They are all suffering from cognitive dissonance.
Professor Mahmoud El-Gamal (referring to the industry’s scholars)
As 2012 came to a close, copies of the Goldman Sachs sukuk prospectus were gathering dust on the shelves of the bank’s anonymous offices in DIFC. By December, almost exactly one year after the launch of the programme, one of the Arab world’s leading newspapers declared the sukuk dead.1
At the likes of Barclays, Deutsche, Credit Suisse, UBS, Credit Agricole, and many other global institutions, Islamic finance had morphed from ‘strategic’ to ‘opportunistic’ as the global financial crisis unfolded. All had either lost key personnel or formally shut down their Islamic finance teams. In public they made assurances that the Islamic market remained important to them,2 but in private they conceded they no longer had the expertise to transact.
And then came the big one: HSBC. Iqbal Khan, the founder of Amanah – HSBC’s Islamic subsidiary – had already fallen on his sword a few years earlier following the arrival of the unsympathetic Michael Geoghegan. Without their charismatic and connected leader to defend them, Amanah was cruelly culled in late 2012, ostensibly because Islamic finance was no longer an economically viable business for the global banking giant. In HSBC’s own words:
‘[HSBC] allocate[s] capital to markets and businesses with clear growth potential…we [therefore] no longer offer Shari’ah compliant products in some markets.’3
Some insiders took a very different view to the official line. HSBC was in the throes of an unpleasant investigation by the Securities and Exchange Commission into breaches of anti-money laundering rules. Four of the institutions named by the US authorities in whose names accounts had been opened at HSBC included institutions with alleged links to terrorist financing.4 One was a Saudi Arabian bank that had categorically denounced terrorism and denied all links to it.5 Al-Qaida sympathizers may well hold bank accounts at high-street banks in London, argued Amanah insiders. You could probably follow the flow of money back from any bank in the world to some criminal activity and find yourself in breach of anti-money laundering rules. Why single out Al Rajhi over any other bank? To some, the allegations felt like the immediate aftermath of 9/11 when international banks profiled their Middle Eastern account holders in scrupulous detail, prompting an exodus of clean money back to the Gulf region, precipitating a regional boom in bank assets, stock markets and property.
The same insiders contended that HSBC had struck a deal with the SEC. A plea bargain: we’ll close down our Islamic banking arm in six countries if you reduce the sentence. One of the handful of remaining senior bankers at Amanah was there at its inception in the 1990s, and he concurred with this view. It wasn’t about the economics, he told me. Amanah had attracted significant deposits: ‘We were making good money but they had to show something was being done about financing of terrorists. Decisions were made without consultation.’
And so, said the Amanah banker, they conflated unsubstantiated allegations of links to Al-Qaida and killed their support for Islamic markets. It was tantamount to equating Sharia-compliant finance to terrorist finance, as one populist British daily newspaper was fond of doing in hysteria-laden opinion pieces.6 Sharia had become a convenient bogeyman for HSBC.
The view that the decision wasn’t commercial wasn’t just held by Amanah insiders with an axe to grind. One Financial Times journalist had been called by the marketing team at HSBC a year earlier in 2011, asking for all references to HSBC to be removed from the FT’s annual Islamic finance supplement. It seemed a little odd given HSBC’s immense standing in the industry (and their historical support for the supplement) but the journalist complied. ‘There was apparently some internal tension about Islamic finance’, she told me. ‘They didn’t want to be too forward in their support for the industry.’ How odd, when they were riding so high.
Now the senior Amanah banker, the former protégé of Iqbal Khan, contemplates his future. He’s looking into the restaurant business and thinks maybe the banking game is over for him. Eighteen years of hard-won experience at the coal face of international Islamic capital markets will be coming to an end.
He is not alone. UBS’s talented Hussein Hassan – the ex-Deutsche banker who wrote the White Paper (and not the scholar, Sheikh Hussain Hamed Hassan) – ponders life as a farmer in his native Kenya as UBS, too, exits the business. A short while later he enters through the revolving door at JP Morgan, which continues to blow hot and cold on Islamic finance. This week, it’s back in fashion.
Deutsche’s innovator Geert Bossuyt departed in a shutdown of Deutsche’s Islamic activities some years ago but opted to stay in the game by acting as a consultant to the banks. His ill-fated advisory firm took on the Goldman Sachs mandate, and folded a year later. Despite the setback, he is quietly confident that the industry desperately needs his brand of highbrow technical advice. At the same coffee shop in Dubai where the advisor on the Goldman transaction had earlier pleaded his case, Bossuyt tells me he recognizes that a bank is not an Islamic concept, forcing bankers like him to squeeze a square peg into a round hole. And though his industry reputation is that of a conventional super-banker getting the toughest deals done by any means necessary – ‘conservative products for conservative investors and aggressive products for aggressive investors’ – on this occasion he says he advised Goldman to ensure that the use of the fund raised by the sukuk issuance should be Sharia compliant. His client and its legal team ignored him.
Amanah founder Iqbal Khan has turned his attention away from banking to private equity, perhaps reasoning that equity-like products are closer to the spirit of Islamic finance. If the regional banks are to take up the slack where HSBC and others left off, they will have a smaller base of experienced and talented executives to choose from. And yet, somehow Iqbal Khan remains optimistic. We spend a few minutes together in a conference ante-room before a panel session is due to start. Isn’t he sad to see his legacy being ripped apart?
