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
The Lawyer Who Built UK Islamic Banking - And How He’s Fixing It | Mohammed Paracha - MMT Ep 31
In this episode, Sheikh Mohammed Paracha an accomplished Islamic finance lawyer and fintech pioneer—shares his journey from drafting groundbreaking Sharia-compliant contracts to building Nesta, a non‐bank financial institution that reimagines ethical fixed income products. He also discusses the challenges of aligning conventional financial practices with true Islamic principles while advocating for regulatory innovation and grassroots engagement.
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Kestrl is an app that helps Muslim to grow their wealth without compromising their beliefs
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Show Notes:
0:00 - Islamic Finance and Fintech Opportunities
3:05 - Legal Career and Islamic Scholar Journey
12:05 - Pioneering Islamic Finance in the UK
22:10 - Breaking Ground in Islamic Finance
31:26 - Islamic Banking Feasibility Study and Challenges
39:31 - Reforming Islamic Finance and Fintech
43:22 - Innovative Sharia-Compliant Investment Platform
48:58 - Regulatory Challenges and Financial Empowerment
57:09 - Islamic Finance and Foreign Investment
1:04:54 - Innovative Approaches in Islamic Finance
1:10:31 - Islamic Finance and Entrepreneurial Insights
You can't call it interest and I know that some people do say that profit is just interest by another name. You have to look at the fundamentals of that underlying contract. What we've got as an opportunity as an industry, and the fintechs in particular, is to say well, how can I go back to grassroots and show the world at large, starting with my first customer being Muslims that Islamic finance is about delivering a much more just equation between the entrepreneur and the manager of those funds? People who are not your traditional names that you'd associate with Islamic finance are coming into Islamic finance, and these are multiples of billions of dollars in transaction flow that we're talking about. My answer remains you can't have an Islamic bank doing all of that. You can have a global bank doing that if they're interested, but they're not interested. You know, I think, when you make that intention to do something, they don't note, but someone else's notes, and that's Allah, subhanahu wa ta'ala. So you have to strive.
Speaker 2:In today's episode I'm joined by Sheikh Mohammed Baraja, a renowned Islamic finance lawyer based in Dubai, where he's the partner for esteemed firm Norton Rose Fulbright, and he's also the co-founder and director of a well-known Islamic fintech here in the UK called Nesta. Alongside Yunus Abidu, who we had on the podcast a few episodes back, he shares his story here in the UK how he saw Islamic finance getting set up with the very first Islamic banks here in the UK. He took that over with him in his career in the UK. How he saw Islamic finance getting set up with the very first Islamic banks here in the UK. He took that over with him in his career in the Middle East. And now what he's doing with this Islamic fintech to try and solve the problems that have been left behind by those original Islamic banks.
Speaker 2:As always, I'm your host, areeb Siddiqui, and this is Muslim Money Talk. 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.
Speaker 1:Now back to the show muhammad assalamu alaikum, welcome to the show wa alaikum assalamu alaikum, nice to be here yeah, I'm glad that we caught you, because you're usually based in dubai.
Speaker 2:Just about coping with the weather, yeah, um, I mean there's. There's so much that I wanted to chat to you about. But first off, a massive congratulations to you, because you've recently become a certified Sharia scholar, after more than 10 years of study. Yeah, thank you very much. It doesn't feel like it was 10 years Because you were doing it part-time whilst in Dubai. Right, that's right. Every weekend Saturday, sunday.
Speaker 1:Well, it's about 20 hours a week 20 hours a week, it's over four days hours a week split over four days. So we used to study after fajr on saturday. Sunday used to be friday, saturday, but then the weekend changed okay for about three and a half hours, and then monday and wednesday nights after work. Incredible, was that online in person, in person, in person?
Speaker 2:wow okay, and was it because we had mufti for us on the on the podcast, the episode exactly before this? Right check it out if you haven't heard it, but he was talking about what it was like becoming a Mufti. They all had to go into like deep training, make sure they were praying the Hajj every single night, waking up at 4am. How did you balance that kind of routine with your full time job as a partner at a huge international law firm?
Speaker 1:It wasn't easy, I have to say, but I think having teachers who are sort of flexible was really helpful because obviously you've got the traditional path where you're sort of full time in a school environment, Modesta type of environment and for those of us that have taken a different path and have got a career, I think the teachers are a bit more lenient and they know that you've got you know, I call it baggage. You're carrying baggage with you, so you've got things to do outside of studies.
