Friday, April 20, 2012

Mordechai Kedar: Syria, Iraq, the Gulf and the Iranian Tentacles

by Mordechai Kedar

Read the article in the original עברית
Read the article in Italiano (translated by Angelo Pezzana)

The Islamic Minister of History is Laughing all the Way to the Blood Bank

We have all been watching the horrific events happening in Syria for more than a year now, and the media report all the time about conflicts between "Syrian security forces" on one side, and the "rebels", the "opposition" and the "Free Syrian Army" on the other. However, most of us are not aware that the "Syrian security forces" include no small number of foreign soldiers, a true foreign legion, which came to Syria by the order of their superiors in order to help Bishar Asad and his cronies to remain in power at any price. The foreign soldiers who came to Syria to shore up the regime are mainly Lebanese members of Hizbullah, and Iraqis who serve in special units composed entirely of Shiites, who are routinely used by Iran to carry out assassinations and attack missions.

In the beginning of April, the governments of Iraq and Syria signed an agreement to organize a patrol on the border between them, in the area of Dir A-Zur, in order to stop the flow of weapons and ammunition that the Sunni Iraqis send to their Sunni brothers in Syria, in order to stand up to the murderous attacks of the Alawite regime. The Syrian regime especially fears the activists of "Al-Qaeda in the land of the rivers", those who in the past, operated under the leadership of Abu Musab Al-zarqawi, and who might relocate the focus of their activities from Iraq to Syria, and turn their jihad against the Alawite infidels who are supported by the Christian Russians and Chinese idol worshipers.

Iman Al-Zawahiri, Bin Laden's successor and head of Al-Qaeda in Afghanistan, also declared a few weeks ago that it is the duty of every Muslim in the world to enlist in the holy jihad against the regime of infidels in Syria. These announcements harm the Syrian rebels very much, because they justify the claims of the regime that it is fighting not against peaceful citizens but against armed terror gangs. Organizations of the Syrian opposition have stated that they strongly object to the Al-Qaeda announcements, and that their intention is to establish in Syria a democratic, civilian state, not a radical Islamic emirate.

In parallel, there are many reports of a large quantity of weapons that are streaming into the rebels' hands, including those stolen from the munitions warehouses of the Syrian military. These weapons include mortars, heavy machine guns, anti-tank missiles and even katyusha rockets, which will enable the Free Syrian Army to renew its attacks on the Syrian regime's military bases and its units, if and when - and apparently it will be very soon - it will decide to renew the fighting, since it is now clear that the cease-fire exists only "on paper" in the documents of Kofi Anan. In the field, the regime continues to slaughter citizens, and dozens of them are killed every day of the "cease fire".

The head spokesman of Sunni Islam, Sheikh Dr. Yusuf al-Qaradawi, has also joined the chorus that supports the Syrian rebels. He recently published a Fatwa forbidding the purchase of Russian and Chinese goods, because of Russia's and China's support of the Syrian regime, which is murdering Sunni Muslims.

Iran is Very Worried

Iran watches all of these developments with great concern fearing the fall of the regime in Damascus. Because if it does fall, then Iran's whole sphere of influence in Syria, Lebanon, Gaza and other places in the Arab world will collapse as well, since Syria is Iran's spring-board to them. General Qassem Suleimani, one of the heads of the Iranian Revolutionary Guard, has entered the picture. It he who is responsible for the portfolio that includes Iraq, Syria and Lebanon. He enlisted Iraqi Shi'a militias who were trained, armed and equipped in Iran in order to act against the American forces in Iraq, who have won for themselves the name "Asab ahl al-Haqiq" ("Teams of people of the Truth"), and commanded them to speed to Syria by way of Iraq to join forces with the Syrian military in the suppression of the Syrian rebellion. The operational battle experience of these militias, accumulated over hundreds of terror attacks carried out against Iraqi Sunnis, will be translated into similar "quality actions" against the Sunni rebels in Syria.

The head of this militia is "Abu Dara", a Shi'a mass murderer and one of the commanders of the "death squads" that belong to Muqtada Al-Sadr's "Mahdi Army". Born in 1970, his real name is Ismail Hafeth Allami, and he served previously in the Iraqi army. After he joined the "Mahdi Army" in 2003 he was assigned to hunt down officers, pilots, intelligence people and administrators who had served Saddam Hussein and the Baath party, and execute them without a trial. He took an active part in the mass attacks against Sunnis in Baghdad in order to rid the capital of the Sunnis and turn it into a Shi'ite city. In Islam, this act has very great significance, because for five hundred years, from 751 until 1258 CE, Baghdad was the capital of the Abbasid caliphate, which was established upon the skulls of the Shi'ites. The transformation of Baghdad to a Shi'ite city would be sweet revenge upon the Sunnis, who slaughtered Hussein bin Ali, the Shi'ite leader, in Karbala in the year 680 CE. And now, Abu Dara is sent to Syria in order to support Asad, who participates in the activity of the Iranian Shi'ites, to continue ruling in Damascus, which was the capital of the Sunni Umayyad dynasty between 660 and 750. The minister of Islamic history is laughing all the way to the blood bank.

The ability of Iran to send Iraqis to fight on Asad's side and cause the Iraqi government to participate in the action with Syria in order to prevent the smuggling of weapons to the rebels, may be the biggest strategic surprise in the world, because it has become known that it is Iran who controls Iraq, and that Iraq functions today according to the interests of Iran. After all of the Western blood and treasure that has been spent on Iraq since 2003, and after the elimination of the bloodthirsty dictator who ruled Iraq, this torn and divided country has clearly fallen like ripe fruit into the hands of the Ayatollahs of Qum. It can be said ironically that Iran is the big winner in the war of the West against Saddam. Iran achieved this position even while the Americans were still in Iraq, but they were too frightened to act decisively against Iran.

The Americans in Iraq had a lot of information about the involvement of the Guardians of the Revolution and Iranian Intelligence in Iraq since 2003. The Americans were able to get their hands on lots of standard equipment, weapons and ammunition that had been smuggled from Iran into Iraq and was used in the guerrilla war led by people like Abu Dara, and militias such as the "Mahdi Army" against the forces of the coalition. Thousands of coalition soldiers were killed and wounded in Iraq since 2003, by Iranian weapons and Iranian ammunition smuggled from Iran to Iraq and used by Iraqi militias (even Sunni ones) that had undergone training in Iran. Despite all of this, the United States and the coalition never dared to place the responsibility on Iran for killing coalition soldiers, because they feared that making such a statement would obligate them to act against Iran within Iran's territory, while they had to continue to protect themselves against Iranian attacks in Iraq and Afghanistan.

The Iranian regime realized the Western lack of determination, and increased the attacks upon coalition soldiers, in order to force the members of the coalition to declare one after another that they are withdrawing from the hopeless war, the treacherous swamp called Iraq. Finally, the United States also escaped from Iraq, and left that hemorrhaging country to the mercies of the Ayatollahs, who do with it as they please: if it suits them, they launch attacks against Sunnis, or they allow the Arab League summit to meet in Baghdad and create the appearance of a free, liberated and serene Iraq, so that they can sneak the representatives of the five permanent members of the Security Council (plus Germany) into Baghdad in order to extort from them more concessions and buy more precious time for the development of the military nuclear program.

Iran, which is suffering a difficult economic crisis and severe deterioration in the value of its currency because of the international sanctions , has found an easy way to support the collapsing Syrian economy: it pressures Iraq to supply Asad with cash to pay its military for protecting those faithful to Asad. Iran demanded from Nouri Al-Maliki, prime minister of Iraq, to also supply oil to Syria, so that it can fuel Asad's tanks and armored personnel carriers that shoot death bombs into the residential neighborhoods of Homs, Idlib and Dar'a. The payment for these services will arrive to Iraq when the hidden Mahdi will return to the world...