‘Sad? No, not at all. This decision must have been made with the best interests of HSBC at heart’, he tells me, diplomatically skirting the nasty business of corporate politics. ‘The whole banking industry has suffered in this crisis and Islamic finance is no exception. It is no doubt a very rational decision and we need to be less emotional about such things. I was immensely privileged to work with my colleagues at HSBC and proud of what they have become. They’ve gone on to do great things.’
That’s his legacy as far as he’s concerned, not the bank itself. I sense he is quite emotional about his staff, moulded in his own image to disseminate a philosophy of ethical banking, and there’s no doubt in my mind that his pride in his legacy is sincere. His staff were like his children, mentored and protected by him. Now grown up and flown the nest, they are dispersed throughout the world to spread the good Gospel.
Away from the banking industry, Iqbal’s private equity firm is concerned primarily with taking risk by buying and selling assets – real trade, perhaps what a ‘merchant’ bank should be doing. This is a departure from his former life as a provider of banking products to bank customers. Maybe Iqbal Khan has discovered he is more comfortable dealing in equity – risk-sharing – than debt, where risk is firmly passed on to the borrower. In his Amanah days he had not been an advocate of the burgeoning Islamic derivatives industry, focusing instead on the simple day-to-day products that retail customers wanted. Maybe, like Iqbal, there is a critical mass of industry specialists – many of them Amanah alumni – becoming increasingly uncomfortable with ‘reverse-engineering’ financial products so that conventional products can be deemed Sharia compliant with the mere addition of a ‘wrapper’.
On the subject of the fate of the Islamic finance industry, especially in the light of the setback to his beloved alma mater, Iqbal takes a typically philosophical – or, if you like, Islamic – view. ‘Allah the Glorified and Exalted7 has a plan’, he reassures me with the utmost confidence. ‘He hasn’t surrendered the remote control of the world to Mr Obama or anyone else. From a historical perspective, the first Islamic finance transactions [of the modern era] were musharaka in nature – sharing in profits and losses of ventures, real economy. But the universal banking model took over as people searched for debt-like products. Private equity is inherently suited to Islamic finance. And it will come back. The institutional sector will open up – the leverage model is dead. Asset managers will look to the real economy and share in its returns.’
The man who replaced Iqbal Khan as the head of Amanah has also stepped down. He had read the writing on the wall six months earlier, as global markets bounced along the bottom of the curve, and big banks looked for scapegoats and easy fixes to allay shareholder concerns. Back then, he approached HSBC’s arch rival, Standard Chartered, to open his own personal bank account, reasoning that only they could offer the same level of retail service as HSBC globally and on an Islamic basis. With a wry smile on his face reflecting the irony of a bank’s CEO opening a checking account with his greatest rival, he says he will remain a StanChart customer ‘until such time as they take a similar decision’.
So is that it, then, for the Islamic finance industry? The withdrawal of the flow monsters, the creative innovators with big balance sheets and legions of sales personnel marching across the world?
‘The industry should rejoice’, he says when I ask him if he is sad about HSBC’s withdrawal. The little guys are the ones who suffer from HSBC’s presence. If it stays in the industry for ever, it would ‘mop them up’, he says.8 ‘There can be local institutions who can step into our shoes and lead [the industry].’
But the smaller wholly Islamic institutions are hamstrung. Operating under the same rules as conventional institutions, they are forced to offer debt-like products so that they set aside the same proportion of their balance sheet to cope with potential shocks, as their regulators require them to. The moment they begin operating as a manager of deposits, a ‘merchant’ trading inventory rather than lending money, they cease to be a bank and their funding costs become prohibitively expensive.
And so they find themselves forced to revert to their default product: a commodity murabaha loan, without which they do not exist. Even the sale and leaseback structure – the ijara – as used in the majority of sukuk transactions, has been criticized by some, despite its attachment to a real asset. A minority of detractors deem it to conform to the industry’s need to seek abnormal rents by leveraging assets and thus gearing up investor returns. For these detractors, including Professor El-Gamal, the focus on slavishly replicating the debt model of conventional finance gives Islamic finance no unique or ethical character. According to him, there is nothing uniquely ‘Islamic’ about it:
if Islamic financial providers were to focus on the substance of Islamic jurisprudence instead of its forms, they can explain to customers that some – but not all – forms of debt are harmful, and some – but not all – forms of interest are harmful.9…In the area of Islamic finance, one could argue that the unique power of religious injunctions (especially against riba and gharar [uncertainty]) is that they protect individuals from temporary greed-driven heightening of their appetites for risk. Alas, by shunning mutuality and adopting some of the most transparent forms of Sharia arbitrage, the regulatory substance of the Sharia has been squandered, while adherence to its forms has continued tragically in the shallowest way.10
Ouch. Perhaps he might concur, then, with both the Vatican and also a former Achbishop of Canterbury, the head of the Church of England and the symbolic head of the worldwide Anglican Community. Archbishop Rowan Williams wrote to the Financial Times in November 2011, a few days after the Vatican had published a bold forty-one-page statement calling for the establishment of a ‘global public authority’ and a ‘central world bank’.11 Protesters with no specific agenda other than a rage against what they saw as the disastrous effects of global capitalism had camped out on Wall Street and outside London’s St Paul’s Cathedral. The Archbishop marvelled at how the Church of England could still be used by British society as a stage ‘on which to conduct by proxy the arguments that society itself does not know how to handle’.12
‘The Church of England and the Church Universal have a proper interest in the ethics of the financial world and in the question of whether our financial practices serve those who need to be served – or have simply become idols that themselves demand uncritical service.’13
