Episode Transcript
Speaker 1 00:00:22 Alignment between Islamic finance practices and ethical finance practices are quite evident. Islamic finance are Sharia compliant. Finance is rooted in the rich history of the Islamic faith and culture. And with the emergence and now prevalence of E S G investing and responsible investing, we see a greater spotlight on Islamic finance in the west with Sharia compliant financial assets forecasted to reach about 3.5 trillion Within the decade, investors and financial services firms are looking to learn more about how to serve this growing area. Here. To give us insight into Islamic finance, our Umer Suleman head of advisory board for Waha uk, the world's largest Islamic FinTech. He also sits on the board of the UK I F C, and is the business and economics advisor to the Islamic Council of Europe. Also, we have Mustafa Adele, who is head of Islamic finance data and analytics for London Stock Exchange Group. Ls a, he is responsible for leading the Islamic finance and Islamic markets business. Thank you both for joining.
Speaker 2 00:01:31 Thank you for having us. Thank you for having us.
Speaker 1 00:01:34 So for starters, Umer, what are the principles of Islamic finance and what does it mean to be Sharia compliant?
Speaker 2 00:01:41 Okay, so I mean, look, there is a, uh, general definition, and I think there's a wider definition of Islamic finance. And I'll start with a kind of the general definition, which is to interact, have all of your financial and business, uh, transactions in a manner compliant with Islam. Now, what does that mean? So, Islamic finance as a whole comes under, uh, the science of mok, which is your general social contracts as opposed to your worship. And I'll tell you why that's important, is because within the general principle within maam Malat is everything is permissible unless it's been specified that it's not. And why this is important is because all types of business transactions, the, the multitudes of different ways in which you can interact with each other financially are generally allowed other than, and this is where the screen is, other than those transactions which contain interest <unk> this is strictly prohibited in Islam and, and those other faith traditions that came before us, um, there should be no gambling involved.
Speaker 2 00:02:45 So speculation, uh, no <unk> which is a type of unnatural risk. Um, Islamic finance itself is underpinned by a genuine exchange of, of service or commodity. There has to be a real exchange. Um, and it should not be involved in any type of activity that is counterintuitive to the faith or general morals, uh, within society or ethics. So for example, pornography, arms, alcohol, these types of transactions or investments are screened out. So it just works as a screen. So Islamic Finance today works to screen these out. On top of these, we have certain principles which, uh, kind of bring about good stewardship of investing. So your, your debt percentage, your debt profile, how much debt does the company has? Is it able to meet its obligations? Is it too highly leveraged? Islamic finance advises companies to avoid these. Um, so as a whole, these are your general principles of Islamic finance. Did I miss anything?
Speaker 3 00:03:49 No, Omar, I think you wrapped it up, uh, very, very well. And I think that, you know, based on these principles, you know, um, what, what started out as very negative screening, uh, from the point of view of just excluding certain items because they were deemed to be, um, you know, non cherry compliant. I think today what we're seeing more and more is positive screening where institutions are trying to structure products and services more in line with the principles to achieve the positive outcome that Islamic finance hopes to get by not having excessive leverage by not having speculation, by not, you know, enforcing too much risk on any one particular party, but sharing that risk across different parties of any transaction.
Speaker 1 00:04:31 And, and that's great. And just continuing with that Mustafa, I'm wondering how are investment institutions serving, um, this gap? Or would you say that there is a gap? You talked about the positive screening as opposed to the negative screening and really structuring this type of product with no excessive leverage. And we know sometimes excessive leverage does happen. Um, sometimes these instruments are highly leveraged. Do you feel that there is a gap or do you feel that the investment institutions are really serving this area adequately?
Speaker 3 00:05:01 Um, I think there is a gap, but the gap is declining over time. So what, what, what you would've had a couple of decades ago would've been a very significant disconnect between the needs of capital owners that are sure sensitive, that want to invest in line with the principles and the type of products that typical financial institutions or investment institutions could structure and rollout. And that was for various reasons. Uh, we had challenges in terms of regulation where the entire regulatory system that the financial services institutions had to operate in was very much geared towards a pure lending based, uh, environment, right? Um, not really any kind of asset ownership or participation, uh, component that was built in. The other challenge was finding assets, tangible assets that could be utilized as underlying assets in any particular transaction. And then the third thing was a lack of general understanding of how best to translate some of these principles of Islamic finance into practical contracts that could be enforceable under different jurisdictions like UK law and things like that.