There are reports that Iraq is acquiring equipment that Iran is forbidden to acquire. And after this equipment arrives in Iraq, it is transferred to Iran. This is equipment and materials used in the infrastructures for oil and gas production, petro-chemical industries and factories that manufacture fertilizer and medicines. The concern is that Iran uses this equipment and material in order to produce chemical weapons, and that's why the countries of the world are forbidden to sell these items to Iran. Iraq serves as a legal cover for this Iranian acquisition. It may be that instrumentation and metals that are used in the weapons industries are also acquired today by Iraq in order to transfer them to Iran.

The Gulf is Burning

Along with the Iranian takeover of Iraq, Iran has also succeeded to frighten the states of the [Persian] Gulf to death by activating the Shi'ite noose: Shi'ite communities who live in all of the states of the Gulf serve as an Iranian fifth column. These communities undermine the internal stability in Iraq, and especially in Bahrain, the monarchy that is situated on an island opposite the coast of Saudi Arabia. This monarchy has mostly Shi'ite residents, but is ruled by the Sunni minority. And in this island-monarchy is situated the main naval base of the United States in the Persian Gulf. The goal of undermining the stability is to force the ruling family to demand that the Americans will leave, exactly as when the Saudis eliminated the American air base in Dhahran, in eastern Saudi Arabia in order to silence the Al-Qaeda propaganda, which stated that the House of Saud was collaborating with the modern crusaders who came from America and contaminated the land of the two holiest places to Islam. Eliminating the air base also served the purpose of depriving Iran of an excuse to incite the Shi'ite residents against the Saud family.

Iran is increasing its hold on the Gulf by emphasizing its control of the three islands that it conquered in the days of the Shah, Lesser Tunab, Greater Tunab and Abu Moussa. Last week Mahmud Ahmadinejad visited the Iranian base that was established on the island of Abu Moussa, provoking strong reactions in the Gulf states, which understand it as the first steps for Iran to begin the takeover of the Straight of Hormuz and other islands in the Gulf.

The fear of Iran that is harbored within the citizens of the Gulf states has increased in recent times as a result of the success that Iran has experienced in buying time in the negotiations with the West over its nuclear program. Increasingly, the states of the Gulf are convinced that the West, which is now very deservedly seen as weak and flabby, will not succeed in deterring Iran from taking practical steps against the Gulf states. Lately a discussion was held in the Kuwaiti parliament on the question of whether Kuwait should object to a possible future conquest of Kuwait by Iran or perhaps it would be preferable to surrender and accept it, because in any case, the West will not repeat the war of 1991, when Kuwait was liberated from the claws of Saddam. Needless to say that Kuwait does not not possess even the minimal the ability to stand up to an Iranian conquest; Iran will need only a few hours in order to conquer Kuwait, and will encounter little resistance.

However, Iran has no need to take dramatic military steps against its Arab neighbors West of the Gulf. It would be enough to take "soft" steps in order to bring them under the wings of its hegemony: elimination of an Emir here, buying off an Emir there, frightening a sheikh in one principality, a terror attack in a banking center, bringing down an office tower, a fire in an oil installation, sinking a ship of the Coast Guard or something of this sort such that everyone will know that Iran is responsible, will suffice to frighten the smug billionaires into thinking that it's better to cooperate quietly with their Eastern neighbor who has become the "landlord" of Iraq, rather than to experience what Iraq did until it was ultimately subordinated to the Iranian regime, and in order to keep the billions of petro-dolalrs in their accounts in Switzerland or other tax shelters.

The rich people of the Gulf have never been great fans of their countries, because had they wanted to preserve the character of their societies they would not have flooded the principalities with millions of foreign workers and business people, who have subsequently turned the citizens of the states of the Gulf into small minorities in their own states. And if they have sold out their countries in order to increase their personal wealth, why would they rebel against Iran? They have never had a real military force capable of defending them, and therefore the security forces in the Gulf states are composed of foreign soldiers, usually from Bangladesh or Balochistan. Will these foreign soldiers fight and put their lives on the line for a state that is not theirs?

The only state in the Arabian Peninsula that perhaps may have some ability to cope with Iran is Saudi Arabia, however the operational skills of its military forces are dubious, because they have never fought a real war on a national scale. From time to time they were involved in a border dispute with Yemen or Iraq, and performed an aerial bombing here or an artillery shelling there, but never in an actual war. It is reasonable to assume that without massive support from the United States, even the Saudis would not survive a war with Iran. A takeover of Saudi Arabia is especially attractive for the Iranians, because with Saudi Arabia, the holy places of Mecca and Medina would fall into their hands, and so the Shi'ites would again control Islam as it did in the days of the fourth Caliph, Ali Bin Abi Talib, the founder of Shi'a Islam, and all of the achievements of the Sunnis since the middle of the seventh century would be erased and it would be as if it never happened. And very sweet indeed would be the Persian revenge on the Bedouins, who left the Arabian Peninsula in the seventh century and destroyed the Sassanid Persian Empire.

This geo-strategic balance between Iran and the Gulf, which is clearly biased toward Iran, turns the Gulf into easy prey for the Iranian conquest machinery. The political and economic gains that would occur in Iran from the control of the reserves of oil in the Gulf, together with those that are hidden in the ground of Iraq, are tremendous. Iran would become the controlling state of the greatest quantity of oil and gas in the world, something that would buy it the ability to play with the prices in a way that, whenever it wanted, it could bring down states with poor economies like Greece, Italy, Spain, Portugal and Ireland. And in order to placate Iran, the whole world might be offered as a potential sacrifice to the Ayatollahs, including Israel. Therefore, Iran, as it sees itself, does not need to attack Israel, because the West will shun the Zionist entity anyway, and abandon her to her fate, and she will certainly fall.

On the other hand, Israel in the current situation is not yet a superpower of either oil or gas, and therefore getting mixed up with Israel serves no useful purpose for Iran. The damage that Israel might cause to Iran might be fatal to Iran, because there are rumors going around by means of "copy and paste" on Internet sites that claim that Israel has between 200 and 300 nuclear warheads. I don't know if Israel has even one, but on the Internet there are reports about hundreds. Moreover, Israel has proved in Lebanon (2006) and in Gaza (2008-9) that sometimes it loses its cool and fights back "disproportionately". The Iranians fear that it may be too dangerous to mix with a state that may have between 200 and 300 nuclear warheads and sometimes loses its cool, and in comparison to the Gulf, nothing good will come of war with her. Therefore, in my opinion, Israel will not be listed on Iran's list of targets, anyway not among the primary ones. The states of the Gulf are on this list, though, whether because of the profits that Iran can earn from taking them over, or because of the low price that Iran would pay for taking them over. Israel is on the list of secondary targets, together with Turkey, North Africa and Europe.

Israel understands this consideration and so - in my opinion - there is no immediate reason, and therefore no chance that Israel will attack Iran. Iran is a problem for the Gulf and the world at large well more than it is a problem for Israel. Therefore Israel will not sacrifice itself on the altar of the Ayatollahs in order to rescue the Gulf and the world from the Iranian problem. The Iranians also do not believe that there is truly an argument between Dagan, Barak and Netanyahu about attacking Iran. They are sure that this whole public argument conducted in the media in Israel whether to attack Iran or not is intended only to ring the world's alarm bells in order to wake the napping Europeans as well as those sleeping in the White House, and that actually, Dagan, Barak and Netanyahu have divided up the work between them, like "the good cop and the bad cop". Since when does Israel conduct a public discussion about a military plan?

And speaking of short-term goals, there is another strategic goal that Iran is planning to execute in the near future: Afghanistan, its neighbor to the East. The moment that the foreign forces leave this failing country too, Iran will take control of it using its well-known methods - murder, terror, bribery and fear - and all the treasures of Afghanistan will fall into the hands of Iran, exactly as it happened in Iraq. This takeover as well would be a delicious historical plum for the Iranians, who will have succeeded to take over a country that the British, Russians and Americans, each in its own turn and its own time, failed miserably in its attempts to conquer and to take over its assets.

And when Iran will have nuclear weapons in its hands they will succeed to intimidate the whole world, they will complete their takeover of the Gulf, the Arabian Peninsula, Iraq and Afghanistan, and will continue their journey westward to Egypt and North Africa, Israel, Turkey and Europe.

