Showing posts with label fraud. Show all posts
Showing posts with label fraud. Show all posts
Saturday, 10 August 2024
Monday, 6 May 2024
Why don’t auditors find fraud?
Stephen Foley in the FT
For decades, investors have lamented how rarely external auditors uncover corporate fraud. From Enron to Wirecard, the cry after each scandal is, where were the auditors? The Association of Certified Fraud Examiners’ biennial report on how workplace fraud gets detected has typically shown auditors are the ones uncovering the wrongdoing only 4 per cent of the time.
Bad news. The latest report out a few weeks ago said the number is down to 3 per cent. Whistleblower hotlines and other internal controls may have helped some companies themselves discover some malfeasance earlier, but what about when management is the perpetrator or a corporate culture is rotten? A survey of investors by the Center for Audit Quality, a trade group for large accounting firms, found that 57 per cent thought the current system “frequently” failed to detect illegal acts.
Regulators fear auditors are failing in their role as a last line of defence for investors against corporate shenanigans. Audit firms argue that company executives are responsible for the accuracy of financial statements and that the role of an auditor role is only to provide reasonable assurance — not a guarantee — that a financial statement is free from material misstatement.
It is an argument that has prompted the US Securities and Exchange Commission’s chief accountant, Paul Munter, to exclaim to me on more than one occasion that he is fed up hearing from auditors what they do not do.
But a series of proposals to clarify and extend auditors’ responsibilities has now been made. In the US, the Public Company Accounting Oversight Board is revamping rules on how auditors must look for and deal with evidence of a client’s non-compliance with laws and regulations (Noclar, in the jargon). The intent is to force auditors to cast a wider net for matters that could have a material effect on a company’s financials, even indirectly by leading to big fines or regulatory action that threatens the business.
Audit firms have responded that they cannot be expected to make legal judgments, and that the huge amount of extra work implied by the Noclar proposal as currently drafted probably will not uncover anything significant that current procedures do not already.
A narrower proposal in the UK — which says auditors do not have to probe every minor law or regulation, and can use management’s own compliance programmes as a starting point — has elicited almost as thunderous a set of comment letters in opposition.
The latest move is by the International Auditing and Assurance Standards Board, which sets rules that are used as a template by scores of countries around the world. It has proposed strengthening standards on fraud detection to emphasise that auditors must look for financial misstatements that might not be “quantitatively material” but which might be “qualitatively material”, depending on who instigated the fraud and why it was perpetrated.
The emergence of all these proposals is no coincidence, and it is not as if audit firms themselves do not see room for improvement. PwC last year promised it would overhaul its fraud detection procedures and probe its clients’ whistleblower programmes more closely, among other reforms to boost audit quality. PwC boss Tim Ryan tried and failed to get all the Big Four firms to make a common pledge on these issues.
Other leaders still talk of an “expectations gap” between what investors want an audit to be and what it really is, as if it is the investors that need to be educated instead of the profession that needs to change.
An alternative response to some of the current proposals would embrace them to strengthen the hand of auditors. They provide new justification to pry open clients’ businesses, push back on hostile finance chiefs and chief executives, and flag more matters of concern to directors, to investors or to the authorities — to follow through on the professional scepticism that is supposed to be at the heart of the auditors’ creed. There is room for agreement, even on the contentious Noclar proposal.
Better still for auditors, there is evidence investors are willing to pay for a more robust service. The CAQ survey showed a majority would support auditors charging an additional 20 per cent or more to cover the extra work of rooting out non-compliance.
A high-quality audit is sometimes called a “credence good”, because its value is difficult to calculate. But, as the shareholders of Enron, Wirecard and countless others will tell you, the cost of a bad audit can be so much more.
Monday, 18 March 2024
Sunday, 11 February 2024
Thursday, 21 September 2023
Thursday, 31 August 2023
Modi-linked Adani family secretly invested in own shares, documents suggest
Hannah Ellis-Petersen in Delhi and Simon Goodley in London in The Guardian
A billionaire Indian family with close ties to the country’s prime minister, Narendra Modi, secretly invested hundreds of millions of dollars into the Indian stock market, buying its own shares, newly disclosed documents suggest.
