a degree and bagging a great job are fine goals. But living a wholesome life with people who love and respect you is infinitely more rewarding in the long run.

Irony. This was the worst thing to happen to a young man whose name means ‘The Best’.

HSBC closes some Muslim groups' and individuals' accounts

30 July 2014 By Dominic Laurie BBC News
Reporter, Radio 5 live

HSBC bank has written to Finsbury Park Mosque and other Muslim organisations and individuals in the UK to tell them that their accounts will be closed.

The reason given in some cases was that to continue providing services would be outside the bank's "risk appetite".

The wife and teenage children of a man who runs a London based Islamic think-tank have also been contacted.

HSBC said decisions to close accounts were "absolutely not based on race or religion".

"We do not discuss relationships we may or may not have with a customer, nor confirm whether an individual or business is, or has been a customer.

"Discrimination against customers on grounds of race or religion is immoral, unacceptable and illegal, and HSBC has comprehensive rules and policies in place to ensure race or religion are never factors in banking decisions."

No chance

Finsbury Park Mosque in North London was written to by HSBC on 22 July.

The only reason given for the intention to close its account was that "the provision of banking services… now falls outside of our risk appetite".

In the letter, the bank notifies the treasurer of the mosque that it will close the account on 22 September.

Khalid Oumar, one of the trustees of the mosque, questioned the motives behind the letters.

"The letters that have been sent and the letters that we received do not give any reason why the accounts were closed in the first place," he said.

"That has led us to believe that the only reason this has happened is because of an Islamophobic campaign targeting Muslim charities in the UK."

'Astonishing'

The mosque's chairman Mohammed Kozbar told the BBC: "The bank didn't even contact us beforehand. Didn't give us a chance even to address [their] concerns.

"For us it is astonishing - we are a charity operating in the UK, all our operations are here in the UK and we don't transfer any money out of the UK. All our operations are funded from funds within the UK."

Until 2005, the mosque was run by Abu Hamza, who in May this year was convicted of terrorism offences in the United States.

"The positive work we have done since taking over over from Abu Hamza to change the image of the mosque, there is nothing really that can explain [HSBC's decision]," says Mr Kozbar.

"They have put us now in a very, very difficult situation - this is the only account we have."

Mr Kozbar says HSBC's decision could have negative repercussions for the bank.

"We are sure that our community will be frustrated, and might consider closing their accounts themselves with HSBC if the bank doesn't reopen our account, or at least give us an explanation."

Jeremy Corbyn, the local MP for Finsbury Park, says he has worked with the mosque ever since it was built.

"Over the past 10 years, it has developed into a superb example of a community mosque supporting local people and providing facilities for all faiths if they need it.

"I am shocked and appalled at the decision of HSBC."

'Unsettling'

Anas Al Tikriti was born in Baghdad, but has lived in the UK for several decades. His family has also received letters. He runs the Cordoba Foundation, a think tank on Islamic issues set up in 2005 in order to address, he says, the relationship between Europe and the Middle East.

He, his wife, his 16- and 12-year-old sons all received separate letters this week from HSBC informing them that their accounts would be closed in September. This time, no reason was given.

Mr Al Tikriti says he has banked with HSBC since the 1980s and has rarely been overdrawn.

"It is unsettling. I am not used to being addressed in those terms. It's like I have done something wrong. The involvement of my family disturbs me. Why the entire family?"

"I can only speculate - and I wish someone from the bank could explain [why the accounts were closed]. The organisations are mainly charities and the link is that many of them if not all of them are vocal on the issue of Palestine."

"It would be a great shame if that was true. As I'm left to speculate, that's the only reason I can come to."

His think tank, the Cordoba Foundation, which also banks with HSBC, was also told that its account will close, with an almost identical letter to that sent to the Finsbury Park Mosque, and dated the same day.

'Alternative arrangements'

Ummah Welfare trust, based in Bolton, has distributed £70m to projects in 20 countries. It has had a presence in Gaza for 10 years.

In a letter, also dated 22 July, HSBC gave Ummah the same reason for closing its account that it had given to the Finsbury Park Mosque - that "provision of banking services now falls outside our risk appetite".

It then gave the charity two months' notice of its decision to close the trust's accounts.

"You will need to make alternative banking arrangements, as we are not prepared to open another account for you," the letter continues.

Mohammed Ahmad, who runs Ummah, says it is a dream customer for a bank and always in credit.

He asked HSBC in a meeting why the accounts were closing, but says the bank's representative gave them no answer.

Mr Ahmad says that they "have always tried to work within a legal framework and accommodate banks, if, for example, there was an issue with sanctions".

Mr Ahmad says he thinks HSBC has made its decision because of its work in Gaza, where he says Ummah provides "ambulances, food aid, medical aid, and grants."

