Transcript

Islamic finance is one of the fastest growing sectors in the world. But does it have anything better to offer than traditional western finance? World Finance interviews Harris Irfan, author of Heaven’s Bankers: Inside the Hidden World of Islamic Finance and Managing Director of European Islamic Investment Bank, to find out if ethics and religion have a place in modern day business, whether Islamic finance is misunderstood, and how prominent he thinks it will be in the west in years to come.

World Finance: Well Harris, let’s start with the name of your book: Inside the Hidden World of Islamic Finance. Now this makes it sound very mysterious, secretive even; surely this is contrary to what people want from their financial services?

Harris Irfan: A lot of friends and family asked me about Islamic finance. Many of them say, “Look, I looked at Islamic finance, and it didn’t look very different from conventional finance to me. So really what is it that you guys do that is different?”

And I have a lot of sympathy with that argument, and I wanted to demystify that argument, and explain to people how this world actually works.

World Finance: Well does ethics – and religion for that matter – really have a place in modern day business?

Harris Irfan: In my opinion it’s of critical importance! And there’s no better demonstration than the last few years, when we’ve seen the short-termism in the conventional banking industry has caused an implosion. And actually if investors and financiers and all the various stakeholders in the commercial market took account of this societal, and environmental, and other impacts of the business that they do, then actually we might have better business all round.

If banks really wanted to change the way they did business, they wouldn’t stick with the status quo

World Finance: So ethics and religion – it doesn’t affect profits?

Harris Irfan: Well if you look at some of the performance, particularly in recent years, of what they call socially responsible investment funds (and included within those are the Islamic funds), you’ll find many of them will have outperformed the conventional investment funds.

So typically for example, if you look at Islamic finance, it will have excluded a lot of the institutions that were exposed to toxic assets during the financial crisis, and as a result they’ll have strongly outperformed.

World Finance: Well how developed is Islamic finance compared to traditional western finance?

Harris Irfan: It has a long way to go. Many of the investors, the institutions, may be newer and perhaps less sophisticated than their conventional counterparts. So you could say that it has a fair way to go.

I think one of the dangers is that it might stagnate as a result of the attempt to replicate the conventional banking industry. And actually I think it needs to forge its own path, and demonstrate to a wider investment base, a wider community, that actually there’s something good, and proper, and right, here. And it can forge a new path, and it needn’t be like the conventional industries.

World Finance: Islamic finance was largely seen to be immune to the financial crisis, but the Malaysia-based Islamic Financial Services Board has recently questioned financial ratios of Islamic financial institutions. So could Islamic finance be headed for its own crisis?

Harris Irfan: It’s unlikely, because although the ISFC are quite correct in identifying that certain institutions have a larger exposure to certain types of assets – like real estate in the Middle East, for example – and therefore is perhaps overly exposed to one area.

On the other hand, those same institutions have not been exposed to some of the toxic assets that we’ve seen in the conventional banking industry. You know, the sort of intangiable derivative contracts that brought down Lehman Brothers and Northern Rock and so on.

So I think there’s a balancing argument. I wouldn’t say that Islamic institutions are completely immune to financial crisis: they do after all operate in a global economy. But at the same time there are some checks and balances in place to ensure that they smooth out those bumps.

World Finance: From my understanding, Islamic finance operates under Sharia law. But that’s not recognised here in the UK, or in fact in most western countries. So how can these financial institutions carry any weight?

Harris Irfan: Actually I think it’s a popular misconception that the two are incompatible. So typically in a Sharia-compliant financial transaction, the contracts are governed by – let’s say – English law. That’s quite common.

But the basis on which this commercial deal has been constructed would be according to a set of ethical parameters, which are the parameters of Sharia law.

[W]hat we’ve learned from Islamic finance can be applied to western

finance generally

So those parameters might be fairness, justice, transparency, not unjust enrichment of one party over another. These are all good principles, and they are definitely not incompatible with English law, for example.

And I think that actually, if one looks very very closely, one will see that there are aspects of English law which have borrowed very heavily from the work of 11th and 12th century jurists from the Islamic world, who developed concepts like trust law and agency law, and so on. Some of the commercial devices that we use today.

World Finance: Well Muslims account for 22 percent of the world’s population, and that number keeps on growing. So how prominent do you see Islamic finance in the coming years for the western world?

Harris Irfan: It will be I think not just important for Muslims, but it’ll also be important for non-Muslims: broad-minded individuals who are looking for a fairer society, a society in which there is a much more even distribution of wealth, where the gap between rich and poor is much less.

You know, what we’ve learned from Islamic finance can be applied to western finance generally. And we’ve certainly seen there’s been a failure of the system in the west over the last few years. Why is that? Why is there a growing inequality between rich and poor? Is there a way to redistribute wealth?

In a sense there’s an argument to go back to basics, and understand what is it that we do when we enter into a trade? How can we make that trade fairer? How can we think about things more holistically? How can we think about our customers, and our shareholders, and our employees, and the environment, and labour practices, and so on and so on.

Because I think once we start thinking about those things, we’re only a small step away from considering Islamic finance as an ethical alternative source of finance. We don’t even have to call it Islamic! It’s just an ethical form of finance, and actually I think it’s relevant for everybody in the world, not just for people from one particular religious group.

World Finance: Well banks are embracing ethical finance more – you’ve got more corporate social responsibility – so isn’t this the same thing?

Harris Irfan: No, I think that that’s very much a sort of PR puff. I’ve been a part of these institutions for 20 years, and I’ve seen CSR come and go, and I’ve seen PR within these organisations. And it’s very much about making sure something gets seen in the annual report, rather than something actually grass-roots taking place.

If banks really wanted to change the way they did business, they wouldn’t stick with the status quo. I actually think that banks are not the leading light as far as ethics are concerned. I think that we ought to be looking beyond those types of financial institutions. And we ought to be involving people outside the traditional debate.

Why aren’t we talking to the people involved in the Occupy Wall Street protests? Why aren’t we talking to the anthropologists? Why aren’t we talking to the social scientists? We seem to be very fixated on only talking to the central bank governors and the politicians, and really the man and woman on the street is not having his or her voice heard.

World Finance: You have a wealth of experience in traditional banks, so how seriously do you think they take Islamic finance?

Harris Irfan: They see it seriously when the money’s good; they see it as a fad when the money’s not there. That’s why I think those who are in it for the long term, those who sincerely believe the ideology of Islamic finance, those institutions that are Sharia-compliant by their nature and therefore are in it for the longterm – those are the ones I think that will carry that flag.

World Finance: Harris, thank you.

Harris Irfan: Thank you.