How to Tether an Investment Banker: Observing Innovation and Control in Islamic Finance

Scholars of alternative economies have noted that financial markets are particularly resistant to social experimentation due to the absence of institutionalized dialogue between finance industry insiders and outside critics.  A noteworthy exception is the recent development of Islamic investment banking in Malaysia, where (external) Islamic scholars are in an institutionalized dialogue with (insider) investment bankers.

This dialogue has created an ongoing experiment to create “sukuk,” a novel financial instrument designed as a moral replacement for sovereign and corporate bonds. “Conventional” bonds are understood by many Islamic scholars as immoral because they are untethered from “real” economic activity and produce revenue streams based on “interest.”  In contrast, sukuk are alternative asset-backed securities (ABSs) putatively tethered to the real economy and generating moral revenue streams without recourse to interest.  This intervention is ambitious and global:  in 2012, $137 billion sukuk were created (issued) world-wide in a number of currencies.

To theorize the social mechanisms and governance structures that enable such dialogue, this paper investigates two questions centered on how theologians understand and control investment bankers.  How do Islamic scholars and financial engineers speak with one another with sufficient expertise so as to co-construct new asset-backed securities that conform both to theologians’ interpretations of Islam as well as to bankers’ perceptions of marketability and profitability?  Moreover, how can religious scholars control financiers sufficiently to enforce minimum standards of moral compliance?

To investigate these two questions, this paper draws on 48 focused, ethnographic interviews conducted in 2012 and 2013 in investment banks with financial engineers and Islamic experts who co-produce sukuk.  The paper and presentation summarizes the case, theorizes social mechanisms and governance structures, and hypothesizes implications of the case for other morally-committed financial reform projects seeking to dialogue with and control investment bankers, such as Occupy Wall Street.