Speaker 1:So, there were some people full-time, no, we were all part-time, all part-time, all part-time, so they were extra lenient with us. Okay, and so if you travel, the classes were recorded so you could play them back and if you missed a class you could ask your friends for notes and that kind of thing. But I think most of the people, especially in the last couple of years when we were doing the you know the Dora Hadith, you know where you're in the sort of sunnah of the Hadith they wanted to be present. So very little travel and if you missed a class you definitely played it back.
Speaker 2:Really yeah. And what was the? We're jumping all over the place with the. What was your motivation to go a step further? You were already a huge name in Islamic finance. In law, what made you want to bridge the gap and become a scholar?
Speaker 1:So it's kind of like the same question. If you ask me how did I become a lawyer, I don't think I'll be able to answer the question. It just kind of happened.
Speaker 2:Well, I heard a little bird told me that your journey into law began a long time ago in a masjid in in thumbridge. Is that? Is that correct?
Speaker 1:yeah, no, that is correct. I mean my. I mean I I don't think I can point towards a series of steps or you know action points that push me into law. Uh, back back in the you know 90s, when we were going through a levels and choosing universities, we had this thing called the morrisby profile. I don't know if it exists anymore.
Speaker 1:You've kind of like a career trajectory essentially, and it's a bit of psychometric analysis and you throw everything in and it kind of churns out, um, you know what the top jobs are that would meet your personality type and your academics and you know, law was at the top and I don't think I had a conversation with my parents and asked them what should I do?
Speaker 1:You know, it was just something that just happened and so I transitioned into that. But I I think the signs were probably uh, there, if I go back with the benefit of hindsight and think about what I was doing, yeah, I did set up my local masjid. So when I was probably I don't know 15 or 16, I remember writing to probably east l East London Masjid at the time and Regent's Park asking for a copy of their constitutional documents and having our charity to set up and our mosque to set up. I took care of all of that for the masjid and you know, if you think about it in hindsight, you know I was there with my dad at all the meetings and fundraising and all that kind of stuff.
Speaker 1:There were the hallmarks of being a lawyer you know, which other 15, 16 year old person is going to draft a constitution and look at the words and think, hmm, that might have worked for them, but will it work for this mosque, knowing what I know? So, yeah, I think it was inevitable. And Qadr Allah at the end of the day.
Speaker 2:It's always amazing when you can piece back something in hindsight and say of the little fingerprints of Allah's God that are just.
Speaker 1:Well, you don't realise it at the time. I mean it's something that just happens, doesn't it? Yeah, absolutely Very few people plan. I mean now it's a bit different, but you do plan more. But you know, sometimes things fall into place.
Speaker 2:Yeah, I always say, like even with Kestrel, when we pull together a pitch deck and we're talking to investors we make out like it to the Islamic world.
Speaker 1:No one really thinks like that. It's an opportunity. Well, I mean, interestingly, I did step out of being a lawyer for about four or five years.
Speaker 2:I was an investment banker.
Speaker 1:This was 2007 to 10.
Speaker 2:So three or four years.
Speaker 1:So at that time and I was working in Bahrain I actually was doing the IPO, the initial public offering for a Bahraini bank that had been sponsored by Imar, which is quite a big developer in the Middle East, and they decided we were going to banking. So they set up this bank called As-Salaam Bank in Bahrain quite a big bank now and we'd just done the IPO and for me at that time it was actually coming back to your point of your pitch deck. I was a very experienced lawyer. You know I was doing a lot of Islamic finance and then I was doing more in Saudi Arabia and elsewhere, but I always felt, okay, there's something missing, and this is advice that I give to lawyers even today. You don't really understand the client side of the business. And so, as a consultant, yes, I could carry on doing what I was doing and I could become a partner, and then you know progress inside a law firm. But I had a real burning desire to sit on the other side of the table, to really live it.
Speaker 2:Yeah.
Speaker 1:And so when we did the IPO, I was asked to join as an EVP, as an executive vice president. So they put me straight into the management committee. I sat on investment committee credit committee. I sat on investment committee credit committee. I was there in the management of this bank and I'm in my 30s, by the way.
Speaker 1:You know this is something that probably shouldn't happen In this day and age.
Speaker 1:You probably shouldn't be propelled into that role, but I was, you know, employee number three or four and it was very much so I could understand how banks do deals and to this day, I mean, I think that's how some of the entrepreneur part of what I do comes from those days, because I was very good at debt, part of Islamic finance.
