Islamophobic Regulation
First, some obligatory shoutouts. Thanks to the folks at www.reddit.com for making my post on Salafism so wildly popular, lifting my humble blog out of its obscurity for the usual fifteen minutes or so. I had initially read the link to my article in a fit of rage, clearly taking I had said out of context to suggest something rather horrible that I didn't suggest, but commentary made it clear it was a ploy to garner attention, to my article, and actually a pretty effective one judging by the off the charts viewing numbers. Always nice to hear thoughtful things about one's work, scholarship and blog. Another fellow, DJ Konservo had done something similar a long, long time ago respecting a post I wrote on child marriage on which he had a few criticisms as I recall, but I was in Iraq with limited internet capacity and so couldn't thank him then. As far as I can tell, he's on the complete other end of the political spectrum from me but is a fellow original thinker and an iconoclast, and an amusing one, though his blog has seemed to go dark after a pretty funny piece about invisible oil plumes.
Appreciate the attention, but I can deal with the obscurity when it often returns, as like the Sa'alik, a band of pre-Islamic poets whose name loosely translates to "the Brigands", I embrace my outsider status as indicative of my freedom and nobility. Which ripped off text brings me to my last shoutout, friend of the blog Mohammad Fadel has recently started up a blog with a great recent post on Egypt and its future. There are two reasons you should add his blog straight onto your subscribed list. First, because he is one of the foremost thinkers on Islam and liberalism, expert in classical Islam and one who knows and talks a lot about Egypt in modernity as well in a thoughtful erudite and comprehensive fashion even if we don't always (often?) agree. Second, because his existence proves I am not the most verbose blogger in the universe. Go Mohammad, just make em a little bit longer even.
Now on to Islamic finance:
One of the reasons I usually like having conservatives around is their continual skepticism of regulation, a skepticism which I do not always share but nearly always consider well grounded. Surely it is true that regulation inhibits commerce, and it is true that it raises costs, and requires bureaucracies and impedes efficiencies. It is of course also true that it helps insure clean air and water, healthy meat, and truthful advertising, but the question is always one of balance, as between government intrusions into commercial affairs that inhibit private activity, as such intrusions always do, and the protection of the public from private harm, an obvious social good I believe. The conservative can explain precisely what bad is going to happen with any regulation, and then one has to decide whether or not the good expected to accrue might be worth the cost.
THEN there's this supposedly conservative Christian religious lot who want to ban all sorts of Islamic stuff, who add regulation that seems to provide no real social benefit (preemptive strikes they are called by their proponents) and who add all sorts of deleterious transaction costs that they seem not to care about, because business to hell, we have to kill Islam first, and then worry about the business people. We started with Oklahoma, whose amendment, as I have posted earlier, really should scare the crap out of any Oklahoma oil company seeking to do business in Saudi, as the company has to explain to the Saudis why it is that arbitration under Saudi law is something the Saudis should trust if the state of Oklahoma might not enforce the judgment because it is grounded in shari'a. (There are answers, it's federal, not clear what that constittional provision does, but the point is, why in the world would you cripple your own business community like this, potentially threatening not to enforce their contracts in Muslim countries, to make a point about shari'a in a state with I don't know seventeen or so Muslims?)
Now we have South Dakota quickly following suit on Islamic finance. Their proposed legislation deals with securities, so does not actually address most Islamic finance, such as, for example, a loan to buy a house, as there is no "security" involved in that. It seems to touch primarily the Islamic bond known as the sukuk.
The proposed legislation (thanks to Blake Goud of www.sharingrisk.org for pointing it my direction) requires investment advisers and the like to inform potential clients if the security they are selling, OR its underlying asset or collateral, is "subject to, bound by or otherwise controlled by a foreign law in which any part of that foreign law, relevant to the security or not, would violate an existing state or federal law if applied in" South Dakota. Moreover, "each provision, rule, regulation, or procedure of that foreign law that would violate an existing state or federal law if applied in this state is a material fact" meaning it has to be disclosed. Foreign law includes religious law under a subsequent subsection.
So the (simpleminded, almost idiotic) theory is that the sukuk are "bound by" religious law, that this religious law, in aspects unrelated to sukuk, violates existing law in matters unrelated to the sukuk (rules on polygamy let's say, or whatever) and so what you have to do is disclose every single thing in shari'a which violates South Dakota law, which of course is ridiculous for any number of reasons (among them, shari'a isn't internally consistent enough to make any attempt to do that even possible) and thus are the sukuk effectively banned because by selling them you will not be disclosing some material fact, and that failure to disclose is actionable by a purchaser of the sukuk.