Syria today is the key to the future of Iran: if Asad's regime survives, Iran will be encouraged and will continue in its global octopus-like plan; and if Asad will collapse, Iran's progress westward will be halted and it may sink into internal disagreements about the question of who is to blame for the failure in Syria. These disagreements might split the ruling class and bring it to total collapse. Therefore, for Iran, the war over Syria is critical, with a character of "to be or not to be", which explains the massive Iranian investment in the shoring up of Asad.

Whoever who wants to bring down Iran must support those rebelling against Asad. Erdogan in Turkey, King Abdullah in Saudi Arabia, Sheikh Hamed al-Thani in Qatar and King Abdullah in Amman, have understood the matter and what they are doing for the rebels in Syria may save them and the Gulf from the Iranian octopus. The question is how much time it will take for the sleeping Europeans and the dreamers in the White House to understand the reality of this complicated Middle East, and when they will begin to take action in order to bring Iran down.


Dr. Mordechai Kedar ( is an Israeli scholar of Arabic and Islam, a lecturer at Bar-Ilan University and the director of the Center for the Study of the Middle East and Islam (under formation), Bar Ilan University, Israel. He specializes in Islamic ideology and movements, the political discourse of Arab countries, the Arabic mass media, and the Syrian domestic arena.

Translated from Hebrew by Sally Zahav.

Links to Dr. Kedar's recent articles on this blog:
Source: The article is published in the framework of the Center for the Study of the Middle East and Islam (under formation), Bar Ilan University, Israel. Also published in Makor Rishon, a Hebrew weekly newspaper.

Copyright - Original materials copyright (c) by the authors.

Wash. Post exposes corruption, repression in Gaza under Hamas

by Leo Rennert

The Washington Post, in its April 19 edition, features a front-page article on Hamas's miserable rule of Gaza, pointing to failure to deliver basic services, repression of dissidents, corruption among the Hamas elite, which lead a cushy life while most Gazans struggle with power blackouts and shortages of other basic needs ("In besieged Gaza, residents say Hamas hasn't delivered - For many, Islamist rulers turn out to be a lot like regular politicians" by Karin Brulliard).

It's not a perfect piece - the sub-head refers to "Islamist rulers" (another euphemism for "terrorist"). The lead paragraph points to vast destruction of a neighborhood "in an Israeli military assault three years ago" without mentioning the constant rocket barrages against Israel that prompted the IDF operation. The second paragraph zeroes in on "Israeli airstrikes pounding the Gaza Strip last month" again without mentioning the rain of Gaza rockets on civilian targets in southern Israel.

But once Brulliard gets going, Hamas and all its warts become her main focus. She notes that Hamas came to power in a Palestinian election in 2006 "with a reputation for terrorist tactics against Israel" (finally, the "T" word to properly identify Palestinian terrorism).

She points out that Hamas's charter dedicates the group to Israel's "ruin." Unemployment is at 30 percent. Hamas hasn't delivered on its pledge of justice and fairness. Graft is rampant under Hamas "corruption and patronage." The Hamas elite has enriched itself. Gas station lines snake around corners. Dissent is "squashed." Political opponents face arrests. People are fearful under a "police state" while the Hamas prime minister visits Iran.

Brulliard ends her report with a devastating comment from an unemployed former shopkeeper, Abu Khaled - "We used to take taxis, now we walk. We were eating, now we are not. Things changed - but for the worse. Hamas is controlling us. They are responsible for us."

An impressive and comprehensive indictment of Hamas - a rarity in the Washington Post. Kudos to Brulliard, who's new on the beat.

Now if Brulliard would only train her investigative talents on how Mahmoud Abbas reigns in the West Bank, Post readers might finally get a full picture of both sides of the Palestinian coin.

Leo Rennert is a former White House correspondent and Washington bureau chief of McClatchy Newspapers


Copyright - Original materials copyright (c) by the authors.

Gazans Blame Hamas for Economic Condition, Lack of Terrorism Against Israel

by Seth Mandel

Critics of Israel’s policies toward Hamas-run Gaza center their complaints on two premises: that Israel’s naval blockade of the Gaza Strip is responsible for Palestinians’ lack of goods and services, and that the Palestinians in Gaza cannot be held responsible for the actions of their terrorist government.

Both premises are wrong, but usually it is left to Israel’s defenders to point this out. Today, the Washington Post carries a story that adds a new wrinkle: the paper’s reporter went to Gaza, and the Palestinians there clearly and unambiguously disputed both premises as well. The Post writes:

The militant Islamist movement surged to a surprise victory in Palestinian elections in 2006 with promises of clean governance and a reputation for terrorist tactics against Israel, which had withdrawn from Gaza the year before. But after five years of Hamas administration, many in this besieged strip say it has lived up to neither. Hamas is fast losing popularity, and recent surveys indicate that it would not win if elections were held in Gaza today.

Hamas “has lived up to neither”–that is, Palestinians are frustrated by the corruption and the lack of “terrorist tactics” against their Jewish neighbors. The Palestinians spelled out to the Post exactly what they meant by corruption: they blame the state of affairs not on Israel’s naval blockade, but squarely on Hamas, where it belongs.

“Many aspects of the siege are imposed by Hamas,” an anonymous smuggling tunnel manager told the Post. (Yes, smuggling tunnels, being run as mainstream business shops, have “managers.”)

“Hamas is controlling us,” an unemployed former shopkeeper told the Post. “They are responsible for us.”

After Egypt stopped providing subsidized fuel through those smuggling tunnels for Gaza’s power plant, the Strip experienced blackouts and gas lines. Once Egypt–not Israel, but Egypt–cut their fuel supply to Gaza, Hamas could have turned around and purchased some from Israel. They chose not to. Explains the Post: “Analysts — and ordinary Gazans — say the crisis has been prolonged by Hamas’s refusal to import pricier fuel through an Israeli-controlled crossing.” The Gazan Palestinians are upset, but are not foolish enough to blame Israel for what is clearly Hamas’s doing.

Let’s return to the second premise: who to blame for violence against Israel. Again, the Palestinians in Gaza told the Post that, far from being peaceniks, they can’t understand why there isn’t more terrorism against Israel. That’s what they voted for! And that’s exactly what they are telling reporters:

“They say they are the resistance against the enemy,” said Umm Mohammed, 26, bouncing a baby on her knee. “Where is the resistance?”

Where are all the dead Jews we were promised? wonders a young Palestinian mother aloud while holding her child. More:

Hamas, eager to preserve its rule, has also become wary of provoking a new Israeli offensive in Gaza, costing it credibility in some quarters. Although Gaza’s cement-block buildings are papered with posters of gun-toting fighters, and Hamas allows Islamic Jihad and other militant factions to fire rockets into Israel, Hamas itself has mostly adhered to an unofficial cease-fire since the 2008-2009 Israeli offensive…

Islamic Jihad’s performance — it lobbed hundreds of rockets toward civilian targets in Israel and lost 14 fighters — increased the group’s appeal, Ahmed boasted, noting that Hamas now has “different calculations and bigger responsibility… It has a lot to lose.”

The Post wonders whether this means Hamas is becoming genuinely more moderate. Its evidence for this–which it reports with a straight face–is the following: “But Nunu said Western powers have ignored symbolic moves by Hamas, such as Haniyeh’s decision to make his first official trip abroad, in January, to Turkey — a country whose electoral democracy and moderate Islamism are serving as a ‘model’ to a growing number of Hamas leaders, Yousef said.”

Well then. Islamists are branching out by visiting with other Islamists. Maybe they are shunning the more murderous and genocidal of the region’s Islamists, at least? “One month after that trip, though, Haniyeh visited Iran, another longtime Hamas benefactor.”

It’s amazing what you can learn when you ask actual Palestinians, rather than their self-appointed spokesmen in the West, what they think.

Seth Mandel


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IPT Exclusive: Jihadis' New Toulouse Inspiration

by IPT News

Jihadis are finding inspiration in the murder of Jewish children and French soldiers in Toulouse, calling for the attack to form a new "school" of terrorism in the West.

