Muslim Money Talk
Introducing the Muslim Money Talk Podcast, a place for all things Muslim and Money related.
Every week we'll be sitting down with Founders, leaders and industry experts from across multiple disciplines to discuss lessons learned, mistakes made and most importantly 'How they did it?'.
Brought to you by Kestrl: The Muslim Money App, software to help Muslims grow their wealth without compromise. Find out more here: https://kestrl.io/
Muslim Money Talk
Is Islamic Banking TRULY Islamic? | Harris Irfan - Muslim Money Talk Ep 23
In this special podcast episode, Harris Irfan, a veteran in Islamic finance, critiques the industry for not adhering to its foundational principles and discusses innovative solutions for real-economy, risk-sharing financial instruments.
He emphasises the need for skills, innovation, and aligning modern Islamic finance practices with prophetic economic principles, while also advocating for Bitcoin as a freedom currency and discussing the future of Islamic fintech.
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TIMESTAMPS:
00:00 - Coming Up
02:13 – Haris’s career journey and contrarian perspective in Islamic finance.
06:12 – Challenges faced by Muslims in conventional finance and career advice.
08:28 – Analysis of the disconnect between demand and use of Islamic financial products.
12:50 – Early days at Deutsche Bank and innovation in Islamic finance.
16:50 – Transition from conventional banking to Islamic fintech and ethical dilemmas.
24:41 – Issues in Islamic banking culture and reverse engineering of conventional banking products.
30:31 – Role of fintechs in addressing gaps in Islamic finance.
39:58 – Introduction to Cordoba Capital Markets and the Profit Participating Note (PPN).
52:14 – Discussion on AOFI Standard 62 and its implications for Sukuk.
58:02 – Pakistan’s aim to eliminate riba by 2028 and Bitcoin as freedom money.
1:09:50 – The role of prophetic values in building a better economic system.
1:11:25 – Advice for aspiring Islamic fintech entrepreneurs.
It's actually a legalized fraud if you think about it. If you had a Martian land on planet Earth and they looked at this, they would say, oh wow, you guys are perpetrating a fraud on everybody. You're just creating money from nothing. Islamic banks are not solving the problems of the Muslim community, no matter how much they congratulate themselves. They're actually not doing a great job. We you and I can do a better job because we have the skills and experience that we got from blue chip institutions.
Speaker 1:Banking is an asymmetric relationship. Islamic finance is symmetric. Investors are partners with a company or the venture that they invest in, and that's what we lack in this industry. So if we're going to scale up our small fintechs, we've got to have high quality people with experience of actually building these things and we've got to know how to navigate the regulations. Whose business is money creation, and money creation is financialization. Financialization is the proliferation of debt and financial services in the economy. What you and I are focusing on is the real economy, real business and risk sharing. That's the essence of prophetic economics and risk sharing. That's the essence of prophetic economics.
Speaker 2:Before we begin, we actually noticed only about 10% of you are subscribed to the podcast. So if you like what you're listening to and you want to hear more from us and see more things Muslim and money related, then please consider subscribing and, of course, leaving this episode a like and share it with your friends, leave us a comment or a review, because it really really does help us out and help more people to find us. Thank you now back to the show. Haris, assalamu alaikum, welcome to the show. It's been a long time coming. Yeah, thank you very much.
Speaker 2:Yeah, thank you for taking the time, and you have been one of our high targets from the beginning for anyone we wanted to speak to in islam, for a couple of reasons. One you've been at the epicenter of this industry pretty much since the beginning of your career, through Deutsche Bank to heading up Barclays global Islamic banking arm, all the way to Russmiller as well here in the UK. But when I ask people in the industry about you, the same kind of story tends to come up. Someone described you as equal parts visionary as well as naysayer of Islamic finance, sometimes friend and sometimes foe of the industry, do you think?
Speaker 1:that's fair. Yeah, I don't think it's unfair. I mean, I think I do tend to polarize opinion. I think, by nature, I'm contrarian and I like to look at things from first principles. And I think my industry has not looked at least in its current form, has not looked at things from first principles and it tends to rely on received wisdom. And I'm not a believer in received wisdom. So, yeah, I can see why I might polarize opinion. But you know, I think as Muslims we are duty bound to commit to ihsan excellence in our lives, and our lives are lived for the pleasure of Allah. And if sometimes that means I displease human beings, well, that's not my problem.
Speaker 2:Couldn't care less. Yeah, there you go. So on paper, you have had a career that I think a lot of young Muslims coming out of university who want to do something which they feel matters, I think a lot of those people would envy, right In that you went and found a job almost immediately in your career in Islamic banking. And a lot of people ask me this how can I do something in Islamic finance? I feel like something's happening. Could you talk us through that journey? Because was it something you set out to do or did it find you by accident?
Speaker 1:No, I think I fell into it. Happily there wasn't a from my side, there wasn't a huge design, but from you know, allah has a plan for all of us and I think that you know he kind of steered me in that direction. So I started out as a training management consultant and then I was a junior investment banker at a British merchant bank doing project finance, which is financing infrastructure. Of course it was all Riba-based. And I had a conversation with an industry grandee, an Islamic finance industry grandee, and I said to him, before I accepted this offer from this merchant bank, I said look, you know, project finance is important. It's financing good things schools, hospitals, railways. You know what should I do? I've been made this offer, I don't know what to do.
Speaker 1:And he said something to me which I don't necessarily repeat to all young people today. I think it's contextual. He said if you don't do this thing and learn those skills, how can you ever move beyond that and create a parallel industry that is halal and that is good for Muslims? So that was his advice to me. Now I'm not necessarily saying that was good or bad advice and I'm not saying that advice applies to everybody, but when young people approach me and say what should I do? I want to work in a halal finance, financial services industry, but you know, where do I get my skills from? I recently was asked this question on another podcast and I think I answered it too quickly and I had to. I don't think I had to walk it back, but I had to qualify what I was saying.
Speaker 1:So I wrote a blog article on it, which was a couple of pages long and people thought that I had said go and work as a banker and work in Riba and then go and work in Islamic finance. Not exactly what I said. What I said was there are many different blue chip organizations full of high quality people and high quality training where you can learn skills in the financial services industry without necessarily being close to RIBA. Now, of course, all industries are connected to RIBA in some way today, some more than others. So investment banks, corporate banks they are close to RIBA. If you are an auditor in a big four firm, if you're a lawyer, if you are a financial modeling specialist at a consulting firm, these things are areas where you can do research and development and develop your skills and understand the industry, but not necessarily by dealing directly in RIBA are already stuck in those positions and feel like they need to get out and work away from Riba. Bear in mind, keep it at the top of their mind, that you are collecting these skills and these experiences for a specific purpose and you will use those skills and experience to do something better later. And the first exit you can find get out and then either find an Islamic finance firm, which is a very difficult thing to do because we're a relatively small industry, especially in the UK or create your own if you're experienced enough, and I think you've discovered this. I've discovered this.
Speaker 1:A lot of people within our own ecosystem have realized that the Islamic banks are not solving the problems of the Muslim community. No matter how much they congratulate themselves, they're actually not doing a great job. We you and I can do a better job because we have the skills and experience that we got from blue chip institutions. They could be big four firms, they might've been investment banks, but in the top of our mind we kept this thought that I know there's a problem with what I'm doing right now, I have to get out of here and I have to apply these skills to something better. With what I'm doing right now, I have to get out of here and I have to apply these skills to something better. So we have that purpose in mind.
Speaker 1:Not everybody does. I mean most people I know in the banking industry who are Muslims. Rather many of them have said to themselves over the years you know, I'm really not comfortable with this, but they carry on for 10 years, for 20 years, for 30 years, before you know they're retired and they've got, you know, mortgage free house and they've got kids who've gone through private school and they've got a nice Mercedes on the driveway.