Speaker 1:But I wanted to learn about the equity side of Islamic finance and you hear from the scholars all the time that we're skewed into lending financing, call it debt, debt, and we don't really have the balance which obviously we do in our sharia in relation to equity modes of financing musharaka, mudaraba wakala, all of these other modes of financing. And for me that was my opportunity, that was my training ground, because I was in this, uh, in this bank doing private equity and joint ventures and, you know, basically selling investments. And interestingly and this we can end on this but in the last 18 months of that role I was reverse seconded back to the UK, which was really odd. So I'm working for a Bahraini bank, reverse seconded back to the UK. So it's now an expat package from a Bahraini bank where I'm now an expat in my own country, back in the UK, and so everything's paid for, which is bizarre.
Speaker 2:Yeah, so how was schooling?
Speaker 1:Well, schooling wasn't, but yeah, I was driving into work in Cavendish Square and basically running the private equity arm for the bank in Europe.
Speaker 2:And you were a young 30-something going through all of this. When we put the question out there, we let people know that you were coming onto the podcast. A lot of the questions were from young, young lawyers or people in law school right now, right where, when they look at your trajectory, it seems almost like you invented a role for yourself, in a way. So you were. You were a lawyer. I think you was doing criminal law yeah um for a high street law firm yeah and you went over to Norton Rose, Fulbright, where you're currently partner.
Speaker 2:But you wrote to them and basically an opportunity came up where you could create an Islamic finance team. Was that the case?
Speaker 1:Yeah. So I think the lesson that I learn and the message that I give to youngsters is don't give up on your curiosity and your and your, your ambition and you know it's. Things may not come immediately, but they will come, you know, make that dua if you've got parents. Get your parents to make dua for you, inshallah, and you know things will unfold. I mean what? What I was doing at that time was really, um, the path that typically you know you would take if you're coming from, you know, somewhere, like tumblr jaws in kent, like me, you know you work. You work in London or you work for your local provincial law firm. So I chose the latter. I wanted the easy life. I thought, let me just, let me just go to the high street lawyers where I'd done my work experience. So I was doing criminal law and prison law. So my role was actually there, going into places like Belmarsh, wandsworth, you know, brixton. These were the prisons that I would be going into and literally sitting down just like you.
Speaker 1:You know, obviously you're not a criminal, not as far as I know for the benefit of the tape, but sitting down with you know, people at this distance talking about some pretty awful things, and that was the path that I was treading. But in parallel with that, because I had been connected with Alma Sajid and through my father and, as I mentioned to you before some of the groundwork that we did in Tunbridge Wells, I had quite a unique opportunity to sit with our scholars, our who are now senior ulama, and just have you know, we were all single, you know, we were all just chatting, finding our way in life, and with them it was about talking about riba, and so that interested me at the time. And on the back of that and again, bearing in mind, I'm 15, 16, maybe 17, certainly a level years um, at that time I'm thinking, well, okay, how do I connect the dots here?
Speaker 1:and it comes back to curiosity. Because I think if you're curious, uh and um, you, you, you want to do things you know to help yourself and others, then things tend to snowball. And what I was doing was, of course, this was letter writing era, you know, emails were not around. You'd either pick up the phone or you'd write a letter, and for me it was picking up the phone or writing the letter, invariably the letter. And so I would write to banks and building societies and say, hey, there's this thing called Islamic finance, and it would be my own selfish desire to try and get an Islamic mortgage down the road. Because I'm thinking, okay, how do I get onto the ladder?
Speaker 2:So you were writing to like Barclays and Halifax, asking them if they had Islamic finance products.
Speaker 1:I say no, I know that. I knew they didn't have Islamic finance products. I was writing to them to say here is something that you might want to tap into. So I was saying there's a marketing opportunity, there's an opportunity for you to create product and this is how you can do it With my limited knowledge. Basically, the circles that I was in with my scholar friends Were there any products at the time in the UK.
Speaker 1:None, the only one. There was a bank, I think it was called BCCI, which was a famous. I think it wound up or there was something. Again, it's slightly before. I was probably quite young when that happened, but that was the only example. But I don't know what its product suites were and some people, I've said, have commented on them having Islamic product. But you know you're going back 20, 30 years, so how would you even find out? But very limited. Did anyone ever respond to you?
Speaker 1:Yes they all said no. At least they responded A bit like the rejections I got when I was applying for a training contract. But no, they all kind of responded in one way or another. You know, customer services would always just write back to you and say sorry. Thank you very much.
Speaker 2:It's interesting, but not one for us. It never really got beyond the customer service. Never got beyond the customer service, never got beyond that.
