One might argue that rationality and theology do not go together. But they do. And they should. If not, then the 1% folks who control significant chunk of global resources (to be precise, just 1,594 billionaires across the world) will declare a permanent victory over 99% of us who are increasingly living at their mercy.
In late 1960s and early 1970s some noble minds came up with the idea of a banking system that would do justice with both the suppliers of capital (depositors and investors) and the recipients of capital (borrowers and investees)! The basic premise was (and still remains) simple: the supplier of capital cannot and must not ask for a profit or “return” on his/her deposit or investment if the recipient of capital is not making profits.
This was pure justice. So it was rational. Since the concept was deeply imbedded in the Islamic theology, it was another proof that rationality and theology have synergies. But in the economic and financial world, a lot has changed since late 60s and early 70s. A lot.
- The global economy is far more integrated than it was in 60s and 70s;
- The financial world primarily consisted of bank loans and equity capital markets. Now the combined size of these two asset classes is a fraction of the total financial assets;
- The real economy (current size is about U$ 77 trillion) was the bedrock of economic growth unlike financial/virtual economy of over US$ 200 trillion now (this 200 trillion does not include over-the-counter derivatives market whose notional value is close to US$ 700 trillion);
- Politicians were still the real rulers of their respective countries then, unlike corporate czars who are ruling the world now;
- Currencies were largely backed by tangible reserves, unlike paper and plastic “money” now;
The change in each of these factors has had certain degrees of adverse effect on the concept of just-banking. But the most profound damage was done by number 5. This allowed central banks to acquire unlimited powers to print as much “money” as they can. As this bizarre idea emanated from the West, their economies and institutions established a clear edge over the rest of the world. Many of us failed to anticipate the full impact of the above factors would have on the concept of just-banking.
After receiving my doctorate in Private Equity, I was quite determined to set up an Islamic Private Equity Fund in line with my research learnings/findings. The year was 2002. And the size was modest: just US$ 75 million. That plan did not succeed for a variety of reasons. And I moved on. Without regret.
Some well-wishers keep asking me if this is the right time for me to have another go? And my answer is NOPE. And it is not because of the possibility of another failure. It is because we are in an extremely different era compared with 2002. At that time, the printing press of US Fed was still running slower; the supply of US dollars was much less as there was no Quantitative Easing (QE) i.e. handing over hundreds of billions of dollars by the US Government to a bunch of top US banks/Funds. I received a call from a very senior banker at a top Wall Street firm asking if there are 20+ years financing/lending opportunities in the region at ridiculously low return expectations!
The 2007-08 “credit crisis” was a big boon to some of the top financial institutions in the world. As a result of governments’ support, they have accumulated enormous “war-chest”. The free (or cheap) funding allows them to bid for limited number of assets/projects at a much higher valuation. Too much money is chasing too few deals. So instead of US$ 75 million, even if a US$ 750 million Islamic Fund is set up which has no perpetual supply of free/cheap capital, how on earth will it be able to stay competitive in a market that is truly and completely beyond our control?
And this is not just related to Funds Management which forms a major share of the global Islamic banking industry. This adversely affects the entire scheme of Islamic banking. Rules of the game are being rehashed to promote and sustain a certain type of institutions. And those kinds of institutions are most definitely not engaged in just-banking!
Probably, this is the right time to set up a global task force that analyses the present architecture of the financial world at macro level, within which the Islamic finance industry has to operate. It should attract academics, bankers, fund managers, central bankers, lawyers and Shari’ah scholars. This should not be purely an academic exercise for writing academic papers in academic journals. A serious effort is required to reset the button on Islamic Banking to answer some of the questions raised above…
Apart from the macro challenges, there are a number of micro issues that require our urgent attention. Some of these are:
(a) development of top-tier talent pool who have ideological (not just commercial) connection with Islamic banking;
(b) more emphasis on equity/musharakah structures and less on debt/murabahastructures;
(c) ideologically aligning the recipients of capital (business community) with the suppliers of capital Islamic Funds/Banks. Because businesses tend to use Islamic Banks/Funds as a source to “tap additional pool of capital”;
(d) Islamic equity funds are invested in stock markets. But those markets arecompletely at the mercy of large hedge funds and other “conventional” institutional investors. We need to check whether those Funds are still “Shariah compliant” or there is a need to review this as well?
A fair description of Islamic banking operating within the global financial system is perhaps this: a person decides to travel in a southern direction. But he boards a superfast bullet train that is going up north. After boarding the north-bound train, he starts walking (inside the train) towards south believing that he is heading south. In reality, however, he is being taken in the opposite direction at an extremely high speed!