Quote of the week:
'If the industry introduces too many new products, cynics will argue that sharia is being twisted for economic ends-the scholars are being paid for their services, after all. But if it fails to innovate, the industry may look too medieval to play a full part in modern finance.' - The Economist.
Please read this article about the industry and notice how smoothly, coolly and with such great perceived expertise on the matter, The Economist has painted us as medievalists unfit for modern finance. Too funny really ... as if modern finance is somehow better than medieval finance.
Some articles from the IWB have been picked up by the International Business Times. Please click here and vote on how great the articles are. Do be shameless and liberal with your praise.
Commentary of the week:
'Quick and Easy' Islamic Finance:
Regular readers of the IWB know that letting yours truly in at Financial industry conferences is always a bit risky so imagine my surprise when I was invited to the World Alternative Investment Summit held at the very plush, very luxurious Fallsview resort in Niagara Falls. At first, it was questionable whether I would be allowed to go after the cutlery fiasco that took place some decades ago (described here), but after many empty promises of good behaviour, permission was reluctantly granted and I had my bags packed and ready before the authorities could change their mind (or even finish the 'k' part of 'okay, you can go'). On the way there, I realized that in my excitement at being taken along, I had overlooked to read the agenda of the 'Summit'.
Reading the agenda while doing my best impression of a docile passenger had two effects. First, it made yours truly quite incredulous that the conference (which had a significant component devoted to Islamic Finance), was being held at a Casino (yes, that is correct), in the middle of Ramadan. Second, once I got over the shock of that realization, the predictability of the topics under discussion put me into a deep kind of sleep. Fast forwarding past our arrival at the venue and the sheer decadence of the surroundings, let me tell you what most of the conference was dedicated to.
As this was an 'Alternative' investment conference, you had the usual suspects in attendance. Lots of hedge funds, some real estate LP's, lots of lawyers, some back-office suppliers and of course, yet more lawyers. The salient themes of the conference were twofold, with a session on Islamic Finance thrown it at the end. First, as the liquidity crisis is having its way with public markets, the order of the day is to find assets that are uncorrelated with major stock market indices. This is supposed to create some predictability in your rapidly shrinking portfolio. Second, as there is very little gain to be had if funds just buy and hold stocks, the order of the day is to borrow from banks at prime and invest at prime + infinity% so we can all get rich quicker than we can resolve whether strawberry milk shake is better than chocolate. As we at Ittihad have heard this story again and again and have already decided on strawberry, we of course know that using borrowed money to invest is fine and dandy in this life only some of the time, but can be quite problematic for our next life - so we try and steer clear of this whole idea. As two of my fellow Ittihad geniuses were with me, I quietly nodded my head as if I agreed and did not make a scene by pulling out the hair in my beard at the insanity of it all. But alas, this sense of forced calm did not last - and the session on Islamic Finance broke all pretence at self-control.
While I will not bore you with all the ways in which I came away offended and quite hurt at the shallow way in which many people treat and think of Islamic Finance, there is an exchange that I would like to leave you with that is quite instructive. After describing to the audience how anything that our friendly hedge-fund types usually did or wanted to do could be structured in an 'Islamic' or 'Shariah-compliant' way, some members of the audience were left a bit confused. One question, which was 'well, if you can structure anything 'Islamically', then what is the difference, and why bother?' was answered along the lines of the thought that Muslims need to be liberated from their money (which I thought was a very clever way to put it). The second question (asked by my associate) was along the lines of whether what these practitioners were proposing was in line at all with the letter and spirit of Islam? The answer to this was such that I almost fell out of my chair and had to be first propped up and then restrained before I ran up onto stage, held the speaker's collar and then gently fixed the alignment of his tie before walking back calmly as if nothing had happened, but I digress.
The answer to this beautiful question was quite illuminating indeed. It was that the responsibility of the spirit of Islam, if there is such a thing that can be agreed upon, did not lie with those who create these products and structures, but with the Shariah Boards that approve them. Of course, when this question is asked of Shariah Boards, they simply turn around and say that it is not their responsibility to structure genuine solutions, it is their responsibility to pass on the legalese of individual contracts. Since three or four individual contracts can be combined to reproduce conventional finance quite well, both parties pass the buck to each other on the entire solution and make a mockery of whatever little Islam there is in Islamic Finance.
As we usually find that the only one's at these panels that make a direct link between Ethics and Islamic Finance are people from the Ittihad tribe (at this one it was our Dear Leader - God Bless him for introducing some integrity and dignity to the proceedings), I think it may be time to take some responsibility for what happens in Canada on our own shoulders. As such, let me humbly suggest that I hope you all will not allow anyone to 'liberate you from your savings' unless you are an aware, willing and educated participant in this grand liberation being planned at the Casinos of the world.
Ramadan Mubarak - May this month be full of blessings for you all IA.
--------------
Upcoming Events:
You can watch our newly married (alas ladies), VP of Private Client Services, Mr. Firaaz Azeez, explaining some of the reasons why Ittihad exists and what we stand for as a company between 2 and 3 pm on Saturday the 27th of September on the Faith of Life Network on the CTS channel. Tune in for the depth of the ideas, but if that does not interest you, then perhaps I should also tell you that he has a dreamy voice and very pleasing appearance. Please tune in, listen to what the Private Client Division at Ittihad is up to these days and then call the Faith Of Life people to ask for a repeat or two.
Office for Rent:
As we have recently moved all our staff to the glass-enclosed cage that we call our head office, we have an entire fully furnished, gorgeous office for rent in a Medical Building at the corner of Sheppard Ave. and McCowan. The rent is minimal and the salient features of the space - such as the beautiful windows, the spacious Board-Room, the Corner offices, the nice faux mahogany furniture are enough to motivate your employees to work long hours while being paid whatever little you grudgingly give them. As this is a Professional Building (not just any building mind you, this one has achieved professional status through years of just sitting there), it would be most suitable for a growing real estate, accountancy or legal practice. You can visit the space and see the endless possibilities that this new location presents for your business by clicking here or calling Mr. Azeez at (416) 412 3999 ext. 115.