Speaker 2:But they never really made that change, so they didn't have the energy and the commitment to get out of it and I feel like a lot of people, get shackled because as you go through life, you get the mortgage, you get the kids you have to send them to school, you have the partner you need to take care of. It's harder and harder to take a risk like that. When we first met, I was doing an MBA at Cambridge. Before then, I'd worked in big four firms like Deloitte and PwC and was really living that life that you described, that I wasn't too comfortable. I wasn't making my money directly from Riba, but it was almost adjacent. I was advising and creating strategies for banks and wealth management firms, helping them to launch their own digital retail arms and products and apps, and it was part of the reason why I left consulting at that time to go and find myself and do this MBA.
Speaker 2:But, like you said, I saw there was an issue happening. I'd felt it my whole life in that I knew vaguely there was something called Islamic banking. It had something to do with avoiding interest, or riba in Arabic but no one I knew was using it, despite people talking about it and caring about it. And when we did our nationwide survey, which you kindly helped advise us on at that time, we asked that question do people care about this. 3,000 people we interviewed. 97% of them said that they did indeed want to find an alternative form of financial services. But when asked, do they actually use anything that's on offer?
Speaker 2:We listed out all the main high street Islamic banks and some of the fintechs which were available at the time. Fewer than 3% of the group said that they were using it, and this was outside of London. So this was London, cambridge, all the way up to Edinburgh. We were interviewing people and that was weird. That was really really weird. And when we asked why, top reasons were poor customer service, poor user experience, higher fees and also a general lack of awareness and understanding about what was Sharia compliant or not. So that was my realization. But when I look at your career Deutsche Bank, barclays what was the aha moment? Because you've written about this extensively you wrote one of the most what I think is one of the more readable books in Islamic banking today Heaven's Bankers, where you detail this a lot. But was there a specific moment where you thought what I'm doing is not right here?
Speaker 1:There were many such moments In the early days. So, going back to the early 2000s, when I first co-founded the team at Deutsche Bank, we had a scholar who was our spiritual guide. He was Sheikh Hussain Hamid Hassan and he was considered the grandfather of the modern Islamic finance industry. And Sheikh Hussain was a great guide. He had around him for the first time a group of young practicing Muslims who were Western educated and highly trained and worked for a blue chip institution. Up till that date he'd been used to working people at local and regional banks, maybe not quite the same training and education, but certainly not Muslim. Oh, they would be Muslim, they would be Muslim at those regional banks, but the quality wasn't there and they weren't dynamic enough to innovate. So the industry was basically kind of meandering along up until the early 2000s.
Speaker 1:And suddenly this Deutsche Bank comes out of nowhere with these young Muslims who have been transferred over from London to Dubai and set up the investment bank in the DIFC, the Dubai International Financial Center, and for the first time he's getting pushback in a respectful way. So we're saying to him Sheikh, you know we're trying to make this kind of product and you know we think it can be done this way. I know you think that that way is not halal for various reasons, but you know, within fiqh al-mu'malat we have other contractual tools that we can use. And what if we did it this way? And this was the first time that he was getting bankers saying to him sheikh, you know, I know you've said no to this before, but what if we tried a different way? And he was working with puzzle solvers. That's what we were. We came from. You know maths and physics and quant backgrounds, and in these investment banks people are paid for cleverness, for solving puzzles, and they do that with Belgian tax structures or whatever it is. And for the first time we're applying that skill set and that background to Sharia compliance. So, in addition to the usual legal structuring and tax structuring and commercial structuring, now you're also adding the Sharia rules on top of it and you're just taking a bunch of people who know how to solve problems using a set of parameters. This hadn't happened before. So now you've got a situation where we're working with a spiritual guide who recognizes the importance of having these young people innovating in the industry.
Speaker 1:And we obviously we were ideologically driven, we were practicing Muslims and we wanted to do the right thing. So, for example, in the early days we did the very first convertible or exchangeable Sukuk. This was PCFC Sukuk to finance the purchase, the acquisition of P&O by Dubai Ports World the first time a capital markets issuance had been used to acquire a Sharia-compliant capital markets issuance had been used to acquire a FTSE 100 company and obviously a very groundbreaking deal. And so our team structured that and we did it on the basis of a musharaka. A musharaka is an investment partnership in which the investors and the investee company are aligned. It's not a master-slave relationship, a borrower-lender relationship. Banking is an asymmetric relationship. Islamic finance is symmetric. Investors are partners with a company or the venture that they invest in, so their incentives are aligned and they each need to do well and they each need to do due diligence on each other. Bankers don't do due diligence, no matter how much they tell you. It's a case of here's some money, give me some money back with interest. That's what a bond is. That's what a sukuk has become and we're going to come onto that in a bit.
Speaker 1:But at that time we were trying to really go back to the roots of prophetic finance, prophetic economics, the roots of trade in Islam. Take a trade and put a financial instrument, a modern, high quality financial instrument, around that trade. And that's what we were trying to do in the early days, and then, over time, that ideology got distorted, because then you bring in an army of people, you have generic fatwas issued. For example, we and you're aware of this we created this black box technology that I've often referred to as the Manhattan Project. So this is this idea that we created, this double-wired structure. This is a total return swap. So you know, very briefly, it's basically a black box that allowed us to replicate the return of any financial instrument with any payoff structure, which sounds ridiculous, right, but it was a generic fatwa around this set of contractual information that allowed us to do this.
Speaker 2:There's a way of putting a Sharia stamp on something which, for all intents and purposes, you would never think would be Sharia compliant.
Speaker 1:Well, we had always intended we meaning I and my close colleagues we had always and my scholar, we had always intended that this technology would be used for good. So we would take, for example, macroeconomic hedging. So companies need to hedge against their foreign exchange, they need to hedge against various macroeconomic variables, and that is a perfectly valid financial instrument. We're allowed to do that in Islam. What we're not allowed to do is to take completely noncompliant underlyings, wrap them up some kind of shorting hedge fund strategy in alcohol companies, for example, wrap them up in this Sharia wrapper, this black box technology, and then replicate the return of it. And that's what our salespeople were doing, because they saw this generic fatwa and they thought this is easy I can just churn out term sheets on anything I want and investors can buy anything they want. So they spoiled that market.
Speaker 2:And so that was kind of and the banks began to pick up on that.
Speaker 1:Yeah, everybody did so. Deutsche Bank did it first, and then we started to see same products from JP Morgan and BNP Paribas and so on and so on. All of these guys came out with the same data. They saw how the technique was done, they started to replicate it and by the time the whole market has it it's you know it's it's spoiled. So that was an aha moment.
Speaker 1:I was sitting in a press conference where my boss at the time was sitting on the panel announcing the launch of a I think it was a Goldman Sachs backed hedge fund wrapped up with the Deutsche Bank wrapper, and he said the phrase we we create conservative product for conservative customers, but aggressive product for aggressive customers. I'm like I'm doing a facepalm at this moment in the audience because I'm thinking this is the wrong thing to say to a Muslim audience, because you're telling them that we don't care about Sharia. I care about it. You may not sitting on that stage, but I care about it and I'm part of this team that created this and I don't want my name against something like that. So for me, that's the start of me trying to find a way to get out of this. Take my skills and experience and apply it in a better way. And over the years you know there's been some ups and downs. I moved to Barclays. After that Essentially that's more of the same Came back to the UK, worked as co-head of investment banking for Rasmussen. It's only really when I left the sober employment of a banking job seven years ago that I had the freedom to innovate on my own.
Speaker 1:And you could argue that you left it a bit late in life, mate. Some people do like oh yeah, the guy made his money and now he's just trying to find a way to reconcile himself with God. Yeah, you could argue that. I'm not going to deny that there is an element that you're shackled to your job when you're there and a part of you believes it's sort of cognitive dissonance. A part of you believes that, hey, there's no other way to do this. And still today I'll speak to friends in the industry you know, who are still bankers, and they'll say oh, but Haris, you don't understand. You know it can only be done this way. The regulations say this, the taxes like this. I can't make the product the way you want me to make it because I'm constrained by all these things.
