KEESA:
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 ESG investing and responsible investing, we see a greater spotlight. Honest to make 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 by man's are Umar Suleiman. Head of Advisory Board for Whitehead, UK. The world's largest Islamic been tag. He also sits on the board of the UKISC and is the business and economics advisor to the Islamic Council of Europe. Also we have Mustafa Adil who is head of Islamic Finance Data & Analytics for a London Stock Exchange Group, L said. He is responsible for leading the Islamic Finance and Islamic markets business. Thank you both for joining.
For starters, what are the principles of Islamic Finance and what does it mean to be Sharia compliant?
UMER:
Ok so, general definition and I think there's a wider definition of Islamic finance. Also, with kind of the general definition, which is to interact, have all your financial and business transactions in a manner compliant with is to know what does that mean. So it's Islamic finance as a whole comes under the science of your general social contracts as opposed to your worship. And I tell you why that's important is because within the general principle, everything is permissible unless it's been specified that it's normal and why this is important is because all types of business transactions. The multitude 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 free. But this is strictly prohibited in Islam and those other faith traditions that came before us, and there should be no gambling involved. Post speculation, which is a type of unnatural risk. Islamic Finance itself is underpinned by a genuine exchange of service or commodity that must be a real exchange and it should not be involved in any type of activity that is counterintuitive. To the faith or general morals 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 kind of bring about good stewardship. move investing so your debt percentage your debt profile how much better the company is able to meet its obligations is it to highly leveraged Islamic finance advises companies to avoid these have so as a whole these are your general principles of Islamic finance. Did I miss anything, Mustafa?
MUSTAFA:
No, no, I think you wrapped it up very very well and I think that you know based on these principles, you know when what started out is very negative screening from the point of view of just excluding certain items because they were deemed to be non shariah compliant. I think today we're seeing more and more is positive screening. Where institutions are kind of structured 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 enforcing too much risk in any one particular party, but sharing that risks across different parties of any transaction.
KEESA:
And it's great and just continuing with that, Mustafa. How? I'm wondering how are investment institutions serving this gap? Or would you say that there was 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. Sometimes these instruments are highly leveraged. Do you feel that there is a gap, or do you feel that? Investment institutions are really serving this area adequately.
MUSTAFA:
I think there is a gap. But the gap is declining overtime, So what would you would have had a couple of decades ago would have been a very significant disconnect between the needs of capital owners that are sugar sensitive that want to invest in line with the principles and the type of products that typical financial institutions investment institutions could structure. And roll out. And that was for various reasons. 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 environment, right? Not really any kind of asset ownership or participation. A 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 can be enforceable under. Different jurisdictions, like UK law and things like that, but I think over the last couple of decades we have seen you know more and more role played by regulators who are developing regulations that are more aligned to the principles of Islamic Finance. We're seeing greater education amongst investors who are now becoming more familiar. With the different options and avenues that they have to invest in line with their fate and we're 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 Islamic finance, 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 ijara or accenting structures or leasing structures, but you got you have a whole variety of different types of products that cater to different means. Umer, I don't know if you want to add any. Anything more to that?
UMER:
I think you covered it succinctly.
KEESA:
i know that you just talked about all more about the social contract and stewardship and then we stopped you talked about the social contract as well. Think 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 as Islamic financing. Those who participate in this space really played a role in the recovery of these regions. I'm looking at your thoughts on that Umer.
UMER:
I mean, I can't speak for every country, but in essence, you would hope that these Islamic finance institutions definitely would've played a part. Because most of these regions they are more, I guess industry lead as opposed to having financial based services. So these types of industries. Very much in line with this traffic finance because we took asset financing with booking about, you know, helping them grow their business through servicing of you? Know increasing capacity of the manufacturing, etc. That's on one side. On the other side is also access to opportunity for their population who are now more at home. Who need access to financial products? Who there is now against information as symmetry they have access now to be able to take part in global transactions through the power of their mobile phone. And so from both sides, this opportunity has been created. Static Finance certainly is able to help promote and fund. If we're looking at, for example PPE PPE equipment factory needs to increase its capacity maybe 2-3 four times, how many times to meet global demand? You know that italic finance that institutions were able to locate, we can invest in the stock. We can come up with there some sort of structure for this rather than a pure loan. And also these countries. Generally if you look at them they are manufacturing or production based of some sort. So this definitely helps in terms of the uptake, and we've seen from the information best come out early days that the countries were going to be quickest in recovery. Are actually these nations, whereas I would say the more development countries are. That's going to be more stagnant in how they recover, because when you have a completely just a financially all predicated on the majority of the financial based industry, then you have to wait for those transactions to come through, whereas the need for everyday type of items is there so you can see how it's going to finance plays its part in supporting those countries.