"We make sure we go out of the way to work with organisations that are non-partisan. What we do now is we do a check on Thomson Reuters and make sure that there is no link whatsoever with blacklisted organisations. We don't want to damage our relief efforts. We have tried our best to be non-partisan as much as possible."

A government official the BBC spoke to said they did not believe this was the result of government action but reflected a decision the bank had taken itself based on its own risk analysis.

In December 2012, HSBC had to pay US authorities $1.9bn (£1.2bn) in a settlement over money laundering, the largest paid in such a case. It was alleged to have helped launder money belonging to drug cartels and states under US sanctions.

In August last year, it was reported that HSBC asked more than 40 embassies, consulates and High Commissions in the UK to close their accounts. At the time, the bank said "HSBC has been applying a rolling programme of "five filter" assessments to all its businesses since May 2011, and our services for embassies are no exception."

The Charities Commission has confirmed that it is not investigating any of the organisations involved and says that if the charities don't have a relationship with bank it could harm public trust in their work.

The banking industry's biggest problem isn't bonuses or market share

The only way to make the sector pursue long-term viability instead of short-term greed is to change the rules of the game

• 
• • Ha-Joon Chang
  • The Guardian, Wednesday 22 January 2014

‘The fact that the political class, including Miliband himself, cannot even imagine state-owned banks ditching the business model that caused this crisis is a testimony to the power of the financial industry lobby.’ Photograph: Stefan Rousseau/PA

Last Friday, in another of those agenda-setting speeches for which he has rightly become famous, Ed Miliband took on the biggest of what he describes as "the broken markets" in the UK economy – the financial market.

Taking his "cost of living crisis" theme to another level, the Labour leader emphasised that the issue is not just about oligopolistic firms fleecing their customers; it is also about the lack of jobs with decent wages that can support decent standards of living. The problem with the British banking industry, Miliband pointed out, is not just about the concentration of financial power in the personal account market, but also in the business loan market.

According to Miliband's analysis, the dominant banks are not lending enough to small and medium-sized enterprises because they form a cosy oligopoly (controlling 85% of small business lending) that does not want to take any risk; enterprise loans are inherently riskier than mortgage and personal loans. Given that small businesses create most jobs in the UK (as they do in all countries), lack of finance for them is limiting the creation of decent jobs. The solution, he argued, is to introduce more competition into the small business lending market by capping the share of individual banks.

This proposal has caused much controversy. However, one thing is certain: it is going to be slow-acting. It may be years before proper "challenger" banks emerge, given the time necessary for the review by the Competition and Markets Authority – which takes over the roles of the Competition Commission and Office of Fair Trading from April – and for the process of selling branches.

But there is a quicker and simpler solution to this problem. It is for the government to use its ownership of two of the big four banks, RBS and Lloyds, to direct more lending to small businesses. Thanks to the bailout following the 2008 financial crisis, RBS is 81% owned by the government. This means it can tell RBS what to do. It also owns 33% of Lloyds, and while this does not give it a total control over the bank, it is well above what is normally considered a "controlling stake" in an enterprise.

Now, if you can basically tell two of the four largest banks what to do – say, to increase lending to small businesses – why go through the rigmarole of calculating their market shares and forcing them (and the other two) to sell off some of their branches?

The usual refrain is that Westminster cannot make RBS and Lloyds do things differently because, in order to survive, these banks need to behave like other competitors: generating as much profit and paying their staff as much.

This argument may be right if the existing business model of British banks and other financial companies is fine. But it is not. It is a business model that has caused the biggest financial crisis in 70 years and created imbalances and inequalities that threaten the future viability of the British economy. The fact that the political class, including Miliband himself, cannot even imagine state-owned banks ditching such a model is a testimony to the power of the financial industry lobby.

From the day when RBS and Lloyds were bailed out, the Labour government was at pains to emphasise it would run them along the same lines as before nationalisation. The only thing for which Labour and, subsequently, the coalition government have used the government's dominant shareholding position has been to restrain bonuses. But this is really missing the point.

The problem with bonuses in the financial industry is not about their levels – if someone makes a huge contribution to the economy, he or she should be richly rewarded. The main problem is that these bonuses are given to people for doing the wrong things well – things that harm the economy in order to enrich the shareholders, the top managers of banks and other financial firms.

So the real question is how we make banks and other financial firms pursue the right goals, rather than how much people should be paid, whether in bonuses or salaries. And the only way to make them pursue different goals from those they pursue now is to change the rules of the game.

Unfortunately, few regulations have been introduced since the crisis that have materially changed the goals of financial companies. The result has been "business as usual".

All those complex and risky financial products that were at the centre of the 2008 financial crisis – such as mortgage-backed securities, collateralised debt obligations, credit default swaps and other financial derivatives – are back in vogue again.