Useless fact of the day:
Conniption: flirting with a stroke-like state due to intense anger or excitement. The feeling of being emotionally overwhelmed such that self-control falls below the top 3 on the list of one's priorities in life. Not recommended during Ramadan.
__________
Finance News:
1. The US Govt. decides to own everyone's home also ... welcome to the USSR, no, no - I mean the new USA ... (quite possibly the best news for Gold investors but don't quote me) ... read more here
2. After the fall of Bear Stearns, another large investment bank is having a delayed reaction ... read more here
3. Who bears the cost of mortgage bailouts ... read more here
Economic News:
1. Economist Paul Krugman speaks about the paradox of deleveraging ... read more here
2. An excellent article on the background of why the creation of credit in an economy is fraught with danger ... read more here
3. The problems with deposit insurance and how this creates issues for the industry ... read more here
4. What the instability of the US$ means for US policy-makers ... read more here
Islamic / Middle East / Emerging Markets:
1. An article on Islamic Finance from The Economist (must read article of the week) ... read more here
Interesting but not all Finance:
1. Introducing the Ramadan Phone. If only it could cook before sunrise also ... (hat-tip to Husein Kirefu) ... read more here
Showing posts with label Islamic Finance. Show all posts
Showing posts with label Islamic Finance. Show all posts
Wednesday, September 17, 2008
Monday, July 7, 2008
Seminar Feedback
Quote of the week:
'In theory there is no difference between theory and practice. In practice there is.' - Yogi Berra. (Hat-tip to Ms. Imtiaz)
Commentary of the week:
Seminar Feedback:
As you know, we presented a seminar on our ideas about Islamic Finance to the community at the TARIC masjid this past weekend. It was well attended by lots of men (alas, the sisters don't want to know about money even though they control most of it), who came armed with excellent questions and strong views on the subject. I have received many feedback forms which are full of praise for my good self (that is the official story and I am sticking with it) but they seem to fall into two camps. This divergence is worth analyzing a bit deeply because I think it speaks volumes about human nature. The respective camps are:
1. The Seminar was great. We loved that it was educational, interactive and had nothing to do with products and sales. It made us think, which God knows we don't do enough of.
2. The Seminar was terrible. We already know all we need to know about the idea of Islamic Finance, we want to know about Halal products that we can use right now. We mean NOW. Did we say NOW?
And there you have it - the community has philosophers and it has practical, action-oriented people (credit to our good Sr. Pappano for this insight). The first camp thrives in the world of ideas. The second flourishes in a structured, predictable action-oriented environment. To me the question is not who is right (obviously only I am right), but which section of the community is more dangerous? This is not as simple a question as it sounds, so let me explain a bit.
Like any other industry, Islamic Finance is subject to the whims of Supply and Demand. There is a growing Muslim population (some people say too quickly growing but we will leave that aside for now) and an even larger population of people interested in Ethical Finance. Voices from section 2 (the practical people) demand that their 'needs' (which somehow are the same as everyone else's commercial needs) be met in an Islamic manner. Then others from section 2 also, decide to do something about it and create products and services to Supply the needs of the people who demanded Islamic solutions. Before you know it, thanks to people from section 2, Muslims across the world are demanding Islamic Financial services and the type 2's are in business big-time. But in their rush to produce a new reality and choices for themselves, what have the type 2's really done?
In my opinion (and lots of people tell me I am wrong J), while we have a huge Islamic Finance industry, we have much less Islamic Finance going on (read this again if you didn't get it). As the problem is being both defined and solved by practical, action-oriented people, Islamic Finance is becoming a field of technical sophistication but philosophic bankruptcy. The whole point of Islam was to help instil justice, fairness and a fairly equitable distribution of wealth in society while protecting the balance of Nature. Instead, we have reduced Islam to a tool with which we solve petty financial issues such as credit cards and collateralised loans with which to buy things we cannot afford on our own. There is something deeply elegant about running an economy without debt. This elegance is being tarnished if we think we can 'do Islamic Finance' by removing references to 'interest' in contracts to make things 'Halal'. Our sense of practicality is leading us into waters charted quite well by other communities who got around usury laws using similar tricks in the medieval past.
So what is the solution (cause you know I am one of the practical types that worries about solutions)? All this while, the people from the first section (the philosopher types), have had nothing really to do. They sit around, call the type 2's disrespectful names and are generally cynical and pessimistic about the problems faced by Muslims and people of Faith these days. As they are frequently confused with academics, they feel they no place in the industry and feel left to one side as matters of great import such as the appropriate benchmark rate is determined by the type 2's. This situation is a mistake. Islamic Finance does not belong to the type 2's of the world that want to solve problems NOW, come what may. It belongs really, if there is such a thing as belonging, to the world and all within it as a rich, textured and fundamentally elegant way in which to manage the problems of an economy.
This should include the Type 1's who are struggling with this marginalization at seminars. Every seminar they go to, people ask them for a cheque at the end. The educational, community service aspect of the information is subsumed by the drive for relationships to be commercial and ratified to be so by the transfer of money. This is injustice of a very deep kind. We must allow people to have access to knowledge about Islamic Finance without asking them for money at the end. For the people who attended the session last Saturday and asked for product details, this is why I didn't answer your pointed questions. This particular seminar series is for people who want to discuss ideas. If you want a financial solution to your particular problem, call me at work and I will try and help. Better yet, come to our investment seminars. Don't complain about more education - even the first word of the Holy Book was 'Read'.
For those who missed the seminar, I hope you will come out to the next one. For those who came, I hope you recognize that both you and I are truly blessed to be involved in some manner with Ittihad and this initiative, where there is the freedom to do things with integrity. I look forward to seeing you all the next seminar. For the record, people loved the samosas and the turnout was humbling in terms of both numbers and the intelligence of the discussion. We are a beautiful community with much to contribute to Canada and the world, and I want to thank the administration at TARIC once again for inviting us and having the courage to allow us to engage the community directly on issues where usually their input is just monetary. I look forward (quite shamelessly) to being invited back.