Speaker 1:And I say you got to free your mind right. I, alhamdulillah, alhamdulillah I've managed to free my mind. By the grace of Allah, it wasn't me that did it. No-transcript. You know we found that freedom to innovate. It's a hard road, you know this. You have to bootstrap your business for a long time and it's very insecure, and you know your family is insecure as well. But we've got to do it, otherwise our industry will continue to be dominated by these banks that are fiat-based and fractional reserve banks, whose business is money creation, and money creation is financialization. Financialization is the proliferation of debt and financial services in the economy. What you and I are focusing on is the real economy, real business and risk sharing. That's the essence of prophetic economics. So I want to move on to that and the essence of prophetic economics.
Speaker 2:So I want to move on to that and the problems, the macro problems across the industry in general. But before that, do you regret your time entirely within the industry? Or there must have been high points, things that you know you might that you're proud of. I mean you were responsible in some way for are you okay talking about?
Speaker 1:yeah, yeah, no I.
Speaker 2:yeah, yeah, no I am For basically shifting the landscape of Makkah and building the clock tower.
Speaker 1:Yeah, I don't regret anything, because I think regret is a wrong emotion. Okay, I think that everything that I've been through has got me to where I am now, and if I hadn't been through that, I wouldn't be here, so all of it was valuable. I think we all have this sort of Sisyphean task where we push that boulder up the hill and it keeps rolling back on us, and that's part of the jihad, the struggle. It's internal and it's external. We have to go through that. So, regret no, I don't regret. I think that there are some things that we could have done better, but that's what destiny decreed for us.
Speaker 1:The Makkah example that you give is one where I learned a great deal. So this is and I'm sure people have heard this, but I'll repeat it very briefly you know, this is the clock tower, and the seven towers around it in Makkah were part of an overall project called Abraj al-Bayt, and if you go there today, if you know anything about the previous architecture of that region in Makkah, you may consider it a monstrosity, which I do. It's pretty ugly. It dominates the skyline. Now, when you see pictures of the Kaaba, our most holy place in our faith, it's dominated by this huge it's always there in the background Right.
Speaker 1:I mean, you don't even see, you can't even see the black cube in the middle. So from that point of view it's regrettable that that happened, but it was always going to happen. Right, planning permissions had already been done, the construction companies were already lined up. You know the government had already accepted these proposals, the key merchant families were involved in it and you know that's a boulder that you're not going to stop.
Speaker 1:And as a junior banker I didn't have the perspective to be able to say to anybody in my organization is this the right thing that we're doing, because you're just basically knocking down some historical mountains and buildings in favor of these steel and glass constructions. So I was never really in a position to resist that and actually the skills and experiences of going through that process not just the financial structuring but the political process is quite important to my understanding. Now that I know now how to resist those kinds of things, I wouldn't have been able to back in those days. We're talking 20 years ago. Yes, I think the project overall is regrettable, but it would have happened in any case. It's remarkable that Deutsche Bank was asked to do the financing of one of those towers. By the way, it wasn't the clock tower. It was one of the ones in front of the clock tower, but part of the same project, so it was a really small piece of it, and if they hadn't found Deutsche Bank to do it, they would have found somebody else to do it.
Speaker 2:That isn't a justification but it does tell you how I got to where I am today. Sure, yeah, okay, great answer, and thanks for summarizing again. I know you've told that story many times, but it is one that I think resonates with a lot of people in the space, but especially those who are trying to move away, who have made their money in a very river-based system and are now trying to do good with it. So that moves us very nicely onto the next part, which are the issues with banks. So when I go out there and I'm pitching Kestrel, firstly a lot of people don't know what Islamic finance is or Islamic banking is altogether. And then when I do tell them, they might've heard of Islamic Bank of Britain or Oryan or some of the other more well-known Islamic banks which are here in the UK, in Malaysia, saudi Arabia, other places.
Speaker 2:You have been. No, you've made it no secret that you have issues with this industry in general. Could you elaborate on that a bit more?
Speaker 1:I have an issue A with the culture and B with the financial instruments themselves.
Speaker 1:By culture you mean I mean that if you look at Islamic banking, it is dominated by conventional bankers, it is dominated by people who care little for the underlying principles and it's dominated by people who feel no need to innovate. So the culture is one where it's sort of I'm all right, jack, so do you. I've got my nice pension nest egg and I earn good money. I see no need to change anything. So I'll carry on doing what I'm doing, and that's not how I live my life, because our risk is written, our sustenance is already written. So we may as well strive to earn our income in a halal way and strive for ihsan, for excellence in everything that we do, and I'm not happy to just kind of rest on those laurels and receive a nice income every month. So I think the culture of Islamic banks is very much. Let's just reverse engineer what we've seen in the conventional industry. So they reverse engineer debt and financialization, this proliferation of debt and financial services. So this is what is called a commodity marabah.
Speaker 1:Well, it's more than just commodity marabah. I mean, that's the best example, this particular contractual structure which ends up effectively being a proxy for a loan with interest. That's just an example. I mean, look, there are some scholars that I respect very much. Faraz Adam is one of those. He's a.
Speaker 2:Sharia scholar.
Speaker 1:Yeah, he's written a very good book on this subject and one chapter is dedicated to Komoditi Murabaha and he asked me to review that book and when I read that chapter and you know my views on Komoditi Murabaha I hate it because it is too much like Alone with Interest and yet he has a very nuanced and scholarly opinion on it which I think is worth reading for both sides of the argument. So I think it's important that in everything I do I try not to be too close-minded, because as much as I am contrarian and a rebel by nature, I also have to accept that I can be wrong sometimes and I have been very harsh about commodity morale behind the past. But there are scholars that I respect a great deal who present a very smart, intelligent, knowledgeable and nuanced view on this subject very smart, intelligent, knowledgeable and nuanced view on this subject.
Speaker 1:There are many products within the Islamic banking industry that attempt to replicate a credit arrangement and the banks, just like conventional banks, the Islamic banks, maintain this borrower-lender relationship. So the risks aren't really very different Even though you've changed the contractual structures, even though you have IJARA, which are lease contracts, or WACALA, which are agency agreements, or, you know, sometimes you may claim you have a modaraba arrangement, which is an investment management arrangement, the reality is that the risks are transferred wholly against the borrower quote unquote even though they're not called a borrower by the Islamic banks. So this is problematic for me. You may have met the letter of the law, but you've not met the spirit of the law, and I want to see that change, but I don't think it will, because the culture of banks is very much. I'm all right, jack, so do you.
Speaker 2:We interviewed Umar Suleiman from Wahid as one of our first episodes, and he said something which went a little viral. I think people took it out of context where he said that he spoke with several Islamic scholars all over the world and asked them is Islamic finance today Sharia compliant for all times and all places? And he couldn't find a single scholar who said yes, the implication there being that we have basically molded an industry to fit within the shape and the framework of a fractional reserve banking system within central banks, within banking regulations which, if we were to go back in time to the times of the Sahaba or even after that, Muslims then would not recognize this as being Sharia compliant.
Speaker 1:Do you agree with that? I agree with him. He's right. He's absolutely right. It's contextual and whilst scholars may have approved certain contractual and transactional structures for use today, they are not certified for all time, especially as scholars know. They know that we are building Islamic finance off the back of a conventional system, and the conventional system is one where money is created from nothing, and the conventional system is one where money is created from nothing. So, as you know, fiat money, which is money that is decreed to be sold by a government that's the US dollar, that's the euro, that's the pound, that's the yen, and so on. Fiat money is created by governments and private sector banks in the act of credit creation. Every time a bank lends you money, it creates new money in the process. Every time a bank lends you money, it creates new money in the process.
Speaker 1:People seem to think that the money that you deposit in your bank is then used to lend to other people. That's not how banking works. Banking is called fractional reserve banking. Why? Because the deposit that goes into the bank from depositors is just a reserve. Actually, the bank is allowed to lend multiples of the money that it holds in reserves. Where's that money come from. It's literally created from nothing. They're investing it's digits in a computer, so if they held a hundred as a deposit, they might be lending. A thousand 900 new pounds were created.