Speaker 1:But you know, I think when you make that intention to do something, they don't note, but someone else's notes, and that's Allah, subhanahu wa ta'ala. So you have to strive.
Speaker 2:Incredible, wow. So it's just bizarre to me because today to hear that someone so young was doing something like that and reaching out to those banks Is that also how you reached out to Norton Rose?
Speaker 1:So Norton Rose was an interesting one. It was completely speculative on my part. So within your viewers that are in law will appreciate that we have this sort of journal called the Law Society Gazette, which kind of throws in everything. All the exciting stories about lawyers go into that journal, and so when you're young, I mean it used to be printed. It's probably online now. We used to get it every week. You kind of look at it and you read it and you think, oh well, this is all very interesting. And when you're in a provincial firm, of course you're reading about international law firms in London and you're thinking, okay, why did I make this choice to stay in the sticks when I could have gone to gone to london? So you have those feelings as well. Um and I I started reading I think it was a center piece in that journal and it was a story about norton rose. It was a, the guy that became my boss, and then it was the guy that um was.
Speaker 1:At the time the global head of banking, who then became the chairman of the firm, were writing about islamic finance and growth in bahrain and how they'd made recruitment of certain associates were mentioned because at the time bahrain was, it was a financial capital yeah, there was no difc, there was no dubai, and so I saw that article and I said okay, that's interesting, they're talking about islamic finance, the fact that they've been doing this in the 19th and 1970s, um, why don't I write into them and just maybe tell them what I've been doing as my pet hobby?
Speaker 1:And that's what I did. I just wrote to them and said look, I've been trying to educate UK banks and building societies on Islamic finance. This is what I've done, and before I know it, I get an invitation to come in for an interview. And that was it. I mean, I was it was right place, right time Arid, because my supervising partner had just returned back from Bahrain and he was trying to establish London as a center for legal Islamic finance work. Again, not much was happening then and I was his first employee, so he didn't know that he wanted me until I wrote in.
Speaker 2:Wow, okay, and basically that's how the team was created here in the UK. Yeah, yeah, the two of us. It was two of us. That's unprecedented, right? Because I get so many young people who, whether it's at a bank or at a law firm or at a consultancy, they're coming to me and they're trying to be almost internal entrepreneurs or intrapreneurs where they want to start up their own team, make it Sharia-based something in Sharia banking, but you I it's sharia based something in sharia banking, but you, I guess, were one of the first people to actually do that successfully and almost by accident.
Speaker 1:Yeah, I mean pretty much. I mean there were just two lawyers in london at the time. I'm talking about 2000, 2001, now, wow. So there were two lawyers in in london and we knew each other very well because we'd obviously have lunch and coffees with each other, compare notes and try to find out. He would sometimes try to poach me and I would sometimes try to poach him. We had that friendly rivalry of law firms. But then all the other law firms kind of cottoned on and realized this was an area of interest and one by one they all kind of got involved.
Speaker 2:So this was before Islamic Bank of Britain, now Orion Gatehouse, A long time before then, and you helped shepherd in some of these banks Islamic Bank of Britain, Well before then we were doing transactions where we had problems doing those transactions.
Speaker 1:So my very first property financing. So I was in a team that did shipping finance and aircraft finance. So I trained basically helping buy planes and ships and with asset finance you can do real estate. So if you can do one asset you can do real estate. So if you can do one asset you can kind of do another. And so my first ever financing was for a hotel in I think it was on cromwell road and it's for a q80 investor.
Speaker 1:And the first time that I realized there's a problem here was when we used murabaha, which is a cost plus contract where you buy the property for the sale price and then you sell it for a markup. So it's like a fixed term financing basically, and it's the most classical kind of trade contract that you can sort of come up with. But the issue that we saw was and our tax team was involved the issue that I saw was well, you're buying the property for, let's say, £100. I know you can't buy a property for £100, but just to give you a round number and you're selling it for 110 pounds. That's actually two sales and so that's two times of stamp duty. So you have to pay stamp duty when the bank buys the property for 100 pounds and then stamp duty on 110 pounds when the property is sold under the marabaha to the customer the so-called borrower in conventional finance. And so we had some techniques where we could avoid having to pay stamp duty twice, but you would have to pay stamp duty on the 110 rather than the actual purchase price. So that's your double stamp duty issue that we saw and I thought that's interesting. We've got a QAT customer who doesn't mind paying more stamp duty and knows that actually there's a tax problem in the UK, but they still want to structure it in compliance with their faith.