--------------
Upcoming Events:
N/A
__________
Finance News:
1. An interesting analysis of short-sellers (A borrows stock from B, sell lots of it to drive down its price and then buys it back at the lower price. A then returns the stock to B - pocketing the money made in the process). Unfortunately, there are issues in Islam about selling stuff you don't own so this is questionable. A very interesting article nevertheless ... read more here
2. The perils of the joint-ownership strategy for inheritance purposes ... read more here
3. Now the Global Banks are casting aspersions and questioning each other's balance sheets ... read more here
4. The Bank of Canada will accept US treasuries as security for loans ... (Might as well accept rolls of toilet paper too) ... read more here
5. People finally make the connection between Socially Responsible Investing and Islam ... read more here
Economic News:
1. The Future of Energy ... read more here
2. The Washington Post uses the R-word for the US economy ... read more here
3. Good analysis of the disagreements between Central Banks ... read more here
Islamic / Middle East / Emerging Markets:
1. N / A
Interesting but not all Finance:
1. US Company asks US court to use Shariah to decide a claim. I believe this is called Shariah Arbitrage ... (major hat-tip to Mansoor Ullah) - read more here
2. If you are chased by the police, you get to pay for their gas also (hat-tip to Siddiq Mohamed) ... read more here
'In theory there is no difference between theory and practice. In practice there is.' - Yogi Berra. (Hat-tip to Ms. Imtiaz)
Commentary of the week:
Seminar Feedback:
As you know, we presented a seminar on our ideas about Islamic Finance to the community at the TARIC masjid this past weekend. It was well attended by lots of men (alas, the sisters don't want to know about money even though they control most of it), who came armed with excellent questions and strong views on the subject. I have received many feedback forms which are full of praise for my good self (that is the official story and I am sticking with it) but they seem to fall into two camps. This divergence is worth analyzing a bit deeply because I think it speaks volumes about human nature. The respective camps are:
1. The Seminar was great. We loved that it was educational, interactive and had nothing to do with products and sales. It made us think, which God knows we don't do enough of.
2. The Seminar was terrible. We already know all we need to know about the idea of Islamic Finance, we want to know about Halal products that we can use right now. We mean NOW. Did we say NOW?
And there you have it - the community has philosophers and it has practical, action-oriented people (credit to our good Sr. Pappano for this insight). The first camp thrives in the world of ideas. The second flourishes in a structured, predictable action-oriented environment. To me the question is not who is right (obviously only I am right), but which section of the community is more dangerous? This is not as simple a question as it sounds, so let me explain a bit.
Like any other industry, Islamic Finance is subject to the whims of Supply and Demand. There is a growing Muslim population (some people say too quickly growing but we will leave that aside for now) and an even larger population of people interested in Ethical Finance. Voices from section 2 (the practical people) demand that their 'needs' (which somehow are the same as everyone else's commercial needs) be met in an Islamic manner. Then others from section 2 also, decide to do something about it and create products and services to Supply the needs of the people who demanded Islamic solutions. Before you know it, thanks to people from section 2, Muslims across the world are demanding Islamic Financial services and the type 2's are in business big-time. But in their rush to produce a new reality and choices for themselves, what have the type 2's really done?
In my opinion (and lots of people tell me I am wrong J), while we have a huge Islamic Finance industry, we have much less Islamic Finance going on (read this again if you didn't get it). As the problem is being both defined and solved by practical, action-oriented people, Islamic Finance is becoming a field of technical sophistication but philosophic bankruptcy. The whole point of Islam was to help instil justice, fairness and a fairly equitable distribution of wealth in society while protecting the balance of Nature. Instead, we have reduced Islam to a tool with which we solve petty financial issues such as credit cards and collateralised loans with which to buy things we cannot afford on our own. There is something deeply elegant about running an economy without debt. This elegance is being tarnished if we think we can 'do Islamic Finance' by removing references to 'interest' in contracts to make things 'Halal'. Our sense of practicality is leading us into waters charted quite well by other communities who got around usury laws using similar tricks in the medieval past.
So what is the solution (cause you know I am one of the practical types that worries about solutions)? All this while, the people from the first section (the philosopher types), have had nothing really to do. They sit around, call the type 2's disrespectful names and are generally cynical and pessimistic about the problems faced by Muslims and people of Faith these days. As they are frequently confused with academics, they feel they no place in the industry and feel left to one side as matters of great import such as the appropriate benchmark rate is determined by the type 2's. This situation is a mistake. Islamic Finance does not belong to the type 2's of the world that want to solve problems NOW, come what may. It belongs really, if there is such a thing as belonging, to the world and all within it as a rich, textured and fundamentally elegant way in which to manage the problems of an economy.
This should include the Type 1's who are struggling with this marginalization at seminars. Every seminar they go to, people ask them for a cheque at the end. The educational, community service aspect of the information is subsumed by the drive for relationships to be commercial and ratified to be so by the transfer of money. This is injustice of a very deep kind. We must allow people to have access to knowledge about Islamic Finance without asking them for money at the end. For the people who attended the session last Saturday and asked for product details, this is why I didn't answer your pointed questions. This particular seminar series is for people who want to discuss ideas. If you want a financial solution to your particular problem, call me at work and I will try and help. Better yet, come to our investment seminars. Don't complain about more education - even the first word of the Holy Book was 'Read'.
For those who missed the seminar, I hope you will come out to the next one. For those who came, I hope you recognize that both you and I are truly blessed to be involved in some manner with Ittihad and this initiative, where there is the freedom to do things with integrity. I look forward to seeing you all the next seminar. For the record, people loved the samosas and the turnout was humbling in terms of both numbers and the intelligence of the discussion. We are a beautiful community with much to contribute to Canada and the world, and I want to thank the administration at TARIC once again for inviting us and having the courage to allow us to engage the community directly on issues where usually their input is just monetary. I look forward (quite shamelessly) to being invited back.