Speaker 2:Which is why it's a house of cards which quite often topples. Yeah, With all these financial crises.
Speaker 1:It's actually a legalized fraud if you think about it. If you had a Martian land on planet Earth and they looked at this, they would say oh wow, you guys are perpetrating a fraud on everybody. You're just creating money from nothing.
Speaker 2:I'd push back a little bit on, not on that point, but on the idea that Islamic finance today doesn't have a purpose, because you know far, far better than I why it was done this way. It was so that we could move in the right direction. Muslims had nothing. Then the forefathers of Islamic finance, people like Iqbal Khan and others, came on and they had to do something to move and create something that was, I suppose, more Sharia compliant than there had been before, and to get around the regulations and the licensing and everything there. They had to do something that still fit into that framework. It wasn't perfect, but it wasn't meant to be the final step. Do you think we've lost sight of moving forward and we've just dropped the ball, left things where they were?
Speaker 1:So I agree that that was the intention back then, but I also agree we've lost purpose, we have lost sight, we haven't kept our eyes on the prize and now we're entrenched and happy and comfortable reverse engineering conventional debt and calling it Sharia compliant, because we've overlaid a halal contract on top like an Ijara, a lease right, but fundamentally underneath we still have fractional reserve banking. So I have the utmost respect for people like Iqbal Khan and the originators of our industry. Remember that back in the 1980s, scholars allowed the commodity murabaha as a proxy for loan finance, on an interim basis only, as a proxy for loan finance on an interim basis only. They said you can use this for now, but we need you to move across to a better, purer form of financing which is risk sharing. So, for example, if you and I entered into a modaraba arrangement, an investment management arrangement, where I give you capital, you take that capital and you trade it somewhere and we agree to split the profits at the end of that venture, that's halal right, that's a pure trade activity between us, but that's not what banks do. We have a borrower-lender relationship, an asymmetric relationship, where one is the master and the other is the servant, and we were always meant to move away from that credit arrangement. That's what the scholars said.
Speaker 1:But we didn't do it as an industry. Why? Because we got all our approvals on the basis of commodity marabaha. So you know, in an investment bank you've got an army of people, You've got compliance and legal and salespeople and credit traders and you know derivative structurers and everybody in the chain has agreed that we're kind of comfortable with this commodity marabaha because it looks like a loan, it quacks like a loan. We're going to carry on using this thing. We'll never really innovate beyond that.
Speaker 1:When Deutsche Bank came on the scene in the early 2000s, they completely shook up that market because they said, no, no, we don't need to do this. And we sincerely wanted to do the right thing. We wanted to create Mosharaka Modaraba Wakala contracts, real risk-sharing arrangements like the PCFC Sukuk, which eventually had a purchase undertaking added to it, which was this buyback at the par value, which of course renders it like a normal bond. That's not what we wanted originally. So we had good intentions, but along the way people get entrenched and they don't want to change and they make good money out of what they're doing. It's all about economic incentive and the incentive is not there for people to change.
Speaker 2:Thank you for listening to Muslim Money Talk. If you like what you've heard so far, you might be interested in checking out what we do at Kestrel, the Muslim money app. Kestrel is a service that helps Muslims who want to grow their wealth without having to compromise, whether it's on their belief or user experience or price. I founded Kestrel because of how fed up I was at how poor Islamic financial services were in this country. Often people didn't use them because of how bad the user experience or customer service and indeed, how high in price they were. So Kestrel was the answer to that. If you download the Kestrel app today, it can help you by creating a budgeting plan. Plug in whatever bank account you have and it will create an auto budget just for you. You can then tell us what goals you're saving for, and we'll save towards them automatically into pots and then, crucially, link you towards Sharia compliant investment and savings products as well. So download Kestrel today and try it out for yourself.
Speaker 2:Now back to the podcast. So it sounds like there's a structural problem and there's also perhaps a leadership problem. Yeah, I then move on to what the solutions could perhaps be. We're seeing loads of fintechs pop up, people who realize that there is a problem ourselves at Kestrel, included what you're doing now, as well as other people in the space. Could fintechs be a solution to this, or do you see similar problems arising in this industry?
Speaker 1:I think that fintechs are the solution, because the banks clearly don't have the right incentives in place and they don't want to change and they will fall back on oh tax, oh regulations, oh this, oh that. Whatever the excuse is, I find it a lazy excuse because it means they're not prepared to innovate anymore. They were once upon a time, but they're not anymore. So it's incumbent on people who have experience in the industry to step out and create a parallel, non-bank financial intermediary that solves a specific problem. So you guys felt solving a specific problem in wealth management and budgeting. We're solving a specific problem in investment and trade finance. Fida is solving a specific problem in home financing. Nesta are solving a specific problem in et cetera, et cetera. So I think that's where the solution is coming from. The solution is coming from high quality individuals who came from blue chip organizations. They have the relevant financial and managerial skills. They know how to build these products on a technical level. That is so important. I can't emphasize that enough.
Speaker 1:You cannot be a marketing machine and expect to do well. You cannot be a bunch of coders and expect to do well. You have to have everything in the chain. You've got to have all the infrastructure. You've got to have people who understand how modern finance works, the legal and regulatory constraints, how the financial structures work, how to put financial products together.
Speaker 1:If you build a Formula One team and you've got all of your IT personnel and your marketing people and your brand and your salespeople, but you don't have a chassis engineer or a race engineer, you've got nothing. You've got a shell company. You know you're not. You got a shell company and what I'm finding with some islamic fintechs is clearly there's an idea that they're very keen on some particular problem that they want to solve. The most popular problem is I'm going to create an islamic digital bank, right, and I've had this conversation well over a dozen times in the last few years, right, and then you see what it is and it's yeah, maybe it's just a marketing concern, monzo, for muslims. Yeah, people, a lot of people, want to do brand on that.
Speaker 2:Yeah, I mean we still so many that came up at around the same time. Yeah, um, very few of them around. I think only maybe one yeah maybe that's even pivoted. Yeah, very few of them are around in the same way or have collapsed entirely just because they were trying to do the same thing that had already been done. Yeah, these digital banks, yeah.
Speaker 1:And they were using conventional bankers. Exactly. They brought conventional bankers along and said hey, you set up First Direct before or something. Just do it again on an Islamic basis. Don't worry, I'll sort out the Sharia. Don't worry about that man.
Speaker 1:If you at the top do not know how this stuff works, you can't do this. You know, all the great companies of the world were experts, leading experts. They weren't general managers, leading managers. There's a very famous Harvard Business Review study on this. It's about Apple how Apple became a great look. We can talk about ethics and whatever. Let's leave that to one side.
Speaker 1:But as a company that sells a product, it sells an excellent product and it does very well selling that product because it is a company of experts, leading experts, not general managers, leading managers. Anyone can be taught to manage right, but to be an expert you have to put in your 10,000 hours and we don't have that in our industry. You've got a bunch of guys coming along and saying I'll just put a conventional banker in here. That's not an expert. That's not a guy who actually knows, A how these products are structured and, B what his market is. How do we fix this? How do we get more experts? It's you and I we actually need to make our companies successful, and then the rest of the industry will sit up and take note and adapt accordingly. So people need to make dua for us, Please do Inshallah, we'll do well inshallah.
Speaker 2:But I'm seeing something quite dangerous happen within the industry right now, where I think people are weaponizing certain concepts, saying that we are more sharia compliant than you and they are putting that into their marketing and saying that, well, these guys are using this structure, which is just haram. And I really worry because the retail market they to extent don't care too much about the details, they just want to know is it Sharia compliant, is it not? Is my chicken halal or is it not Right? Is this mortgage halal or is it not? And unfortunately it's starting to really become kind of dog eat dog out there. What do you think can be done to kind of solve this problem?
