Ethica Webinar - Is Islamic Finance Delivering?

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www.EthicaInstitute.com
PO Box 127150, Dubai, UAE | contact@EthicaInstitute.com
2011-15. All rights reserved. Ethica Institute of Islamic Finance is a training, certification, and advisory company.
So where then are you headed? (Qu ran: 81:26)

Is Islamic Finance Delivering? The Journey of Islamic Finance
Vast Topic: Basic Outline Only

The financial system of the world today arose out a certain soil Namely, the legalization of interest and the divorcing of ethics from economics The Islamisization process however has sought to legitimize what already exists We don t have all the answers. But we do believe we have some of the right questions ?
An Islamic Economy
Is against Riba (interest) Sees money as a means of exchange only and not as 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
This Meant The Islamic Economy

Had a currency consisting of gold and silver supported by community currencies Had business investment through partnership Had quality orientated production through guilds Had its socio-welfare decentralized through Waqf and Zakah Importantly, succeeded
Islam is concerned with the well-being of community, sometimes at the immediate expense of the individual A single interest-based loan may *seem* harmless, but an entire economy based on interest can have devastating consequences for everyone
Qu ran alludes to the main problem of interest Interest : Is structurally violent Encourages systemic competition Concentrates and polarizes wealth Creates an incessant growth demand
The logic of interest is the logic of an addict

(Charles Eisenstein, The Ascent of Humanity)
Interest And The Growth Paradigm
Interest and the debt-based financial system is the major cause of global warming
The Big Question:

How can the operating instructions for the modern world economy be changed so that economic activity both protects and restores the natural world?
James Gustave Speth Administrator of the United Nations Development Program (1993 99) www.EthicaInstitute.com
The Modern Financial Landscape

National Level: Commercial banks dealing in fiat currency, fractional reserve, central banks as lenders of last resort Global Level: Multilateral institutions (IMF, World Bank) Global Financial Markets: Capital, derivative, money and currency markets Shadow Financial system
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 Islamic Economics, held in Mecca
The Birth Of The Islamic Bank

Dubai Islamic Bank (1975) Faisal Islamic Bank (1977) Bahrain Islamic Bank (1979)
The Murabaha dawn of the 1980 s

The Birth Of The Islamic Bank

From 1975 to 1986: IDB s portfolio fell from 55% to 1% while that of Murabaha rose from 0% to over 80%, the rest taken up by Ijarah 80% 55%
1%
The Murabaha (TPO)

(2) Sale of Item (4) Sale of Item
Desired Item
(3) Payment on Spot Often with Customer as Agent
Islamic Bank
(3) Payment deferred with mark up
Customer
(1) Purchase Order of Wa ad The issues with this structure are: The financing nature of the structure The use of the Wa ad as being binding What constitutes ownership from the Bank?
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 Wa ad Structured Products
I tell you, truthfully and without pretense, that we went beyond choosing the bank label [in Islamic Banking ], to the point of adopting its central essence Consequently, we failed to give our financial institutions any characteristics beyond simple financial intermediation. This is accomplished through Islamic banks favorite investment modes that are essentially a hybrid between loans and investment; which hybrid carries most of the characteristics of usurious loans
Saleh Kamel, Founder of Dallah al-Baraka Group Acceptance speech for the IDB Bank Prize, 1996)
Undoubtedly, Sharia Supervisory Boards, academic councils, and legal seminars have given permission to Islamic banks to carry out certain operations that more closely resemble stratagems than actual transactions. Such permission, however, was granted in order to facilitate, under difficult circumstances, the figurative turning of the wheels for those institutions when they were few in number [and short of capital and human resources]. It was expected that Islamic banks would progress in time to genuine operations based on the objectives of an Islamic economic system and that they would distance themselves, even step by step, from what resembled interest-based enterprises. What is happening at the present time, however, is the opposite. Islamic financial institutions have now begun competing to present themselves with all of the same characteristics of the conventional, interest-based marketplace, and to offer new products that march backwards towards interest-based enterprises rather than away from these. Oftentimes these products are rushed to market using ploys that sound minds reject and bring laughter to enemies.
Mufti Taqi Usmani in his paper on Sukuk
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 needs a separate operational structure He has shown each of us the two paths (Q90:10)
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)
Key Questions
Where did we come from? How did we get here? Where do we want to go? How do we get there?
A Paradigm Shift
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
Introducing the Waqf Interface
Musharakah-Mudarabah Financing
Equity based models can be used on a local level Mutual fund for SME s 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
The Souq
Open Markets
Five largest supermarkets in Britain control 2/3 of all retailing Open Market Open Production Open Distribution Free Currency Ethical Contracts Example: Open Trade Network www.opentrade.org.uk
Interest-Free Loans (Community Based)