Speaker 1:And so that was the first time I saw things not quite right and I was doing sort of aircraft deals. I did an aircraft fund, a shipping transaction in those early days. We did an LNG carrier for I think it was HSBC and a Brunei company that wanted to buy one. But these were huge commercial deals, these are huge commercial transactions and my memory of that time was I was probably doing 20% Islamic finance in that first day and the balance was leasing. So back in those days there was a lot of leasing work that was going on, so leasing out containers, ships and that kind of thing.
Speaker 1:Within that first year that just turned on its head. So the two of us got together, my partner and I got together, and within that first year which is probably 2001, maybe two it just turned on its head and we were doing 80% Islamic and 20% conventional. What was the change? It was just going out there and the work came to us. I mean, there were only two lawyers in town and so you know, when we went out and started talking to clients and you didn't need much to be busy, you went and spoke to them and you know, if you're talking about something that their clients are looking for, then you just get busy. And so it wasn't an oversaturated market and there was a lot of foreign investments into the UK at that time yeah.
Speaker 1:And so we had. I think at the time we had UBK, which was United Bank of Kuwait, later became Ahli United Bank, which is now Kuwait Finance House has just recently been acquired, and so they were the only provider of an Islamic mortgage product, bearing in mind the tax problem that I mentioned.
Speaker 2:Yeah, Okay, and during this process, as a young man, you probably were looking at buying your own property At the back of your mind. Were you still thinking there's still a big retail problem to be solved here?
Speaker 1:I think at the time I was not. I was probably in commercial law mode where you're kind of doing your day job and back then you'd be working very long hours, so often not getting home until 9, 10 o'clock. We had a policy that if you finish work after 9, you could take a taxi, so I would invariably take a taxi home and at the time it feels great.
Speaker 1:But I missed my eldest daughter. I remember once not seeing her for three days because I was coming home and sleeping in office accommodation kind of thing because the deals were too crazy. But no, I don't think that that was relevant. I think it was just being out there talking to clients about Islamic finance. I think where it really changed for me was when I discovered that there was this thing called the Bank of England Committee on Islamic Finance.
Speaker 1:And you know, again, one thing that I'd say to your younger viewers who are looking at you know, islamic finance or law is read around the subject matter, you know, be curious. Again, it comes back to that curiosity that we've mentioned two or three times so far. You've got to really understand the industry that you want to be a part of and you've got to network. You've got to be involved. I mean, I love it when I get LinkedIn messages from students who just want to have an hour chat to talk about. You're going to get an influx of messages now from students who just want to have an hour chat to talk about.
Speaker 2:You're going to get an influx of messages now Well, I've got a good PA who will filter it.
Speaker 1:But I tend to give time to students who want to talk about Islamic finance or law. It's important You've got to give something back. But I think it was really when I was on the committee that things started to change, because I kind of Again it was a bit strange because it comes back to me writing those letters I ended up writing a letter to the chairman of Barclays. He used to be the CEO and then he became the chairman of Barclays a chap called Andrew Buxton, and that's because I discovered that there was this thing called the Bank of England Committee on Islamic Finance. And so I'm connecting the dots. I'm in the industry. I'm now talking to my clients. So I'm connecting the dots. I'm in the industry, I'm now talking to my clients, and my clients I think it was HSBC told me. Oh, by the way, we're involved on this committee because we're looking to make changes to the UK landscape. It was either them or UBS, I can't remember which one.
Speaker 1:Now Memory's fading a little bit, but I ended up writing to this chap, a very senior banker. You know you don't write to a chairman of a bank and expect a response. But I got a response and at the time there were four people on this committee and there were bankers and one senior banker and this had been set up by Sir Eddie George, who was the governor of the Bank of England, and he had been requested by Gordon Brown, who was the chancellor, to set this up. And you've heard the story about the governor of the Bank of England at the time meeting his neighbor and his neighbor, basically you know, going around being good neighborly said to him look, I can't buy this house because I can't take a mortgage. And you know, the governor basically was tasked with trying to fix it and he fixed it. I mean, it's a longer story, we don't have time to go through the detail, but he then formed this, this, this committee.
Speaker 2:And I remember, I discovered it, his neighbor made made dua specifically, specifically that sir eddie was would actually be successful.
Speaker 1:Well, I think he said, I mean he's not here so we can't ask him the questions, but I remember interacting with him and him telling the story sort of personally. Um, you know, he, he said, look, I can't do anything because I'm not the governor. Yeah, and then that's where the neighbor made the dua said I make because I'm not the governor.
