The world today is a small place, with information flowing instantaneously from the farthest corners to central markets. There are few countries from which internet access is impossible. Along with information, money flows hither and thither, and it is impossible to keep track of it. Once in motion, money melds into the mass, becomes commingled, loses its origins, and opportunity for mischief abounds.

Money, like information, takes many forms, associated now with charity, now with instruments of war. Rice and palm oil, by the shipload, move smoothly to the tune money makes, underway port to port. The innocent and necessary needs of people around the world are met by this motion, just as other money allows movement of arms and ammunition for purposes of threat and violence.

Money need not be immediately exchanged. It may be set aside as a form of deferred spending, known as savings. As an inducement to those with idle money, additional money is offerred for the temporary use of the saved funds. Banks make a business of being the middleman in these transactions. As a service they store your money in safekeeping for a small fee, and if you agree, pay compensation for the use of the money for an agreed time period.

One may allow the use of saved money for these purposes on a day-by-day basis, or you can enter into a contract for a fixed time. The amount of return will vary according to the type of contract entered into. Though the terms may vary, the basic facts remain the same. At the end of the term, you get your money back, with interest.

It is a good business, as casual inspection of bank buildings reveals. They are massive to generate confidence that the money inside is safe. During regular business hours you may go inside and visit your money. If you have entered into a fixed term contract it cannot be removee without penalty, if at all. Once the bank lends out your money, they cannot recall it readily until it is repaid to them. That is the nature of the banking business. It is an old business, and well established.

Large scale banking began in Italy in the thirteenth century, made more manageable by the invention of double entry book-keeping. The Medici family of Florence became wealthy and powerful through their skill in managing money, and became a model for the international banking which makes the modern world move as it does. Before the credit card was the letter of credit issued by the bank, which guaranteed your purchases to the limit of your letter.

Islam was established in the seventh century, long before the Italian banking families made a business of storing and re-lending stored money for a fee. To receive a consideration for lending money was considered wrong, and an offense to the morals. To receive interest, known as ribat, was regarded as an improper use of gifts received through the grace of Allah. The introduction of interest fell foul of this proscription, and Muslims to this day look guiltily askance at returns on their stored money.

The taint of interest has not deterred Muslims from participating in various communal activities such as pension funds. The distinction between interest, dividends and capital gains becomes misty when the money is commingled in large public trusts. Even money set aside for the Hajj is expected to give a competitive return. It is considered a discourtesy to refer to this return as ribat or interest, and other terms are therefore used.

There are large sums of money which have been set aside by Muslims for which strict instructions are given that this money is to be free of ribat (interest). Some have estimated this reservoir to be around USD 200 billion, certainly sufficient to attract the eyes of the average gold shop robber. In Malaysia there is great hunger for US dollars, and no effort is spared to tap into this treasury of interest free money.

Most of this money was accumulated from the sale of oil, and is held in the countries of the Middle East. The problem for Malaysia is how to move it east. The creative solution is the invention of the "Islamic" bank, and the issuance of "Islamic" bonds. But just what is an "Islamic" bank, and what is an "Islamic" bond?

Because it is a recent invention, there is not yet a proper definition. No one knows what a properly Islamic Bank is, nor what the terms should be for a truly Islamic bond. The tag Islamic is found offensive to Umno when it is in the name of an opposition political party, and most suspect the offense is caused by fear that confusion will arise between the opposition party and attempts to attract money using the Islamic label. It is especially feared that the Islamic Party will find the Islamic bank (and the Islamic bond) haram. That would be fatal to the entire enterprise.

How does an Islamic bank attract money without paying any interest on deposits. Easy; instead of interest (ribat), the depositor will receive a fee, or perhaps "a share" in the profits of the bank, much as a mutual savings bank does. Once the money is secured by the institution, there is the problem of lending it out without an interest charge. Banks cannot stay in business unless there is some type of return, and whether it is called a fee or interest is merely a matter of semantics. What offends is an attempt to present the transaction as somehow making proscribed transactions acceptable in the eyes of Muslims.

The Islamic bond is also suspect. The basic idea is to get at the pool of oil money; all else is secondary. To accomplish this, any number of promises are made. These promises to perform are carefully written to provide assurance that no interest is involved. Muslim sensitivities and sensibilities are craftilly taken into account. After the Muslim is satisfied as to the interest-free nature of the transaction, he feels free to hand over his money to the Islamic banker. Now the nagging question intrudes; will the money ever be paid back?