In "Lessons and Treasures from the Battle of Toulouse," al-Qaida forum moderator Abu Sa'd al-Amili transforms Mohammad Merah's murder of a rabbi, three Jewish school children, and three French soldiers into a glorious raid on Western civilization. Merah's executions, termed "a little like 9/11" by French President Nicolas Sarkozy, are called a "practical lesson in bravery" and the murderer is part of the "fighting men of a special class."

A translated version of the essay was quickly produced, ostensibly to expand the reach of the Arabic essay, which was first released in late March and documented at the time by the Middle East Media Research Institute (MEMRI).

"The hero of the battle of Toulouse will be an example and a role model for whomever is behind him among the Muslim youth in the West, especially those who have not joined up with Mujahid groups," al-Amili writes, emphasizing that the attack is a realization of al-Qaida's call for lone-wolf jihadis. "His message to all those people is that the route to jihad is open and available," promising small-time plotters that their actions will make them heroes for Islam.

To al-Amili, the attack's main success is the rejection of the West's anti-extremism campaigns by a Western Muslim. "The hardest strike against the Crusader West" is that Western Muslim youth are still joining al-Qaida, he writes.

The essay targets the large class of unemployed and frustrated Muslim youth in Europe, touching on themes common in their lives. Al-Amili notes their frustration with life in the West, and at the same time explains how this anger has turned them into the best soldiers in al-Qaida's ranks.

These youth today "have no social value, no jobs to mention, and no weight or consideration," he writes. As long as they are Muslims who believe in Islam's "divine law," "they would be marginalized and allegations would be made against them of being terrorists and radicals, [allegations] which are made to keep them always in defense position rather than attack," he ironically notes.

Western civilization has given them a single option to become "the new servants of their materialistic, unfair civilization" and "lost generations without identity or values or faith, no color, no taste and no smell" to life.

In contrast, the Taliban and al-Qaida give them hope that Islamic law and honor could be restored. And the "wide margins of liberty" in the West, which he demonizes throughout the essay, prevents them from becoming downtrodden like the Arabs living under tyrannical rule in their home countries.

"They were independent of others and self-confident and had other attributes which qualified them to be the best soldiers in the hands of the Mujahideen," he writes. "More than that, they could actually become a special and distinguished type of hidden soldiers who are not known or cared about by many people and who are not easy for the enemy to spot, through whatever methods and ways are available to the enemy."

These "soldiers of a new type" have found their inspiration in other al-Qaida attacks on the West, Al-Amili explains. He singles out the "London and Madrid operations," as well as the Mumbai massacre, as the strongest examples. In London and Madrid, local terrorists used explosives to kill dozens using buses and subways. In Mumbai, gunman targeted popular Western hangouts as well as a Jewish center.

Merah's attack is viewed as particularly unique and noteworthy, al-Amili explains. Unlike other successful operations carried out by immigrants, Western-born Muslims are rejecting local governmental attempts to promote non-violent forms of Islam. The operation has also reminded jihadis about the importance of attacking France, which has been spared the successful mass attacks experienced in the United States and elsewhere in Europe.

Ultimately, the goal of this raid and others like it, is to produce an al-Qaida "in Western dress with blue eyes" and with a "totally Western appearance."

These "Mujahideen have broken the fear barrier and took the [Muslim] nation to a stage of challenge, by staging quick and unique attacks that target the enemy's economic, political, and military positions in their own homes," he writes. The economic and social drain on the West is just as much a success as the damage of the raids.

IPT News


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A “Plan B” on Syria Urgently Needed

by Max Boot

It’s good to hear the Obama administration may be searching for a Plan B on Syria. One is certainly needed—and urgently. Plan A was the UN-brokered cease fire which, as no less an authority than UN Secretary General Ban Ki-moon notes, is not being implemented by the Assad regime. Indeed, there are numerous reports of regime assaults continuing on opposition bastions while the rebels have little equipment with which to defend themselves.

Sens. John McCain and Joe Lieberman just got back from Turkey where they meet with Syrian rebel leaders. “The most stunning, unsettling conclusion I drew from the leaders of the Free Syrian Army was that they have essentially got no help from anyone. They are literally running out of ammunition while Assad’s forces are being resupplied by Iran and Russia,” Lieberman told a reporter afterwards.

That being the case, what a Plan B might be answers itself: simply provide more aid to the Syrian rebels and also help Turkey to set up safe zones inside Syria where refugees can come to escape annihilation. Those options, which could be combined (but don’t have to be) with air strikes on Syrian regime targets, are hardly new, but the case for them is becoming more compelling as it becomes clear there is no real alternative–unless we are simply willing to sit back and watch a close Iranian ally maintain his bloody rule in such a vital state.

Max Boot


Copyright - Original materials copyright (c) by the authors.

The Piety Premium of Islamic Bonds

by Theodore Reuben Ellis

Traditionally, the Islamic states have had to reach out to Western capital markets to obtain funding for major projects. Islam's prohibition on the collection of interest (riba) made it difficult to find buyers within the Muslim world for debt securities issued by sovereign nations, even predominately Muslim ones. In recent years, however, the invention of a financial instrument widely called sukuk—a kind of bond structured so as to be acceptable under Islam—has enabled governments of Islamic nations to tap into an entirely new capital market. Muslim investors, buoyed by the rise in the price of oil, have devoured the new sovereign issues of sukuk, developed and marketed by the governments of Muslim-majority nations.

Islamic governments did not, however, abandon conventional bond issues with the emergence of sukuk, which are still a small fraction of debt issues in the Middle East. In the past ten years, several governments have issued both sukuk and conventional bonds within a year of one another. These bonds have behaved very differently on secondary markets.

Though they cannot be paid traditional interest, investors in sukuk still expect to be compensated for the money they lend sovereign borrowers. The traditional measure of return on a bond is its "yield," roughly put, the amount the borrower gets paid back annually relative to the market price of the bond. Traditional financial models expect yield to rise with the riskiness of an investment. The yields on sukuk and conventional bonds, however, have behaved quite differently from one another—even when the issuer is the same government. In some cases, the behavior of sukuk yields has seemingly defied principles of mainstream finance theory. The forces driving this disparity need to be considered in order to understand how and why Islamic nations structure their borrowing as they do. To do so, evidence for a difference between the investment bases for the two types of bonds must be examined. If present trends continue, parallel capital market infrastructures could emerge in Islamic markets.

There are some fifty to 260 sheikhs worldwide who have the recognized expertise necessary to approve sukuk bond issues. Dependence on such a small group of Islamic scholars, like those seen here, increases risk as bonds deemed conforming to Shari'a may turn out to be non-compliant. A crisis in confidence could threaten the entire Islamic finance industry.

Appreciating what drives investment decisions in Islamic capital markets is critical not only to those who participate in financial markets but to all parties affected by capital markets' self-sufficiency in Middle Eastern economies.

Islam's Ban on Interest

Shari'a, the changing body of Islamic law intended as a system for governing all facets of life, has long proscribed the charging of interest as it is typically construed. The restriction is based on passages such as the following, from the Qur'an:

And whatever you lay out as usury, so that it may increase in the property of men, it shall not increase with God; and whatever you give in charity, desiring God's pleasure—it is these [persons] that shall get manifold.[1]

Shari'a's limitations on financial transactions extend beyond the mere charging of interest on loans. Generally speaking, Shari'a does not allow for investors to make money from money. Accordingly, strict adherence to Islamic principles of finance frowns upon both interest-bearing loans themselves and the secondary markets that emerge to profit off them.

