ethica webinar - is islamic finance delivering?

8/6/2019 Ethica Webinar - Is Islamic Finance Delivering?

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www.EthicaInstitute.comPO Box 127150, Dubai, UAE | [email protected]

2011-15. All rights reserved. Ethica Institute of Islamic Finance is a training, certification, and advisory company.


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www.EthicaInstitute.comPO Box 127150, Dubai, UAE | [email protected]

2011-15. All rights reserved. Ethica Institute of Islamic Finance is a training, certification, and advisory company.

Ethica is #1 in Islamic finance training

and certification with over 20,000 paid

learners in more than 40 countries and

over 100 banks, universities, and

institutions in 2011

Compared to less than 1,000 per yearestimated at nearest competitor


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www.EthicaInstitute.com

Is Islamic Finance Delivering?The Journey of Islamic Finance

So where thenare you headed?

(Quran: 81:26)


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Vast Topic: Basic Outline Only

The financial system of the world today arose out acertain soil

Namely, the legalization of interest and the divorcingof ethics from economics

The Islamisization process however has sought tolegitimize what already exists

We dont have all the answers. But we do believewe have some of the right questions ?


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An Islamic Economy

Is against Riba (interest)

Sees money as a means of exchange only and notas a commodity for productive purposes

Is a moral economy

Favors real trade in open markets

Supports transactions with equitable risk

Is against monopolization and favors social justice

Supports stewardship through contractual principles


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This Meant The Islamic Economy

Had a currency consisting of gold and silversupported by community currencies

Had business investment through partnership

Had quality orientated production through guilds

Had its socio-welfare decentralized through Waqfand Zakah

Importantly, succeeded


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Islam is concerned with the

well-being of community,

sometimes at theimmediate expense of the

individual

A single interest-based loanmay *seem* harmless, but

an entire economy based

on interest can have

devastating consequencesfor everyone


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Quran alludes to the mainproblem of interest

Interest :

Is structurally violent

Encourages systemic

competition

Concentrates andpolarizes wealth

Creates an incessantgrowth demand


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The logic of interest isthe logic of an addict(Charles Eisenstein, The Ascent of Humanity)


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Interest and thedebt-based financialsystem is the major

cause of global

warming

Interest And The Growth Paradigm


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The Big Question:

How can the operatinginstructions for the

modern world economybe changed so that

economic activity bothprotects and restores

the natural world?

James Gustave Speth

Administrator of the United NationsDevelopment Program (1993 99)


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The Modern Financial Landscape

National Level:

Commercial banks dealing in fiat currency,fractional reserve, central banks as lenders of lastresort

Global Level:

Multilateral institutions (IMF, World Bank)

Global Financial Markets:

Capital, derivative, money and currency markets

Shadow Financial system


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The Islamisizing Process

The Islamic Big-Mac

The first generation of Islamic economists

The first experiments in Islamic finance:

Mit Ghamr Bank

Lembaga Tabung Haji

The first International Conference on IslamicEconomics, held in Mecca


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From 1975 to 1986: IDBs portfolio fell from 55% to 1%while that of Murabaha rose from 0% to over 80%, therest taken up by Ijarah

The Birth Of The Islamic Bank

55%

1%

80%


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The Murabaha (TPO)

The issues with this structure are: The financing nature of the structure

The use of the Waad as being binding

What constitutes ownership from the Bank?

DesiredItem

IslamicBank

Customer

(2) Sale of Item

(3) Payment on

Spot Oftenwith Customer

as Agent

(4) Sale of Item

(3) Payment

deferredwith mark up

(1) Purchase Order of Waad


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The Lizards Hole?