Speaker 1:I don't really know, but I think market segmentation is already taking place. So I know, speaking to family and friends who don't necessarily know much about Islamic finance and don't even have an Islamic bank account, but are practicing Muslims and recognize the heinousness of riba as a sin, and they still use conventional banks. And the reason why is because they can't see the value add. They can't see why Islamic banking meets their values. They don't get it. What they see, rightly or wrongly, is a conventional product that's been dressed up in fancy words. Now there is a nuance behind that and maybe this is not the time and place to go into that nuance, and to some extent it's better for people like Mufti Faraz to explain that nuance to us.
Speaker 2:We need to get you on the podcast.
Speaker 1:We are already seeing some customers who see a product and intuitively feel in their heart remember, this is hearts and minds in their heart they feel that this is a better product from their values point of view. So Fyther is the good example I always like to use because it's such a fantastic product. I wish people who are looking to buy a home would use this product. It is based on a non-debt home financing. That's the premise, the first principles that they come from. They approach it from the angle of how do we create a Sharia compliant mortgage? No, what they say is, the problem to be solved is people cannot afford to buy a house. How do we create a non-debt financing that pulls risk, that shares risk between us, so that people can afford to buy their homes?
Speaker 2:And we had a fantastic episode with Raza, which we'll put a link to at this point.
Speaker 1:It's a great episode. I really recommend it I know.
Speaker 2:Thanks for checking it out. I think here's my other issue with this, though, because it seems like there is a spectrum of the more Sharia compliance you get with your model, the less scalable the model becomes. Just because it gets harder to unlock capital, it's harder to play within the rules. For example, fida are unregulated, not because they're doing anything you know hiding things from the regulator, but just because the regulator in the UK doesn't know what to do with them.
Speaker 1:Well, no, they don't need to be regulated because they're not a debt instrument. But does that?
Speaker 2:block them from raising enough money.
Speaker 1:You could argue that people like the reassurance of a regulator behind something. You could argue that I've taken a hybrid approach to that. So, on the one hand, I wanted to create a risk sharing real economy type of Sukuk or Islamic bond, which is truly risk sharing and is therefore very different from the circle you see out in the market today. And that requires me to very much think from first principles and go completely off menu. I cannot rely on what Deutsche Bank and Clifford Chance have created before. I have to do it from scratch and I have to do it myself. Nobody else is going to do it for me. But on the other hand, I need to have it regulated Because if I don't do that, I know I will struggle to attract the kind of capital I need to be scalable and commercially successful.
Speaker 1:So you do have to play the game a little bit. Yeah, it's necessary, and that means you need to have knowledge of the industry. You can't just jump into the industry from a marketing background and just say, hey, we're going to create a neo-digital bank and I'm just going to just gather up lots of people and we're going to do that. No, you've got to have a clear. You've got to have experts leading experts, sure, but you've got to have the right people building the engine and the chassis of this thing, and that's what we lack in this industry. So if we're going to scale up our small fintechs, we've got to have high quality people with experience of actually building these things, and we've got to know how to navigate the regulations.
Speaker 2:So that moves us on quite nicely to what you are doing right now to try and solve this. So we've flirted with the idea of it a little bit, but now let's call it out so Cordoba Capital Markets.
Speaker 1:that's what your current venture is and what you're doing.
Speaker 2:CCM. Tell us about that. What are you doing with it?
Speaker 1:About a couple of years ago, I got approached by the CFO of an international agribusiness called White Lion Foods, and they are a medium-sized company. It's a sort of a rising star, run by an entrepreneur who has a string of high-quality businesses behind him, of high quality businesses behind him, and they are one of the world's leading exporters of Brazil nuts, as it happens, and so it's quite a niche industry but a really good commodity to have as a first trade. And the CFO approached me. The CFO, by the way, was Muslim, is Muslim, but his you know, the shareholders and his CEO and chairman are non-Muslims. So this is not a company that's was Muslim, is Muslim, but his you know, the shareholders and his CEO and chairman are non-Muslims. So this is not a company that's, you know, halal in any sort of conventional understanding of the word. It just happens to be a company that does good business and, by the way, their practices are very Islamic in many ways, which I'm happy to go into. So he says look, we want to expand, we want to grow, we need working capital, we need trade finance to grow, but, number one, we don't want to put debt on our balance sheet because we don't want to burden our business with collateral and security and all the stuff that goes with taking on bank financing which they have used in the past, and they've got banks tripping over themselves to lend them more money because banks recognize it's a good business. So this is not a business that's saying I can't find financing anywhere else, what can Islamic finance do for me? This is the opposite. This is a company saying I need a better source of liquidity. On the other hand, the only other way to finance working capital other than bank finance is diluting your equity.
Speaker 1:And most of these medium-sized many of these medium-sized companies are owner-managed businesses. So why would they want to give away their equity if they're raising trade finance and working capital or supply chain finance? So the CFO said how can we do this? And we sat down. We worked out how to create, from first principles, a trade finance instrument. That is a regulated capital markets instrument, listed and offered to investors around the world. So it's like buying a stock on a stock exchange. It's issued by a regulated vehicle in Jersey and it allows you access directly to the profits or losses of a particular trade. In this case, that trade happens to be the purchase of raw materials, which is the barricas or the raw Brazil nuts, which are then bought, processed in the factory, packaged, sealed, sold and the profits are shared with investors.
Speaker 1:And the standard question I get asked back when I say that is, but then the return is not guaranteed, the capital is not guaranteed.
Speaker 1:I say no, it's not guaranteed, because if you guarantee the return of an investment, that's a loan with interest, that's haram, very basic.
Speaker 1:However, what can we do to ensure that investors have some certainty, have some reassurance that there is a profit to be made here?
Speaker 1:And there's many things that we can do, the most important of which is that we spend several months with the client beforehand do the most important of which is that we spend several months with the client beforehand, embedded with the client, going through all of their operational and financial processes from start to finish, almost like a credit scoring process. Much more than that Credit scoring is quite superficial and we are deeply embedded. We call it CFO services. So we're deeply embedded within the business, watching the flow of cash throughout the business, from start to finish, and having control of that throughout the business and having governance of that throughout the business, so that by the end of this process, by the time we issue this financial instrument that we call a PPN, a profit participating note by the time we issue it, we know that this is a high quality business with great internal controls and a reasonable certainty that they will be profitable, and we've got a trading history and so on.
Speaker 2:So is this a debt instrument or an investment. From a hybrid.
Speaker 1:Yeah, from a regulatory and from an accounting point of view it's treated like a bond. Okay, but from a Sharia point of view it is very much a real economy risk sharing instrument. How does a bond not guarantee the return.
Speaker 1:So from format, you could consider it a bond, because it has what you might call coupon distributions on a quarterly basis. So investors get paid out as if they're being paid out a coupon on a bond, except that bond. That coupon is related to the profits that business is generating and it falls within certain tick boxes of tax authorities, like HMRC, which are required to be ticked in order to qualify as an AFIB an alternative finance investment bond, which is what a Sukuk is, one of those being it has to be listed on an internationally recognized exchange. So we've managed to find that fine line between ticking all those boxes so that HMRC sees it as a Sukuk and, at the same time, having scholars say this actually is a risk sharing instrument. So it's what a Sukuk should always have been from the beginning, without the purchase undertaking that guarantees to buy back the bond at par value.
Speaker 2:So it's basically a contract that doesn't sell ownership or equity of the business. Instead, it allows participants to benefit from profits of a particular deal. So you'll notice financing a deal here, in this case, buying up these Brazil nuts and then the idea is that, look, we're going to sell these. If all goes well and the market's too well, all of that, you'll benefit from this much, which you own, but if things go wrong, you could lose everything.
Speaker 1:And the way we mitigate that is, we say before the money is deployed from the segregated bank account of the orphanized vehicle held in trust on behalf of investors In other words, we're not directors of that, there's independent directors Before we allow the money to leave and we have control of when the money leaves, we need to see sales contracts locked in.
