Islamic Financing

This would be a very touchy subject as I am sure that a whole host of scholars have dwelt and issued fatwas on this. I am in no position to question those fatwas; I am here to just share my thoughts. Please correct me if I am wrong.

As an investment banker, I was well aware and exposed to the various Islamic financing instruments although not in depth: the murabaha, musyarakah and so forth. It basically serves as an alternative to conventional loans that has interest, ursury or riba which is haram in Islam. It is stated as such in the holy Quran.

The lingering question in my head is the basic principle of 'Islamic' financing. As I see it (in the most lay-man's terms), ursury requires an interest in the form that it is guaranteed to lender. It falls back on the principle of "Time Value of Money" or opportunity cost; that money, in its purest form, has income. Why? because if it was not lent to the borrower, it could have been used in other investment that it is assumed would bring in profit. It is assumed that returns are guaranteed. In contrast, business venture in the form of equity investment, does not guarantee return.

Therefore, it strikes me that the existing Islamic financing still has an element of 'guaranteed' return albeit worded as profit/coupon. It then goes back in support of the principle of "Time Value of Money", which is the foundation of 'interest'. The instruments seeks to protect and guarantee both the principal and profit attributable to the lenders.

Allah states that he alone decides the wealth or 'rezki' and hence renders these guarantees as mere hopes. There is no certainty but from Allah. And before you misunderstood this to be an easy lament, an excuse to be lazy, I want to tell you that it is not the case. Search for Allah's bounty we must, but the act of guaranteeing return could be the contentious issue here.

And how strong is this man-made guarantee of return? We have seen the strongest of financing instruments being defaulted upon. If banks are considered stronger than instruments, we have seen banks failed and defaulted. If we think that a country is stronger than a bank, we have seen countries going bankrupt. If an economic region is considered stronger than a country, the asian financial crisis proved us wrong. If we think the whole world is the strongest, the great world depression serves as a bitter reminder of how wrong we are.

Wow, I can sense that people would be feeling more and more depressed reading my thoughts here. But the opposite is what I want to convey. I want to convey that Allah, our god, is much stronger than everything we can conceive in our minds. And faith in him and following what he says would beget rewards no human can alter.

The muslim community, entrepreneurs, no doubt need funds; funds to start or grow their businesses. However, most of the funds are already in the capital/debt market where it is ruled by the principle of time value of money, instead of "faith in Allah and hard work". The latter may have sounded too flimsy to all of us, bordering absurd; why? because we are more used to the first principle rather than the second. We cannot quantify the return on our faith to Allah; we cannot quantify divinity. Therefore, we tried to work within the same core principle of Time Value of Money, but change its form, so that we can give the access to our funds.  But we need a capital market that hinges on our own  basic principles.

I would therefore support the promotion of a Pristine Islamic Private Equity model. A model that invest purely on equity and lends (a small portion) free of any interest. If all the other business qualities are taken care of (feasibility studies, strong management, good products etc), I believe that the small step of sacrificing that interest portion will be rewarded. Anyway, if you do not get the monetary reward on the loan, it is just 15% per annum. If you are rewarded in terms of equity profits, it is technically unlimited: could be 15%, 15%, 100% or even 1000%.

Salam and work smart everybody.