--------------
Upcoming Events:
N/A
__________
Finance News:
1. An interesting analysis of short-sellers (A borrows stock from B, sell lots of it to drive down its price and then buys it back at the lower price. A then returns the stock to B - pocketing the money made in the process). Unfortunately, there are issues in Islam about selling stuff you don't own so this is questionable. A very interesting article nevertheless ... read more here
2. The perils of the joint-ownership strategy for inheritance purposes ... read more here
3. Now the Global Banks are casting aspersions and questioning each other's balance sheets ... read more here
4. The Bank of Canada will accept US treasuries as security for loans ... (Might as well accept rolls of toilet paper too) ... read more here
5. People finally make the connection between Socially Responsible Investing and Islam ... read more here
Economic News:
1. The Future of Energy ... read more here
2. The Washington Post uses the R-word for the US economy ... read more here
3. Good analysis of the disagreements between Central Banks ... read more here
Islamic / Middle East / Emerging Markets:
1. N / A
Interesting but not all Finance:
1. US Company asks US court to use Shariah to decide a claim. I believe this is called Shariah Arbitrage ... (major hat-tip to Mansoor Ullah) - read more here
2. If you are chased by the police, you get to pay for their gas also (hat-tip to Siddiq Mohamed) ... read more here
Friday, May 9, 2008
Letters Edition #3 - Letter from Law Student interested in 'Sane Finance'
Quote of the week:
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
Tuesday, May 6, 2008
Letters Edition #2
Quote of the week:
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
Economic Complexity and the Price of Food
Quotes of the week:
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
"The biggest question is whether the sovereign-wealth funds, some of which rushed prematurely into the distress market last year and are now treading more carefully, will now stay out, when arguably they should be returning to it. Some of their investments last year in private-equity firms, such as Blackstone and Wall Street banks, have since plunged in value." -
The Economist opines on the timing of Middle Eastern investments in the US.
To what would you ascribe such faulty Middle Eastern decision-making? Bad luck or consistently bad advice? You decide ...
Commentary for the Week:
Economic Complexity and the Price of Food:
Today's commentary is going to be a bit more ambitious than usual. While there is a profusion of many crises in the financial sector on the one hand and nascent trouble in the real economy of foodstuffs and commodities etc. on the other, it is really the connections between the two that should be of interest to us at the moment. If you read some of last week's links, you would have noticed that there seems to be a food shortage in many places of the world. This is reflected in both the quantity of food such as rice available and the price that is being charged (Economists among us will want to collapse these two measures into one, but allow me the latitude to separate the two for a minute - I will reconcile the two below). Similarly, on the financial sector side, lenders and investment banks are in some serious trouble and Central Banks are slashing interest rates and encouraging cheaper loans on their respective populations. So, are these two phenomena connected? If they are, how are they connected and what does all this mean for us? Is this really one problem masquerading as many?
One way to make sense of this is to look at the financial sector first. There is a severe overhang of non-performing investments and confidence has been severely shaken with the failure (or dressed up buyout for the technically minded) of Bear Stearns, the loss provisions of Countrywide, the failure and subsequent nationalization of Northern Rock in Britain, the severe multi-ten Billion losses at Citibank, SocGen, UBS and now RBS. Add to this the fact that the largest insurers in the world such as AIG have declared (too quietly for my liking) historic losses even though Insurance is supposed to be and was always a cash-cow business and you begin to see what is happening. The absolute last thing that the authorities want is for people to begin to worry about their investments (Retirement Savings, 401k's etc.) and begin to call their broker's and advisors to start pulling some cash out. The cascade effects of such actions are too terrible to contemplate. That is why Central Banks have been feverishly providing credit to any bank that asks and new rules are being put in place to provide credit to investment banks as well (Canada is a bit 'ahead' of the game here because here the banks are everything rolled into one and such pedestrian distinctions are unnecessary). This printing of money and provision of loans is having some of its intended effects. The investing public's confidence has not been shaken, stirred perhaps, but not shaken. The fund managers / hedge funds and private equity firms have an open line of credit at easy rates so they are continuing to buy stocks. In this sense, the declining stock market trend is being managed quite well, with no spectacular collapses on a daily / weekly basis.
Nevertheless, the law of unintended consequences must have its pound of flesh as well. While the stock markets are staying afloat in a way that does not display much of the bad news, the bad news is showing up at the grocery store. The problem is that the places where these financial crises are taking place are printing money like there's no tomorrow (primarily the US). The places where these financial crises are not present (primarily Brazil, China, India etc. ) hold lots of US$'s already. As they try and exchange those dollars for actual resources that their growing middle classes now demand, both the value of the dollar and the price of real stuff is affected. There is excess paper money and there is a shortage of real stuff such as metals / foods and energy. Both trends reinforce each other, creating an inflationary cycle the likes of which most people only read about in history books but never pause to witness personally.
Of course, this is not the whole picture at all. Even within the economy of real assets and products such as food, there is an internal dynamic that we have to keep in mind. The sheer technical complexity of our economies and economic growth strategies is such that we are voracious consumers of energy. We use it not only to power our homes and washing machines but also to grow the food that we eat. If farming were fashion, mechanized and high-input, high fertilizer methods would be the new black. We have simply stopped using natural seeds and native species of foods. Over 90% of the world now grows maybe 7-8 different staple foods that absolutely require high energy inputs. With the collapse of the US$ against the price of energy (Oil barrels), food production has not only suffered in absolute quantity terms (why produce food when you can produce biodiesel?), but also in monetary measures such as food affordability (Economists - please notice the reconciliation). Fertilizer prices and food transportation charges have simply overwhelmed many small producers in many parts of the world where they remain unable to receive the kinds of agricultural subsidies as farmers and food companies find available in the G-8. Many have simply been driven out of not just the business, but also the process of producing food.
So getting back to the question about the connections between the food and financial crises then - do you remember that our grandmothers would explain to us how their previous generations had no real cash but that good food was abundant. Look how far we have come as a species, we are rich beyond our wildest dreams, but have substituted paper for food, and Oil for water. We are unable to feed the planet unless the financial system works and the oil rigs keep pumping. Sometimes one must pause and think deeply about this my friends, isn't there a real cost to our many mortgages, credit cards and leveraged investments that cannot be captured or explained away by conventional cost measures such as the 'Prime Rate'?