The credit rating agencies, whose incompetence and cynicism in rating those financial products has become legendary after the crisis, are still operating in the same way.

Thanks to Help to Buy, the mortgage-lending market is nearly back to its old self. Now you can get loans that are 95% equal to the value of the house – not quite the 125% you could get before the crisis, but nearly there.

In the absence of measures to encourage longer-term shareholding – for instance, by granting more votes or tax advantages – short term-oriented shareholders are still reigning supreme, putting pressures on banks to generate short-term profits, whatever the consequences.

The main problem with the British financial industry is not the level of bonus, or even the concentration in the banking sector; it is that the industry is pursuing goals that are detrimental to the long-term economic viability of the country, in the process enriching only a tiny minority and sapping human and financial resources from the rest of the economy.

Unless those goals are changed through better regulation, the industry will remain harmful to the rest of the economy, whatever we do about bonuses and market concentration.

Five tips for George Osborne on banking reform

These simple steps would provide the direction for deeper reform of the banking system

• 
• • Prem Sikka
  • theguardian.com, Tuesday 26 November 2013 18.31 GMT

Public pressure for better banking reform from George Osborne, the chancellor, is growing. Photograph: Chris Ison/PA

Some six years after the banking crash, the UK taxpayer is still providing £977bn of loans and guarantees (pdf) to support the ailing banking sector. The reform process is painfully slow. The banking reform bill currently going through parliament (pdf) has grown from 35 pages to 170 pages, but still does not deal with the flaws that led to the crisis. Public pressure for a tougher approach is growing, with figures including the archbishop of Canterbury demanding firmer government action. The chancellor, George Osborne, should at the very least do the following five things. On their own, they won't necessarily solve the deep-seated crisis in our financial institutions, but they would provide the direction for deeper reforms.

1. Think outside the ringfence

Introduce a statutory separation of retail banking from speculative banking and not just the weak "ringfence" he is proposing. Despite the crash, banks remain addicted to gambling with other people's money. They bet on everything from the movement of interest rates, price of commodities, oil, wheat, foreign exchange and much else through complex financial instruments known as derivatives. Derivatives have been described by investment guru Warren Buffett as "financial weapons of mass destruction". Derivatives brought down Lehman Brothers, Northern Rock, Bear Stearns, MF Global, Countrywide, Merrill Lynch, Wachovia and Washington Mutual, just to mention a few. Yet no lessons have been learned.

The Bank of International Settlements (BIS) shows that the notional/face value of over-the-counter (OTC) derivatives is about $693tn. In addition, derivatives are traded on exchanges; adding up to a whopping $1,200tn. The exact economic exposure of the UK banking system is probably considerably lower, but is not known. The Treasury's response to requests for information is that the information "is not currently available". So what do bank balance sheets show us? The financial statements of Barclays Bank (pdf) show the dangers. Its derivatives assets and liabilities of £469bn and £462bn respectively need not net off and could expose it to anything from £7bn to over £900bn. The UK, with a GDP of £1.5tn is in no position to absorb the losses and the knock-on effects. Even Nobel prize winners in economics have been unable to manage the risks in derivatives.

2. Hold banks responsible for losses

Withdraw limited liability from speculative banking. Merely separating the banking arms is not enough because banks use monies from savers, pension funds and insurance companies to finance their gambling habit. Major losses from their bets will ultimately infect the rest of the economy and affect every household. Therefore, the owners of these vast casinos must be held personally liable for the losses.

3. Make them balance the books

Force banks to address their gross undercapitalisation. Barclays has gross assets of £1,500bn against capital of just £63bn. A decline of just 4.22% in the value of its assets could wipe out its entire capital. HSBC has gross assets of $2,700bn (£1,687bn) compared to capital of $183bn (£114bn). It can barely absorb the decline of 6.75% in its asset value. Capital ratios in these ranges have not been and will not be good enough to cushion losses. No doubt some will say that some assets are less risky than others and banks will get away with modest capital ratios, but none of this saved banks previously. So a healthy capital adequacy ratio of at least 12.5%, and higher, should be aimed for.

4. End fat-cattery

Risk capital should be built by clamping down on executive pay. No executive should receive more than 10 times the minimum wage until the required capital levels are reached.

Despite the taxpayer-funded bailouts excessive executive pay is rife and remains linked to reckless risk-taking. The long-term solution is to empower bank employees, savers and borrowers to vote on executive remuneration. They all have a long-term interest in the wellbeing of banks and can curb reckless risk taking.