KEESA:
What I'm hearing is that maybe BCS maybe something that's they're really playing a role in terms of the growth. Here we we talked about 3.5 earlier. That's such a huge number. Are there certain areas that you seen exponential growth in certain categories?
UMER:
So I mean, for certain, speaking from from wines perspective with the Robo device, we we've definitely seen a huge uptake in people accessing investment opportunities online. So the democratization of investment opportunity we've seen that the financial inclusion adjusted. There's there's information is symmetry. Now everyone has access to the Internet, and there's there's barriers to entry have been lowered. We're kind of in a disruptive phase, not just from. I guess the way we live our lives through coving, but digital disruption, where now we're seeing that the larger players don't hold the positions that you used to have, but smaller startups. And now, operating at the very niche they're able to penetrate markets and be able to address. I guess the communities needs wherever that community is. We also match this with a young population, generally in the Muslim majority countries, the profile of populations that they young and growing, and so. These people don't have any kind of baggage. Any kind of traditional loyalty to the large prime. So when someone comes with a product that matches their lifestyle needs and is aligned to their values, they're taking up and we've seen it hand over fist. So definitely from that point of view.
KEESA:
Mustafa, let’s more into the sugar demographic and what's really aligned with their values. As we know, green initiatives UN SDGS. Those are things that are really taking off. Quite frankly, let's talk about the growth that you've seen in these particular areas and how you see this really coming to bear in the next coming years.
MUSTAFA:
no, definitely. I think Umer explained very well in terms of the demographics, and we have a young population and not only that, you have young population that is much more align to their values and their shape based tradition, right? I mean, Pew Research Eric I recalls five years or four years ago. Did a study that showed that in most. Majority countries, approximately 70% of individuals take things 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% in in Europe and Western Europe. So you know, she plays a much more significant role in the economic decision making mechanism. Many different aspects of their life, and we're seeing that reflected. So if you look at something like sukuk. Is a very interesting instrument in Islamic Finance, essentially equivalent of a a bond, but it's structured, ensure compliant manner. We have seen the growth of sustainable and green sukuk grow exceptionally at about 200% year on year for the last five years. And and we see them come in all types. Do you see? The government is not the Arabia, Saudi Electricity Authority issuing a green sukuk to invest in solar energy capabilities in the Kingdom of Saudi Arabia.
see there are there ways investing any transitions to cook to reduce their carbon emission and to invest in greener technologies for themselves going forward you see you know islamic development bank issuing a you know $2.5 billion a sustainability scoop you see the government of malaysia issuing retail greens the cooks as well right so you see. And not just some of these countries, but also till after institutions as well. So for example, the United Nations runs a vaccine program targeting Asian Africa African countries that is entirely funded, honest cook structure basis using Islamic finance. And we know that the UNHCR, the UN human is starting the UN Higher Commission for Refugees. They have a second funding program grants account for everyone. References a compulsory wealth tax that is imposed. Almost things that have wealth above a certain amount that they're meant to donate to help the less fortunate in their communities. So the UNHCR has utilized this particular aspect of Islamic finance. And used it to generate, you know, hundreds of millions of dollars of funds to help some of the most distant franchise people which are refugees all over the world. So we're 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 really works towards the mainstreaming with Tomic finance. Of course, particularly these communities in Asia and Africa that rely on you know Islamic finance as a basis to help address some of the challenges that they face.
KEESA:
And now we're talking more about the social impact piece of it, which seems to be really deeply embedded in deeply ingrained, is that there's a cop 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 discussion around now whether we can continue to expect. An increase in returns overall are for those who embrace ESG investing embrace Islamic Finance is the expectation that we will see decreased returns given the correlation between the issue investing an historic perspective of Sharia compliant investing which her take on whether we must globally contend with if we as a society commit to this type of investment strategy and we will get your thoughts there.