____
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
Finance News:
1. RBS - (Isn't this the bank that just bought ABN AMRO for $100B last year?) wants to raise $24B through a share offering. As Citibank comes out with bad news each quarter, RBS realizes that this is another arena in which to compete and comes out with really bad news ... read more here
Economic News:
1. After the credit crunch, comes the 'cereal crunch' (not my phrase, but genius nevertheless) ... read more here
2. Solar Power is coming to Ontario in a big (well, not too big) way ... read more here
3. Home sales in the US fall 2% in March ... read more here
4. The property market in Spain falters as well ... read more here
Islamic / Middle East / Emerging Markets:
1. Do you know if you are invested in a company that has helped create this problem in Afghanistan? ... If you don't know, isn't it time to ask yourself why not? ... read more here
2. Islamic Finance sector in 'danger'? ... Personally, I think we are beyond danger. The traffic on the highway with which IF is merging will swallow us whole ... read more here
3. How the Gulf States are spending their wealth this time around (the last time they were this wealthy was in the oil embargo days of the seventies) ... read more here
Interesting but not Finance:
1. I won't say much about this story except that it has to do with the key to the Kaaba ... read more here
2. The economics of the federal government's despicable policy on the seal hunt ... read more here
Why care about Islamic Finance?
Quotes of the week:
"EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy." - John Bryant of Operation HOPE, an evangelist for financial literacy.
This why we have announced our first Educational Seminar on Islamic Finance in Toronto for 2:30 pm tomorrow April 12th at the Radisson East Hotel (55 HallCrown Place, Toronto). The seminar is designed to explore the place Islam occupies in our financial lives. We will not be selling anything other than ideas and you will get the unusual and unprecedented chance to meet your humble correspondent in person ...
P.S. The column below does speak of God, but not in an exclusionary or exclusively Islamic sense and I think that people of all faiths, no faiths and no interest in faith whatsoever on this list will still find something there to appreciate. I do apologize for any offense - I assure you that none was intended. I do look forward to seeing some of you at the seminar tomorrow (Free but no real Food - sorry).
Commentary for the Week:
Why should I care about Islamic Finance?
Many people are of the opinion that Islam and Finance should not really mix. It is said that Islam is about values, morals and duties whereas finance is about making money. As money is a great 'evil', necessary but ultimately impure, never the twain shall meet. If we add to this the argument that our fellow Muslims (and perhaps us - God only knows), have not really done much in service to humanity while professing to be Islamic Finance professionals, we begin to understand the argument. Indeed, our contributions pale in comparison to even mining magnates in just Canada - whose companies use up and destroy large tracts of land in the search for jewellery and telephone wires. Even though their companies use chemical leaching and other destructive extraction processes, many are themselves the greatest personal donors and benefactors of hospitals / universities / charities and the like. In comparison to that, what has Islamic Finance really done, and why should you really care? After all, your mortgage is well on its way to being paid off, you have a good job, family and bills to be worried about. Why should you take Islamic Finance seriously? Why should you care?
Well, this is a difficult question, and ultimately it will of course be a personal choice. Let me share with you though, some of my humble thoughts and maybe you can share with me some of yours. First, the question as we have framed it above, is a bit misleading. The question is not really whether we should start to care about Islamic Finance, it is about how we came to stop caring about God in the realm of our financial choices. In essence, we are asking ourselves when and why we lost sight of God as we saw money. Does our sinking into materiality have something to do with that connection to God such that our absorption in one, leads to loss of the other? Is there a balance then, that we should be hoping to achieve?
Personally, I myself am totally off kilter. I wouldn't know Piety even if it hit me in the face while I was supersonic. But learned minds have explained to me that there is something of a balance that people can sometime find. Instead of either chasing money or either chasing God, perhaps it is possible to use money as a powerful means to do Good. How is this Islamic you ask, and what about money being 'evil', and what about never the twain shall mix? Well, without harping on the details, it is unthinkable to me that our faith would address so many mundane aspects of our daily lives and yet leave the profundity of wealth management unaddressed beyond charity. There must be then, something about how we spend our wealth and conceive of finance that we have not paid any real attention to.
In my limited and imperfect research, there are two major themes that come to mind. First, one feels that at its core, Islamic Finance should be about Social Improvement. It should be about leaving the world a better place than we found it. There is so much that there is to do and improve and fix, that we really have no lack of opportunity. We also have no lack of resources. We have been entrusted by God with land, intellect, muscle, capital, technology and of course, thanks to NAFTA (cannot blame God for that) - cheap Mexican labour. So the second theme really is whether we have been good Stewards of all the amazing things, including our hard working and underpaid Mexican brothers, that we have been entrusted with. Between the concept of a moral use of our money and the concept of a careful stewardship for all the wealth that we coexist with which is not money, is perhaps the place that we have been searching for. It is perhaps the place that we will find another connection to God. It is also perhaps the place we really want to mean when we speak of Islamic Finance.
Going back to the question of why we should care then - let me ask you a question to counter yours. I know that we usually share a few not-so-funny jokes that still make you laugh, but today is perhaps a day to be a bit reflective. Let me then overstep my bounds and ask you a personal question. What then, is the purpose of your life? Is it not to be at the same place that we have just discovered? Let me get even closer then, to the heart of the matter and to you. Close your eyes my friend, and ask yourself this question: Do you really need a reason to care, or can you feel that we are past reasons now?