Speaker 3 00:06:07 But I think over the last, uh, couple of decades we have seen, um, you know, more and more, uh, role played by regulators who are developing regulations that are more aligned to the principles of Islamic finance. We are seeing greater education amongst investors who are now becoming more familiar with different options and avenues that they have to invest in line with their faith. And we are seeing institutions, lawyers, accountants, and other industry stakeholders get a better understanding and therefore be able to develop products that are more aligned with the principles of Summit Finance. And I think we can see that both in terms of the growth of assets which have, you know, grown exponentially over the last decade or so. But also in terms of the variety of products where it's not just simple, uh, HR or asset structures or leasing structures, but you got, you have a whole variety of different types of products that cater to different needs. Um, Omar, I don't know if you wanna add any, anything more to that? Uh,
Speaker 2 00:07:09 No, I think you covered it succinctly. Thanks, sfa.
Speaker 1 00:07:12 And one of the things that I, I know that you just talked about, Omar, about the social contract and, and stewardship, and then Mustafa, you talked about the social contract as well. I'm thinking about countries and populations now. You know, we're coming out of this pandemic and countries, populations that have been especially vulnerable during the pandemic in Asia. In Africa, we talk about the concept of stewardship. Has Islamic finance and those who participate in the space really played a role in the recovery of these regions? Um, we'd love to get your thoughts on that, Omar.
Speaker 2 00:07:43 So, I mean, I can't, uh, speak for, uh, ev every country, but in essence, you would hope that the Islamic finance institutions definitely would've played a part because most of these, uh, regions, they are, um, more, uh, I guess industry led as opposed to having financial based services. So these types of industries very much align with Islamic finance because we're talking about asset financing, we're talking about, you know, um, helping them grow their business, uh, through, uh, servicing of, of, you know, increasing capacity of the manufacturing, et cetera. That's on one side. On the other side is also access to opportunity for their population who, uh, are now more at home who need access to, uh, financial products. Um, who there is now, I guess, um, information asymmetry. They have access now to be able to take part in global transactions through the power of their mobile phone.
Speaker 2 00:08:37 Uh, so from both sides, this opportunity has been created. Islamic finance certainly is able to help promote and fund. If we're looking now at, for example, P P E P P E, um, equipment, a factory needs to increase its capacity, maybe 2, 3, 4 times, I dunno how many times to, to meet global demand. You now have the Islamic finance institutions were able to, okay, we can invest in the stock, we can come up with, uh, some sort of structure for this rather than a pure loan. Um, and also these countries generally, if you look at them, they are manufacturing or, or production based o of some sort. So this definitely helps in terms of the uptake. And we've seen from the information, uh, that's come out early days, that the countries who are gonna be quickest in recovery are actually these, these nations. Whereas I would say the more developed, uh, countries are perhaps gonna be more stagnant in how they recover. Um, because when you have a completely just, uh, financially or predicated on a majority the financial based industry, then you have to wait for those transactions to come through. Uh, whereas the need for everyday type of items is there. So you can see how Islamic finance plays its part in, in supporting, uh, those countries.
Speaker 1 00:09:49 Well, it sounds, from what I'm hearing that maybe BCS may be something that's, that are really playing a role in terms of the growth here. If we, we talked about 3.5 earlier, that's such a huge number. Are there certain areas that you've seen exponential growth, um, in certain categories?
Speaker 2 00:10:07 So, I mean, for certain, speaking from from W'S perspective with the robo advisory, we've definitely seen a huge uptake in people accessing investment opportunities, uh, online. So the democratization of, um, investment opportunity. We've seen the, the financial inclusion, as you said, there's, there's information a symmetry now everyone has access to, to the internet. Um, there's, there's, there's barriers to entry have been lowered. Um, we we're, we're kind of in a disruptive phase, not just from I guess the way we live our lives through covid, but a digital disruption where now we are seeing that the larger players don't hold the positions that they used to have, but smaller startups are now operating and they're very niche. They're able to penetrate markets and be able to address, uh, I guess the community's needs, wherever that community is. Uh, we also match this with a, a young population, generally in the Muslim majority countries. The profile of of, of the population is that they're young and growing. And so these people don't have any kind of baggage, any kind of traditional, um, loyalty to the large brands. So when someone comes with a product that matches their lifestyle needs, uh, and is aligned to their values, they're taking up and we've seen it handover fist. Um, so definitely from that point of view.
Speaker 1 00:11:30 And Mustafa, let's dig more into the, this younger demographic and what's really aligned to their values. As we know, um, green initiatives, un SDGs, those are things that are really, um, taking off quite frankly. Let's talk about the growth that you've seen in these particular areas, um, and how you see this really coming to bear in the next coming years.