Speaker 1:And then that's where the neighbour made the dua, said I make dua that you become the governor. So, qadar Allah, he became the governor and he felt that he had to do it. And then the other thing that was interesting about the time is community groups were lobbying the government. So it wasn't just the governor of the Bank of England, but it was community groups who were lobbying the government. So this is the Labour government of the time and saying you've got to help the muslims. So these two came together and that's a really important continuous message. I know that we've got different um stages of that happening at the moment and different levels of success of that happening at the moment, but that pressure from grassroots was how we really got the politicians on side, and I'm sure we'll talk about that a bit later.
Speaker 1:But the two came together and, just to conclude the story, I discovered that they didn't have a lawyer and I discovered that they didn't have any community groups. So through my network I actually brought MCB on board, who was Iqbal Asaria, who is a very senior member of the Islamic finance community, but back then he was, I think, the head of the business committee, if I remember correctly. And then we had another institute which was the IIBI, which is the Institute of Islamic Banking and Insurance, and so those were the two think tanks. Basically, maybe MCB was not a think tank, it was more of a representative body. And I said to them both well, we've got this thing that I've discovered. Uh, why don't we go to them and say you're missing the legal brain and you're missing the community aspect, and let's go and see if we can get co-opted onto this committee?
Speaker 1:okay, so suddenly, this committee of four became a committee of seven, with the three of us on there, it's another pattern where you're almost creating roles for yourself.
Speaker 1:Yeah, I mean it's it's again just something that sort of happened. But yeah, you're right, it was something that we created. But again it comes back to if you're enthusiastic about something, be difficult, be a pain in someone's neck, and if you've got something interesting to say. You know, the chairman of barclays bank thought this was interesting and we went on to this committee and it was fun. I, I mean, I was the only lawyer on this committee.
Speaker 2:I was probably Were you a partner at the time.
Speaker 1:No, no, I'm like two or three years qualified. So this is before Islamic Bank of Britain. This is 2003, two and three, and essentially I'm rubbing shoulders with these senior bankers. Yeah, and we're exploring the changes that are needed in UK law and regulation and we're doing it one by one.
Speaker 2:Thank that are needed in UK law and regulation, and we're doing it one by one 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. Now back to the podcast. So, through that committee, is that what led to the first Sharia savings accounts being issued by Islamic banks HSBC, amana forming in the UK?
Speaker 1:What it led to was an enabling environment, okay, so we kind of fixed a few different problems, the double stamp duty issue being one First one. And then the other big one was if you are going to have a bank set up in the UK, how is that going to be regulated In markets like Malaysia? There's a rulebook for conventional banks and there's a rulebook for Islamic banks, because you recognise that one is lending and the other one is doing something else. It's trading, dealing with goods and services. We didn't have that in the UK services, we didn't have that in the UK.
Speaker 1:And so the regulator, fsa at the time, and the Bank of England had to really learn how to regulate an Islamic bank, because, on the one hand, they were making all these changes to law, and that was great. First piece of legislation came in 2003. But on the back of that, middle East investors started saying, okay, well, we're now very comfortable in maybe exploring setting up a bank there, and so we had in the wings almost the application from Islamic Bank of Britain. And then that crossed my desk, probably 2003, as an MOU, when there were two or three people basically running it the CEO or the person that became the CEO and this was called Islamic House of Britain, because you can't have bank in your name until you are a bank, so we had Islamic House of Britain and for a long time I thought why is it called Islamic House of Britain?
Speaker 1:I didn't connect the dots until much later and so they were on, I think, old Broad Street their offices initially they were not in Birmingham and I was going into the offices and literally in a room probably the size of this room, there was one desk and that would be where I'd sit with the CEO and we'd be mapping out the products that the bank needs. And look, I'm two or three years qualified. I'm not with my partner. This is me doing it with this guy and putting together an RFP response and saying, well, I think you need these products. Four or four banking license. Well, we didn't do the banking license. Another firm did the banking license. We did the products. So, every product that the bank needed to offer, whether it's setting up its treasury, its terms and conditions for a relationship or your savings account or your home financing those are the things that we did and, one by one, we created those products. What was the?
Speaker 2:vibe at the time, because that must have been incredible. You're all young people. Still young, still young, you are young you were younger back then, doing something that had never been done before in the UK or the Western world. Do you understand what you were doing? It was great.