Speaker 2:So that's how we ensure that there is some control over capital and investors have some reasonable assurance that they'll not only get their capital back but they'll have some profit as well in the trade so from a business perspective say I was the business I was selling brazil nuts it's beneficial to me because I'm not giving up part of my business, which I would do through a typical investment equity fundraise. But I'm also not not, I guess, liable Like if things go wrong. It's not like a bank who will just come and seize my assets right and that's it.
Speaker 1:You're liable in four instances fraud, negligence, breach of contract and one more thing, which is insolvency, the reason being, from a Sharia point of view, if you are taking risk on a trade and you do something that is outside the parameters of what is allowable, then you are liable as the manager of that money. So those are the circumstances in which investors' capital is protected, right, but Sharia only allows certain things to be protected negligence, fraud, etc. Whereas taking risk on the market is something that investors have to do due diligence on, and that's part of our job is to spend several months with that company and make sure that this is a high quality trade that we're entering into. I can't name any banker that does that. Bankers don't really do due diligence, not even ratings agencies. Again, rating agencies check a lot of boxes. So would you classify?
Speaker 2:this as a low or a high risk type investment and rating agencies check a lot of boxes.
Speaker 1:So would you classify this as a low or high risk type investment? Well, I'm required by regulations to classify it as high risk, but that's because regulations are based around debt right? So throughout the world, regulatory authorities tend to treat bonds, loans, as low risk and equity as high risk, and they would consider us somewhere in between. But from first principles, knowing what I know about the due diligence process and the capital controls and the controls that we built into the financial instrument itself in Jersey through a protected cell company, I would say if I were putting which I am I am putting my money into this. If I'm putting my money into this trade, then I am getting the protections that I would get if I was buying a Sukuk. Except with a Sukuk, I'm typically earning 4-5%. We generated 16% returns for our investors in the first year. I'm not saying that's going to happen forever, by the way, and I'm not committing to that number, but I'm saying that's well beyond our expectations and we hope to be able to deliver double digit returns throughout.
Speaker 2:You delivered 16% in the first year. What were you anticipating?
Speaker 1:We originally started with a range of 8% to 13% and realised the market was a bit better than that. So I think we ended up moving to something like 12% to 16%, so we delivered at the top end of the range.
Speaker 2:Sorry, this is getting really technical, but I think a lot of our listeners will be quite interested.
Speaker 1:I mean, I think, my point being that if you structure it right, you can make money and you can protect your downside as well.
Speaker 2:That's exactly what I wanted to move to, because I think I can't remember the model, but there's like a new model within investment management or not new, but it's becoming more popular the idea that high risk entails high reward and low risk means lower reward, that's. It moves away from that and saying that if you have an appropriately diversified portfolio, you can get the the hallowed ground which is high risk with sorry low risk, with high rewards. In return for that. Do you see you? You know, moving into that space and creating a whole portfolio of these types of transactions, these types of deals which are like properly diversified?
Speaker 1:Yeah, I currently have seven clients looking to raise in 2025, a total of about $60 million. We've just closed our second PPN with White Lion Foods and we're raising $8 million for them now. So, sorry, we're just about to close the second one. So there is a pipeline of deals coming up. But, more importantly, I sincerely believe this is a multi-trillion dollar opportunity and there's a huge gap in the market for medium-sized companies that don't have access to high quality liquidity sources and properly structured and I must emphasize the word properly structured, because one of the things that worries me is eventually, everybody will learn how to do this, and that's fine and I want that to happen.
Speaker 1:I want the industry to gravitate towards this type of hybrid instrument. It's not debt, it's not equity, it's highly structured and it's healthy for the economy, for investors and investee companies, because it aligns incentives and it leads to a healthy economy, a long-term healthy economy where we make good, long-term investment decisions. That's why I think this is a game changer and I want everybody to do it. But before we get to that point, I want people to do it right, right. So I want us to scale up, make sure we offer this and I want people to realize this is a multi-trillion dollar opportunity, in the same way as 20 years ago when Deutsche Bank came on the scene and everybody says, oh, you can't do this.
Speaker 1:Oh, structured investment products you can. Oh, structured investment products it can't be done. Oh, convertible Sukuk Can't be done. Hedging and management treasury management products Can't be done. We did all of those things. This is Islamic finance 3.0. We're changing the way Islamic finance works. We're giving a true risk-sharing financial instrument. That is true to prophetic economics. So no one else is doing this. Nobody's doing this. That actually means we are the only sukuk structurer that already meets Aofi standard number 62.
Speaker 2:Can you go into that please? So I know this has come up in the media a little bit now, but what exactly is number 62?
Speaker 1:So Aofi, as you know, is the international body that sets the standards for sharia compliance of financial instruments and, around the world, many countries have required their Islamic banks and Islamic financial institutions to adhere to Aofi standards. Aofi have recently proposed, in a consultation process, a new standard called standard number 62, called standard number 62, which says that henceforth, all Sukuk need to be risk sharing, real economy based and transfer ownership. And I'm paraphrasing slightly. That's not exactly the words that they use and mostly they talk about ownership transfer. So today, if you buy a Sukuk in the market, what you're buying is a credit obligation of the obligor. Let me explain what that means.
Speaker 1:What a sukuk is supposed to be is you take investor's money, it's put into a venture. The spoils of that venture are shared with the investor. That's what it's meant to be. A sukuk is meant to be an ownership interest in an asset, or an inventory, or a business venture, an activity A modaraba, in other words, an investment management arrangement. What it actually is is some very clever investment bankers and lawyers will say we have these very clever documents that will take an asset, a real asset. Oh look, there's a real asset behind this. We'll take a building, let's say, we'll plonk that building into a special purpose vehicle. So we'll transfer ownership or beneficial interest or a master lease over that building, plonk it into an SPV and now investors are getting a return related to the rent of that building. Oh look, it's a real economy asset. There's something real here. That's Islamic finance.
Speaker 1:This sounds a lot like your PPN, yeah, but what's the catch? The catch is oh, we need to add a purchase undertaking. It's just a little contract, Don't worry about it is. Oh, we need to add a purchase undertaking. It's just a little contract, don't worry about it. It's a contract that says I, the originator of this transaction, whoever it is, you know, a sovereign government or Emirates airline or whatever who is issuing this sukuk. I agree to buy back the sukuk at its par value. In other words, you put in 100 on day one, in three years time, or whatever the maturity is, I'll give you back 100. Right? And if there's a default, if I fail to pay you my quarterly or semi-annual coupon that's a default my capital becomes due to you, right? I can't see the difference here between a bond and a sukuk. So what you've done is you've given investors the credit risk of the obligor, like a loan or a bond, you have not given the investor an attachment to a real underlying asset, even though your contracts say you have Good luck trying to enforce. If things go wrong, you're not going to get that asset.
Speaker 1:People tried to do it with the Nakhil Sukuk, by the way, many years ago and they realized they couldn't actually enforce over the parcel of land that the contracts were talking about. So what's the solution? The solution is and this is what AOFI is saying let's move to a purer standard where investors actually participate in an underlying business activity and therefore it's no longer a bond with a purchase undertaking, with a buyback of your capital. Actually take the money and put it into a specific business venture and the spoils of that venture go to investors or split in a particular predetermined way. Bankers and lawyers do not like that because it's not debt as far as they know it. To them, that is a very risky instrument. Oh my goodness, I actually have to do due diligence now. Very risky instrument. Oh my goodness, I actually have to do due diligence now. I actually have to look after my investors' interest.
Speaker 2:now the standard credit scoring process just goes out the window.
Speaker 1:That's not going to cut it, yeah, if you truly want to align yourself with your investors, who are your customers. You need to be in their shoes. You need to be an investor yourself. That's why I'm an investor in my own business and the trade that we're doing. This is so interesting, Do you think?
