Why the Islamic Finance Industry is Failing to Evolve
Yangon, Myanmar - Islamic finance expanding into non-OIC countries. Image courtesy of Shutterstock.
If anyone attended the recent Deloitte-IRTI/IDB workshop, I owe you an apology. I know, I was ranting. I’m slightly concerned it’s kind of my thing nowadays. I think the angry young man is still somewhere within, even if disguised by middle age. Is this what I am reduced to in the late ‘asr of my career? The only madman in the room. A repetitive impotent diatribe against the hijackers of an industry I care deeply about.
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Maybe you care. In fact, it’s more than likely that you do otherwise you wouldn’t be subscribed to this website and reading this. You recognise the elegance of the Islamic economic model. For you it has the power to change the world for the better. Not just the Islamic world. You know that its values are universal and have a benefit for all of humanity, irrespective of their creed. You may not even refer to the model as Islamic – it’s just common sense. You know that it doesn’t recognise money as a commodity to be traded. You know the importance of the 1:1 connection between the real economy and the financial economy. You know that transparency, fairness, justice and certainty are the backbone of a Shari’a compliant transaction. But do senior managers and board directors of Islamic institutions know this? Are these (predominantly) conventionally trained bankers the sort of people who actively seek out this kind of knowledge?
At the workshop I bemoaned the disconnect between the ethics and principles of Islamic finance and the actual practices of Islamic finance institutions. Sorry I continue to bore you on this subject, but I continue to see a distinct lack of passion from the Islamic bankers for the core ethical principles of their profession, for the Maqasid al Shari’a, the objectives of Shari’a. For those trained in conventional banking, Shari’a compliance is a series of inconvenient negative screens with an outcome that should differ little in substance from the comforting familiarity of money-as-a-commodity banking. Some of my counterparties don’t even bother to run their docs past their Shari’a departments: take a standard commodity murabaha as a proxy for loan financing, sprinkle with standard LMA clauses and execute.
And even for those who recognise the importance of the structuring and compliance process, there’s very little incentive in the industry to innovate and drive change through R&D. Where ten years ago the industry grappled with intellectual quantum leaps like exchangeable and convertible sukuk, or hedging platforms, or structured pay-offs, or multi-tranche buy-outs, now it is merely content to finance real estate and arrange vanilla sovereign sukuk. It doesn’t surprise me that the Islamic finance industry is worth a trifling $2 trillion whilst the ‘conventional’ ethical industry – typically defined as ESG (environmental, social and governance) assets - is worth $59 trillion.
I often get accused of pessimism. I worry that we’re stagnating and we seem not to care. That’s partly because I consistently note that acquiescence is a key success factor for a career in Islamic finance which is one of the primary reasons why the industry progresses glacially. What do I mean by that? I mean that turning down a deal that feels wrong – ethically and Islamically – is not going to do your career any favours. Here’s a nice graphic representation that has been used by some commentators about the conventional finance industry, but we can analogise to Islamic finance as well:
It’s a widely held belief that if more women ran Wall Street and the City of London that there might have been fewer bank failures during the crisis. I certainly believe that. Not just because having more women in senior roles might have diluted the testosterone of a psychopathic risk taking culture, but perhaps more importantly because an organisation that truly recognises diversity is one that benefits from a healthy tension of ideas, generated by people of different backgrounds and ways of thinking.
The Islamic finance industry suffers much the same problem. As long as the boards and C-suites of Islamic banks remain an old boys’ club - hiring in their own image - we continue to stagnate. As long as weak-minded incumbents continue to fear smarter younger entrants – the “other” that defines diversity – Islamic finance will be doomed to remain a curiosity on the world stage.
The ones who really care about the Islamic economic model - the ones for whom social justice and the real economy should be fundamental attributes of the industry - are currently excluded. The ones studying for Islamic finance qualifications are not getting the jobs. The buyers of the product are not the sellers. Instead they wait on the sidelines hoping to get spotted, attending career fairs and IF conferences whilst their conventional colleagues are courted by employers.
I recently interviewed a 20-something white non-Muslim male who works in a front office position at an Islamic bank and was dismayed by what I found. He had absolutely no real interest in understanding what was fundamentally different about his chosen profession. Consequently the structures and the legal constructs were an annoying distraction to him and he will no doubt infect his firm with the same apathy as he climbs the pay scales. As he becomes more and more senior, he will hire more and more clones of himself. Additionally he is unlikely to embrace the disruptive tech that Islamic finance has so far studiously avoided because his dinosaur-like brain can only comprehend traditional banking products. So he will not be the driver of real change. He will, of course, never read this article as he does not subscribe to a website about Islamic finance but he will probably have a long and successful career despite (or perhaps because of) his mediocrity. Depressing, isn’t it?
Well, it might be, except that I was recently encouraged by the news of an Islamic financing in a non-OIC country. The Malaysian telecoms group Axiata recently issued a $500 million wakala sukuk to finance an investment into telecom towers in Myanmar. Why is this cause for celebration? Because unlike corporates in the UK, the US and Europe (with one notable exception), in Southeast Asia Islamic finance is making inroads outside its traditional markets. A top-down approach from Malaysian authorities may be the driving force behind this. Senior management at Malaysian Islamic banks seem to get it – they recognise the potential for IF outside Malaysia and they’re acting on it. They’re demonstrating vision, ambition and technical ability. In contrast Europe has only one rated corporate sukuk: German insurance company FWU continues to blaze a trail with its sukuk issuance programme but despite embarking on this programme two years ago has yet to be joined by others. And despite both the UK and Luxembourg issuing sovereign sukuk, there has been no corporate follow up.
Gulf investors love solid, rated, fixed income investments. That’s why they buy ‘big box’ real estate in the UK’s Golden Triangle. Rated corporate issues from developed markets would be a perfect buy for their risk appetite. With directionless markets for the last few years, a Darwinian year for hedge funds and a 16 year low for average commodities prices, surely it is time for the managers of Islamic finance firms to step up and be the future rather than just react to change?