Yet Shari'a law is not without an appreciation for the time value of money. Most Islamic scholars allow for goods to be sold on credit (nasi'a) at a higher price than they would be sold for with cash upon delivery,[2] a practice similar to many forms of Western consumer credit. The Hadith, the oral records of the teachings and actions of Muhammad, even point to a seventh-century version of futures contracts (salam) whereby farmers were paid gold in advance for wheat to be delivered at the harvest.[3]

Islam's prohibition on the collection of interest but acceptance of the time value of money has been explained in terms of "certainty." Islam accepts that the lender is forgoing the opportunity to engage in profitable transactions with his own capital while it is being used by another. He is, therefore, entitled to reimbursement for missed opportunities. However, since these opportunities are, in theory, unknowable beforehand due to the uncertainty of business, it is deemed wrong to determine interest payments in advance in the form of a contract guaranteeing a particular interest rate. Payment for foregone opportunities must be made after the fact on the basis of actual return on the borrowed capital and can never be made legally binding. By the standards of modern Western finance and from the creditor's perspective, this is not a favorable structuring of loans. Such an arrangement is known as an "unsecured loan" because the lender has no recourse should the borrower decide not to repay the loan. Moreover, the lender has nothing to gain should the borrower's investment turn out to be more profitable than expected. In practice, Islamic lending becomes, as analysts Iqbal and Mirakhor write, "a charitable act without any expectation of monetary benefit."[4]

The Qur'an's distinction between gains from loan interest and the ordinary profits merchants make from shrewd bargaining might seem arbitrary. After all, both are monetary gains made without any "tangible" production. Indeed, the Qur'an makes the contrast by fiat and not by any explicit philosophy of economics: "They say: 'Trade is just like usury,' but God has permitted trade and forbidden usury."[5]

It is no coincidence then, that Islam's modern methods for lending appear so similar to an ordinary business joint-venture. By structuring debt in such a way that it resembles trade, modern Islamic finance has found ways of creating an instrument previously impossible under Shari'a, namely, the Islamic sukuk bond.

Structuring Islamic Bonds

Although there are traditionally hundreds of ways loans can be made acceptable in Islamic society, only a handful of different structures are used in modern global sukuk issues. The predominant forms of sukuk are known as mudaraba, musharaka, and ijara. Mudaraba, usually used to finance specific capital-improvement projects, is a structure in which the lender is considered a part-owner in whatever investment is being made. Coupon payments on the loan are drawn from the profits of the venture according to a ratio agreed upon when the contract is drawn. Should the venture fail, the borrower is not responsible for reimbursing the lender regardless of its solvency as an institution.

The mudaraba agreement thus carries a great deal of risk for lenders. Mudarabas were the first kinds of sukuk issued in recent history, usually used to finance municipal improvement projects with the investment of local lenders. Furthermore, under mudaraba arrangements, there is no expectation that the lender provide any managerial help.[6]

Musharaka arrangements are structured just like mudaraba bonds with the exception that the lender is expected to take a role in the daily management of whatever venture is receiving the funds. Musharaka partnerships are increasingly rare in modern Islamic finance because they require a great deal of manpower investment on the part of banks. Even mudaraba loans make up only 5 percent of the assets of most Islamic banks.[7] (In fact, some 80 percent of Islamic banks are typically involved in still another loan type called murabaha which is extraordinarily controversial within the Islamic banking community because it is virtually identical to an interest-bearing loan.)

The structure of choice for sovereign state sukuk issues is ijara. Under this arrangement, the borrower (a sovereign state in this case) sells tangible assets at a price agreed upon by contract to a "special purpose entity" (SPE). This SPE in turn issues sukuk bonds in an amount exactly equal to the purchase price of the assets. The SPE then leases the assets back to the state at an amount equivalent to the coupon payments of the sukuk. At the maturity of the sukuk, the SPE sells the assets back to the sovereign state at a price agreed on beforehand. At this point the SPE dissolves and the ijara contract is concluded.[8]

For example, one particular Pakistani sukuk is issued by an SPE called the Pakistani International Sukuk Company Ltd. and not the Pakistani government itself. The sukuk securitization is backed by the 250-mile Islamabad-Lahore motorway, also known as M-2 within Pakistan. This highway was "sold" to the SPE for $600,000,000 in January 2005 with an agreed ijara, or lease-payment, of 5.6 percent on the face value of the bonds with a maturity of five years.[9]

Thus, sukuk bond issues are backed by real assets to which all bondholders can claim partial ownership. According to Islamic law, the sukuk issuer cannot guarantee the return of principal or interest payments without turning the agreement into an ordinary interest-bearing loan. The money that bondholders receive must be considered lease payments on the underlying assets and, presumably, reported as such for purposes of taxation. Hence, owners of the Pakistani sukuk backed by the M-2 road must in theory consider their returns on the bond as payments derived from tolls on the motorway. Financial services providers who sell their clients sukuk have an obligation to inform them of where their returns are coming from. In theory, the borrower can legally stop making coupon payments on a sukuk if the underlying asset is not profitable (for example, if drivers stop using the M-2) even if the borrower has other sources of income (such as oil revenues).

The Global Sukuk Marketplace

The sovereign sukuk introduced a new class of investors to government debt financing quite different from the one that had previously bought sovereign debt. While conventional investors have certainly participated in sovereign sukuk issues, Islamic investors and institutions are by far the predominant players. Indeed, according to the Islamic banking unit of the London-based HSBC, the global banking concern that managed Pakistan's 2005 sukuk issue, 47 percent of demand for that bond came from the Middle East, 31 percent from Asia, and 22 percent from Europe.[10]

Calculating the size of the sukuk market has been notoriously difficult due to the lack of a central regulatory body or even a standardized definition of what constitutes sukuk. The most widely cited source, the Islamic Research and Training Institute, puts the size of the entire Islamic finance industry at between $700 billion and $1 trillion dollars with an annualized growth rate of 63 percent in 2005.[11] The Islamic Finance Information Service estimated the size of total sukuk issuance in 2007 at $47 billion, an increase of 73 percent over the previous year.[12] The total value of active sukuk worldwide was most recently put at $120 billion by the First International Conference for Islamic Sukuk in Bahrain on March 18, 2008.[13]

These numbers might be even larger were it not for a critical sticking point. The main bottleneck in the creation of new Islamic bonds has been a shortage of scholarly boards to approve the bonds. In fact, only somewhere between fifty and 260 sheikhs worldwide have the recognized expertise necessary to approve sukuk bond issues. Within this group, about a dozen take on the vast majority of bond approvals. The Financial Times quotes Yusuf Talal DeLorenzo at investment firm Shari'a Capital as saying that "to sell products into the market, to give them credibility, you go to the tried-and true guys whom everybody knows." Investment banks have spent millions of dollars seeking the fatwas (religious edicts) of this small group of Shari'a experts.[14]

Such a small band of preferred Shari'a scholars and the millions of dollars at stake give all the indications of an emerging moral hazard problem within the sukuk industry. In fact, since the recent financial crisis, there have been a few cases of sukuk being retroactively declared noncompliant. For example, in 2009, the Shari'a Committee of the Accounting and Auditing Organization for Islamic Institutions tightened its standards for Shari'a compliance after a number of semipublic sukuk issued by Dubai were found noncompliant.[15]

There is concern that should sukuk bonds regularly be found religiously unacceptable after issuance, investors who demand Shari'a compliance might pull out not only from the affected bond but from sukuk bonds in general. A crisis in confidence could threaten the entire Islamic finance industry. The theological research that Shari'a boards do for a particular sukuk issue is entirely out of sight for the average investor. Thus, the failure of a single bond could threaten the credibility of the entire approval industry.

It is not known how widespread this fear of a crisis in confidence is within the Islamic investment community. Any perceived risk of such a crisis would probably reduce the trading price of such bonds vis-à-vis bonds that do not contain that risk. All other things being equal, one would expect investors to demand additional return from sukuk bonds over conventional bonds issued by the same sovereign authority due to the potential risk of a crisis in Shari'a compliance. Surprisingly, and contrary to what mainstream risk-return models would suggest, there is little evidence that sukuk investors demand a premium for this risk, at least thus far.