Speaker 2:what will happen? Do you think Islamic banks are already pushing back on this?
Speaker 1:Already. Yes, they are the consultation process, and I only pick up what's on the grapevine here. But bankers and lawyers are not happy here, because it really needs a. It's a complete rethink of their mindset. It's a complete shift in the way they do business. This is the opposite of financialization. This is about having a healthy, long-term economy.
Speaker 2:What's the push here for them? Because if Aofi say, okay, unless you're doing it this way, I know it's just a consultation, but they could put it into effect, but unless you do it this way, you're not going to be Sharia compliant. Under Aofi, bankers may have a choice. They could say, okay, fine, but FTSE Sharia doesn't say that, so I'll move to footsie or s&p. Yeah, but I guess the difference is aoffi is probably the largest sharia compliant and most recognized across the middle east.
Speaker 2:Malaysia, pakistan yeah, they all talk about aoffi. Do you think that's? Do you think they have the power to make this happen?
Speaker 1:I think there's a lot of tension in the process, there's a lot of push and pull, there's a lot of politics here. So sovereign nations may say we don't think it's a good idea to move to AOV standard 62 because it affects the Sukuk market and we need the Sukuk market as it stands to raise money for our country. Yes, so there may be a political pressure not to go down this route. I hope that's not the case, but unfortunately, realistically, that is possibly a slightly more likely outcome. All I will say to my investors is we're the only people you will find in the market today anywhere not Goldman Sachs, not Deutsche Bank, not anybody who already meets the requirements of standard number 62.
Speaker 2:And are your products available primarily for institutional investors? Or if there's a retail investor or a high net worth listening, could they reach out and participate?
Speaker 1:I wish retail investors could invest. My regulator does not allow me to do that. It has to be what they call qualified or accredited or professional investors. There is, unfortunately, a minimum ticket size of $100,000 per investment. For now, there's nothing I can do about that. That's the basis on which we're set up, and I don't have the capital to invest in a retail infrastructure, but when I do, inshallah, I'll make sure that this is going to be a product that's offered to everybody.
Speaker 2:So interesting. Maybe we can have a chat about that offline as well. But something you said was very interesting about whole sovereign nations pushing back against this. I wanted to talk to you about Pakistan there, coincidentally at the time where Pakistan's parliament announced a constitutional amendment that said that all riba has to be eliminated from Pakistan by the 1st of January 2028, which is, on the face of it, seems like quite a tall task. Right now, only about 20% of Pakistan's banking infrastructure is Islamic, and they're trying to move to 100% in the next three years. Do you think this is feasible, or could Article 62 represent an opportunity for Pakistan to do something genuinely innovative in this space?
Speaker 1:So I think there's two issues here. The first is that it isn't feasible in that timeframe. If they'd said 10 years, maybe it was feasible, but they've said one month, right, so it's practically speaking, it's just not going to happen. But secondly, and more importantly and I've had this conversation with a very famous scholar in Pakistan when the new administration arrived in Afghanistan, I wrote to the scholar, who was somewhat connected to the regime in Afghanistan, the regime change, and I said here is an opportunity for the Afghani people to adopt a form of freedom money. And what do I mean by that? People know that I'm an advocate of Bitcoin because I believe that it is an Islamic form of money, and I'm very happy to explain that in great detail. But we may not have the time for it, and at this point I'd start losing people.
Speaker 2:Well, you don't know, a lot of people come in just for that kind of talk but, yeah, we can go into it, but because I'm formerly a gold bug.
Speaker 1:I believe in gold as the traditional form of Islamic money because it's what I call sound money, and I'm happy to explain what that means. But let me just backtrack a bit. So Afghanistan had $7 billion worth of their reserves stored in the US, in US banks, and when the Taliban came to power, the US administration decided to withhold that money and that was a very harsh winter and people died of starvation and exposure. So the US government holding back $7 billion of Afghanistan's own money, of the Afghani people's own money, that's theft and actually it's murder, because people died as a result of that government not having access to those funds. I mean, that's a really egregious. I can't wrap my head around that. They really weaponized finance. They weaponized finance. What if they had access to a type of money that didn't require them to have a trusted intermediary, which eventually you realize you can't trust, and you don't have to store your money with them? The same applies to gold, by the way. That's why I'm no longer a gold bug, because gold is centralized, it's held. 8,000 tons of it is held in the US. So good luck to Venezuela trying to get their money back.
Speaker 1:So I said to the scholar. This is a real opportunity for Afghanistan to adopt freedom money that gives them access to their own funds, that gives them sovereignty over their own money, that allows them to make their decisions and not be held to ransom by a foreign power. And the scholar's response was very instructive to me. It was RS you shouldn't worry about these things too much. Let's give them Islamic banking first. Let's focus on the basics. Let's give them an Islamic banking system and remove riba from their system. And I'm like yeah, but Bitcoin is anti riba, it's literally anti inflation and therefore it's anti riba. You can't create Bitcoin from nothing. It requires proof of work, just like gold requires proof of work.
Speaker 2:And that's why it's Islamic. So you mentioned sound money, gold being sound money, but Bitcoin also has that. What do you mean by that?
Speaker 1:So sound money is money that is scarce, that is finite, that is divisible, that is decentralized, it cannot be manipulated by one or a small group of people. It's money that is fungible, in other words, one piece of it is the same as another piece of it is indistinguishable. So fiat money, meaning money that's decreed to be sold, like the US dollar, is money that is controlled by a small group of people, in this case, the Fed. So if they decide to print trillions of dollars of it I think 81% of all dollars in existence were printed since COVID it's an amazing number, right? It's devalued what a dollar is. That's why the price of Bitcoin goes up, not because Bitcoin is volatile, but because the dollar is depreciating.
Speaker 1:So people flock to Bitcoin as a store of value. Correct, it's a store of value. Maybe one day it becomes a medium of exchange. I believe it may become. It certainly will become a inshallah a global reserve currency. In fact, even the US is now talking about using it as a strategic reserve. They're talking about buying a million Bitcoin. Of course, game theory says that all nations on earth should be getting behind this right now, before the US does this, to prevent them getting their hands on a million Bitcoin.
Speaker 2:People have really changed their tune. I remember Jamie Dimon. He used to be a huge naysayer of Bitcoin. I don't get it. No one's going to go for it. He said he would fire traders who ever bought it. Yeah, literally. And now I think it was on Bloomberg just the other day talking about how Bitcoin is the future. Yeah, we need to be on this.
Speaker 1:Everybody's changed. Everybody's changed, and the people who were talking about this several years ago were saying this is freedom money. This will get you away from dollar hegemony. You won't be held earth. That's what the Afghani people could have done, but this scholar said no, we need to have you know Islamic banking. So that was my second point. The first point was about you know the timeline, which was not feasible. The second point was actually why are you talking about Islamic banking? The basic, fundamental premise of Islamic banking is flawed because it's reverse engineering of fiat-based fractional reserve banking, and that is not. Neither of those two concepts are Islamic. Let's start from the basics here. If Pakistan had been mining Bitcoin from seven, eight years ago, had been building up reserves, had been allowing citizens to use it as currency, imagine what a huge difference it would have made to its economy right now A massive difference.
Speaker 2:And yet its economy is frankly being destroyed by the imf and other organizations, I mean the imf, are basically just high finance versions of the people who come around to break your legs.
Speaker 1:Yeah, yeah they they are an organization whose stated aims are to promote, you know, wonderful peace and tolerance and sdgs. You know the united nations, uh, social development goals, uh, uh, clean water, sanitation, women's rights, and so it all sounds very lovely, right? Oh, this is lovely. These IMF want lovely things for us. They're going to give us a loan and then they're going to do nice things for us. But actually, a loan from the IMF always comes with strings, it's. It's no coincidence, uh, in my opinion, that president Sisi of Egypt got a $6 billion loan from the IMF and the next thing that happens is he's building a concentration camp in the desert outside Rafah. That's not a coincidence. Those are the strings attached. So, whilst the stated aims may sound very noble, in my opinion the IMF exists, based on verifiable empirical data, to reallocate wealth and resources from the global south to the global north. That's not a good thing.
