Sharia law for the City of London

by James Watkins

When it comes to the banks, Labour often seems to tie itself in knots. Without the square mile, the finances of the country are seen to be on shaky ground. At the same time, governments around the world which took it easy on the bankers contributed to the financial morass we are in now.

For many in Labour, there seems to be no centre-left vision or school of thought other than to accept the model of banking we have now – while maybe taking another look at regulation. But as recent events demonstrate, even this seemingly pragmatic approach is a risk too far and is one which led Gordon Brown to call for “markets with morals”.

As for the government, with Vince Cable seemingly out of the picture in pushing for fairer bank terms to small businesses, all we now have left is a threadbare deal with the banks from chancellor George Osborne. This has the non-binding target of £190 billion for lending being a gross amount, not net. So it is very possible that, as businesses repay their loans and others have credit withdrawn, the gross target is met, but net lending declines.

With such timidity on show towards the bankers, the prospects of the government ensuring that the banks are more responsive to the needs of our economy seem remote.

It is against this sorry background that Labour needs to develop a more thoughtful approach towards the banks. And there is an intellectually robust model to banking that can serve Labour well in ensuring that our values and a strong financial sector go hand in hand. This model shifts away from outright gambling and ensures all of us have a stake in the future and control over our lives. That model is Islamic finance.

Islamic finance is based on profit sharing. There is no interest involved and dodgy practices, such as selling arms, are out of bounds. On top of this, because of the nature of Islamic finance, certain practices – such as short selling sterling or the euro – for instance – are frowned upon. Contracts are based on the business itself, not on guesses as to what changes may occur in the markets.

All of this may sound like a dream. After all, if you can’t speculate to accumulate based on interest then how can the market, and our pensions, grow? But recent experiences of Islamic finance here in Britain show that, despite the small nature of the sector compared to the rest of the economy, not only does it place the highest value in ethics: it also makes money.

The first $1 billion Islamic finance bond has been floated on London’s stock exchange. HSBC and Lloyds TSB have Islamic finance arms. Europe’s first regulated Islamic bank – the Islamic bank of Britain plc – has its headquarters in the leafy Birmingham suburb of Edgbaston. And James Bond’s favourite, Aston Martin, is still in business thanks to an Islamic finance fund. On top of this, London is now rivalling Dubai as the world’s leading centre for Islamic finance.

Even the then US ambassador secretly told his superiors that Islamic finance was good for Britain – thanks to a Labour government. Robert Tuttle, according to a leaked cable, said:

“Should London successfully position itself as a leading Islamic finance centre, it could gain an edge on New York, when the global financial markets recover. Her Majesty’s government perceives supporting Islamic finance as a way to differentiate London from New York and advance London’s image as the world financial centre”.

This success is relevant for Labour as it develops its response to the emerging proposals from the independent commission on banking. For many of us, we want to ensure that some of the practices of the banks, such as interest, continue. Not everything that is contained within Islamic finance is suitable for everybody across the board.

But the success and the reality of Islamic finance means that Labour can challenge the dogma of the bankers – and possibly the banking commission – when it comes to what is and what is not realistic.

So when the banks say that they are unwilling to damage their balance sheets and invest significantly in small and medium sized businesses, the example of Islamic finance shows that the practices of sharing risk can work.

When banks state that they want to focus on invoice discounting – only lending on the short term basis of orders a company has definitely received – Islamic finance shows that long term real investment in small firms is a practical way forward.

And when banks state that too many small and medium sized businesses cannot enter into proper risk sharing agreements with them, due to the risky nature of some of these firms in sectors such as manufacturing, Islamic finance shows that by inviting businesses to be partners in the financing deal – rather than being mere supplicants – then the chances of creating jobs go up.

The centre-left is too often unfairly tarred by our opponents for not having the practical plans needed to make our values a living reality. This is especially so after the last Labour government’s unhappy dalliances with the bankers. Now, we need to learn, and learn quickly, from good practices such as Islamic finance. If the potential caution of the banking commission and the incompetence of the chancellor does not tie up the creation of jobs for years to come.

James Watkins is a member of Unite’s national political committee. He writes in a personal capacity.

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One Response to “Sharia law for the City of London”

  1. Tacitus says:

    Oh that we invested as much money into social welfare as we do into maintaining capitalist structures like the banks.

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