Condemning the ‘idolatory of the market’ and ‘neo-liberal thinking’, the Vatican called on the world to examine the principles and the moral values at the basis of social coexistence. It warned that society would head towards an abyss of growing hostility and violence, ultimately undermining ‘the very foundations of democratic institutions, even the ones considered most solid’. It was, in short, suggesting the end of civilization as we know it unless solutions were found to ‘injustice’. At a press conference, the Cardinal responsible for the document questioned whether those on Wall Street ‘[are] actually serving the interests of humanity and the common good’.14
These fine sentiments were spectacularly overshadowed by an own goal two years later from Williams’s successor, the Rt Revd Justin Welby, a former oil industry executive and a member of the Parliamentary Commission on Banking Standards. Wading into the public debate over high-street ‘payday’ lenders charging vulnerable borrowers usurious rates – 5,853 per cent annually being a typical and scarcely believable example15 – Welby vowed to put payday lenders out of business by using the Church to build up Britain’s network of credit unions. Welby told the Financial Times that he would compete against Wonga – one of the UK’s leading payday lenders – and put it out of existence. A day later, the Financial Times discovered that the Church of England had itself indirectly invested in Wonga16 and the Archbishop declared himself ‘embarrassed’ and ‘irritated’ to have discovered the holding.17
Despite the Church taking an active role in the debate over ethical banking recently, its message on usury had been undermined. Keeping track of the Church’s pension fund investments would have been no easy task, with holdings across ‘a diversified portfolio including equities, real estate and alternative investment strategies’. That latter asset class – alternative investments – gives me some cause for concern. These include, after all, hedge funds, many of whom aggressively leverage their holdings with debt, and engage in ruthless trading strategies that maximize the pursuit of profit above all else. Leverage, shorting, event arbitrage, credit default swaps, complex derivatives – these are all instruments and techniques used by hedge fund managers to generate absolute returns. And though the Church publicly declares its commitment to manage its assets in a way that reflects the Church’s teachings and values, as well as being a signatory to the UN Principles for Responsible Investment, it might not have found itself in this embarrassing predicament had it – ironically – asked a Sharia -compliant asset manager to invest and monitor its holdings.
And quite what Jesus would have made of Welby’s stated intent to open his network of 15,000 church premises to existing credit unions and offering volunteers to help run them – in an attempt to compete Wonga out of business – God only knows. Perhaps the only recorded instance of Jesus striking down with great vengeance and furious anger18 took place against the money changers in Herod’s Temple – and today the Church of England is inviting the moneylenders back in.
Pointing the finger of blame at individuals, however, is not constructive and is plainly wrong. The Archbishop can hardly be personally responsible for monitoring the billions of dollars his fund managers oversee. The Church’s lively engagement with the banking industry over the past few years has seen valuable contributions such as that of the Church Commissioners’ fund, an endowment worth £5.5 billion, taking part in the ‘Shareholder Spring’ of 2012 to express concern over executive pay, complaining to 200 of the UK’s largest companies, and seeking assurances from Barclays – one of the most prominent transgressors in recent banking scandals – that it was making a ‘determined and successful effort to effect a fundamental turnaround in culture’.19 The fund even sold off shares in News Corporation as a result of failing to allay the Church’s concerns over corporate governance, the kind of action of which the Sharia board of an Islamic bank might approve. There are, despite the recent controversy, strong similarities in values between the Church and Islam when it comes to finance.
And though Christianity and Islam seem to have a common sense of morality and justice in matters of wealth, one does not have to be religious to recognize the shortcomings of modern financial markets. The founder of the annual World Economic Forum – where Mufti Taqi Usmani had delivered his lecture on reformation of the economic system only a couple of years earlier – acknowledged ‘a general morality gap’.
‘We are in an era of profound change that urgently requires new ways of thinking instead of more business-as-usual’, said Klaus Schwab. ‘Capitalism in its current form has no place in the world around us.’20
But what new ways of thinking are required and, just as importantly, how to implement these reforms? For the Vatican, the practical solution pivoted on minimizing the damage of certain practices rather than a radical rethink of the nature of money itself. Among some of the bolder rhetoric on establishing a global authority, it also suggested pragmatic incremental changes. Routine banking business should be clearly separated from speculative transactions – in other words, the separation of the high-street retail banks from the more risky investment banks. Banks should be recapitalized by public money and in return should be obliged to help reinvigorate the real economy. And, finally, the financial transaction tax, more popularly known as the ‘Robin Hood Tax’ – a 0.05 per cent tax levied on all share, bond, currency and derivative transactions – should be imposed on financial institutions with the resulting funds designated for investment in the real economy.
Is this enough? Do these tweaks to the financial regulatory system address the moral agenda of the protesters at St Paul’s? Is Islamic finance’s risk-sharing model a more far-reaching solution?
And do Muslims – and indeed non-Muslims looking for ethical ways to invest and finance themselves – really want a true risk-sharing model? Because if they don’t, then those like Tarek El Diwany, the cult figure fighting a one-man crusade against riba, must give up. If no one wants to buy what he is selling, then he too must turn to opening a restaurant or running a farm.
I catch up with Tarek in the City of London shortly after HSBC’s shock announcement. Despite the freezing conditions, he wears a short-sleeved shirt and light-brown sports jacket, making me feel very self-conscious in my distinctly City attire. He bounds up to me, apologizing profusely for the lateness of his train into Liverpool Street Station, and extends a hearty handshake full of his trademark energy and enthusiasm.
We discuss home financing using real profit-and-loss sharing, and the prevalence of debt-like structures at Islamic institutions in Britain. We concur they have been a failure: a failure to engage the Muslim community, a failure to differentiate themselves from conventional banks. We agree that Islamic finance should have been about bringing something wholesome and beneficial to everyone, irrespective of creed.