Speaker 1:It was great. I mean, mean, my partners didn't know what they were doing. Okay, we, we did have. We had no precedence. You know, the thing that lawyers these days and I suppose accountants also benefit from this is, if you're doing a transaction you know those of us that are transactional lawyers you kind of have your shelf here, you pull off, pull off your last transaction that looks sort of sort of similar and you've got a framework to go by to document or to work on the new transaction. Back then there was nothing, so we were kind of faced with okay, when was the last time that anyone drafted terms and conditions for a bank?
Speaker 2:How often is a bank set up Over a century?
Speaker 1:I mean, think about it.
Speaker 1:So I remember I was actually going on holiday to Pakistan and I remember going in. I can still remember walking down Liverpool Street no, it was Bishop's Gate, sorry and we had Abbey National, which is now Santander, we had a Halifax, we had probably a Barclays, and I went into all of these branches and I took their terms and conditions off their shelf and I had set myself a task of, on this flight going to Pakistan, I'm going to draft the terms and conditions for Islamic Bank of Britain. So it was a nine-hour flight. I had spare batteries with me in my backpack because it was, you know, the laptops were massive back then and the batteries were bricks and I honestly do not remember that flight. I remember being served food but it started and I was juggling all these different brochures and things, thinking, okay, how do I create this new framework document for this bank, bearing in mind I'm like three years qualified? Yeah, this is a bit odd. And I ended up drafting the terms and conditions which, to this day, you'll see if you open the account.
Speaker 2:Incredible, wow, and that effectively was the first Islamic bank in the UK. Yeah, hsbc, amana followed and then Gatehouse Bank and all the other Islamic banks.
Speaker 1:Yeah, they all followed, one by one. Yeah, what then?
Speaker 2:Gatehouse Bank and all the others. Yeah, Bill Fuller, one by one. What was the community response like to these banks?
Speaker 1:So it's a very different environment to now. You know I call this version one. We're now kind of hopefully version two and beyond. But this was the golden era. You know this is from a position of standing still and the community at large thinking, okay, we don't have anything. We now have something. So there was a tremendous amount of excitement about the opportunity that Islamic finance will bring. But at the time and again, with the benefit of hindsight, you look back at that time and ask yourself what went wrong, because things haven't gone right in terms of banking and Islamic banking, particularly in the UK. And one of the fundamental I think there's two reasons.
Speaker 1:One of the fundamentals that we often hear people talking about now, or probably even at the time this existed, was a study by Loughborough University who had done a survey on who would be the customers of an Islamic banking system and it fell into three categories. And it's not rocket science. You're diehard customers who are going to be looking for a faith-based solution. They'll rent the property and you can recognize some of this now, I'm sure, but this is going back 25 years ago. This study, your customer that doesn't care.
Speaker 1:Second category so they're just looking at a financial product. They don't care if it's interest-based or otherwise. They may be Muslim, but that's fine, they're just looking for a good product. They're just looking for a good product. So you've got the two categories. And then you've got your third category, which is in the survey. If there was something available, they would incline towards the Islamic product. And so that's even to this day. If you go with a commercial term sheet to a customer and say I've got an islamic product or conventional product and here's my terms if you're an investor in a borrower in saudi or the middle east, they will incline towards the islamic product if it's available. That's kind of how we do.
Speaker 1:If it's available and the terms aren't markedly, yeah against them yeah or not, in their favor and I think the the issue that we had was it was a great time in the UK and it was exciting and all of that.
Speaker 1:I think we didn't focus on this study and we didn't focus on who really is the user of this bank, and I think this is probably a flaw in terms of feasibility and something that you know. If you've got young entrepreneurs, they really need to focus on doing the business plan and checking the use of the product or the use of the institution before they do anything else, and they really need to get under the skin of that. What would you have done differently had you focused on that study? So I think one of the things that again with the benefit of hindsight is we tend to. We tended to I don't think it's the case now but we put ourselves into a silo, and I think this is not just within Islamic finance, but many other aspects of our interaction with one another. From a Dini perspective, from interacting with other communities perspective, we had Islamic in the name.
Speaker 2:Islamic Bank of Britain.
Speaker 1:So you're immediately saying to the world at large around you, rather than saying the entire UK is my customer base and it still is, but you're making your product very niche. And so when you couple that with the fact two facts one is that, as the study revealed, there's a limited number of people that are going to come to you. So either those diehard customers or, if you have a compelling offering, the people that are sitting on the fence, that third category they'll pivot towards you. You're going to have a struggle. And I think that third category was really the lion's share of the market at the time because there was a lack of education.