Murabaha to the Purchase Order

Tawwarruq

Bai al Ina

Ijara Muntahiya bi Tamleek Wakala Deposit

Islamic Profit Rate Swaps

Fixed income Sukuk Waad Structured Products


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I tell you, truthfullyandwithout pretense, that we

went beyondchoosing the banklabel [in Islamic

Banking], to the point ofadopting its central

essenceConsequently, we failedto give our financial

institutionsany characteristics beyondsimple financial

intermediation. This isaccomplishedthrough Islamic

banksfavorite investmentmodes thatare essentially

a hybridbetween loansandinvestment; which hybrid

carriesmost of the characteristics of usurious loans

Saleh Kamel, Founder of Dallah al-Baraka GroupAcceptance speech for the IDB Bank Prize, 1996)


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Undoubtedly, Sharia Supervisory Boards, academic councils, andlegalseminars have

given permission to Islamic banks to carry out certain operations thatmore closely

resemble stratagems thanactual transactions. Such permission, however, wasgranted

in order to facilitate, underdifficult circumstances, the figurative turning of the wheels

for those institutions when they were few innumber [andshort of capitalandhuman

resources]. It was expectedthat Islamic banks wouldprogress in time to genuine

operations basedon the objectives ofan Islamic economic systemandthat they would

distance themselves, evenstep bystep, from what resembledinterest-basedenterprises. What is happeningat the present time, however, isthe opposite. Islamic

financial institutions have now begun competing to present themselves with all of the

same characteristics of the conventional, interest-basedmarketplace, andto offernew

productsthat march backwards towards interest-basedenterprises rather thanaway

from these. Oftentimes these productsare rushedto market using ploys thatsound

minds rejectandbring laughter to enemies.Mufti Taqi Usmani in his paper on Sukuk


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Where Then Are You Headed?

3 Routes of change:

Route 1: No need to change...its all the same

Route 2: The Shariah-compliant approach

Route 3: The Islamic paradigm is different and needsa separate operational structure

He has shown each of us the two paths (Q90:10)


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The Dynamics Of Change

What determines viability:

Changing how we think

Changing how we deliver (Supply side)

Changing how we receive (Demand side)

Facilitating change (Support infrastructure)


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Where did we come from?

How did we get here?

Where do we want to go?

How do we get there?

Key Questions


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What is your intention? Actions are by intentions

What are your goals?

The Shariah Plug?

Think local act local

Difference between lending and investing

Making profit comes second

A Paradigm Shift


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Introducing the Waqf Interface


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Musharakah-Mudarabah Financing

Equity based models can be used on a local level

Mutual fund for SMEs

Co-operative process through community financing

Example: Crowd funding www.growvc.com Examples of Musharakah-based ventures:

First Ethical Musharakah Fund

SAH Global RHT Partners


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The Souq Open Markets

Five largest supermarkets in Britain control 2/3 of allretailing

Open Market

Open Production

Open Distribution

Free Currency

Ethical Contracts

Example: Open Trade Network www.opentrade.org.uk


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Interest-Free Loans (Community Based)

Such loans can be:

Incentivized

Empowered the poor

Islamic Banks can leverage the internet and cooperatewith microfinance institutions

Examples:

The KIVA Network www.kiva.org

Grameens Interest-free program


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Shared productive infrastructure along a common ethos Employer-Employee Relationship replaced by a Master-

Apprentice Partnership

More balanced local economy

Motivated by service to ideals not by profit

Exist to serve their owners (local community) and henceare sensitive to their needs

Examples: The Amul Model - www.amul.com

The Briarpatch Co-operative - www.briarpatch.coop

Guild (Community Production)


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Community Currencies

Mutual Credit Associations and Community Currenciesprovide exchange media that are:

Interest free

Stable

Sustainable Abundant

Provides a built in buy-local bias

Is Goods and Services orientated

Helps retire interest bearing debt

Example: WIR Bank (Mutual Credit ClearingAssociation) - www.wir.ch


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Trust buys land and retains its use for community

Construction can be paid for by local contributions

Property can be:

Sold at non-commercial rates

Or leased out for 99 year leases on an inheritablebasis

Resale is restricted to the Trust and prices are

capped This ensures land will not be capitalized

Example: www.cltnetwork.org

Community Land Trusts


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Trusts invests in a fleet of vehicles of various sizes

Takes out appropriate mutual-insurance/takafulscheme

Vehicles are rented at non-commercial long term rates

Rental income goes back to the Trust

Rules of vehicle use and maintenance meannegligence will be fined

Community Vehicle Trusts


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Exceptional students qualify for scholarships Others qualify for interest-free loan