Speaker 3 00:11:51 No, definitely. And I think Omar, Omar hit it, you know, very, very well in terms of the demographics. And you have a young population, and not only that, you have a young population that is much more aligned to their, uh, values and their faith-based tradition, right? I mean, uh, pure research, I rec I recall five years or four years ago, did a study that showed that in most Muslim majority countries, approximately 70% of individuals take faith into their consideration when they're making some kind of economic decision. And that was compared to somewhere around 50% for the US and something in around 30%, uh, in, in, in Europe, in Western Europe. So, you know, faith plays a much more significant role in their economic decision making like it does in many different aspects of their life. Um, and, and we're seeing that reflected. So if you look at something like suk, which is a very, very interesting instrument in Islamic finance, it's essentially the equivalent of a, uh, of a bond, but it's structured in a compliant manner.
Speaker 3 00:12:49 We have seen the growth of sustainable and green suks grow exceptionally at about 200% year on year for the last five years. And, and we see them come in all types. So you see the government of Saudi Arabia, Saudi, the electricity authority issuing a green suk to invest in solar energy capabilities in the kingdom of Saudi Arabia, you see is investing in a transition suk to reduce their carbon emission and to invest in greener technologies for themselves going forward. You see, uh, you know, Islamic Development Bank issuing a, you know, 2.5 billion, uh, sustainability sauk, you see the government of Malaysia issuing retail green souks as well, right? So you see a lot of that, uh, product diversification and not, and not just some of these countries, but also multilateral institutions as well. So for example, the United Nations runs a vaccine program targeting Asia and Africa, African countries that is entirely funded on a suk structure basis using Islamic finance.
Speaker 3 00:13:53 And we know that the U N H C R, the u the UN human, sorry, the UN Higher Commission for Refugees, they have a zakar funding program. And zakar, you know, for for, for, for everyone's reference is a compulsory wealth tax that is imposed on all Muslims that have wealth above a certain amount that they're meant to donate to help the, uh, you know, the less fortunate, uh, in, in their communities. So the U N H C R has utilized this particular aspect of Islamic finance and used it to generate, you know, hundreds of million of, of dollars of funds to help some of the most disenfranchised people, which are refugees all over the world. So we are seeing it across, across the board, both in terms of different types of assets, but also in terms of products and whether it's governments or whether it's multilateral institutions. It, it really works towards the mainstream of Islamic finance across, particularly these communities in Asia and Africa, that, that rely on, uh, you know, uh, Islamic finance as a basis to help address some of the challenges that they face.
Speaker 1 00:14:56 And now we're talking more about the, the social impact piece of it, which seems to be really deeply embedded and deeply ingrained as ako with the, with the wealth tax. And this kind of brings to mind some of the concerns, issues that people have addressed overall around social impact. And there's a discussion around now whether we can continue to expect an increase in returns overall are for those who embrace E S G investing, um, embrace Islamic finance, is the expectation that we will see decreased returns, given the correlation between the issue investing and the historic perspective of Sharia compliant investing. What's your take on whether we must globally contend with lower returns if we as a society commit to this type of investment strategy? And Umer would love to get your thoughts there
Speaker 2 00:15:44 For certain. I think maybe in the short term you may see, um, lower returns in comparison to the types of returns people have seen historically. But I think as it becomes the new norm, and we should move towards that, it will recalibrate and people's expectations should recalibrate because people now understand that actually we need to take a long-term view, this, uh, idea of kind of, uh, unbridled capitalism where growth or year upon year growth, keep on pushing, keep on pushing until you eventually break the underlying, uh, organization, as we saw with the last financial crisis where, you know, um, profits were privatized and losses were socialized and people thought, wait a second, you know, this isn't fair in terms of the equation, we would rather get less and we know that, you know, this organization or our investments are still gonna be here in a 15, 20, 25, 30 year horizon.
Speaker 2 00:16:41 Um, so definitely I think people are more accommodating. People want to have, um, uh, safer investments and I don't think that they need to be, um, you know, too much of a sacrifice on the return. People are also more, a lot more socially conscious about, you know, the cost, the real cost of, uh, their return. And I think people are also genuinely waking up to what is value, you know, what, what is value? Um, we have our values, but creating value itself, um, is it enough that a company has pure profit growth versus it's increased, uh, the number of its employees? This is something I really like to encourage, uh, and and talk about is, look, if a company has made slightly less profit than it made the year before, but it's increased, its staffing by five or 10%, for me, that company has a massive tick because through its its businesses operations, it's enabled more people to be employed, more families to be supported.
Speaker 2 00:17:44 You know, this is value, this is something that should be celebrated. This is something that we should see as well. Actually it's given us social profit, not just pure profit. So I think as people become more educated, as people get used to, um, E S G based and Sharia compliant, even investments, as these become the norm and they become more embedded in our general investments, then I will see, I think you'll see creativity take its part as well, and profits will start to rise in a sustainable manner. I'll give you just one example that we dealt with in the UK actually where, um, black cabs, the iconic black cabs, black taxis, um, they, uh, uh, the company that produces them approached us, uh, with regards to Shia financing. And, uh, so we, we, we came up with a model in which there was profit sharing, uh, between the, the cab driver and the company as financing it's pure profit sharing.