Devout Muslims are trusting and gentle souls, seldom suspicious, and thereby easily duped of their money. Every day a story is printed of some poor man or woman bilked of a lifetime of savings because someone has betrayed their confidence. In Malaysia there is a cadre of corrupt corporate figures who consider the gullible Muslim fair game for one nefarious scheme after another.

These pirates work worldwide, bringing Malaysia into further international disrepute and shame. Because these activities are shielded by official agencies, and immunity is guaranteed by the police, they are immune to prosecution inside Malaysia. These individuals, both corporate and political, have now taken an active interest in the pool of Islamic funds. A word of caution is therefore pertinent.

Bonds are generally divided into those issued by governmental agencies for infrastructure (utilities), and those issued by private corporations for use in their operations. The first becomes an obligation of the relevant taxpayers, the bond being backed by the utilities it funds. In theory, if the bond issuer of a public telephone company defaults, then you and the other bond holders may foreclose on enough telephone poles to recover the amount due.

Because these types of public bonds are deemed more secure, the rate of interest return (coupon) required to successfully market them is lower. They are usually readily marketable anytime before the date of maturity, and the interest is paid routinely as it accumulates, generally twice a year until the maturity date.

The corporate bond is more risky, being secured by the assets of the corporation, and having a claim on corporate assets superior to that of holders of shares. A corporate bond holder, once the issurer defaults on any regular interest payment, may force the corporation to suspend operation and go into foreclosure in the hands of a court-appointed administrator. Since this is a time-consuming affair, the potential for default is carefully watched, and once weakness is detected, the marketability of the bond (and its value) decreases proportionately.

Because some bond holders have a high tax liability, a bond which pays no interest until the maturity date is atractive. At maturity the bond is retired with full interest charges included. These bonds increase in value with time as the interest due accumulates in a compound manner. Because the bonds can be exchanged for new bonds at maturity, the payment of taxes on the accumulated interest can be indefinitely deferred. These bonds, known as "zero coupon" bonds, are popular because of this deferred interest feature. For the issuer they are popular for another reason. The funds are immediately available, interest-free for the term til maturity, and none of the money need be returned in the interim. In addition, there is no accounting for the entire term of the bond. Nice, huh!

Enter the Islamic bond. Many of the Islamic bond issuers have opted for the zero coupon feature. This has the advantage that the money need never be repaid. A ten year Islamic bond is sold today, and nothing further is heard from the issuer for ten years. Hmmmm ... he has the money, and you have the bond. Ten years is a long time. One can get very nervous in ten years, fretting about the safety of the money.

Suppose ten years passes, and the full amount of the bond comes due. If one is very lucky, the principal is paid, with all interest due. No matter what it is called, if it is fixed in the terms, the sum in excess over the principal is interest (ribat). Suppose, as the maturity date approaches, the issuer finds the money is not available ... that no sinking fund has been established to retire the bond when it matures, what then?

Anticipating this, the issuer simply issues a new ten year bond in a amount large enough to retire the old bonds, and rides on undisturbed for another ten years. By that time the corporation can be declared bankrupt, perhaps sold at a discount to Danaharta, Danamodal, or the Credit Restructuring Agency. This is the typical method of postponing the inevitable used throughout Malaysia today.

The public policy of the party-in-power is to indefinitely defer all outstanding obligations. Only necessary bills are paid. Cronies are bailed out, with political exigencies given priority. For these purposes the Islamic bond is a superlative financing vehicle. Once the money has been transferred from the pool of idle Islamic funds, the requirement for responsible repayment is pushed back indefinitely. The wall of debt increases without concern for future contingency.

This type of financing has become known in financial circles as a Ponzi scheme, where new money from fresh pigeons is used to keep the early suckers at bay. When the pile is big enough, a hasty departure is made to a distant retirement villa. In theory, harmony reigns there all day. The hapless bond buyer, however, is left behind, unhappily holding and re-folding his worthless bond.

The promotion of "Islamic" banking and the sale of "Islamic" bonds has now taken the odor of a gigantic scam, one endorsed by Malaysia's central bank. A great future is envisaged for this type of activity. Muslims everywhere are enticed to donate money to this scheme. For Malaysia it is seen as a way to escape accountability for the mistakes and malfeasance of the party-in-power, leech-like cronies attached. All expect it to be a great success.

Let us hope not.

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