Over the years, he has found himself fighting the views of scholars, the standard bearers of Sharia. So much so, that some refused to be on the same panel as him at conferences, refusing even to engage. ‘They didn’t have an answer, and the best way to appear not to be wrong is not to engage in the first place’, he says. He found himself relegated to the final afternoon slot on the second day of conferences, talking to an empty room. Eventually, conference organizers didn’t invite him at all.
As if the frothing-at-the-mouth opinion pieces in British tabloid newspapers hadn’t already twisted the lay public’s perception of Sharia or Islamic finance through the peddling of deliberate misinformation, Tarek feels that his own people are unwilling to change the status quo.
We look across the table at each other, depressed. Even I’m having my own existential crisis. In the course of my work in the industry, I’ve structured and sold everything. Every product, every asset class, every structural variation. Ultimately my clients (investors) and my employers (banks) want the same thing – leverage and capital guarantees. The former fuels the greed of customers, the latter requires clever contractual manipulation to arbitrage Sharia opinions.
Should we just give up? Tarek is adamant and earnest in his response. No, absolutely no. We have to keep fighting, he advises. We just need to be smarter about it. There are other guys out there, other Sulaimans and Tareks with phenomenal product knowledge and energy, sincerely looking to change things for the better. One day, that group of sincere and credible individuals will find their own critical mass, and create something unique. It will need a patron with deep pockets willing to change the face of the industry – deep enough that he doesn’t need the infrastructure and resources of a Deutsche Bank or an HSBC to back his deals. Someone who views his investment as a sadaqa – a charitable act. A ticket to Paradise.
I visit Iqbal Khan to discuss a transaction with his private equity firm and before long our conversation digresses. As we analyse the specific technicalities of the transaction, he pauses and then springs a question.
‘Harris, are you happy?’ he asks, more than a little tangentially. For a moment, I am not quite sure how to respond.
I fumble my way through a nebulous answer and immediately wish I had been more honest. The truth is, not really. How can I be? Something inside is not quite right. For years I’ve peddled the idea that Islam offers a unique view of trade and commerce, and yet my working day revolves around replicating what conventional banks do. Sometimes, as in the case of the sale and leaseback sukuk, there is some justification for rent-seeking legal devices that use a real asset as an underlying. Though not all will agree, at least it beats the simultaneous buying and selling of copper on the London Metal Exchange to synthesize a loan.
If conventional capitalism – fuelled by the fractional reserve banking model – has spawned the private cartel that is the global finance industry – the cartel that President Thomas Jefferson warned us about – then the modern Islamic finance industry seems little different to outside observers. Surely adopting it in its current form as an economic model would only lead to the same slavishness to debt, cyclical uncertainty and wealth disparity that the world experiences under conventional finance.
Is the Islamic finance industry to be blamed for its own weaknesses? Perhaps not. Commercial pressures have forced the industry into a corner: without conventional banks to offer macroeconomic hedges and inter-bank funding, the Islamic institutions struggle to survive. Credit traders at powerful conventional institutions who transact with Islamic institutions want to see risk packaged in a certain way. Their credit committees don’t believe in the cult of equity, only debt. They are banks, after all.
Regulators force Islamic banks to allocate capital to investment structures they lend on (like the profit-sharing musharaka) in a proportion that is many multiples of regulatory capital allocated to commodity murabaha structures. Tax authorities allow interest expenses to be deducted from taxable profits, unlike dividends on equity-like structures. And though their skill base is critical to the industry, non-Muslim conventional bankers dominate the industry, and they care little for the essence of Sharia. The more the industry grows, the more it does so by an increasing compromise of its once core principles.
‘You must remain sincere and committed’, Iqbal tells me. He advises me to continue to say no to deals I don’t like from a Sharia perspective, the deals that quite obviously flout the spirit of the law, and remove ethics from consideration. Don’t let the industry dictate its terms. Let God dictate. ‘In the end, your rizq is written.’ Your providence, your wealth. God has already decided whether you’ll die a rich man or poor, so you may as well do the right thing.
Something is dawning on me, though it’s taken me most of my career to realize and articulate it. Like most of my fellow Samadiites, commercial realities have tended to dictate the manner in which we conduct our business. Any hint to our employers that one’s life ought to be dedicated to the pursuit of truth and justice – to God, no less – would remove the veneer of acquiescence that ensures we keep our jobs. In our private lives, we tell ourselves that our providence from Allah is already written and that therefore pursuit of a permissible – halal – income is a righteous act, its converse a sin. The corporation, on the other hand, demands absolute submission from its employees; a faceless entity that forces us to consider money a morality so imperative that anthropologist David Graeber concludes all others moralities seem frivolous in comparison.21 The structure of the corporation eliminates imperatives other than profit, encouraging executives to give little thought to ‘[firing] lifelong employees a week before retirement, or [dumping] carcinogenic waste next to schools…because they are mere employees whose only responsibility is to provide the maximum return on investment for the company’s stockholders’.22
It’s only when I have the chance to meet Professor El-Gamal in Houston that I am explicitly confronted with my problem. Driving through the Rice University campus, I am struck by how quiet and charming it is in the world of academia – how far removed from the bustling ant colonies of Wall Street and the City of London. It is an environment where a keen mind perhaps can better see the wood despite the trees. Nestled within these genteel green avenues is the Baker Institute for Public Policy, where El-Gamal teaches economics, statistics, finance and management.