So let's balance social good as against potential harms. On social good, this does not achieve much. While my own criticisms of Islamic finance are longstanding, it's hard to imagine precisely what the harm is when people want to engage in it. I don't particularly understand it, I've written pretty lengthy articles that are fairly aggressive in their denunciations of some of the rhetoric, really social justice cant, underlying the practice, which does not match the holy talk, but it's not evil. It's just a bond gussied up pretending to be risk sharing but not being so in any way shape or form. So it's a lie to say it's better than a bond, as I've said a million times, but it's not any worse than a bond either. Just a bond somebody went through sixteen hoops to create. Who cares? Moreover, even if one might disagree on whatever mystifying basis, I can't believe South Dakota is the sukuk center of anything, anyway, so it's not an issue there.
Then there's the problem that it's not clear whether or not sukuk are actually "subject to, bound by, or otherwise controlled by" shari'a. The documentation underlying them certainly is not. It will choose New York law, or English law, certainly not South Dakota law or Oklahoma law given how little their legislatures seem to think of doing damage to their own state commercial interests, but not shari'a, either, ever. Moreover, as my friend and Islamic finance practioner extraordinaire Kilian Baelz (based in Germany currently) has pointed out in a recent conference, the newest trend is to LIMITING shari'a defenses in the contract. There is often a waiver of the shari'a, a representation by both sides that a shari'a review board has looked at it, their decision is final, and the contract cannot be challenged and cannot be declared invalid on the basis that it conflicts with shari'a. Is it really "subject to, bound by or otherwise controlled by" shari'a, then? It is a contract which by its terms remains upheld whether or not shari'a is violated. Seems odd.
So in sum, the regulation seems not to achieve very much, one of those bureaucratic creations in search of a problem.
Now you'd think that a true Burkean conservative, even one suspicious of Islam and Muslims, would give pause here, and wonder whether or not a regulation in light of this was a good idea. It's adding to government's compass, it might do some mischief, it might limit commercial activity, it might raise the costs of doing business, and so forth. But apparently not, even though it's pretty easy to see what the problem is and the harms are.
Sukuk might or might not be covered. But you know what a person can NEVER buy in South Dakota? Securities listed in Shanghai. Dubai securities. Indian securities. German securities. EVEN London securities. How does U.K. law violate existing federal law in areas other than securities? Well for one thing they fund their ESTABLISHED Church of England, we have a clause that requires disestablishment.
So what, you say, there are already securities laws against making this easy or in some cases possible depending on the purchaser? Well I'm not done. What about the stock for a Chinese company with all of its assets in China listed in New York. Maybe the security is subject to New York law, but the assets underlying that security, the company itself, is certainly bound by Chinese law. Heck what about an American car company doing a bond issuance for a factory it is building in England? The asset underlying that bond is certainly subject to English law. You think the issuer is even going to look at South Dakota, by doing what, listing every single provision of English law that violates US law and if they forget one, they can be sued? Seriously? This is extraordinary, truly extraordinary, commercial damage to achieve nothing.
Finally let's go back for one second, and assume that the sukuk ARE covered by this language even if the agreements that create them are governed by NY law and cannot be challenged or invalidated because of shari'a. The theory would have to be that the mere fact that you tried to comply with shari'a when structuring it rendered it "bound by" shari'a even if the contract says no such thing. Now let's take that and apply it elsewhere. Bond issuance (make it a private placement under 144A doesn't matter, the SD law creates a fraud action which should apply to unregistered securities if SD is typical of most states, and certainly federal law) for a dam project in South Dakota, to broad numbers of potential purchasers via prospectus listed in lots of places, including Germany, the U.K., the U.S. and Japan. Now believe me the prospectus is going to contain warnings specific to each jurisdiction to comply with relevant laws there, even if the bond is issued in South Dakota and subject to South Dakota and US law. But if complying with the foreign jurisdiction requirement when making a prospectus subject to NY law makes the security also "bound by" the law of every place with whose law it sought to comply, as per the sukuk, then all of a sudden that bond issuance cannot happen. South Dakota cannot raise funds from a rich Japanese company which wants to lend them money to build a dam, unless they can find a securities dealer who will write a memo outlining every single Japanese law, securities related or not, that violates South Dakota or U.S. law or be sued if they fail to, and I promise you that will be one tall order. This is just nuts, it's threatening capital to South Dakota.