According to offshore financial records seen by the Guardian, associates of the Adani family may have spent years discreetly acquiring stock in the Adani Group’s own companies during its meteoric rise to become one of India’s largest and most powerful businesses.
By 2022, its founder, Gautam Adani, had become India’s richest person and the world’s third richest person, worth more than $120bn (£94bn).
In January, a report published by the New York financial research firm Hindenburg accused the Adani Group of pulling off the “largest con in corporate history”.
It alleged there had been “brazen stock manipulation and accounting fraud”, and the use of opaque offshore companies to buy its own shares, contributing to the “sky high” market valuation of the conglomerate, which hit a peak of $288bn in 2022.
The Adani Group denied the Hindenburg claims, which initially wiped $100bn off the conglomerate’s market value and cost Gautam Adani his prime spot on the world rich list.
At the time, the group called the research a “calculated attack on India” and on “the independence, integrity and quality of Indian institutions”.
Yet new documents obtained by the Organised Crime and Corruption Reporting Project (OCCRP), and shared with the Guardian and the Financial Times, reveal for the first time the details of an undisclosed and complex offshore operation in Mauritius – seemingly controlled by Adani associates – that was allegedly used to support the share prices of its group of companies from 2013 to 2018.
Up until now, this offshore network had remained impenetrable.
The records also appear to provide compelling evidence of the influential role allegedly played by Adani’s older brother, Vinod, in the secretive offshore operations. The Adani Group says Vinod Adani has “no role in the day to day affairs” of the company.
In the documents, two of Vinod Adani’s close associates are named as sole beneficiaries of offshore companies through which the money appeared to flow. In addition, financial records and interviews suggest investments into Adani stock from two Mauritius-based funds were overseen by a Dubai-based company, run by a known employee of Vinod Adani.
The disclosure could have significant political implications for Modi, whose relationship with Gautam Adani goes back 20 years.
Since the Hindenburg report was published, Modi has faced difficult questions about the nature of his partnership with Gautam Adani and allegations of preferential treatment of the Adani Group by his government.
According to a letter uncovered by the OCCRP and seen by the Guardian, the Securities and Exchange Board of India (SEBI) had been handed evidence in early 2014 of alleged suspicious stock market activity by the Adani Group – but after Modi was elected months later, the government regulator’s interest seemed to lapse.
In response to fresh questions relating to the new documents, the Adani Group said: “Contrary to your claim of new evidence/proofs, these are nothing, but a rehash of unsubstantiated allegations levelled in the Hindenburg report. Our response to the Hindenburg report is available on our website. Suffice it to state that there is neither any truth to nor any basis for making any of the said allegations against the Adani Group and its promoters and we expressly reject all of them.”
The offshore money trail
The trove of documents lays out a complex web of companies that date back to 2010, when two Adani family associates, Chang Chung-Ling and Nasser Ali Shaban Ahli, began setting up offshore shell companies in Mauritius, the British Virgin Islands and the United Arab Emirates.
These financial records appear to show that four of the offshore companies established by Chang and Ahli – who have both been directors of Adani-linked companies – sent hundreds of millions of dollars into a large investment fund in Bermuda called Global Opportunities Fund (GOF), with those monies invested in the Indian stock market from 2013 onwards.
This investment was made by introducing yet another layer of opacity. Financial records paint a picture of money from the pair’s offshore companies flowing from GOF into two funds to which GOF subscribed: Emerging India Focus Funds (EIFF) and EM Resurgent Fund (EMRF).
These funds then appear to have spent years acquiring shares in four Adani-listed companies: Adani Enterprises, Adani Ports and Special Economic Zone, Adani Power and, later, Adani Transmission. The records shine a light on how money in opaque offshore structures can flow secretly into the shares of publicly listed companies in India.
The investment decisions of these two funds appeared to be made under the guidance of an investment advisory company controlled by a known employee and associate of Vinod Adani, based in Dubai.
In May 2014, EIFF appears to have held more than $190m of shares in three Adani entities, while EMRF looks to have invested around two-thirds of its portfolio in about $70m of Adani stock. Both funds appear to have used money that came solely from the companies controlled by Chang and Ahli.