I find the institute across from a large fountain, still incongruously noisy and active in a deserted campus that has shut down for the Christmas holidays. Inside, El-Gamal’s office is lined with volumes of classical texts on jurisprudence in Arabic from the likes of Ibn Rushd, their colourful spines spelling out the titles in calligraphy, letter by letter, across each individual volume. They are oddly juxtaposed with books about Bayesian networks, signifying the professor’s wider teaching responsibilities.
He greets me warmly and I am immediately struck by his easy manner. Dressed as one might expect an American college lecturer to be – black polo shirt, slacks, a short grey beard and neatly groomed hair – I find him exceptionally thoughtful, introspective, and willing to exchange radical ideas without fear of censure.
Indeed, in the opening exchange of words, he immediately suggests to me that my chosen vocation is the result of incoherent pietism. ‘You’re suffering from cognitive dissonance. So are the scholars. They’re all suffering from cognitive dissonance.’ Both blunt and likeable at the same time, El-Gamal does not sugar-coat his views.
Though his manner is undiplomatic, his argument is right-brained – nuanced and reflective. ‘[You’re] not satisfied to admit that the emperor has no clothes, never has, and never will. [You] continue to refer to some mythical moral standard that a “true” Islamic finance, whatever that may be, can offer to humanity – not recognizing that there is nothing distinctively “Islamic” in any of these prohibitions and financial views expressed by Taqi Usmani or others.’
Wait a minute. Did he just diss Justice Mufti Muhammad Taqi Usmani, one of the most respected Sharia scholars in the world? And me as well, to my face! I am not sure whether it would be expedient for me to feign offence, and robustly defend myself, though in fact I am curious and looking forward to some refreshingly alternative views. What does he mean, I have cognitive dissonance? What conflicting views do I hold that make me feel guilt or frustration or anxiety? How does he even know that I am feeling this way?
For El-Gamal, Islamic finance is primarily about religious identity and has arisen from the writings of Islamist intellectuals of the mid-twentieth century, seeking to rid their societies of Western banking practices introduced during colonial periods. For these intellectuals, Islamic finance was a Utopian dream to rid the world of interest, explicitly prohibited by Islamic scripture. The solution for these intellectuals was to build all financial intermediation services on the basis of equity-based profit sharing, and the Mit Ghamr experiment was one of the first of its type.
But the dream of economic development and poverty alleviation was not to last. Islamic financiers began to approach the discipline from a practical rather than ideological standpoint: the use of legal devices – Sharia arbitrage – became rampant, and special purpose vehicles became the wrapping paper to restructure interest-bearing debt into rent or price mark-ups. For El-Gamal, these sale and rent contracts were spurious attempts to rename interest as profit or rent, for an additional cost that Muslims were only too eager to pay.
‘In the ancient world, arbitraging fatwas was very difficult’, he explains. You had to travel vast distances to meet prominent scholars and procure their opinions. ‘Today you can arbitrage this ancient law written in the twelth century and that’s easy – you can run rings around it. [In fact] Islamic jurisprudence was written for society to shun risk, to shun excessive risk.’ In other words, today we use Islamic jurisprudence to replicate what the modern financial system provides to everyone else, rather than to protect the weak and restrain our natural tendency for greed.
And yet, here we run into a paradox. If the proselytizing faith of Islam is to remain alive and healthy, it needs to hold its own in an increasingly sophisticated and polarized world. ‘You have no choice but to keep up’, says El-Gamal. ‘If the other side produces better weapons than you, then it would be lunacy to let others have a competitive advantage over you.’ So he is suggesting that replicating ‘their’ financial products is necessary. Perhaps it’s not even a necessary ‘evil’ – it’s just progress. And it need not be approved by the faith, because it doesn’t need to be. It’s just finance. So do it, but do it ethically – according to the spirit of the Sharia. Reject these nonsensical modern versions of contractum trinius and retrovenditio to justify the existence of an industry that need not exist. ‘There are many ways to sell your soul to the devil and using religion is the lowest of the low. For years, I tried to give the scholars the benefit of the doubt but not any more. A small sin becomes a large sin if it becomes habitual’, he says.
For a few uncomfortable moments I’m anxious that I’m being exposed as a charlatan. He’s right, I tell myself. Every inter-bank liquidity trade is a compromise. Every attempt to share in the risk of an asset that a customer wishes to finance is watered down by credit risk departments and regulators, until eventually the transaction that remains is one that the conventional bank across the high street can simply do more cheaply. No wonder the conventional banks entered this market in their droves when the market was booming – economies of scale and willing customers meant easy money for them.
I spend a few minutes trying to justify my motivations to the professor. All the arguments that Iqbal Khan and Tarek El Diwany have outlined to me: the daily jihad – the striving – that people like us undertake in our day-to-day lives, to uphold what is good. Without people like me, I reason, the industry would be filled with those who seek to milk it for personal gain, and ultimately will destroy it. So what, I shrug, the whole industry is a work in progress – even the cynical participants recognize that. We’re working towards an ideal, an equity-based economic system, and – God willing – we’ll achieve it one day. Perhaps the end justifies the means.
I don’t feel I’m even convincing myself. I’ve had this conversation before, with Tarek and others. And though I refused to admit it to myself, I always left those conversations in that confused state of mind between the satisfaction that I’m doing something morally upright and noble, and the guilt that perhaps I’m trying to fool myself and my customers. I am experiencing cognitive dissonance. El-Gamal has heard the argument before as well. And though I know he’s not convinced, he softens a little.
‘Cognitive dissonance is very useful’, he responds. ‘It helps you to get out of bed in the morning and believe that you can do something useful.’ He suggests that if I want to stay in the industry I should hold on to it. I’m not sure how to take that, but he seems so well meaning, I don’t think he’s mocking me. It sounds like sincere advice.