All students commit to:

An oath of conduct A pledge to help educate at least one more

member of the community in their life-time

Works with local education authorities to helpmonitor childrens progress

Example: www.hantam-trust.org.za

Community Education Trusts


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Gold and Silver Deposits

Islamic banks can offer Gold and Silver deposits

Gold and Silver can be stored in secure vaults forwhich deposit fees can be charged

The bank can then administer e-gold or e-silveraccounts and allow for online transactions

Physical delivery can be procured at any time

Example: www.e-dinar.com


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Time Banks and LETS Systems

Time Banks allow for community services to beexchanged through members without physical currency

Connects unmet needs with unmet resources

Builds societal relationships through mutual

reciprocity LETS systems work on the idea of Mutual Credit

Examples:

www.letslinkuk.net

www.timebanks.org

www.ithacahours.com


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Waqf

The parent structure that binds it all together

2/3 Ottoman Economy was administered by Waqf

At its dissolution of its land belonged to Awqaf

The Ottomans had practically relegated socialwelfare to the Awqaf

Awqaf were locally based and managed

There is a need to revive this institution as aninstrument of public policy and Islamic banks cando this


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Summary

Islamic Banks are headed in the wrong direction

The direction can be changed by changing theiroperational structures that allow for them to interactwith local, ethical, sustainable and community

focused initiatives

But Islamic finance like its capitalistic counterpartmakes a lot of money for a few people

Change requires courage look to the best ofexamples


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The Prophet (Peace be upon him) established a greenbelt of 12 miles around Medina

He prohibited the cutting of trees, polluting of water

He encouraged the revival of barren lands throughassigning property rights (~ The Kyoto Accords)

His courage did not waiver in the face of economicchallenge

If you are planting a tree and the hour comes keepplanting it

The Best Of Examples


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Things We Can Do Now:

1. Create lobby groups and send letters to thetop 5 Islamic Finance Scholars seekingfeedback on the issues raised in thispresentation

2. Collectively lobby AAOIFI to issue a directiveasking all Islamic banks to create institutionsthat focus on local community sustainability.

Banks not complying can be downgraded inAAOIFI Membership


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3. Islamic Finance Scholars:

Need to develop a more refined fiqh thattakes into account means and ends

especially concerning the environment Need to actively engage with the local

sustainable community finance

Need to answer the Quranic question


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4. Islamic Finance Educational Programmes:

Example: University of SouthamptonsCentre for Banking, Finance and

Sustainable DevelopmentSome Resources:

www.neweconomics.org

www.feasta.org www.schumachercollege.org.uk


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5. Create community currencies based on thetime banking model and LETS

6. Try and remove credit from our lives try

and live within ones means7. Re-introduce open trade markets

8. Deal with people and communities more and

depersonalized institutions less


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An analysis of usury and its effects:

The Mystery of Banking(Murray Rothbard, 2008)

An analysis of the nature of the debt-based financial system produced by

legalizing usury:

The Grip of Death: A Study of Modern Money, Debt Slavery andDestructive Economics(Michael Rowbotham, 1998)

Recommended Reading


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An analysis on the history of how policy formation often accompanies theinterests of banks and big corporations:

The Creature from Jekyll Island: A second look at the Federal Reserve(G. Edward Griffin, 2002)

An analysis of the role of the IMF and the World Bank since inception:

Goodbye America!: Globalisation, Debt and the Dollar Empire(Michael Rowbotham, 2000)

Recommended Reading


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An analysis on the growth imperative produced by usury and how itaffects societies and the environment:

The Growth Illusion: How economic growth has enriched the few,impoverished the many and endangered the planet(Richard Douthwaite, 1992)

A practical discussion on some local initiatives that could well operateunder an Islamic framework:

Short Circuit: A Practical New Approach to Building More Self-Reliant

Communities.(Richard Douthwaite, 1996)

Recommended Reading


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A discussion on how adherence to certain principles can produce a verydifferent community and wider society to that seen today:

Sacred Economics: Money, Gift and Society in the Age of Transition(Charles Eisenstein, 2011)

Recommended Reading


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