In September 2014, a separate set of financial records set out how the four Chang and Ahli offshore companies had invested about $260m in Adani shares via this structure.
Documents show that this investment appeared to grow over the next three years: by March 2017, the Chang and Ahli offshore companies had invested $430m – 100% of their total portfolio – into Adani company stock.
When contacted by the Guardian by phone, Chang declined to discuss the documents setting out his company’s investments in Adani shares. Nor would he answer questions about his links to Vinod Adani, who along with Ahli did not respond to efforts to contact them.
Indian stock market rules
The alleged offshore enterprise of the Adani associates raises questions about the possible breaching of Indian market rules that prevent stock manipulation and regulate public shareholdings of companies.
The rules state that 25% of a company’s shares must be kept “free float” – meaning they are available for public trade on the stock exchange – while 75% can be held by promoters, who have declared their direct involvement or connection with the company. Vinod Adani has recently been acknowledged by the conglomerate as a promoter.
However, records show that at the peak of their investment, Ahli and Chang held between 8% and 13.5% of the free floating shares of four Adani companies through EIFF and EMRF. If their holdings were classified as being controlled by Vinod Adani proxies, the Adani Group’s promoter holdings would have seemingly breached the 75% limit.
Political ties
Gautam Adani has long been accused of benefiting from his powerful political connections. His relationship with Modi dates back to 2002, when he was a businessman in Gujarat and Modi was chief minister of the state, and their rise has appeared to happen in tandem since. After Modi won the general election in May 2014, he flew to Delhi on Gautam Adani’s plane, a scene captured in a now well-known photo of him in front of the Adani corporate logo.
During Modi’s time as leader, the power and influence of the Adani Group has soared, with the conglomerate acquiring lucrative state contracts for ports, power plants, electricity, coalmines, highways, energy parks, slum redevelopment and airports. In some cases, laws were amended that allowed Adani Group companies to expand in sectors such as airports and coal. In turn, the stock value of the Adani Group rose from about $8bn in 2013 to $288bn by September 2022.
Adani has repeatedly denied that his longstanding connection with the prime minister has led to preferential treatment, as has the Indian government.
Yet a document unearthed by the OCCRP and seen by the Guardian suggests the SEBI, the government regulator now in charge of investigating the Adani Group, was made aware of stock market activity using Adani offshore funds as far back as early 2014.
In a letter dated January 2014, Najib Shah, the then head of the Directorate of Revenue Intelligence (DRI), India’s financial law enforcement agency, wrote to Upendra Kumar Sinha, the then head of the SEBI.
“There are indications that [Adani-linked] money may have found its way to stock markets in India as investment and disinvestment in the Adani Group,” Shah said in the letter.
He noted that he had sent this material to Sinha because the SEBI was “understood to be investigating into the dealings of the Adani Group of companies in the stock market”.
However, a few months later, after Modi was elected in May 2014, the SEBI’s apparent interest seemed to disappear, a source working for the regulator at the time said.
The SEBI has never publicly disclosed the warning given by the DRI, nor any investigation it might have conducted into the Adani Group in 2014. The letter appears to misalign with statements made by the SEBI in recent court filings in which it denied there were investigations into the Adani Group before 2020, as well as saying suggestions it had investigated the Adani Group dating back to 2016 were “factually baseless”.
The ability of the SEBI, a regulator under the purview of the Modi government, to independently investigate the Adani Group has recently been called into question by critics, lawyers and the political opposition.
According to a report given in May to the supreme court – which set up an expert committee to investigate the Adani Group after the publication of the Hindenburg report – the SEBI had been investigating 13 offshore investors in the conglomerate since 2020 but had “hit a wall” in trying to establish if they were linked to the Adani Group. Two of the entities under investigation are EIFF and EMRF.
The regulator has been accused of dragging its feet in their investigation into possible violations by the Adani Group, seeking several extensions. On Friday, the SEBI submitted a report to the supreme court stating that their investigations were in the final stages but did not reveal any findings.