As for himself, he severed ties with his friends in the industry long ago. Not out of choice – it’s just that they couldn’t handle his outspoken views. The only scholar who has dared to agree publicly with his point of view is Sheikh Hussain, the octogenarian chairman of Dubai Islamic Bank’s Sharia board. Perhaps it was the common Egyptian heritage that the two men share. Certainly both are close participants and observers of the Arab Spring – El-Gamal having just come away from a daily news briefing he provides for Bloomberg News on the current Egyptian constitutional crisis. The father of the modern Islamic finance movement, Sheikh Hussain, meanwhile, has been drafting Egypt’s new constitution, culminating in an appearance on live national television to read the constitution article by article.
Perhaps these ties of kinship have helped El-Gamal to feel a greater degree of respect for Sheikh Hussain than perhaps for any other scholar in the industry. But despite this, El-Gamal thinks that even the good doctor demonstrates a little cognitive dissonance. Dubai Islamic Bank, for example, is the oldest existing Islamic financial institution in the Middle East, set up by the guiding hand of the venerable scholar in the 1970s and still to this day certified for Sharia compliance by the Sharia board that he chairs. And yet, El-Gamal feels that the bank continues to engage in the subterfuge that is modern Islamic finance. They were the guys, after all, who sold Deutsche’s hedge fund-backed double-wa‘d structured product to their customers.
Other scholars get shorter shrift. Even the most highly respected names are not close enough to the world of complex modern financial instruments to opine on the subject, claims El-Gamal. When it comes to the Islamic finance industry, it’s not so much debt or even interest that El-Gamal has a primary problem with. It is the scholars themselves. ‘Some Sharia scholars are cynical, but others have been picked for their compliance’, he says, lamenting the dominance of a small number of individuals who define the industry by approving its products.
What upsets El-Gamal most of all is the fact that Islamic product manufacturers and their scholars pretend that what they offer is even required by the religion. He is right, of course, about debt. Debt itself is not prohibited, though some champions of equity-based financing might tell you otherwise. Indeed there are examples of the Prophet and his companions being indebted to others, though, it must be said, without the additional burden of interest on their loans.
‘Islamic finance specialists are like gun manufacturers’, he explains. Most people don’t really need a gun, but if they do purchase one, their intent determines how harmful it could be. ‘If Geert Bossuyt walks in through the door, I’m afraid’, says El-Gamal. To him, the ex-Deutsche Bank ex-Dar Al Istithmar boss is the gunrunner to tribal warlords and drug dealers, like Nicolas Cage in the film Lord of War, selling loaded automatic assault rifles to the psychopathic and mentally unstable. Bossuyt, on the other hand, will argue that he is simply providing a service that people want.
Some will want to use that product in ways that may seem unethical, like the banker who wants to use the double-wa‘d structure to buy a credit default swap – an insurance policy – on the default of a nation, even when his own institution has no intrinsic interest or exposure to that country. But men like Bossuyt will argue, so what? Who is he to judge to whom he should sell and to whom he shouldn’t, as long as it’s within the law of the land? If a man wants to buy a fire insurance policy on his neighbour’s house, it’s not his place to refuse.
But the law of the land was changing. As the European Union pushed ahead with its regulatory crackdown on trading of sovereign debt-related derivatives at the heart of the Eurozone crisis, politicians in the European Parliament were almost unanimously in agreement on the subject of ensuring market stability. Concerned about ‘naked’ short selling of shares and sovereign debt – that is where the seller has made no prior arrangement to borrow the security he intends to sell (even though he doesn’t actually own it) – the politicians voted 507 to 25 in favour of restricting the practice.23
‘Parliament has successfully fought for very strict conditions for short selling to contain destructive speculation’, said one German politician,24 little realizing how similar to classical Islamic jurisprudence were the restrictions against greed voted on by his parliamentary colleagues.
And so I leave my interview with El-Gamal both enlightened and confused. He may have the best of intentions but his increasing isolation from his peer group and the industry he was once part of means that his views have become marginalized and almost forgotten. It is a shame, as he has so much to offer; he remains right-brained in a world where the left-brained are honoured and rewarded. In choosing to take the path of academia over Wall Street, he implicitly accepted that his providence from God had already been written. Today he tells his PhD students, ‘I’m only going to teach you if you go into the regulatory side, so the system doesn’t collapse. Don’t envy the guys across the table, and don’t demonize them.’
Islamic bankers and lawyers feel the same conflict inside, but generally internalize those feelings.
At a symposium arranged by a Magic Circle law firm, one of the world’s leading Islamic finance lawyers gathered a group of scholars together for a day-long session on current deal trends. The workshop was intended to help the scholars understand the detailed commercial issues in real-life case studies, so that they would be better prepared in future to opine on their Sharia compliance. At the close of the day, the lawyer related, the scholars gathered their thoughts in a final session. One scholar hinted at the dissonance inside him, and set off a wave of agreement among his peers. It seemed that every scholar in the room was living with his own internal conflict, each human enough to have felt pressured into approving loan-like structures. With every new transaction, they would suggest an equity-based structure, like musharaka – the investment partnership – and find themselves gravitating towards either a series of additional contracts to mitigate the equity basis of the transaction, or instead avoid the complex legal device altogether and employ a simple commodity murabaha. The resultant structure would be debt-like and help their clients meet their regulatory requirements.
