LEARN: More on Islamic Finance structures

This material dates back to 2011, obtained from a course run through Tarek El Diwany’s IslamicFinance.com website. Apologies for the upside view of some of these slides, please rotate to view correctly

ifc-course-2006_pt1Download

ifc-course-2006_pt2Download

LEARN: Islamic finance structures and overview

Material can be found here pertaining to an overview of the Islamic Finance industry and particularly the common legal structures which make up the products offered. This detail is dated, originally obtained in 2008 however some of the origins of the data may even precede that

if-overview-2008Download

What makes an effective currency?

In my opinion there are three main ingredients to an effective and durable currency base in current times

Confidence from Power

Exchangability

Infrastructure 

These may differ from some of the purposes of currency which are a means of exchange, a store of value and a unit of account, but the topic of this piece is specific to what gives any form of money it’s authority and effectiveness

Conventional currency may be fiat – created from nothing, largely intangible with no instrinsic value but everyone buys into that fiat. We know that confidence, is a key factor that makes it work. This follows its acceptance by participants, and tied closely to this is the interchangeability of this currency with other forms of money and assets.

This point is paramount – the participant has confidence that whether they fully have faith in it or not, they know they can use it to buy in/out from this into real assets, such property, land, metals, or into alternative currencies, even something which has some infrastructure to allow access to it although is itself not real such as bitcoin or cryptos generally.

Full confidence is not a prerequisite. One just needs to know you can buy in and out, that is what is meant by trust or confidence.

Confidence is backed by something else that is vital – power and violence, ‘men with guns’. This comes with a precedent – a history of violence, in the modern case, European colonialism. 

The knowledge that there is power behind the words and symbols, and that it has been seen before or that we know violence can happen because the ability and intention exists.

This point must be examined against Cryptocurrencies, who will back up crypto (with the necessary power)….clearly the amount of volatility shows that no one will. The price highs are apparent because there is infrastructure – accessible mechanisms with which to buy and sell this asset. People know that they can get in and get out, however they need to be careful because there’s no protection when the floor gives way….as it has done frequently.

Creating your own currency can work but it will only be done within a silo….participants will need to know and accept that there is limited control, no interchangeability and no protection or real power behind it. Although if enough people buy in it can work on this limited basis. However, the fact that this currency cannot be protected from outside forces, it can relatively easily be forged and will have no value in interchanging with other assets, hence the necessary acceptance by participants that it’s operation is entirely within this flimsy silo.

It has appeal as a practical alternative but the essential missing ingredients of power and exchange means it will always be short lived.

Gold when viewed from this perspective also shows up some vital flaws in todays world. Historically it had the element of power behind it…indeed the lesson of the massive hoards of gold transferred from Latin America to European shores by the Spanish and Portuguese empires reflects the very power and violence used to take it and make use of it in the first place. 

It’s exchangeability holds firm even today with plenty of infrastructure and demand to make this work. However some key control elements are missing, so much of it is owned by a few nations who are the only ones who have a realistic ability to use it as a currency to any scale. This also leaves open the ability of those other large holders to compromise any gold standard with their own holdings, and buy into this eco system from the sidelines. 

Of course historically we saw gold currency minted under specific names/authorities therefore the ability to differentiate one’s gold currency base or even dilute it when supply is low has much precedence. Ownership indeed points to power, and where these two are lacking I can’t see how any gold standard can take root. The Islamic gold dinar will remain a historical relic where this point holds true.

These are my own thoughts, I’d welcome any reflections from others in order to validate this stance

Graeber on the real origins of money

A short clip here from the late great David Graeber, recovering some of his material from his work ‘Debt: the first 5000 years’

The following points are important:

• The origin of free markets linked to Islamic history (listen at 24 minutes), an enabling factor of this is shariah law itself which is outside of a ‘state’/government. In addition, because there is no state apparatus fierce competition is not the main driver but transactions are done on the basis of mutual aid.

• The barter story is a myth, no anthropological evidence exists to support this

• The only way two parties can understand an equivalent value is where a monetary system is already is existence thereby assigning some concept of value

• Money’s existence has been linked to violence and war

• The origin of much of Adam Smiths theories have their place in works by Al Ghazali, as well, I may add, Ibn Khaldun

TRT World Roundtable: How Islamic is Islamic Finance?

The host asks all the right questions….and there are some very telling answers in my opinion….Mehmet Asutay provides some incisive contributions which I always have time for

My initial response to some of the defence given for the industry is as follows;

• In terms of risk sharing, this is an oft cited defence but can easily be broken down further, these transactions are not between equal sized parties with relatively similar assets at risk; the ownership of one house being the largest asset an individual owns compared to a bank which has a significant balance sheet (even the smaller ones) and can absorb the loss of one property is not exactly the type of risk sharing which it is always prompted as

• Regarding the investments in halal products, there is talk of how resilient these have been during the financial crises, however this doesn’t cover some important facts which should be stated. If an investment is low risk, it will typically make less of a loss in times of downturn and correspondingly make less of a return during an upturn too – this is a basic understanding of risk and return, but is not mentioned when talking about the performance over the last deep recession.