Finance News:
1. Mortgage foreclosures start in the richer neighbourhoods and areas of US as well ... read more here
2. As was humbly predicted here a couple of weeks ago, some hedge fund payouts are truly amazing ... read more here
3. Some strategies and insight into how debt affects your financial plans ... read more here
4. Video interview of George Soros discussing this crisis. He is the man that 'broke the Bank of England' in the 90's (?) ... read more here
Economic News:
1. For a long time now, the US has been importing deflation from abroad in the form of cheaper goods. That tide seems to be turning with the precipitous fall in the US$ ... read more here
2. The IMF reports that losses from the credit crunch will top $945B ... read more here
3. In case you were wondering some of the real decisions of the world are made (hint: It's not the UN) ... read more here
4. The gambling industry says they generate almost 300,000 jobs and create lots of value to the economy. Hmm ... all those lives, time, energy and resources spent robbing Peter to pay very little to Paul? ... Value indeed ... what is unconscionable is that the Government is actually in on the act ... read more here
5. House Prices in Britain are now falling ... read more here
Islamic & Middle East Finance:
1. N/A
Miscellaneous:
1. Excellent column and advice for job-seekers ... the idea is to create the opportunity rather than waiting for one to fall in your lap ... read more here
2. A physicist disputes the naming of the 'God Particle' that is supposed to explain a bit about how mass was created early in the universe ... read more here
"EVERYBODY wants it. Nobody understands it. Money is the great taboo. People just won't talk about it. And that is what leads you to subprime. Take the greed and the financial misrepresentation out of it, and the root of this crisis is massive levels of financial illiteracy." - John Bryant of Operation HOPE, an evangelist for financial literacy.
This why we have announced our first Educational Seminar on Islamic Finance in Toronto for 2:30 pm tomorrow April 12th at the Radisson East Hotel (55 HallCrown Place, Toronto). The seminar is designed to explore the place Islam occupies in our financial lives. We will not be selling anything other than ideas and you will get the unusual and unprecedented chance to meet your humble correspondent in person ...
P.S. The column below does speak of God, but not in an exclusionary or exclusively Islamic sense and I think that people of all faiths, no faiths and no interest in faith whatsoever on this list will still find something there to appreciate. I do apologize for any offense - I assure you that none was intended. I do look forward to seeing some of you at the seminar tomorrow (Free but no real Food - sorry).
Commentary for the Week:
Why should I care about Islamic Finance?
Many people are of the opinion that Islam and Finance should not really mix. It is said that Islam is about values, morals and duties whereas finance is about making money. As money is a great 'evil', necessary but ultimately impure, never the twain shall meet. If we add to this the argument that our fellow Muslims (and perhaps us - God only knows), have not really done much in service to humanity while professing to be Islamic Finance professionals, we begin to understand the argument. Indeed, our contributions pale in comparison to even mining magnates in just Canada - whose companies use up and destroy large tracts of land in the search for jewellery and telephone wires. Even though their companies use chemical leaching and other destructive extraction processes, many are themselves the greatest personal donors and benefactors of hospitals / universities / charities and the like. In comparison to that, what has Islamic Finance really done, and why should you really care? After all, your mortgage is well on its way to being paid off, you have a good job, family and bills to be worried about. Why should you take Islamic Finance seriously? Why should you care?
Well, this is a difficult question, and ultimately it will of course be a personal choice. Let me share with you though, some of my humble thoughts and maybe you can share with me some of yours. First, the question as we have framed it above, is a bit misleading. The question is not really whether we should start to care about Islamic Finance, it is about how we came to stop caring about God in the realm of our financial choices. In essence, we are asking ourselves when and why we lost sight of God as we saw money. Does our sinking into materiality have something to do with that connection to God such that our absorption in one, leads to loss of the other? Is there a balance then, that we should be hoping to achieve?
Personally, I myself am totally off kilter. I wouldn't know Piety even if it hit me in the face while I was supersonic. But learned minds have explained to me that there is something of a balance that people can sometime find. Instead of either chasing money or either chasing God, perhaps it is possible to use money as a powerful means to do Good. How is this Islamic you ask, and what about money being 'evil', and what about never the twain shall mix? Well, without harping on the details, it is unthinkable to me that our faith would address so many mundane aspects of our daily lives and yet leave the profundity of wealth management unaddressed beyond charity. There must be then, something about how we spend our wealth and conceive of finance that we have not paid any real attention to.
In my limited and imperfect research, there are two major themes that come to mind. First, one feels that at its core, Islamic Finance should be about Social Improvement. It should be about leaving the world a better place than we found it. There is so much that there is to do and improve and fix, that we really have no lack of opportunity. We also have no lack of resources. We have been entrusted by God with land, intellect, muscle, capital, technology and of course, thanks to NAFTA (cannot blame God for that) - cheap Mexican labour. So the second theme really is whether we have been good Stewards of all the amazing things, including our hard working and underpaid Mexican brothers, that we have been entrusted with. Between the concept of a moral use of our money and the concept of a careful stewardship for all the wealth that we coexist with which is not money, is perhaps the place that we have been searching for. It is perhaps the place that we will find another connection to God. It is also perhaps the place we really want to mean when we speak of Islamic Finance.
Going back to the question of why we should care then - let me ask you a question to counter yours. I know that we usually share a few not-so-funny jokes that still make you laugh, but today is perhaps a day to be a bit reflective. Let me then overstep my bounds and ask you a personal question. What then, is the purpose of your life? Is it not to be at the same place that we have just discovered? Let me get even closer then, to the heart of the matter and to you. Close your eyes my friend, and ask yourself this question: Do you really need a reason to care, or can you feel that we are past reasons now?
Finance News:
1. Mortgage foreclosures start in the richer neighbourhoods and areas of US as well ... read more here
2. As was humbly predicted here a couple of weeks ago, some hedge fund payouts are truly amazing ... read more here
3. Some strategies and insight into how debt affects your financial plans ... read more here
4. Video interview of George Soros discussing this crisis. He is the man that 'broke the Bank of England' in the 90's (?) ... read more here
Economic News:
1. For a long time now, the US has been importing deflation from abroad in the form of cheaper goods. That tide seems to be turning with the precipitous fall in the US$ ... read more here
2. The IMF reports that losses from the credit crunch will top $945B ... read more here
3. In case you were wondering some of the real decisions of the world are made (hint: It's not the UN) ... read more here
4. The gambling industry says they generate almost 300,000 jobs and create lots of value to the economy. Hmm ... all those lives, time, energy and resources spent robbing Peter to pay very little to Paul? ... Value indeed ... what is unconscionable is that the Government is actually in on the act ... read more here
5. House Prices in Britain are now falling ... read more here
Islamic & Middle East Finance:
1. N/A
Miscellaneous:
1. Excellent column and advice for job-seekers ... the idea is to create the opportunity rather than waiting for one to fall in your lap ... read more here
2. A physicist disputes the naming of the 'God Particle' that is supposed to explain a bit about how mass was created early in the universe ... read more here
Banking on Islam?