Each scholar was prepared to admit that he was participating in an industry that valued form over substance. Could they not resist? Would strength of numbers not give them the momentum to say no, and move away from reverse engineering? Apparently not. The banks were simply too strong and refusal to cooperate would quickly remove oneself from the game. As El-Gamal had said, scholars would be picked for their acquiescence, and those who wished not to participate would find their voice in academia, teaching students to be gamekeepers, not poachers.
So is the industry perhaps in a state of stagnation? The standard bearers want to move it in a direction that their forebears, the post-colonial intellectuals of the Islamic world, once envisaged. The banks and their regulators will not let them. I am reminded of a question that Iqbal Khan asks me before we part company. ‘If you could be anything you wanted to be, do anything you wanted, what would it be?’
I wasn’t ready for the question. In fact my answer was embarrassingly dumb and childish. I told Iqbal Khan – perhaps the most popular and respected Islamic banker in the world – that I would revive my stalled career as a racing driver; I stood up, shook hands and thanked him for his time. What a cretinous response. My pre-teen children could have answered the question better.
When I got back home, I thought about the question more carefully. The industry lacks a megabank with state backing. Oh sure, the Islamic Development Bank exists – a multilateral institution owned by dozens of Islamic nations – but it is a bank in the traditional sense. The megabank’s premise would be mutuality and an equity basis, a sort of gigantic private equity firm with enough liquidity to provide counterparties with access to macroeconomic hedging and other non-debt financial services. On a mutual basis, like a cooperative insurance company, not using the derivatives we see today, just as Sulaiman had suggested earlier. It wouldn’t be predicated on reverse engineering the conventional industry with Sharia wrappers. Its client base would be small and medium-sized enterprises, retail customers, the man in the street – not multinationals building luxury hotels for oligarchs on reclaimed islands in the sea.
As the first of its kind, it might even have limited commercial success. But it might also spawn a new generation of Islamic institution. One that will allay the fears and guilt of bankers, lawyers and scholars seeking God’s pleasure.
And, just as Deutsche Bank had once established a think tank with the aim of conducting industry-leading research into Islamic finance, the megabank could sponsor just such a think tank, drawing together the world’s leading scholars from Malaysia’s central bank Sharia board to AAOIFI in Bahrain. But rather than focus on setting guidelines and standards for the industry – as AAOIFI and others already do – it would be run by front office bankers and lawyers, not academics and scholars. Its purpose would be to push the envelope on product design, seeking better ways to deliver financial products without the commercial constraints of quarterly budgets or balance-sheet risk.
A Utopian dream for an incurable idealist, maybe. But doable? Perhaps. In fact, perhaps the Islamic Development Bank itself may move in that direction. Shortly after the Goldman Sachs controversy, young Mohammed Khnifer accepted an offer from the IDB to take him on as a product structurer, a sort of free-thinking scientist given the tools to smash atoms at each other in the name of fundamental research.
In the meantime, until such time as the concept of mutuality moves out of the narrow world of Islamic insurance to the wider world of Islamic banking – the next step in its evolution – the existing industry can find ways to mitigate its guilt. Trade finance, for example, is a perfect asset class to explore. Commodities traders – companies that buy and sell agricultural produce, oil, gas, copper, ethanol, all manner of raw materials – need short-term financing in order to fund their inventories. Not being cash rich, they typically approach conventional banks to lend them money for, say, sixty days, during which time they buy the stock from source suppliers and sell it on for a profit to end users. Islamic banks can play a critical role in a vital economic activity – they can finance inventory through a ‘true’ murabaha, where the bank owns the produce and on-sells it to the trader for a price mark-up. A real economy, merchant activity. Merchant capitalism at its best, in the manner in which twelfth-century Muslim traders introduced dynamic entrepreneurship to a primitive Europe. And an asset class that would solve the persistent ‘gap risk’ – the mismatch in tenors between a bank’s assets and liabilities – that Islamic banks are prone to.
What about taking up the mantle on ethical finance? Instead of financing the purchase of English Premier League football clubs – complete with pork pie stalls and bars serving alcohol,25 cleverly ‘structured’ out of the deal via a wrapper – perhaps Islamic institutions should take a greater role in championing employee rights and environmental concerns in the deals they finance – ‘Sharia based’ not just ‘Sharia compliant’. Perhaps the types of assets they should be looking to finance should be the lifeblood of a real economy, the small and medium enterprises, rather than trophy assets for the personal enjoyment of ultra-high net worth princes.
I find myself reluctant to point the finger of blame at the scholars. The vast majority I have worked with have shown admirable personal characteristics and recognize the deficiencies in the industry they serve. They have shown remarkable restraint in the manner in which they have responded to criticism. Sheikh Yusuf DeLorenzo, for example, was the recipient of open criticism from Professor El-Gamal for his role in the creation of Shariah Capital’s long/short hedge fund,26 who described the marketing of the fund as ‘near-fraudulent’. Sheikh Yusuf’s response was calm and measured, scholarly you might say: ‘Mahmoud El-Gamal has said some awful things, but what he is doing is important. Not only do I support his right to do it, but I believe what he is doing is important for the industry.’ He goes on to emphasize the dangers faced by the industry in allowing the cynical and the acquiescent to dominate it, a view deeply held by El-Gamal: ‘I am worried about the deviousness of some in this industry, and how this filters down to the retail level which leaves everyone open to participating in riba without realizing it.’
Despite the manifest shortcomings of the modern Islamic finance industry, there remains within it something wholesome in its participants’ willingness to introspect. This introspection is a form of self-regulation, providing hope to people like me and my customers that it will evolve for the better. And though I find myself often questioning whether I and my fellow bankers and lawyers should simply give up and devote our energies elsewhere, something tells me that we’ll get there in the end.
