Conceptualizing dynamic challenges to global financial diffusion: Islamic finance and the grafting of sukuk

ABSTRACT

Following the Global Financial Crisis of 2008–2009, there has been renewed interest in the diffusion and pluralization of financial ideas and practices, and in understanding how new ideas and practices can emerge to challenge the prevalence and diffusion of dominant ones. However, existing concepts and language in the broader literature on diffusion limit our ability to analyze and assess the contestation of ideas, especially as it is sustained and transformed over time. In this paper, we develop the concept of grafting as a post-equilibrium approach to analyze the ongoing contestation of global finance at the level of market practice. We apply our conceptual framework to analyze the complex dynamics of a class of financial assets that in recent years has made significant inroads in global financial markets: sukuk, often referred to as Islamic bonds. We highlight dynamic differences in the grafting of ideas and practices from Islam and conventional finance and suggest that the grafting of sukuk is an ongoing contestation of the diffusion of global finance that contributes to the emergence of an increasingly pluralistic global economy.

KEYWORDS:

• Global finance
• diffusion
• Islam
• sukuk
• southeast Asia
• GCC

Acknowledgments

We acknowledge generous support from the Melbourne School of Government at The University of Melbourne, the Department of Business Law and Taxation at Monash University, the Department of Politics and International Studies at the University of Warwick and the Princeton Institute for International and Regional Studies. Earlier versions of this paper were presented at Balsillie School of International Affairs, Monash University, Princeton University, the SASE conference at UC Berkeley and the universities of Melbourne, Oxford and Warwick. We thank participants for their insightful comments and suggestions. We would also like to thank the reviewers and editors for their suggestions and guidance.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. ‘Sukuk’ is the plural of ‘sak’ or ‘sakk’ – Arabic for check or deed. In this paper, we follow contemporary convention and use ‘sukuk’ as both singular and plural noun.

2. Latham & Watkins, an international legal advisory firm, produced an accessible guide on structuring sukuk in June 2015, which can be downloaded at this link: https://www.lw.com/thoughtLeadership/Latham-guide-to-structuring-sukuk-2015.

3. Our usage of the term ‘equilibrium’ in this paper follows the notion of ‘steady state equilibrium’ in macroeconomic growth theory.

4. See Mudge Janick, Scofield, and Goldschmidt (2009, pp. 479–480) for a brief history of the bizzaria. In developing our understanding of grafting, we draw on recent discussions in the plant science literature, in particular Mudge et al. (2009) and Goldschmidt (2014).

5. Goldschmidt (2014) also refers to instances where graft-take was impacted by plant age. Ban (2016, p. 244) makes a similar point in arguing that ‘the timing of incorporation into the transnational diffusion of neoliberalism’ matters.

6. See Table 3 for further information about the firm-level sharia boards and advisory firms that were involved in approving a number of recent sukuk.

7. The Islamic notes raised MYR125 million out of a larger funding package that was in excess of MYR1.1 billion, see Reuters (1990).

8. This view was expressed by two interviewees during fieldwork conducted in Kuala Lumpur in September 2014.

9. The first Islamic bank in Malaysia was established in 1983, with the second following only in 1999. For an overview of the development of the Islamic banking and finance sector, see Lindsey and Steiner (2012).

10. Interview with Islamic investment bankers and former Shell employee in September 2014 and May 2016.

11. Ijara is similar to a lease in conventional finance.

12. The ijara structure had previously been used in project finance, most famously to finance the Equate project in Kuwait (Esty, 2000), as well as in sovereign issuance by the Bahrain Monetary Authority in 2001.

13. Ijara structures have since become the standard contract for government sukuk.

14. For a detailed discussion of and graphic representations of these structures, see http://www.islamicbanker.com/education/sukuk-al-musharaka for musharaka and http://www.islamicbanker.com/education/sukuk-al-mudaraba for mudharaba.

15. These guidelines were updated in 2011, 2012 and 2014.

16. See Bi (2008) for an analysis of the import of this statement from a practitioner's perspective. In mid-2009, the GCC held the dominant share of the international (that is, foreign currency denominated) sukuk market with 83%, whilst Malaysia held the biggest share of domestic sukuk markets with 66% and a share of 53% of the global sukuk market (both domestic and international) (IIFM, 2009, p. 12).

17. For a discussion of how wakala sukuk is structured, see http://www.islamicbanker.com/education/sukuk-al-wakala.

18. The evidence of empirical studies is however inconclusive. Studies conducted by Erol and El-Bdour (1989), Haron, Ahmad, and Planisek (1994), Gerrard and Cunningham (1997), Metawa and Almossawi (1998) and Naser, Jamal, and Al-Khatib (1999) queried the influence of Islamic teachings on the choice of whether to patronize an Islamic bank with varying results. Customers in Bahrain gave more importance to religion when selecting their bank, while customers in Jordan, Malaysia and Singapore considered religion and profit as equally important in the decision-making process. Another study by Pepinsky (2013) on Indonesia found no evidence that Islamic piety had any systematic effect on consumers’ choice of Islamic versus conventional financial products.

19. Indonesia created DSN-MUI, the national sharia board for Islamic finance in 1999, Bahrain is currently in the process of drafting legislation to this effect; however, national models of sharia governance continue to exhibit variety.

20. Similar dynamics are at play with regard to lawyers and legal documentation.

21. Regulatory stipulations mean that the financial instruments on which we focus in this paper – sukuk – can only be marketed to ‘sophisticated’ investors. We thus hesitate to make inferences about the relationship between piety, or indeed religious conservatism, and demand for sukuk from our evidence base. See, however, the studies mentioned earlier. In a handful of countries including Malaysia and Indonesia, a limited number of savings sukuk have been offered to retail investors. These met with great demand, but were also heavily marketed by state actors.

Additional information

Notes on contributors

Jikon Lai

Jikon Lai is a researcher with expertise in the politics of the global economy, international finance, Islamic finance and economic governance. He is author of the monograph Financial Crisis and Institutional Change in East Asia (Palgrave, 2012) and has articles published in New Political Economy, Journal of the Asia Pacific Economy, Asia Europe Journal and the Australian Journal of Public Administration.

Lena Rethel

Lena Rethel is an associate professor of International Political Economy at the University of Warwick. In 2016–2017 she was a Fung Global Fellow at Princeton University and in 2017–2018 she is a Visiting Fellow at the Oxford Centre for Islamic Studies. With Juanita Elias, she co-edited The Everyday Political Economy of Southeast Asia (Cambridge University Press, 2016).

Kerstin Steiner

Kerstin Steiner is an associate professor at the Law School, La Trobe University and an associate of the Asian Law Centre and the Centre for Indonesian Law, Islam and Society, both at the University of Melbourne. She researches on Southeast Asian legal studies and is co-author of the monographs on Islam, Law and the State in Southeast Asia (I.B. Tauris, 2012).