Speaker 2:Absolutely, but it sounds like what you're saying is that if Pakistan really was serious about this, perhaps they should consider Bitcoin becoming the main currency of Pakistan, I do.
Speaker 1:I'm a strong advocate of Bitcoin as freedom money, as resistance money, as money for the people, as democratized money, and I want to be very careful because what's now going to happen is a bunch of people are going to say, oh he's this crypto bros into. You know, he's into gambling and volatility and intrinsic value, and they throw all this FUD, fear, uncertainty and doubt and and they've never really read up they haven't done their 100 hours or 1,000 hours of research on this and if they did, they know I only advocate for Bitcoin as a form of gold. It's a digital gold. Why just Bitcoin? Yeah, I don't advocate for crypto because 99% of what I know I do not exaggerate that number 99% of what I see in the crypto world is either gambling or a scam or a project designed to enrich the developers. Only Now I'm going to make some exception for technology applications. You know I have some friends in the industry, people like Khalid Holadar, who look at the technology applications of digital assets. He was on the show just a few weeks ago, right, so you know I encourage that because I think that there are some potential decentralized finance applications that are good for us as Muslims.
Speaker 1:But where I draw the line is alternative altcoins as forms of money. Money needs to have those characteristics to be sound, to be good for humanity. It needs to be scarce, finite, divisible, predictable, etc. All of these things are necessary. That's what gold used to be until it became centralized by the US government. Bitcoin is that realistic, pragmatic alternative. It can work. It is working. The dollar's already depreciating against Bitcoin. People who say it's volatile look at the graphs. Bitcoin's volatile on the upside. It's not volatile on the downside. Yeah, it drops every now and then. Then look how it goes back up again. Everything you throw at it to try and kill it makes it stronger.
Speaker 2:But I don't know too much about this, but didn't El Salvador? They went fully Bitcoin? Yeah, have you been following that? Did that work out?
Speaker 1:Yeah, so they seem to be doing I mean, at least on the face of it, they seem to be doing quite well. They solved their crime problem. They seem to be in the process of solving their economics problems. You know, I think it's a very interesting case study. It's not the only legal tender, but it has been adopted as currency in the country and I think that's really important for the rest of the world to look at and say, look, this was a nation that was in real trouble up until recently. And guess what? The IMF now writes really nasty reports about them.
Speaker 2:What a surprise, but if you were to do that, could you break your link with the IMF and your debts? I don't know how that would work.
Speaker 1:The sooner you do it, the faster you can break that link. The sooner you do it, the more freedom you will have. That's what I believe.
Speaker 2:Well, you heard it here. That's Horace's advice to the Pakistani Central Bank. If you're listening, Maybe consider that as an option. We're getting close to time here, but I've noted you down as having said this a few times in the past A true Islamic finance system could potentially save the world. Do you still stand by that?
Speaker 1:I do and I'm trying these days to avoid using the word Islamic and Sharia compliant and Muslims. I think that there is a form of finance and an economic system out there that is good for everybody. That's why I believe in Bitcoin. It's not necessarily, at least to my knowledge, not been created by a Muslim or a group of Muslims. Maybe it was, but very unlikely. And yet I consider it to be the most Islamic form of money today, more so than gold, because it's not centralized. So I think, on that basis, there is an economic system which happens to be based on prophetic values that I think is good for humanity, whether you're faith based or non-faith based.
Speaker 1:We choose this form of finance. It'll be better for all of us. It will lead to low time preference, which means a focus on the future, future outcomes, not outcomes in the next quarter or tomorrow or right now. We believe in deferred gratification. We are Muslims, it's in our nature. We train ourselves in Ramadan. We fast for 30 days, we deny ourselves food and drink. We train our nafs, our ego, we prepare for the hereafter. We build up good deeds in this life for the next life. We believe in that next life. Why aren't we adopting a low time preference economic mindset, why are we going for get rich quick schemes?
Speaker 1:Bitcoin is the opposite of get rich quick. Bitcoin is a long-term play. I actually tell people I'm against risk. I don't like risk. I want to de-risk myself. That's why I'm interested in Bitcoin. It's long-term freedom money, and the same goes for Islamic finance. I'm interested in sharing risk, apportioning it amongst parties, so we don't have these asymmetric relationships between borrower and lender. So we don't need institutions like the IMF bailing us out and meanwhile requiring us to construct a concentration camp in the desert right, we need to be free of these shackles. That's why I believe in long-term, ethical finance that is real, economy-based, real trade-based and apportions risk amongst us.
Speaker 2:It's much harder to finance wars when you can't print your own money 100% correct.
Speaker 1:This is no coincidence that since we've adopted Keynesian economics and allowed ourselves to print as much as we want post-1971, when the dollar was de-pegged from gold we've had a perpetual state of war. We're in infinite war now. We can finance it just by printing more and more money, and if we couldn't do that, nations would have to stop when they run out of their own funds.
Speaker 2:Absolutely, absolutely, and boycotting would be. It has been impactful, but I think much more impactful than it has been for sure. I just wanted to touch on one point. When you spoke to that scholar regarding Afghanistan, I think that speaks to a big problem within the Islamic finance community amongst Muslims in general. It's all about marketing. I think the reason he responded in that way perhaps saying let's get them to adopt Islamic finance more is.
Speaker 2:I think the reason he responded in that way perhaps saying let's get them to adopt Islamic finance more is, I think, just fear of the unknown. This seems like too out there. No one really gets it. If you think about your parents, could you see them using Bitcoin as currency? I don't know. But that's why I'm really hopeful for the future, because 50% of Muslims are young, young people below the age of 25. And by our nature, we're very open to, I think, adopting new things. I know you say you see yourself as a change maker and a radical in some way, but I think a lot of Muslims are in that way, so perhaps the future is bright.
Speaker 1:Remember that's our history right. We had a prophet peace be upon him who was the most radical man in society of his time, the most radical man who ever lived. You know he moved us in a direction that humanity had never moved before and you know, when he left us, our religion had been perfected for us. If that's not the most radical man who ever lived, I don't know who is.
Speaker 2:We're almost out of time completely, but I wanted to ask do you have any parting words of advice for maybe someone listening who's thinking about venturing into the space, either setting up their own Islamic finance firm and Islamic fintech? As an entrepreneur, what would you say to them? Get your skills.
Speaker 1:It's really important that you get your skills, one of the things I fear and you're absolutely right about young people. They have this dynamism and this motivation behind them and I find it wonderful when I meet them. I go to university, islamic societies and so on, and we have these discussions and debates, and it's actually one of the most fulfilling parts of my job is meeting them and realizing that we inshallah, we have a very bright future. At the same time, I really urge them please, please, spend your time perfecting your skill set. It can be long and boring, I know, but that's because we are low time preference people.
Speaker 1:We believe in deferred gratification. Don't quit your ACA, you know, three weeks into it or a year into it. Finish it, get your qualification and then move on. Spend your time, perfect your skills, do your 10,000 hours that will allow you to be world-class when you set up your Islamic fintech firm, and make sure you assemble the right people around you. Sometimes you need some gray hairs, like me. Right, you need a lot of young people and dynamism, but don't discard that experience and that wisdom and doing things from first principles. You need those war stories in order to succeed, otherwise you're really going to struggle Fantastic.
Speaker 2:Well, that's about it for time, but, haris, thank you so much for joining us. Inshallah, we can have you back soon, that's welcome.
Speaker 1:Thank you for having me, Arif.
Speaker 2:Thank you for listening to the Muslim Money money talk podcast. If you like what you heard, then please subscribe to muslim money talk. Wherever you might have been listening to this, give us a like and share it with someone who you think might be interested. It really, really helps us out. Thank you, assalamu alaikum, and see you next time.