In an age in which Sharia is increasingly demonized, Islamic finance has the power to unite people of divergent beliefs. Of course, every now and then we read an opinion piece that Sharia law is insidiously creeping into civilized Western society and that right-thinking people need to take a stand or see their hard won freedoms dissolved. Or we may see politicians suggesting that Islamic finance is incompatible with Western standards of fair play, equality and liberty, as did one Australian senator who described Sharia as incompatible with Australia’s Western values, and opposed the introduction of any form of Islamic finance into Australia.27
Perhaps that same senator thought that excessive leverage, the infamous ‘liar loans’ of the subprime mortgage debacle, collateralized debt obligations backed by worthless pieces of paper, and that other ‘socially useless’ banking instruments were entirely compatible with Australia’s Western values.28 Perhaps he would also have been horrified to hear that the UK government had banned short selling of bank shares during the depths of the financial crisis.29 As the softly spoken ex-Magic Circle lawyer, Sulaiman, had said when we met to discuss his disillusionment with the industry, ‘Can you imagine a Daily Mail headline saying “UK regulator implements Sharia law to prevent financial meltdown?”’ We wonder what the Australian politician would have made of that.
If there is something insidious, it is not the poison of a foreign law come to rob us of our freedoms, to enslave our women, bludgeon our arts and throttle our sciences. It is the belief that Sharia is incompatible with the mores of a civilized society. Was there a higher seat of learning than Baghdad’s Bayt al-Hikma – the House of Wisdom – or a greater model of tolerance than the Muslim city of Cordoba during Europe’s Dark Ages?
Just as there may be a witch hunt against Islam and all it represents, is there also an inferiority complex among Muslims, caused by a wider feeling of impotence against a sense of neocolonialism, a deep-rooted sense that the Muslim is no longer master of his own house? Some observers might argue that militant Islam is a by-product of colonial empire building, whereas the preceding 1,350 years witnessed Islam of a different kind, often gentler and almost always with a sense of justice unmatched in neighbouring societies.
Former human rights barrister Sadakat Kadri documents his personal journey of discovery of Sharia law in his excellent book Heaven on Earth.30 And though not all Muslims might agree with his views on (for example) literalism in Islam, he reminds us that Western ways of handling criminal justice and war have many deficiencies of their own. He also concludes that ‘no interpretation of the Sharia has ever been timeless, and Islam has never been doomed to insist otherwise…Islamic jurisprudence has not spent the fourteen hundred years opposed to change; it has been defined by it.’
For Kadri, an austere interpretation of Islam that has caused panic among some in the West is a recent phenomenon, one that runs counter to a history of transformation and inclusiveness. Over the last forty years, governments looking to instil an Islamic identity have favoured a literalist approach obsessed with punishment and cruelty, ignoring a millennium of legal development framed by the middle path and context. Islam’s innate capacity to borrow and learn from other cultures once imbued Sharia with an organic and fluid vitality that adapted to the demands of a changing world. It was this inclusiveness and vitality that encouraged its early scholars to focus on those aspects of the Prophet’s life that might have been summed up by his famous saying: ‘Beware of going to extremes in religion, for those before you were only destroyed through excessiveness’.31 In seeking to avoid extremism, the classical scholars looked to Greek, Persian, Byzantine and Indian civilizations for inspiration, taking what was beneficial and rejecting what the Prophet had rejected in his life. The most obvious beneficiaries of this approach were the natural sciences and law. And although, for example, strict punishments could be meted out to those who committed heinous crimes, early Islam had often focused on leaving the door open for repentance, forgiveness and mercy. Despite this, post-colonial Islamic movements seem to have ignored a historical tendency for a gentler form of Islam, one more in harmony with neighbouring cultures. Perhaps the modern-day Muslim leader, faced with an existential threat, looks to fetter the freedoms that once gave his people their greatest strength, and now views the West in the same monolithic way he may be viewed by them?
Perhaps Islamic finance is one of the ways in which to bridge that gap, to bring empowerment and wealth distribution at all levels of society, irrespective of belief. But the continuing demonization of Islam and Sharia means that the Islamic finance industry must engage in a public relations offensive. It must divest itself of the perception that it is somehow linked to militancy, that it is incompatible with Western values. It must rebrand itself as ethical, prudent, safe, reliable and as a contributor to the real economy – a creator of jobs and real wealth, distributed across society.
As the protesters gather on Wall Street and outside St Paul’s Cathedral, and the world fights a double-dip global recession, perhaps now is the second chance for Islamic finance to prove itself. No more spurious industry awards and vacuous back slapping at conferences. No more replication of credit default swaps on conventional corporate bonds, no more Sharia wrappers, no more voodoo magic.
Perhaps even non-Muslims might concede that Islam can bring something to the world that the world can embrace with open arms, just as the world once embraced its contribution to astronomy, medicine, mathematics and the arts. The Middle Ages witnessed dramatic scientific, cultural and economic innovations in the West; not in the European West, but in the Islamic West as it would have been viewed from the perspective of regions such as India or China. Christendom and its primitive principalities slumbered whilst Islamic lands prospered. The translations by Muslim scholars of great Greek philosophers catalysed and melded with the revealed religious traditions of the Abrahamic faiths to advance scientific rationalism and merchant capitalism, concepts that have survived and are championed in the West today as its own invention.
Like Cordoba or Baghdad several centuries before, Islamic finance must now find its own centre for the pursuit of excellence, its own House of Wisdom. Perhaps Dubai is that very centre, and the bankers and lawyers of Masjid Al-Samad its heart.