You'd think if you were going to incite Muslim hatred to get votes you'd close a mosque or make a documentary or something. You wouldn't think a conservative would get it in his head to ruin the securities markets as they operate in his state. But then, haters gotta hate, just like scorpions gotta sting, even if they end up drowning themselves because of it.
HAH
Appreciate the attention, but I can deal with the obscurity when it often returns, as like the Sa'alik, a band of pre-Islamic poets whose name loosely translates to "the Brigands", I embrace my outsider status as indicative of my freedom and nobility. Which ripped off text brings me to my last shoutout, friend of the blog Mohammad Fadel has recently started up a blog with a great recent post on Egypt and its future. There are two reasons you should add his blog straight onto your subscribed list. First, because he is one of the foremost thinkers on Islam and liberalism, expert in classical Islam and one who knows and talks a lot about Egypt in modernity as well in a thoughtful erudite and comprehensive fashion even if we don't always (often?) agree. Second, because his existence proves I am not the most verbose blogger in the universe. Go Mohammad, just make em a little bit longer even.
Now on to Islamic finance:
One of the reasons I usually like having conservatives around is their continual skepticism of regulation, a skepticism which I do not always share but nearly always consider well grounded. Surely it is true that regulation inhibits commerce, and it is true that it raises costs, and requires bureaucracies and impedes efficiencies. It is of course also true that it helps insure clean air and water, healthy meat, and truthful advertising, but the question is always one of balance, as between government intrusions into commercial affairs that inhibit private activity, as such intrusions always do, and the protection of the public from private harm, an obvious social good I believe. The conservative can explain precisely what bad is going to happen with any regulation, and then one has to decide whether or not the good expected to accrue might be worth the cost.
THEN there's this supposedly conservative Christian religious lot who want to ban all sorts of Islamic stuff, who add regulation that seems to provide no real social benefit (preemptive strikes they are called by their proponents) and who add all sorts of deleterious transaction costs that they seem not to care about, because business to hell, we have to kill Islam first, and then worry about the business people. We started with Oklahoma, whose amendment, as I have posted earlier, really should scare the crap out of any Oklahoma oil company seeking to do business in Saudi, as the company has to explain to the Saudis why it is that arbitration under Saudi law is something the Saudis should trust if the state of Oklahoma might not enforce the judgment because it is grounded in shari'a. (There are answers, it's federal, not clear what that constittional provision does, but the point is, why in the world would you cripple your own business community like this, potentially threatening not to enforce their contracts in Muslim countries, to make a point about shari'a in a state with I don't know seventeen or so Muslims?)
Now we have South Dakota quickly following suit on Islamic finance. Their proposed legislation deals with securities, so does not actually address most Islamic finance, such as, for example, a loan to buy a house, as there is no "security" involved in that. It seems to touch primarily the Islamic bond known as the sukuk.
The proposed legislation (thanks to Blake Goud of www.sharingrisk.org for pointing it my direction) requires investment advisers and the like to inform potential clients if the security they are selling, OR its underlying asset or collateral, is "subject to, bound by or otherwise controlled by a foreign law in which any part of that foreign law, relevant to the security or not, would violate an existing state or federal law if applied in" South Dakota. Moreover, "each provision, rule, regulation, or procedure of that foreign law that would violate an existing state or federal law if applied in this state is a material fact" meaning it has to be disclosed. Foreign law includes religious law under a subsequent subsection.
So the (simpleminded, almost idiotic) theory is that the sukuk are "bound by" religious law, that this religious law, in aspects unrelated to sukuk, violates existing law in matters unrelated to the sukuk (rules on polygamy let's say, or whatever) and so what you have to do is disclose every single thing in shari'a which violates South Dakota law, which of course is ridiculous for any number of reasons (among them, shari'a isn't internally consistent enough to make any attempt to do that even possible) and thus are the sukuk effectively banned because by selling them you will not be disclosing some material fact, and that failure to disclose is actionable by a purchaser of the sukuk.