Such loans can be: Incentivized Empowered the poor Islamic Banks can leverage the internet and cooperate with microfinance institutions Examples: The KIVA Network www.kiva.org Grameen s Interest-free program
Guild (Community Production)

Shared productive infrastructure along a common ethos Employer-Employee Relationship replaced by a MasterApprentice Partnership More balanced local economy Motivated by service to ideals not by profit Exist to serve their owners (local community) and hence are sensitive to their needs Examples: The Amul Model - www.amul.com The Briarpatch Co-operative - www.briarpatch.coop
Community Currencies
Mutual Credit Associations and Community Currencies provide 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 Clearing Association) - www.wir.ch
Community Land Trusts

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 inheritable basis Resale is restricted to the Trust and prices are capped This ensures land will not be capitalized Example: www.cltnetwork.org
Community Vehicle Trusts

Trusts invests in a fleet of vehicles of various sizes Takes out appropriate mutual-insurance/takaful scheme Vehicles are rented at non-commercial long term rates Rental income goes back to the Trust Rules of vehicle use and maintenance mean negligence will be fined
Community Education Trusts

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 help monitor children s progress Example: www.hantam-trust.org.za
Gold and Silver Deposits

Islamic banks can offer Gold and Silver deposits Gold and Silver can be stored in secure vaults for which deposit fees can be charged The bank can then administer e-gold or e-silver accounts and allow for online transactions Physical delivery can be procured at any time Example: www.e-dinar.com
Time Banks and LETS Systems

Time Banks allow for community services to be exchanged 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
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 social welfare to the Awqaf Awqaf were locally based and managed There is a need to revive this institution as an instrument of public policy and Islamic banks can do this
Summary
Islamic Banks are headed in the wrong direction The direction can be changed by changing their operational structures that allow for them to interact with local, ethical, sustainable and community focused initiatives But Islamic finance like its capitalistic counterpart makes a lot of money for a few people Change requires courage examples look to the best of
The Best Of Examples

The Prophet (Peace be upon him) established a green belt of 12 miles around Medina He prohibited the cutting of trees, polluting of water He encouraged the revival of barren lands through assigning property rights (~ The Kyoto Accords ) His courage did not waiver in the face of economic challenge If you are planting a tree and the hour comes planting it keep
Things We Can Do Now:

1. Create lobby groups and send letters to the top 5 Islamic Finance Scholars seeking feedback on the issues raised in this presentation 2. Collectively lobby AAOIFI to issue a directive asking all Islamic banks to create institutions that focus on local community sustainability. Banks not complying can be downgraded in AAOIFI Membership

3. Islamic Finance Scholars: Need to develop a more refined fiqh that takes into account means and ends especially concerning the environment Need to actively engage with the local sustainable community finance Need to answer the Qu ranic question

4. Islamic Finance Educational Programmes: Example: University of Southampton s Centre for Banking, Finance and Sustainable Development Some Resources: www.neweconomics.org www.feasta.org www.schumachercollege.org.uk

5. Create community currencies based on the time banking model and LETS 6. Try and remove credit from our lives and live within one s means 7. Re-introduce open trade markets 8. Deal with people and communities more and depersonalized institutions less try
Recommended Reading
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 and Destructive Economics (Michael Rowbotham, 1998)
Recommended Reading
An analysis on the history of how policy formation often accompanies the interests 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
An analysis on the growth imperative produced by usury and how it affects 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 operate under an Islamic framework: Short Circuit: A Practical New Approach to Building More Self-Reliant Communities. (Richard Douthwaite, 1996)
Recommended Reading
A discussion on how adherence to certain principles can produce a very different community and wider society to that seen today: Sacred Economics: Money, Gift and Society in the Age of Transition (Charles Eisenstein, 2011)
Questions & Answers

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www.EthicaInstitute.

So where then are you headed? (Qu ran: 81:26)

Vast Topic: Basic Outline Only

This Meant The Islamic Economy

The logic of interest is the logic of an addict

Interest And The Growth Paradigm

The Big Question:

The Modern Financial Landscape

The Islamisizing Process

The Birth Of The Islamic Bank

The Murabaha dawn of the 1980 s

The Birth Of The Islamic Bank

The Murabaha (TPO)

The Lizards Hole?

Where Then Are You Headed?

The Dynamics Of Change

Difference between lending and investing Making profit comes second

Introducing the Waqf Interface

Interest-Free Loans (Community Based)

Guild (Community Production)

Community Land Trusts

Community Vehicle Trusts

Community Education Trusts

Gold and Silver Deposits

Time Banks and LETS Systems

The Best Of Examples

Things We Can Do Now:

Things We Can Do Now:

Things We Can Do Now:

Things We Can Do Now:

Questions & Answers

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