Speaker 2 00:18:36 So for every mile, the financing company, uh, got a share of the profit. If the, if the cab driver, the taxi driver wasn't working, then the financing company didn't make any money. As a part of this, it was also insisted that each of the new black taxis had to be running on green fuel. So they had to be using green fuel. So all of the new taxis you see now in London and those which are Shia, um, kind of financed, they're also green using clean fuel. And this is how it's kind of embedded within the transaction now. And we'll start to see more of these types of transactions as well as the largest scale ones.
Speaker 1 00:19:14 That is an amazing example, and I think you said something that was very tweetable. I just wanna make sure I got it right cuz you rhymed in everything with this Uber profits were privatized and losses were socialized. Did I hear that correctly?
Speaker 2 00:19:24 That's correct, yeah.
Speaker 1 00:19:25 I, okay. I, that's, wow, what a tweetable moment there. I love that. Thanks for that. The, the black cab example that really kind of, you know, black taxis that really kind of said it, um, very clearly for, for us, I'd like to, as a final question, to get an understanding of exactly how Islamic finance is rooted in the beliefs of Islam, particularly, uh, you mentioned to me earlier examples of how economics is mentioned in the Quran. Could you share a bit about how the concepts of stewardship and endowments appear in the Quran? Mustafa, you can kick us off there.
Speaker 3 00:19:56 Sure. I'm very happy to, and, and you know, I mean, economics is so fundamental to how Islam is, is, uh, you know, presented. I mean, historically the prophet Muhammad spent many years of his life as a trader. And you know, it, it it's, it's been established very, very significantly within the function of every individual, right? All of us are told that, you know, we have to, you know, not, not only earn a living, but also contribute positively to society. And in terms of economics, there's essentially three key principles that you have to be mindful of. The first one is that, you know, Islam highly, highly encourages economic activity with wealth, right? It's through, through, through the prohibition of interest and through other restrictions. They don't want, you know, passive income where, you know, an individual has wealth and then they can make return on that at a, in a risk free manner, right?
Speaker 3 00:20:52 They highly encourage you to invest those funds in any kind of economic activity, whether it's trading, whether it's in assets, what, whatever it may be, right? And to the point where if you've invested your wealth in businesses, you don't have to pay tax on that, you know, that's how much it's encouraged. Whereas if you keep your wealth in cash or you keep it in some kind of commodity, then there's a tax on that. But if you're investing it and you're, you know, generating positive economic return, then that's not even taxable. That's how much we encourage it. The second concept is around equality. Islam highly emphasizes that in any economic contract or transaction, all parties have to be equal. And this is one of the fundamental pillars that if, you know, it can be proved that a party was, you know, put under undue risk or did not share the risk of a particular transaction equally, then the entire contract could be called into question as not being Sharia compliant.
Speaker 3 00:21:47 So the concept of equality becomes very, very fundamental amongst all parties. There's no weaker party or stronger party. Everyone's equal in an Islamic Sharia compliant economic transaction. And then the third aspect is, as you mentioned, stewardship right from the beginning, you know, in, in our belief it is that since you know, God created man and placed him on earth, he placed him on earth as a vice regent or steward over the earth, right? And he's given, you know, human beings a privileged position over many other creatures. But then with that privilege comes a responsibility to maintain and sustain. And something as simple as, you know, planting a tree produces so much reward, and it's so highly encouraged. And, you know, in Islam, we have rights for animals, we have rights for the environment, we have rights for the soil, rights for plants, you know, rights for, you know, fishing and things like that. Everything has to be done in a sustainable manner, keeping in mind current and future generations. So, you know, a a a lot can be said, but I think, you know, these concepts of, you know, encouraging economic activity, equality and stewardship and, you know, promoting sustainability is highly cr you know, very, very central to how Islam views any kind of economic activity
Speaker 1 00:23:07 And what a great place to end it. So just to give a couple of keys, and this was a phenomenal conversation. We are now seeing greater education. And so with that education, we can see a lots of growth in terms of assets and the variety of products as it relates to this type of finance. Also, Umer, you brought up that financial inclusion is something that's really taking place here, lower barriers to entry and also an increased in increase in robo advisories and just smaller startups. Um, additionally we talked about the greens to cooks, the growth of that as well as sustainable, so cooks and the growth of that. And people are very socially conscious and really understanding the real cost of their return and understanding what value means to them. And then clearly, um, Mustafa ending on those top three principles around economic activity with wealth, equality and stewardship. Umer and Mustafa, thank you so much for joining us.
Speaker 3 00:23:57 Thank you. It's our pleasure. Thank you very much.
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