The Adani Group said: “The provocative nature of the story and the proposed timing of its publication, when the allegations in it are entirely based on matters which are already under a formal investigation by SEBI and is at the verge of finalisation of the report and while the honourable supreme court hearing is also scheduled shortly; makes us believe that the proposed publication is being done wilfully to defame, disparage, erode value of and cause loss to the Adani Group and its stakeholders.
“Further, it is categorically stated that all the Adani Group’s publicly listed entities are in compliance with all applicable laws, including the regulation relating to public share holdings and PMLA [Prevention of Money Laundering Act].”
A spokesperson for the two funds that invested in Adani stocks – EIFF and EMRF – said the funds had not been “involved in any wrongdoing generally and particularly in connection with the Adani Group”.
It added: “Both the funds had multiple investments across asset classes like equities, mutual funds, alternate investment funds, bonds etc. Amongst these, EIFF and EMRF had investment in equities of the Adani Group, apart from other investments. EIFF and EMRF received subscriptions from Global Opportunities Fund Limited (GOF) which was a broad-based fund as per declarations received. GOF fully redeemed all its participation in EIFF in March 2019 and EMRF in March 2020.”
The SEBI did not respond to requests for comment.
Tuesday, 30 May 2023
How to treat the Fraud Epidemic!
Kelly Richmond Pope in The Economist
It marks a spectacular fall from grace for a one-time Silicon Valley star. This week a court in California ruled that, Hail Mary appeals notwithstanding, Elizabeth Holmes must report to prison on May 30th to begin serving an 11-year sentence for fraud. Theranos, the startup Ms Holmes had founded in 2003, was worth $9bn at its peak but crashed after its much-vaunted blood-testing technology was shown not to work, and she ended up in the dock for deceiving investors.
Theranos is one of a long list of financial scandals that have made headlines in recent years. Also among these are the frauds at Wirecard, a German payments processor, and Abraaj, a Dubai-based private-equity firm, various crypto-heists, and a bonanza of misappropriation of government handouts to businesses during the covid-19 pandemic. So many frauds are there, and so big are the biggest, that pilfering a billion dollars does not guarantee a global headline. Chances are you haven’t heard of Outcome Health, a Chicago-based health-tech firm whose former ceo and president were recently convicted of defrauding clients, lenders and investors of roughly that amount of money.
Beneath the blockbuster frauds in the billions of dollars is an alarmingly long tail of smaller financial scams. Taken together, these add up to a huge global problem. Research by Crowe, a financial-advisory firm, and the University of Portsmouth, in England, suggests that fraud costs businesses and individuals across the world more than $5trn each year. That is nearly 60% of what the world spends annually on health care.
The drivers of fraud are many and complex. Sometimes it is down to pure greed. Sometimes it begins with a relatively innocuous attempt to paper over a small financial crack but spirals when that initial effort fails; some believe that’s how it started with Bernie Madoff’s giant Ponzi scheme. Market pressure and a desire to exceed analysts’ expectations can also play a part: after the global financial crisis of 2007-09, ge was fined $50m for artificially smoothing its profits to keep investors sweet. Accounting ruses like this, which fall in a grey area, are more common than outright fraud. Among tech startups there is even an established term for manipulating the numbers to buy you time to navigate the rocky road to financial respectability: “fake it till you make it.”
Fraud is an all-weather pursuit. Economic booms help fraudsters conceal creative accounting, such as exaggerated revenues. Recessions expose some of this wrongdoing, but they also spawn fresh shenanigans. As funding dries up, some owners and managers cook the books to stay in business. When survival is at stake, the line between what is acceptable and unacceptable when disclosing information or booking sales can become blurred.
World events can stoke fraud, too. At the height of the pandemic, an estimated $80bn of American taxpayer money handed out under the Paycheck Protection Programme, set up to assist struggling businesses, was stolen by fraudsters. The covid-induced increase in remote working has created new opportunities for miscreants. The 2022 kpmg Fraud Outlook concludes that the surge in working from home has reduced businesses’ ability to monitor employees’ behaviour. Geopolitics affects fraud, too. nato countries experienced four times as many email-phishing attacks from Russia in 2022 as they did in 2020. Cybercrimes such as ransomware attacks have already transferred a staggering amount of wealth to illicit actors. The costs to businesses range from the theft of data, intellectual property and money to post-attack disruption, lost productivity and systems upgrades.