5. Crack down on the auditors

Bring in a fundamental overhaul of the auditing of banks. Big accounting firms, acting as auditors of banks, are supposed to be the eyes and ears of financial regulators, but the lure of profit is too strong. Almost every ailing bank received a clean bill of health (pdf)from its auditors who received millions of pounds in auditing and consultancy fees. In some cases, banks collapsed within days of receiving the all-clear. Even worse, in some cases auditors were complicit in dubious practices. It is time to remove the accounting firms from audits in the financial sector. That task should be performed by a specially created body, equivalent to the National Audit Office. Unlike the present situation, the financial regulator should have unhindered access to all data held by the auditors.

Britain is far more corrupt than we think

Mary Dejevsky in The Independent

Within Britain, there is a widespread view – seriously dented neither by the MPs’ expenses saga nor by the newspaper phone-hacking scandal – that this is not a corrupt country. It might not be quite as squeaky clean as Scandinavia, but it is nothing like – let’s see, who shall we offend? – Italy or Spain. As for Russia or China, well, we can strut the moral high ground – can’t we? – certain of our superiority.

Incorruptibility is part of our national self-image. But we flatter and deceive ourselves. Over the past few weeks, The Independent has exposed private investigators who routinely break the law, digging for dirt on behalf of commercial clients. The techniques – phone hacking and “blagging” – are the same as those for which journalists have been hauled before the courts and pilloried by public opinion.

If there seems to be a slight edge to our reports, how could there not be? On present evidence, law enforcers would appear to take a dimmer view of journalists applying these illegal methods, or buying them in, than it does of business people and lawyers who do the same. That, at least, was the message from the Serious Organised Crime Agency, which initially instructed MPs not to name the companies commissioning such services on the grounds that it could “undermine their financial viability” by “tainting them with… criminality”.  Yesterday, however, there was a change of heart and Soca supplied the Home Affairs Select Committee with a list of a list of 101 names of people and organisations who have hired private investigators. The committee’s chairman, Keith Vaz, is now deciding whether to publish them.

Strictly speaking, blagging – obtaining information by deceit – can succeed without a partner. The offence is all on one side: no money or favour changes hands. But this is not the only way in which information is obtained. As with journalists and the police or others who hold  sensitive information, it is now known that money or favours have changed hands. And in these cases, those who sell are as culpable as those who buy. There has to be a market for the transaction to work.

The sellers might not see themselves as corrupt, merely as individuals exploiting an opportunity, or enjoying a perk of the job. That such practices may not always have been recognised as corrupt does not make them less so. It just means we are more adept than some of our neighbours at not calling things by their proper names. A gift for euphemism is something else that defines our national character.

If journalists and private investigators were the only ones under investigation, and the only commodity changing hands was information, we might just be able to file it away and argue that Britain has a very limited and very specific corruption problem. But this is not true, either.  In banking, we have had the rigging of Libor, the key lending rate, by individual bank employees for personal gain. As corruption goes, this comes close to the top of any list because  greed compromised a major pillar of the financial system – in a global financial centre which was built largely on its word being its bond.

A few steps further down we have claims of corrupt behaviour by British companies abroad. Only last week accusations were made against employees of a British company in China, GlaxoSmithKline. According to the Chinese, other pharmaceutical firms are also in the frame – for allegedly bribing doctors to prescribe their products. It is not, of course, that paying backhanders, or “doing as the natives do”, was unheard of in the operations of UK companies outside Britain. But the Bribery Act of 2010 made it expressly illegal, and it comes to something when it is the Chinese authorities doing the exposing and British companies that find themselves in the dock. The reputational damage flows only one way.

Again, it might be just possible to winkle out a “British” exception and claim that this sort of corruption reflects the malign influence of “foreigners” rather than any home-grown proclivity. But such complacency is challenged by the latest “global corruption barometer” compiled by Transparency International. Published earlier this month, its findings show not only that the perception of corruption in Britain has increased markedly over the past two years – not surprising, giving the prominence of the phone-hacking scandal – but that in the same period one person in 20 claims to have paid a bribe to a public official for services as diverse as health, justice and education.

A first instinct is, naturally, to question these conclusions. A second would be to surmise that those who admitted paying a bribe were at the margins – newcomers, perhaps or illegal migrants. But that would be too easy an escape. As with journalists and police, corruption is a transaction. There must be takers as well as givers. But I find it credible, too, because of a mini-brush of my own. When posted abroad more than 10 years ago, I checked that my husband, if he became non-resident, would have to pay privately for his (expensive) Parkinson’s medicine. The doctor, a locum, said yes, that was so. Then he paused, and – as I read it – implied, no more, that a deal could be struck. I left, but a possibility was there. 

And this is where corruption begins. Not with GSK in China, but with crimes left unpunished, names left unnamed and the prosaic minutiae of daily needs debased. If the Serious Organised Crime Agency is telling MPs – our representatives – what we the public may and may not know for national commercial reasons, the UK is on a slipperly slope indeed.