One additional potential risk of the current system for judging sukuk compliance with Shari'a is that religious regulatory bodies could use their power for political ends—perhaps by implicitly threatening to declare noncompliance on the bonds of sovereign nations that support unpopular geopolitical positions. Another area of broad uncertainty is whether religious authorities will declare Islamic banking activities (presumable including sukuk) subject to zakat, a kind of tax Islamic governments have historically imposed on wealthy Muslims to fund charitable activities.[16]

Understanding the Risk

Conventional bonds and sukuk issued by the same country are extremely similar except for the underlying religiously-informed technical structure. What factors then determine the yield spread, (i.e., the difference in bond yields), sometimes a substantial one, between the two? Normally, riskier bonds have higher yields. Yet, with sukuk, the situation is reversed: Sukuk, which are inherently riskier, often have lower yields than comparable conventional bonds. This fact alone indicates there is more to the sukuk-conventional bond spread than risk of default.

While the yields of Islamic and conventional bonds issued by the same country might differ at any given time for maturity-based reasons, it is worthwhile to compare the way market valuations of Islamic and conventional bonds change relative to one another over time. That is, looking at how the spread between valuations of sukuk and regular bonds has varied over time can shed insight into what determines the relative pricing of the two.

Of course, fluctuations in the likelihood of default of conventional and sukuk bonds are one clear explanation for the changes in the difference in bond yields between the two. After all, bond returns themselves are highly dependent on the risk of default. While the credit worthiness of the entity behind the bonds is identical (the sovereign nation issuing the bonds), there are two factors that could contribute to a disparity in default risk.

First, the intrinsic structure of sukuk puts them at greater risk of default. An ijara form of sukuk, backed in theory by only the operating income of a subset of the government's total assets is most likely riskier than one tied to the entirety of the government's assets. Should the specific assets linked to that bond produce insufficient income during the allotted period, the borrowing government could in theory withhold payments, despite having plenty of other profitable assets. The fact that the sovereign sukuk examined for this study have in practice issued fixed coupons rather than coupons based on the actual returns of the underlying trust assets suggests sovereign issuers wish to eliminate (or at least hide) this source of potential risk. Sovereign entities seem committed to making their sukuk appear as dependable and steady in cash flow as their conventional bonds.

With the possible exception of the troubled, quasi-public Dubai sukuk mentioned above, there have been no sovereign sukuk defaults to date. Like conventional bonds, private sector defaults on sukuk are relatively common. Sovereign defaults should presumably be rarer because the government can raise money through taxation or, particularly in oil-rich Middle Eastern states, licensing of resource exploitation rights. However, specific provisions in the sukuk bond issues shield sovereign governments from having to repay creditors should the underlying assets not provide adequate funds to pay the agreed lease. For example, the offering for Qatar Global Sukuk's 2003 issue includes the following protection for Doha:

Proceeds of the Trust Assets are the sole source of payments on the Certificates. The Certificates do not represent an interest in or obligation of any of the Issuer, the Trustee, the Government … or any of their affiliates. … If, following distribution of the proceeds of the Trust Assets, there remains a shortfall in payments due under the Certificates, subject to Condition 12, no holder of Certificates will have any claim against the Issuer, the Trustee, the Government.[17]

According to these terms, bondholders not only lack a means of recourse should the sovereign issuer decide not to pay its lease but also lack the ability to take control of the underlying assets (which they technically own due to the structure of the "special purpose entity") and liquidate them or use them to more remunerative ends. Sometimes the assets the government sells to SPEs are not ones that could easily produce immediate operating income even if bondholders could take control of the assets themselves. The sukuk from which the above passage is drawn, for example, is backed by a parcel of undeveloped land. The government's guarantee to make timely and complete payments on sukuk is thus for all intensive purposes merely implied.

Gauging the "Piety Premium"

For the purpose of this study, sovereign conventional and sukuk bonds from three predominantly Muslim countries were compared (see Table 1) and the following hypothesis was tested: Do changes in certain macro factors—those economic variables, like gross domestic product or inflation, that affect the broader national and global economies and not just a particular investment—have a different effect on the yields of sukuk than the conventional bonds issued by the same country?

The macro factors selected were not chosen haphazardly: They correspond to possible differences between how conventional investors and sukuk investors view market shifts (See "Methodology" Table 3 for a summary of explanatory variables). Moreover, in some cases changes in macro risk factors would affect the default risk premium—i.e., the amount an investor expects to be compensated for taking on additional risk—between the bonds, and these situations were also examined and tested.

Table 1: Sukuk and Conventional Bonds to be Compared

Sources: Richard, Kristel. Standard & Poor's Ratings Direct: A Closer Look at Ijara Sukuk. (New York: Standard & Poor's, 2005); Datastream, Thomson Reuters, New York.

Overall, the results (Table 2) support the hypothesis that sukuk markets behave differently from conventional bond markets in the same country by virtue of varying sensitivities to external macro factors. Each macro factor (for example, the risk-free interest rate: rtfree) is tested for its significance in determining the sukuk-conventional yield spread. The first number (for example, 0.865 for the risk-free interest rate on the Pakistani bonds) indicates what effect an increase of one will have on the yield spread. In other words, a 1 percent increase in the risk-free interest rate is predicted to correspond with a 0.865 increase in the spread between sukuk and conventional bonds.

The number beneath each value is its "t-statistic." This number is simply a measure of how "significant" or strong the result was. Strong results have a single asterisk next to them, indicating at least 95 percent confidence the result did not happen because of chance. Very strong results have two asterisks, indicating at least 99 percent confidence the result did not occur because of chance. Those values without asterisks were found not to be significant in predicting the yield spread between sukuk and conventional bonds.

A wide range of highly significant t-statistics across entities suggests that the credit spread between these types of bonds fluctuates predictably according to movements in the explanatory variables. There were also indications that the model as a whole predicted a large share of the variation in the sukuk-conventional yield spread. In the cases of Malaysia and Qatar, adjusted r2 values (the higher the r2 the greater share of the variation has been accounted for by the model. An r2 of .05 means 5 percent has been explained; an r2 of .99 means 99 percent has been explained) of the multiple regressions when combining all the explanatory macro factors together were extraordinarily high (Malaysia: 0.953, Qatar: 0.926). Pakistan also had an impressive, but slightly lower adjusted r2 of 0.649.

Table 2: Determinants of Sukuk to Conventional Bond Credit Spread


1) Associated t-statistics reported beneath coefficient values.
2) Single asterisk (*) indicates significance at the two-tailed 5 percent significance level (p<.05), double (**) asterisks denotes significance at the two-tailed 1 percent significance level (p<.01), for the null hypothesis that the given coefficient equals zero.
3) See Table 3 for summary of explanatory variables.

What the results reveal are that a few macro factors can explain a great deal of the fluctuation in yield spread between sovereign sukuk and conventional bonds. The macro factors that had the most significance across all three countries examined were the risk-free interest rate (rtfree), the price of oil (lnoil), developing world stock markets (developmentt), growth in other Shari'a-compliant industry (islamt), and the Standard & Poor's 500 index (spx). Changes in each of these variables affected the spread between conventional and sukuk bonds.

What this means is that investors in sukuk are either more or less sensitive to these particular macro variables than the conventional investor. There are logical reasons why investors in Islamic bonds might be more sensitive to these variables than conventional investors. The general finding is that sukuk investors reacted with more passivity to changes in macro factors than conventional investors—as if their investment in sukuk was fixed and not determined by changes in the outside economy.

The first and most striking difference in investor behavior between sukuk and conventional bonds is in the reaction of the market to changes in the risk-free interest rate (rtfree). The risk-free interest rate is defined here as the yield on 10-year U.S. Treasury bonds, widely considered in financial markets to be one of the safest and most liquid investments available. Investors in the conventional sovereign bonds reacted to changes in the risk-free interest rate as would be expected: That is, as the risk-free rate went up, the yield on the conventional bonds issued by Islamic nations went up in tandem to match. Strangely, however, the sukuk market remained relatively stable at the same time.

The trend could be an indication that while a rosier global economic picture—rising risk-free interest rates normally correspond with a growing economy—encouraged investors to increase investments to sovereign bonds, it did not encourage them to increase investment in sukuk where they would be taking on unnecessary risk of default due to the problematic religious element of the bonds. Sukuk investors were not as influenced by changes in the risk-free rate because investing in U.S. treasury bonds is not permissible under Shari'a.