It is panglossian to think fraud can be eliminated, but more can be done to reduce it. Corporate boards and investors need to ask more questions. Investors are often too quick to take comfort from the presence of big names on the list of owners and directors. Some were clearly wowed by Theranos’s star-studded board, whose members included two former us secretaries of state and the ex-boss of Wells Fargo, a big bank.
Regulators need to be more sceptical, too. America’s Securities and Exchange Commission brushed aside a detailed and devastating analysis of Madoff’s business provided by a concerned fund manager, Harry Markopolos. Germany’s financial-markets regulator was similarly dismissive of the short-sellers and journalists who called out Wirecard.
The most effective change would be to do more to encourage whistleblowers. Falsified financial statements must start with someone who notices fraudulent acts. When fraud happens, many people ask “Where were the auditors?”. But the question should be “Where were the whistleblowers?”
As important as sceptical investors, regulators and journalists can be, much fraud would be undetectable without someone on the inside willing to spill the beans. Research shows that more than 40% of frauds are discovered by a whistleblower. The Wirecard scandal came to light largely because of the bravery of Pav Gill, one of the company’s lawyers, who went to the press with his concerns. The Theranos fraud was brought to the attention of the authorities and the Wall Street Journal by whistleblowing employees (one of whom was the grandson of a former political bigwig on the board).
Too often, companies seek to silence whistleblowers, or portray them as mad, bad or both: Wirecard, for instance, fought back ferociously against Mr Gill’s allegations and the journalists who investigated them. Organisations need to create safe spaces where employees can voice their concerns about wrongdoing. Internal reporting channels need to be robust, and employees educated on how to use them. Creating an environment where whistleblowers are celebrated, not vilified, is critical. Companies should worry more about anyone who can circumvent the controls, such as senior leaders or star employees, than about those inclined to raise concerns.
Governments, too, could do more. Protections for whistleblowers have been recognised as part of international law since 2003 when the United Nations adopted the Convention Against Corruption, and this has since been ratified by 137 countries. In reality, legal protections are patchy. They are strongest in America, which offers bounties to whistleblowers who provide information that leads to fines or imprisonment. In much of Europe, and elsewhere, the law is still too soft on those who muzzle or retaliate against alarm-ringers.
Fraud can be reduced. But first we must better understand who commits it, educate people on how to report it, and then ensure that policies protect those who choose to come forward. Until we do, financial crime will remain a multi-trillion-dollar scourge.
It marks a spectacular fall from grace for a one-time Silicon Valley star. This week a court in California ruled that, Hail Mary appeals notwithstanding, Elizabeth Holmes must report to prison on May 30th to begin serving an 11-year sentence for fraud. Theranos, the startup Ms Holmes had founded in 2003, was worth $9bn at its peak but crashed after its much-vaunted blood-testing technology was shown not to work, and she ended up in the dock for deceiving investors.
Theranos is one of a long list of financial scandals that have made headlines in recent years. Also among these are the frauds at Wirecard, a German payments processor, and Abraaj, a Dubai-based private-equity firm, various crypto-heists, and a bonanza of misappropriation of government handouts to businesses during the covid-19 pandemic. So many frauds are there, and so big are the biggest, that pilfering a billion dollars does not guarantee a global headline. Chances are you haven’t heard of Outcome Health, a Chicago-based health-tech firm whose former ceo and president were recently convicted of defrauding clients, lenders and investors of roughly that amount of money.
Beneath the blockbuster frauds in the billions of dollars is an alarmingly long tail of smaller financial scams. Taken together, these add up to a huge global problem. Research by Crowe, a financial-advisory firm, and the University of Portsmouth, in England, suggests that fraud costs businesses and individuals across the world more than $5trn each year. That is nearly 60% of what the world spends annually on health care.