UMER:
For certain I think maybe in the short term you may see 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 re calibrate and people's expectations should re calibrate because people now understand that actually we need to take. A long term view, this idea of kind of unbridled capitalism where growth or Europe on year growth keep on pushing keep from pushing until you eventually break the underlying organization. As we saw with the last financial crisis where you know profits were privatized and losses were socialized. Appeal for weight. 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 going to be here in 15, 2020, 530 year horizon, and so definitely I think people are more accommodating. People want to have. Safer investments and I don't think that they need to be. You know, too much of a sacrifice on the return people. Also a lot more socially conscious about you know the cost. The real cost of their return an I think people also genuinely waking up to what is value. You know what is value. And. We have all values, but creating value itself. Is it enough that a company has pure profit growth versus it increased the number of employees? This is something I really like to encourage and talk about his look. If a company has made slightly less profit than it made the year before. Fight increase it's stopping by 5 or 10% for me. That company has a massive take because through its its business operations is enabled more people to be employed, more families to be supported. 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. ESG based and shrink 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 it apart as well. And profits will start to rise in a sustainable manner. I'll give you just one example dealt with in the UK. Actually wear black cabs that iconic black cabs, black taxis. They, the company that produces them, approached us with regards to shrink font. Enhancing, and so we came up with a model in which there was profit sharing between the cab driver and the company's financing is pure profit sharing. So for every mile the financing company got a share of the profit. If it, 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 Greenfuel. So they had to be using green fuel, so all of the new taxes you see now in London, those which are Schrier kind of finance. They also green using clean fuel and this is how it's kind of embedded within the transactional and we'll start to see more of these types of transactions as well as the largest scale ones.
KEESA:
That is an amazing example. And I think you said something that was very tweetable. I just wanna make sure I got it right. 'cause you rhymed in everything with this over profits will privatize and losses were socialized. And I hear that correctly. That's correct. Yeah, OK. I went there. I love that. Thanks for that. The The black have example that really kind of, you know. Liked actually go really kind of said it very clearly for us. I like it as a final question to get an understanding of exactly how Islamic Finance is rooted in the beliefs of Islam, particularly as you mentioned to me earlier examples of how economics is mentioned in the Qur'an. Could you share a bit about how the concepts of storeship and endowments appear in the Qur'an?
MUSTAFA:
Sure I am very happy to. Economics is so fundamental to how Islam is presented. Turkey the Prophet Promise Alyssum spent many years of his life as a trader and you know 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 normally earn a living, but also contributed 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 through through through the prohibition of interests 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 arena risk free manner, right? They highly courage you to invest those funds in any kind of economic activity where it's trading, whether it's an assets, when whatever it may be right, and to the point where if you've invested your wealth in business is 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 know generating positive economic return, then that's not even taxable. That's how much we encourage it. The second concept is around equality is long, 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 sure your compliance. So the concept of equality becomes very very fundamental amongst all parties. There is no weaker part, you're stronger party. Everyone is equal in an Islamic Triggerplant economic transaction and then the third aspect is, as you mentioned, stewardship right from the beginning. You know, 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 are privileged position over many other creatures. But then with that privilege comes responsibility to maintain and sustain and something as simple as you know. Planting a tree produces so much reward and it's still highly encouraged. And you know, in a song we have rights for animals we have rights for the environment we have rights for the soil. Rights for plants. For you know, right for 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 lot can be said, but I think you know these concepts. Of you know, encourage ING economic activity, equality and stewardship, and you know promoting sustainability. Is highly critical. You know very very central to how Islam views any kind of economic activity.
KEESA:
And what a great place to end it. Couple of keys and this was a phenomenal conversation. We are now seeing greater education and so with that education can see a lot of growth in terms of assets and the variety of products as it relates to this type of finance. Also, Marine brought up that financial inclusion is something that's really taking place here. Lower barriers to entry in. Also increase the increasing robo advisories and just smaller startups. Additionally, we talked about the green Circle slow growth of that as well as sustainable cooks in the growth of that and people are very socially conscious and really understanding the real costs of their return and understanding what value means to them and then clearly boosted by ending on those top three principles. Around economic activity with wealth, equality and stewardship. Thank you so much for joining us.