Another important point with halal investment assets which should be considered is the ethical dimension and how any definition of what is considered halal and ethical will differ based on preference. Although there are ways to standardise these when it comes to retail offerings, there will always be valid opinions which depart from this standard practitioner view. To add to that, how can something not be compromised in some way? Everything within this monetary system must be contaminated in some way, and this cannot be ignored – there is no parallel financing system in place.

Early Islam and the birth of Capitalism

Please find enclosed a copy of Benedikt Koehler’s text on the application of market based principles extensively throughout out the early and later eras of Islam.

I hope to write more about this enlightening piece in a later post, but meanwhile, please do download a copy and read all about the history you never knew

Early Islam and the Birth of Capitalism – Benedikt Koehler

Also view the following presentation delivered in the City of London at the Legatum Institute, which includes a Q&A

Al-Haddad and Eldiwany refute Islamic Finance

An article from the 2008 economic crises written by the two scholars above makes for worthy reading.

I see it as evidence of calling the bluff of practitioners who dabble in nothing more than conventional finance twisted to fool millions who are easily swayed by superficiality

Boom, Bust, Crunch..

Platforms are rarely provided to scholars who wish to take one step back and question some of the fundamental concepts that are being applied. Few questions are raised regarding the validity of Islamic debt financing, limited liability structures, speculative methods of market trading, or the nature of the monetary system. Such matters are given little attention in the headlong rush to copy interest-based methodologies and this has resulted in a number of embarrassing paradoxes

Abstain

The Islamic month of abstention (Ramadhan) began on Monday 6th June 2016

A month when we cease to eat and drink; we cease to consume.

We are no longer consumers, we will not buy what is being sold, yet we will give up of our property to those who need it most.

The economic undertones of this period are worth considering

Zakat – A viable funding model for enterprise

 

I remember some years ago, a British commentator remarked in an off the cuff, ignorant manner, that Islam (and therefore Muslims in general) had not contributed any thing of substance in the last 100 years or so.

Which Islam or Muslims was he referring to? A number of respected intellectuals have made valid contributions to the most profound topics of discourse in contemporary matters, be they governance, enterprise or spirituality. Perhaps this person never made an effort to look beyond his own sphere of understanding in order to identify these contributions

One such example of what the Muslim world has delivered for contemplation of all nations states, is the funding model based on Zakat – financial or non-financial investment for the sake of others, not to gain personally, but to establish a method to fulfill a need which private profiteering cannot.

In the UK, we struggle to foot the cost of basic welfare through taxation. The number of taxes in existence are far too much to understand how far the web stretches and how much they impact our everyday lives, destroying incentives to save or to give.

In a part of the world riddled with abject poverty, injustice and failing state apparatus, a beacon of light is being provided by world class medical institutions such as the Shaukat Khanum Memorial Hospital (SKMH), entirely funded by donations and providing free cancer treatment to the most disadvantaged patients. Across the third world, similar initiatives  do exist, whether they are based on Zakat or not, I highlight this project due to it being based on principles found at the core of the Islamic faith; giving up of ones own property to provide for others, in a way which establishes justice.

At the end of 2015, SKMH opened its second site in Peshawar. The factors which make this institution thrive, are not confined to Islam, however it certainly demonstrates the way in which incentives, resources and an interest to gain from intangible, distant means, not necessarily financial in nature (based on a belief in a power other than that of Man), can be made to work perfectly well for a wider section of the population, independent of state disintegration.

https://www.shaukatkhanum.org.pk/

 

 

 

LA-RIBA

A few of my previous posts have covered attempts by various parties to introduce their own versions of a financing method closer to what is perceived as genuinely riba-free.

To name a couple, Ansar Finance in the UK, Grameen Bank from Mohammed Younus have made an effort to shed light on alternative models which are closer to interest-free financing, in that an interest derived rate is not charged to the customer.

Ofcourse, the wider context of this should not be forgotten – the money itself, the paper (or digits) we use as a means of transaction – is of interest and IS interest itself. Given this fundamental fact, one cannot escape true defined RIBA in any such method outlined in these endeavors.

However, designing alternative models can expose the wider audience to the weaknesses of the mainstream Islamic Banking practices, which are all in name not in spirit, and I find it refreshing and worthwhile to introduce different forms which may be used as a stepping stone to something widely accessible and equitable in future, Insha Allah.

Contributing to this intiative, are LARIBA, a US based institution who have introduced their own version of what they feel is a RIBA-free mechanism. Judge for yourselves weather you feel their method is actually viable, however this company has been established since the late 1980’s and I favour their understanding of the monetary system, even though they still resolve to make use of it. They too understand and are upfront with their clients about the debt enslavement aspects of interest based loans, and also draw attention to the wider Islamic Banking industry which still uses interest rates in their products.

Their website has a number of worthy materials on related topics which I would also like to recommend.

https://www.lariba.com/sitephp/index.php

Allah (SWT) knows best about their intentions and actions.