The drivers of fraud are many and complex. Sometimes it is down to pure greed. Sometimes it begins with a relatively innocuous attempt to paper over a small financial crack but spirals when that initial effort fails; some believe that’s how it started with Bernie Madoff’s giant Ponzi scheme. Market pressure and a desire to exceed analysts’ expectations can also play a part: after the global financial crisis of 2007-09, ge was fined $50m for artificially smoothing its profits to keep investors sweet. Accounting ruses like this, which fall in a grey area, are more common than outright fraud. Among tech startups there is even an established term for manipulating the numbers to buy you time to navigate the rocky road to financial respectability: “fake it till you make it.”
Fraud is an all-weather pursuit. Economic booms help fraudsters conceal creative accounting, such as exaggerated revenues. Recessions expose some of this wrongdoing, but they also spawn fresh shenanigans. As funding dries up, some owners and managers cook the books to stay in business. When survival is at stake, the line between what is acceptable and unacceptable when disclosing information or booking sales can become blurred.
World events can stoke fraud, too. At the height of the pandemic, an estimated $80bn of American taxpayer money handed out under the Paycheck Protection Programme, set up to assist struggling businesses, was stolen by fraudsters. The covid-induced increase in remote working has created new opportunities for miscreants. The 2022 kpmg Fraud Outlook concludes that the surge in working from home has reduced businesses’ ability to monitor employees’ behaviour. Geopolitics affects fraud, too. nato countries experienced four times as many email-phishing attacks from Russia in 2022 as they did in 2020. Cybercrimes such as ransomware attacks have already transferred a staggering amount of wealth to illicit actors. The costs to businesses range from the theft of data, intellectual property and money to post-attack disruption, lost productivity and systems upgrades.
It is panglossian to think fraud can be eliminated, but more can be done to reduce it. Corporate boards and investors need to ask more questions. Investors are often too quick to take comfort from the presence of big names on the list of owners and directors. Some were clearly wowed by Theranos’s star-studded board, whose members included two former us secretaries of state and the ex-boss of Wells Fargo, a big bank.
Regulators need to be more sceptical, too. America’s Securities and Exchange Commission brushed aside a detailed and devastating analysis of Madoff’s business provided by a concerned fund manager, Harry Markopolos. Germany’s financial-markets regulator was similarly dismissive of the short-sellers and journalists who called out Wirecard.
The most effective change would be to do more to encourage whistleblowers. Falsified financial statements must start with someone who notices fraudulent acts. When fraud happens, many people ask “Where were the auditors?”. But the question should be “Where were the whistleblowers?”
As important as sceptical investors, regulators and journalists can be, much fraud would be undetectable without someone on the inside willing to spill the beans. Research shows that more than 40% of frauds are discovered by a whistleblower. The Wirecard scandal came to light largely because of the bravery of Pav Gill, one of the company’s lawyers, who went to the press with his concerns. The Theranos fraud was brought to the attention of the authorities and the Wall Street Journal by whistleblowing employees (one of whom was the grandson of a former political bigwig on the board).
Too often, companies seek to silence whistleblowers, or portray them as mad, bad or both: Wirecard, for instance, fought back ferociously against Mr Gill’s allegations and the journalists who investigated them. Organisations need to create safe spaces where employees can voice their concerns about wrongdoing. Internal reporting channels need to be robust, and employees educated on how to use them. Creating an environment where whistleblowers are celebrated, not vilified, is critical. Companies should worry more about anyone who can circumvent the controls, such as senior leaders or star employees, than about those inclined to raise concerns.
Governments, too, could do more. Protections for whistleblowers have been recognised as part of international law since 2003 when the United Nations adopted the Convention Against Corruption, and this has since been ratified by 137 countries. In reality, legal protections are patchy. They are strongest in America, which offers bounties to whistleblowers who provide information that leads to fines or imprisonment. In much of Europe, and elsewhere, the law is still too soft on those who muzzle or retaliate against alarm-ringers.
Fraud can be reduced. But first we must better understand who commits it, educate people on how to report it, and then ensure that policies protect those who choose to come forward. Until we do, financial crime will remain a multi-trillion-dollar scourge.
Friday, 7 April 2023
Wednesday, 4 January 2023
Tuesday, 20 December 2022
Sunday, 18 December 2022
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.
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.
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