Quote of the week:
"While Goldman's structure has remained the same, other banks have been changed by the crisis, at least temporarily. Merrill's CEO Thain, for example, has said the bank will exit the subprime-related securitization business. Citigroup may get broken up and there is talk about Bear Stearns getting sold. In addition, many banks are now answerable to sovereign wealth funds from the Middle East and Asia. At Citi, for example, Crittenden helped secure US$7.5 billion from Abu Dhabi Investment Authority." - Avital Louria Hahn - Senior Editor at CFO in the U.S.
Imagine undoing and breaking apart one of the largest banks in the world. Probably lots of fees and profits to be made for that series of transactions also. Must disagree with the statement about being answerable to sovereign funds though ... ME investors are notoriously hands-off when it comes to investing in the US ... willing to provide the money, but not willing to call the shots.
Commentary for the Week:
Banking on 'Islam' in Canada?
I recently had the opportunity to attend a seminar on 'Islamic Banking' and how this industry can be grown in Canada. While I was initially both inspired and excited about being able to learn something, I am very sorry to say that the feeling did not last. I came away extremely disappointed with the ideas that were discussed and completely disenchanted with the mindset of the people who have taken it upon themselves to grow the field. So much of what is beautiful in Islam or Ethical finance was just spoken of as a problem to get around in order to make money while taking zero risk. As such, the whole discourse was demoralizing in the extreme.
Most of the discussion rested upon one crucial point. Whether this point was an assumption or whether many millions went into researching the issue, I could not tell. The point itself however, was quite simple. It was that the Muslims in Canada are so unintelligent (and I am being charitable with my words here), that they can easily be taken advantage of. The entire focus of the discussion seemed to be that if the financial industry designed products (esp. Mortgages) that were the same as usual but hired some 'scholars' to approve them as Islamic, large financial institutions could probably get away with charging Muslim customers more than normal. Furthermore, since Islam requires that 'the financier' and 'the financed' actually share some risk, there were lender protections built into Ontario regulations that could be applied to Islamic products also in order to protect 'the lender' at the cost of 'the borrower'. If that wasn't bad enough, there was also discussion of how once 'Islamic' loans were forwarded to the unsuspecting Muslim public, the lenders would still be able to include those loans in 'structured investment products' that would then be sold to investors for speculation and trading purposes (ala subprime). As such, these products would be indistinguishable from the conventional at the back end and more expensive and risky to the Muslim customer at the front.
As you can no doubt see, this is heady information indeed. Not only am I, as a Muslim customer, being thought of as a proverbial fool who cannot tell when I am being taken for a ride, but I am also about to be charged extra for that dubious privilege. If you are outraged now at reading this, imagine how outraged I was when these thoughts were going through my mind Live, so to speak. Needless to say, I did not appreciate the disrespect inherent in their view of Muslims, and was quite incensed at being implicitly called a fool (esp. because if you are familiar with Ittihad, you are no doubt aware that from top to bottom, we are only staffed by geniuses).
So this leads us to the inevitable realization. In some way, shape or form, things are about to be marketed to us as Islamic. Money is being spent on researching trends, price inflexion points and identifying scholars' who would be willing to lend their services to institutions and practices that they do not understand fully. As sure as the night that follows day, 'Islamic' banking is coming. The question then, for us as a community is - will we be ready? Will Muslims accept the marketing campaigns, clever advertising and end up paying more for something that is demonstrably less Islamic than the norm? Or will we be able to call a spade a spade and refuse to be taken for an expensive ride?
I hope, my friends, Romans, Torontonians, Canadians, people of all stripes, colours, faiths and political proclivities - you will not stand idly by as this travesty is perpetrated upon unsuspecting people. A 1-2% extra interest rate (even if you call it something else) on a mortgage (which seems to be the product of choice), can translate into tens of thousands of extra dollars in needless expense for a family. There is nothing Islamic about that. There are some fabulous contributions that Muslims can make to the Canadian Financial system - expensive mortgages are not one of them.
The primary solution to this state of affairs is of course education; and as an immediate measure, I encourage you to invest some time and effort in educating yourself about both Finance and Islamic Finance. That way both you and circle of friends will be prepared if any big Multinational bank or other local entity were to ask for your business on the basis of Islam. The idea here is that collectively, if we turn ourselves into a community that is educated about such things, stiffing us will not be so easy for those who are trying. I have some ideas about hurrying this education process along, but if you think of something as well, then I look forward to hearing from you on the matter. The refinement of education and thought is always a time-intensive endeavour and it seems that we have little time left to lose ... ideas, anyone?
Finance News:
1. Some of our CPP pension funds are about to be invested in China. Better hope China is still doing as well when the time comes for us to retire ... read more here
2. The Economist reviews Warren Buffett's letter to Berkshire Hathaway shareholders ... read more here
3. The Globe and Mail helps make a financial plan for Aisha, who wants to go to Mecca for the Pilgrimage ... read more here
4. An insightful look into how bank's manage risk, or rather, how they fail to manage risk ... read more here
Economic News:
1. Follow-up to last week's commentary. Oil is now at its highest level even inflation adjusted terms - beating the oil embargo price from 1980. ... read more here
2. This story is too good. For decades there has been a very cooperative nexus between governments and big business in the form of how public money is raised and spent. With the advent of subprime, some municipal governments are trying to break out of these shackles. Ever wonder why your property taxes are so high? ... read more here
Islamic & Middle East Finance:
1. A very good introductory article on Sukuks, as the 'Islamic' version of bonds are currently known. If you read between the lines a bit, you can see the major fault-lines between the various camps on the acceptability of these instruments. The article is also novel because it speaks from the perspective of the issuer, not the broker, and so is somewhat free of advertorial baggage ... read more here
Miscellaneous:
1. Will this mining project get approval to move a quarter of a town in Quebec? ... read more here
2. The Founder of Infosys Technologies shares the best advice he ever got ... read more here
3. Vermont towns vote to arrest both the President and VP of the US ... read more here
"While Goldman's structure has remained the same, other banks have been changed by the crisis, at least temporarily. Merrill's CEO Thain, for example, has said the bank will exit the subprime-related securitization business. Citigroup may get broken up and there is talk about Bear Stearns getting sold. In addition, many banks are now answerable to sovereign wealth funds from the Middle East and Asia. At Citi, for example, Crittenden helped secure US$7.5 billion from Abu Dhabi Investment Authority." - Avital Louria Hahn - Senior Editor at CFO in the U.S.