Investors' reactions to changes in oil prices were highly surprising. The model suggests that conventional bond investors reacted to increasing oil prices by buying bonds from oil producing nations and selling those from oil importing nations. This is consistent with the idea that a government awash in oil revenues will be more capable of paying its debts. Sukuk buyers' purchases of Islamic bonds did not offset the movements of conventional bond traders in these instances. Sukuk investors did not react to changes in the price of oil as dramatically. This is particularly interesting in light of the fact that many sukuk investors are more likely to have economic ties to the petroleum industry and, consequently, would have more investable funds as oil prices rise.

Growth in developing world economies (developmentt) was associated with increasing demand for conventional bonds in Malaysia and Qatar. As the index rose, signaling greater health in emerging markets, conventional investors felt more comfortable investing in the debt of these countries, bringing down the yields of sovereign issues. The opposite effect was found in Pakistan, probably due to country-specific factors: Pakistan's political instability over the period, including terrorism in the autonomous regions and the assassination of Benazir Bhutto in December 2007, made it an undesirable place to invest relative to other booming, emerging markets. Pakistan's history of leadership upheavals raised fears that the country could default on its debt should the government topple. Thus, while emerging markets as a whole grew, investors chose safer havens for their funds than Pakistan and fled its debt, raising yields. Sukuk investors, investing mainly for a "piety premium" rather than for fundamental changes in the underlying economy, stayed put; consequently, the difference in yield between the two types of bonds shrank.

The calculated coefficients on politicst (value of index measuring the amount of political instability in the Middle East region) and VIXt (implied volatility of stock markets), showed a weaker and less consistent impact across the bonds examined. The results suggest that conventional bond investors react more aggressively to adverse changes in the perceived riskiness of markets. As the political instability index rose, yields on emerging-market debt shot up without a concomitant rise in sukuk yields. Thus, sukuk investors appear less sensitive to increasing volatility, perhaps because they have fewer alternative low-risk investments. Also, the relative illiquidity of the sukuk market could contribute to a sense that rising volatility in other markets would not affect a market where there is altogether less turnover.

The effects of the changes in the developed world economy as measured by the Standard & Poor's 500 index reinforce what was found with the risk-free interest rate. That is, sukuk investors were more passive about changes in the S&P 500 index. Again, this is probably a function of the fact that sukuk investors were less likely to be invested in the S&P 500 in the first place for religious and geographic reasons.


It seems likely then that the differing investor bases of the two kinds of bonds are at the root of the differences in bond yield between sukuk and conventional bonds issued by the same country. The two bond markets are essentially isolated from one another due to the sukuk's religious underpinnings. Consequently, different expectations about changes in returns stemming from systematic risk would create a spread between their yields.

It would appear that the sukuk market is a mostly passive one. While conventional bond yield fluctuations can usually be explained by the logical responses of the conventional bond market to changes in macroeconomic risk, sukuk markets evidence little variation in sukuk returns as a result of macro risk. Thus, conventional markets react to adverse or positive news in equity, oil, or risk-free interest rates as would be expected with emerging-market debt securities but sukuk investors mostly ignored these movements.

This could be a result of the importance of the "piety premium" to sukuk investors: The unseen utility benefit of holding a Shari'a-compatible bond for Muslim investors is not sensitive to changes in macroeconomic risk. Alternatively, the passivity could be a function of a lack of alternative assets for sukuk investors. Whereas conventional bond investors can easily move to risk-free or less risky assets, sukuk investors have far fewer options.

The relative passivity of investors in sukuk suggests that they are not as responsive to conventional financial signals. These results are consistent with the notion that sukuk investors are in general less sensitive to changes in the conventional business markets. For example, while conventional investors increased exposure to debt in developing markets like Pakistan and Malaysia as their economies grew, sukuk investors kept exposures constant.

Sukuk research is still in its very infancy. Future research will be greatly aided by the accumulation of new data and issuance of even more sovereign sukuk. While perfect matches of sukuk and conventional bonds from the same country are currently impossible, the present analysis, nonetheless, was able to show the peculiar nature of the relationship between the two markets. Only time will tell if the strange behavior of the Islamic bond yield spread is a consequence of an immature sovereign sukuk market or a permanent feature of the different sensitivities to systematic risk of the two markets.

Table 3: Summary of Explanatory Variables


All sukuk and conventional bonds included in the study are sovereign-issued, quoted daily except for weekends and major holidays. The periods vary by bond pairing with the earliest starting in June of 2002 and some continuing until mid-February 2008. All bonds are U.S.-dollar denominated, which eliminates potential foreign exchange rate effects on yield spreads.

Analysis was conducted in two stages. First, the standard ordinary least squares estimators (OLS) were used to build the multiple regressions where the credit spread, CSit, of bond-pairing i in time t is the dependent variable, and nine explanatory variables related to theoretical determinants of credit spread are included as regressors.

The Arbitrage Pricing Theory (APT) was used as the starting point for security valuation. Simply put, the essence of APT is that in market equilibrium no arbitrage profits can be made (because in efficient markets, traders will eliminate riskless profits immediately). Analysts Stephen Ross and Richard Roll show that a consequence of this assumption is that "asset returns can only come from increasing exposure to market risks. Every equilibrium will be characterized by a linear relationship between each asset's expected return and its return's response amplitudes, or loadings, on the common factors."[18] These "common factors" are the common components of all assets considered in a multifactor model of security pricing. They are typically construed as sources of macro risk. The "factor loadings" are the coefficients on the factors indicating the sensitivity of a particular asset to sources of macro risk. Here, the APT model is chosen over its alternative, the capital asset pricing model (CAPM), primarily because CAPM requires all investors to hold identical market portfolios.[19] This assumption conflicts with two of the key areas of exploration of this study: (1) Muslim investors are more likely to buy sukuk than non-Muslim investors, and (2) sukuk investors, on the whole, have fundamentally different market sensitivities than ordinary investors.

Figuring out where factor weightings are substantially different between the two yields will be the key to unlocking what determines the credit spread. Hence, the choice of explanatory variables (see below) will be guided by the search for variables that are weighted differently between the two bond types. The net effect of the difference between two factor loadings (i.e. bk,sukuk –bk,conv) for any given explanatory variable will set that variable's effect on credit spread.

Note that CSit is the yield premium of sukuk over conventional bonds. Unlike spread comparisons between risky assets and risk-free assets, the credit spread between sukuk and conventional bonds can take on both positive and negative values (indeed, all four series studied have credit spreads that turn negative at some point, if not much of the time).

A number of different variables representing changes in macroeconomic states both domestically and internationally are studied to explain fluctuations in the sukuk and conventional bond spread. For every series i, a set of nine explanatory variables are used in the multiple regression estimated as such:

Descriptions of the regressors can be found in summary in Table 3. The above regression is run three separate times for each entity i using the OLS estimators for the beta values.

A subset of the data from January 19, 2005, to May 25, 2007, is drawn from three of the entities. This time segment is chosen because it is the lengthiest period during which the six bonds included overlap. This panel data set has 613 observations for each of the three entities. The following fixed effects regression model with entity fixed effects ai is estimated:

Where ai is the entity fixed effect and E(ui | Xi1…Xin, ai ) = 0 and uti is a term for all other unexplained variation in the regression. The entity-fixed effect is included to account for country-specific omitted variables that vary across countries but not over time. As earlier, the coefficients are estimated using OLS.

Theodore Reuben Ellis is a graduate student at the University of Chicago, Booth School of Business. Prior his graduate studies, he was a consultant at McKinsey and Company.