So let's balance social good as against potential harms. On social good, this does not achieve much. While my own criticisms of Islamic finance are longstanding, it's hard to imagine precisely what the harm is when people want to engage in it. I don't particularly understand it, I've written pretty lengthy articles that are fairly aggressive in their denunciations of some of the rhetoric, really social justice cant, underlying the practice, which does not match the holy talk, but it's not evil. It's just a bond gussied up pretending to be risk sharing but not being so in any way shape or form. So it's a lie to say it's better than a bond, as I've said a million times, but it's not any worse than a bond either. Just a bond somebody went through sixteen hoops to create. Who cares? Moreover, even if one might disagree on whatever mystifying basis, I can't believe South Dakota is the sukuk center of anything, anyway, so it's not an issue there.
Then there's the problem that it's not clear whether or not sukuk are actually "subject to, bound by, or otherwise controlled by" shari'a. The documentation underlying them certainly is not. It will choose New York law, or English law, certainly not South Dakota law or Oklahoma law given how little their legislatures seem to think of doing damage to their own state commercial interests, but not shari'a, either, ever. Moreover, as my friend and Islamic finance practioner extraordinaire Kilian Baelz (based in Germany currently) has pointed out in a recent conference, the newest trend is to LIMITING shari'a defenses in the contract. There is often a waiver of the shari'a, a representation by both sides that a shari'a review board has looked at it, their decision is final, and the contract cannot be challenged and cannot be declared invalid on the basis that it conflicts with shari'a. Is it really "subject to, bound by or otherwise controlled by" shari'a, then? It is a contract which by its terms remains upheld whether or not shari'a is violated. Seems odd.
So in sum, the regulation seems not to achieve very much, one of those bureaucratic creations in search of a problem.
Now you'd think that a true Burkean conservative, even one suspicious of Islam and Muslims, would give pause here, and wonder whether or not a regulation in light of this was a good idea. It's adding to government's compass, it might do some mischief, it might limit commercial activity, it might raise the costs of doing business, and so forth. But apparently not, even though it's pretty easy to see what the problem is and the harms are.
Sukuk might or might not be covered. But you know what a person can NEVER buy in South Dakota? Securities listed in Shanghai. Dubai securities. Indian securities. German securities. EVEN London securities. How does U.K. law violate existing federal law in areas other than securities? Well for one thing they fund their ESTABLISHED Church of England, we have a clause that requires disestablishment.
So what, you say, there are already securities laws against making this easy or in some cases possible depending on the purchaser? Well I'm not done. What about the stock for a Chinese company with all of its assets in China listed in New York. Maybe the security is subject to New York law, but the assets underlying that security, the company itself, is certainly bound by Chinese law. Heck what about an American car company doing a bond issuance for a factory it is building in England? The asset underlying that bond is certainly subject to English law. You think the issuer is even going to look at South Dakota, by doing what, listing every single provision of English law that violates US law and if they forget one, they can be sued? Seriously? This is extraordinary, truly extraordinary, commercial damage to achieve nothing.
Finally let's go back for one second, and assume that the sukuk ARE covered by this language even if the agreements that create them are governed by NY law and cannot be challenged or invalidated because of shari'a. The theory would have to be that the mere fact that you tried to comply with shari'a when structuring it rendered it "bound by" shari'a even if the contract says no such thing. Now let's take that and apply it elsewhere. Bond issuance (make it a private placement under 144A doesn't matter, the SD law creates a fraud action which should apply to unregistered securities if SD is typical of most states, and certainly federal law) for a dam project in South Dakota, to broad numbers of potential purchasers via prospectus listed in lots of places, including Germany, the U.K., the U.S. and Japan. Now believe me the prospectus is going to contain warnings specific to each jurisdiction to comply with relevant laws there, even if the bond is issued in South Dakota and subject to South Dakota and US law. But if complying with the foreign jurisdiction requirement when making a prospectus subject to NY law makes the security also "bound by" the law of every place with whose law it sought to comply, as per the sukuk, then all of a sudden that bond issuance cannot happen. South Dakota cannot raise funds from a rich Japanese company which wants to lend them money to build a dam, unless they can find a securities dealer who will write a memo outlining every single Japanese law, securities related or not, that violates South Dakota or U.S. law or be sued if they fail to, and I promise you that will be one tall order. This is just nuts, it's threatening capital to South Dakota.
You'd think if you were going to incite Muslim hatred to get votes you'd close a mosque or make a documentary or something. You wouldn't think a conservative would get it in his head to ruin the securities markets as they operate in his state. But then, haters gotta hate, just like scorpions gotta sting, even if they end up drowning themselves because of it.
HAH
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