Imagine undoing and breaking apart one of the largest banks in the world. Probably lots of fees and profits to be made for that series of transactions also. Must disagree with the statement about being answerable to sovereign funds though ... ME investors are notoriously hands-off when it comes to investing in the US ... willing to provide the money, but not willing to call the shots.
Commentary for the Week:
Banking on 'Islam' in Canada?
I recently had the opportunity to attend a seminar on 'Islamic Banking' and how this industry can be grown in Canada. While I was initially both inspired and excited about being able to learn something, I am very sorry to say that the feeling did not last. I came away extremely disappointed with the ideas that were discussed and completely disenchanted with the mindset of the people who have taken it upon themselves to grow the field. So much of what is beautiful in Islam or Ethical finance was just spoken of as a problem to get around in order to make money while taking zero risk. As such, the whole discourse was demoralizing in the extreme.
Most of the discussion rested upon one crucial point. Whether this point was an assumption or whether many millions went into researching the issue, I could not tell. The point itself however, was quite simple. It was that the Muslims in Canada are so unintelligent (and I am being charitable with my words here), that they can easily be taken advantage of. The entire focus of the discussion seemed to be that if the financial industry designed products (esp. Mortgages) that were the same as usual but hired some 'scholars' to approve them as Islamic, large financial institutions could probably get away with charging Muslim customers more than normal. Furthermore, since Islam requires that 'the financier' and 'the financed' actually share some risk, there were lender protections built into Ontario regulations that could be applied to Islamic products also in order to protect 'the lender' at the cost of 'the borrower'. If that wasn't bad enough, there was also discussion of how once 'Islamic' loans were forwarded to the unsuspecting Muslim public, the lenders would still be able to include those loans in 'structured investment products' that would then be sold to investors for speculation and trading purposes (ala subprime). As such, these products would be indistinguishable from the conventional at the back end and more expensive and risky to the Muslim customer at the front.
As you can no doubt see, this is heady information indeed. Not only am I, as a Muslim customer, being thought of as a proverbial fool who cannot tell when I am being taken for a ride, but I am also about to be charged extra for that dubious privilege. If you are outraged now at reading this, imagine how outraged I was when these thoughts were going through my mind Live, so to speak. Needless to say, I did not appreciate the disrespect inherent in their view of Muslims, and was quite incensed at being implicitly called a fool (esp. because if you are familiar with Ittihad, you are no doubt aware that from top to bottom, we are only staffed by geniuses).
So this leads us to the inevitable realization. In some way, shape or form, things are about to be marketed to us as Islamic. Money is being spent on researching trends, price inflexion points and identifying scholars' who would be willing to lend their services to institutions and practices that they do not understand fully. As sure as the night that follows day, 'Islamic' banking is coming. The question then, for us as a community is - will we be ready? Will Muslims accept the marketing campaigns, clever advertising and end up paying more for something that is demonstrably less Islamic than the norm? Or will we be able to call a spade a spade and refuse to be taken for an expensive ride?
I hope, my friends, Romans, Torontonians, Canadians, people of all stripes, colours, faiths and political proclivities - you will not stand idly by as this travesty is perpetrated upon unsuspecting people. A 1-2% extra interest rate (even if you call it something else) on a mortgage (which seems to be the product of choice), can translate into tens of thousands of extra dollars in needless expense for a family. There is nothing Islamic about that. There are some fabulous contributions that Muslims can make to the Canadian Financial system - expensive mortgages are not one of them.
The primary solution to this state of affairs is of course education; and as an immediate measure, I encourage you to invest some time and effort in educating yourself about both Finance and Islamic Finance. That way both you and circle of friends will be prepared if any big Multinational bank or other local entity were to ask for your business on the basis of Islam. The idea here is that collectively, if we turn ourselves into a community that is educated about such things, stiffing us will not be so easy for those who are trying. I have some ideas about hurrying this education process along, but if you think of something as well, then I look forward to hearing from you on the matter. The refinement of education and thought is always a time-intensive endeavour and it seems that we have little time left to lose ... ideas, anyone?
Finance News:
1. Some of our CPP pension funds are about to be invested in China. Better hope China is still doing as well when the time comes for us to retire ... read more here
2. The Economist reviews Warren Buffett's letter to Berkshire Hathaway shareholders ... read more here
3. The Globe and Mail helps make a financial plan for Aisha, who wants to go to Mecca for the Pilgrimage ... read more here
4. An insightful look into how bank's manage risk, or rather, how they fail to manage risk ... read more here
Economic News:
1. Follow-up to last week's commentary. Oil is now at its highest level even inflation adjusted terms - beating the oil embargo price from 1980. ... read more here
2. This story is too good. For decades there has been a very cooperative nexus between governments and big business in the form of how public money is raised and spent. With the advent of subprime, some municipal governments are trying to break out of these shackles. Ever wonder why your property taxes are so high? ... read more here
Islamic & Middle East Finance:
1. A very good introductory article on Sukuks, as the 'Islamic' version of bonds are currently known. If you read between the lines a bit, you can see the major fault-lines between the various camps on the acceptability of these instruments. The article is also novel because it speaks from the perspective of the issuer, not the broker, and so is somewhat free of advertorial baggage ... read more here
Miscellaneous:
1. Will this mining project get approval to move a quarter of a town in Quebec? ... read more here
2. The Founder of Infosys Technologies shares the best advice he ever got ... read more here
3. Vermont towns vote to arrest both the President and VP of the US ... read more here
The Anatomy of an Islamic Finance Deal
Quote of the Week:
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
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