[1] Qur. 30:39.
[2] Frank E. Vogel and Samuel L. Hayes, Islamic Law and Finance (The Hague: Kluwer Law International, 1998), p. 78.
[3] Ibid., pp. 75-6.
[4] Zamir Iqbal and Abbas Mirakhor, An Introduction to Islamic Finance (Singapore: John Wiley and Sons, 2007), pp. 61-2.
[5] Qur. 2:275.
[6] Vogel and Hayes, Islamic Law and Finance, pp. 138-45.
[7] Ibid., pp. 140-1.
[8] Richard, Kristel, "A Closer Look at Ijara Sukuk," Banker Middle East, Feb. 2005, no. 57.
[9] Khaleej Times (Dubai), Jan. 23, 2005.
[10] (Dubai), Mar. 17, 2005.
[11] "Islamic Financial Services Industry Development: Ten-year Framework and Strategies," Islamic Research and Training Institute, Jeddah, and Islamic Financial Services Board, Kuala Lumpur, May 2007.
[12] Financial Times (London), Feb. 7, 2008.
[13] Gulf Daily News (Dubai), Mar. 19, 2008.
[14] Financial Times, Nov. 19, 2007.
[15] The New York Times, Nov. 30, 2009.
[16] Emirates Business (Dubai), Sept. 3, 2009.
[17] "Qatar Global Sukuk: Offering Circular," HSBC Bank, London, Oct. 2003, p. 12.
[18] Richard Roll and Stephen Ross, "An Empirical Investigation of the Theory of Arbitrage Pricing," Journal of Finance, Dec. 1980, p. 1074.
[19] Zvi Bodie, Alex Kane, and Alan J. Marcus, Investments, 7th ed. (New York: McGraw-Hill/Irwin, 2008), pp. 342-3.

Theodore Reuben Ellis


Copyright - Original materials copyright (c) by the authors.

Israel, Palestinians and Water Libel

by Jack L. Schwartzwald

On December 13, 2011, the French National Assembly issued a 320-page report entitled, The Geopolitics of Water, which dedicated 20 pages to an alleged “water war” between Israelis and Palestinians. Employing the incendiary terms “apartheid” and “water occupation,” the report’s lead author, Jean Glavany, accused Israel of usurping Palestinian water sources and showing favoritism to 450,000 “colonial” settlers who purportedly “use more water than [the West Bank’s] 2.3 million Palestinians.”

The report won immediate praise from Palestinian Water Authority Director Shaddad Attili (who made similar allegations in a 2011 Jerusalem Post op-ed). Harper’s Magazine likewise reviewed it favorably, as did the ever-reliable Counterpunch, which proposed the delusional hypothesis that Israel’s security barrier “closely follows the line of the Western Aquifer” as part of a sinister plot to divert “Palestinian” water to Israel. (Just for the record: (i) the Western Aquifer discharges most of its water beneath Israeli territory, where it has been readily accessed since the 1920s; (ii) the “line” Israel’s security barrier most “closely follows” is that separating would-be Palestinian terrorists from their intended Jewish victims; and (iii) Jews living behind this barrier, but beyond the 1949 Green Line, get their water from Israeli — not Palestinian — sources.)

The mendacious French report is hardly the first word on this subject. In May 2008, National Geographic gave two thumbs down to Israel’s life-sustaining desalination plants, pointing out that fossil fuels are needed to run them (thereby threatening the planet), that they produce water that is “too pure” (thereby threatening the integrity of water pipes) and that they are vulnerable to terrorist attack (not to give anyone any bright ideas). Far worse was a 2009 Guardian “exposé” entitled, “Who will save Gaza’s children?” wherein Victoria Brittain claimed that Israeli water policy had exposed Gazan newborns to toxic levels of nitrates, thereby causing an “exceptionally high” incidence of “blue baby syndrome.” In fact, the number of cases of “blue baby syndrome” — the lethal form of the medical condition “methemoglobinemia” — stands at zero. (Although mild, non-lethal cases of methemoglobinemia have occurred in Gaza, the high nitrate levels that cause them are attributable to flawed Palestinian fertilizing methods, not to Israeli water policy.)

Collectively dubbed the “water libel,” by Jerusalem Post blogger, Petra Marquardt-Bigman, the above reports are unified by their devil-may-care attitude towards established facts. Relying on Palestinian Water Authority and Joint Israeli-Palestinian Water Commission documents, Visser and Shaked have wholly debunked Shaddad Attili’s accusations. For example, Attili claimed that Israelis consume four times more water per capita than Palestinians. The reader will reach the same conclusion — provided he uses Attili’s calculus, which (a) overestimates Israeli usage per capita by nearly 100% (280 cubic meters annually versus 150); (b) underestimates Palestinian usage by more than 50% (60 versus 140) and (c) grossly overestimates the Palestinian population by counting 400,000 Palestinians living in Israel (where they use Israel’s water supply), as well as another 400,000 living abroad.

As for the French National Assembly report, it turns out that Monsieur Glavany systematically evaded essential facts with an aplomb not seen in his country since the second Dreyfus trial. Moreover, he interpolated a number of venomous inaccuracies into the report at the 11th hour without notifying his co-authors, all of whom disavowed his claims on reviewing the final text.

So what precisely are the facts? A useful starting point would be to mention that under Jordanian rule prior to 1967, only 1 in 10 West Bank households were connected to running water, and that today, owing to Israeli water policy, the figure stands at 96% (and will soon rise to 98.5%.). Secondly, Palestinians steal Israeli water (not the other way around as alleged by Attili and Glavany), while Israel exports volumes to the West Bank greatly in excess of what is mandated by the Oslo Accords. (Israel does so primarily to compensate for the Palestinian Water Authority’s repetitive failure to implement approved water projects and its substandard maintenance and security procedures, which result in the loss of an estimated 33% of the Palestinian water allotment annually.)

Mainly because it doesn’t waste time on such mundane tasks as developing and maintaining its water resources, the PWA and its director have abundant time to level false charges against Israel. And mainly because Israelis aren’t doing any of the things of which they stand accused, they’ve had abundant time to work on the region’s very real water crisis. Indeed, they’ve been working on it since before Israel was a state. It was the Jewish community that drained the swamps of Mandatory Palestine’s coastal plain in the 1920s in order to access springs from the Western Aquifer which lay beneath. In 1937, this same community founded the Mekerot (or national water company). Since that time, they’ve attacked the water problem from multiple angles. For example, “drip irrigation” methods pioneered by Israel in the 1960s, deliver water to plant roots with an efficiency approaching 80% (double the rate seen with open irrigation), and newer “sub-surface irrigation” techniques do even better. Because the country is mostly arid, Israel built its National Water Carrier (1964) to transport water from areas of higher rainfall near Lake Kinneret to the parched Negev, thereby transforming desert areas into productive agricultural land. Israel recycles 75% of its wastewater (6x the rate of its nearest competitor), and employs the recovered water in agriculture. They have developed airborne drones that detect leaks in water pipes via water meter alarm systems and a “curapipe” process that seals “pinhole” leaks before they are even detectable. Hi-tech “SmarTap” faucets reduce household water consumption by 30% with patrons scarcely noticing.

Israel’s most ambitious program, however, is its “Desalination Master Plan.” Initiated in 2000, its goal was to build state-of-the-art “reverse osmosis” desalination plants along the Mediterranean coast capable of producing 400 million cubic meters of potable water annually by 2005. (By 2020, the figure is projected to be 750 million cubic meters). The first reverse osmosis plant — then the largest of its kind worldwide — opened in Ashkelon in 2005 with a capacity to produce 100 million cubic meters annually at a cost of 52 cents per cubic meter. (Natural drinking water actually costs more since it must be processed.) A second plant opened in Hadera in 2010, and when the Soreq and Ashdod plants go on-line in 2013, Israel’s desalination plants will account for 85% of Israel’s household water consumption and turn the state into a water exporter.

Abroad, Israeli technology companies have built more than 400 desalination plants in 40 countries. India has embarked on a pilot project relying on Israeli expertise, and China has signed a deal with Israel’s IDE technologies to build a “Green” desalination plant that desalinates via evaporation and condensation.

While Palestinians blame Israel, Israelis work on innovative solutions. This March, the Palestinian Water Authority petitioned the World Water Forum to fund a $450 million desalination plant in Gaza. Within 24 hours, Israel offered to lend its expertise to the project. Perhaps an Israeli-Palestinian “water war” is occurring – but it isn’t being waged by Israel.

Jack L. Schwartzwald


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