Speaker 1:Our masajid were not talking about riba. Now there's a lot of conversations in our masajid, in the different khutbahs that we're hearing about Islamic finance, the need to avoid riba. In my parents' time that wasn't something that would be a talk in your masjid. So the education has stepped up. So that third category was by far the largest. So if you're in that third category and you're going to a bank asking for home financing and finding that it's 1% or 2% more than your high street bank, you're not going to pivot towards it and that was the issue. It's the expense of the product, which was a necessity because if you're operating a small bank within a global banking industry, it's very difficult for you, as a bank, to make money out of it. Do you think that's?
Speaker 2:ultimately what it was. It was the cost.
Speaker 1:Yeah.
Speaker 2:So, beyond anything else, whether it was called Islamic or not, you weren't going to be able to capture the non-muslims who were just looking for a good product because this was more expensive. The muslims who would be more inclined towards it would be repelled by something that was higher cost, and then it was just the diehards you were left with, which are just a couple percent well, I think I think it was a few different reasons, but I think branding is definitely one of them, and making your brand again a lesson for us.
Speaker 1:Now to niche, um, not understanding the size of your market and thinking that actually all muslims will potentially be your customers. And then, thirdly, when you do get customers in the door, um, you can't really explain to them why your cost is different. I mean, we understand it because we're in the banking industry. We understand that if you have a small balance sheet and you have a single branch or a single bank, its borrowing costs are going to be more. It has to work within finance, so the reason it's charging you one or two percent more is it's costing itself one or two percent more.
Speaker 1:It can't operate the same efficiencies and economies of scale as a HSBC or Halifax in the day or Barclays. But you can't explain that to lay people.
Speaker 2:They're just coming in to get a product and then the common assertion these days is that it's all interest anyway, or interest by another name which, as a lawyer, is that difficult to hear, given that you've worked hard on making these transactions look very different behind the scenes?
Speaker 1:So I mean, there is a lot of that, and you hear a lot about the fractional reserve banking system as also one of the criticisms. Look, I think this then comes back to our scholars and those respected ulama who, you know, 30 plus years ago, when the first Islamic banks were being established, had to ask themselves some very difficult questions, which is do we permit this thing called Islamic banking to become an industry, knowing that it's going to be on the rails of conventional banking and, in doing that, recognize that it's the front-end product documentation and relationship that we're taking care of? Yeah, or do we say no? Until the whole thing is sorted out, we're going to stay in the sidelines and say you can't do anything that could take a generation and that could take forever.
Speaker 1:So, you know, it's very easy to go back and say, with the benefit of hindsight, why are we in this industry?
Speaker 1:But they had a tough call to make, and may Allah reward them with the decisions that they made. We even learned that if you are a faqih and you are a jurist and you're making a decision and you're making the wrong decision, but you go through all the principles of asool and fiqh and everything that you should do and you still make it wrong, there's a double reward for you, you know. So we have to think about it in the context of what they saw 30 plus years ago and they called it. They said, well, we either, you know, say no, and that's going to be something that holds us back as communities, or we say, okay, we can go to a halfway house, which is we work on the rails, which is the global banking system, and we improve the front-end experience so that the contract that a consumer enters into or a business enters into is a Sharia-compliant contract, and that's the decision they made and that's the industry that we're still into this day.
Speaker 2:So this point around profit versus interest. Where do you fall on that?
Speaker 1:What do you mean by profit versus interest? Where do you fall on that? What do you mean by profit versus interest?
Speaker 2:So if you go to a bank and you take out a savings account, typically at a conventional bank, you'll be getting a return which is clearly interest. If you do the same at an RAR or a gatehouse, you'll be being paid out what's called a profit. The criticism is often when people are having to pay that for a mortgage or a home financing product and they say, well, it seems like the same. It seems like the profit rate is determined by the base rate of the bank of england to some extent. So it's really interest, isn't it look?
Speaker 1:as you know, I'm an advocate for trying to um reset this and you can. You know that from nesta and the things that we're doing there, we'll.
Speaker 1:We'll come to that in a minute. But you can't call it interest, and I know that some people do say that profit is just interest by another name. You have to look at the fundamentals of that underlying contract and it's not a creditor-debtor relationship. So when you open a savings account and, by the way, that Mudaraba savings account I can remember drafting that at my kitchen table, so that's a memory that I'll have Again.
Speaker 1:Certain things happened around there which will make it something that will always be memorable, but it's a Mudarriba contract and so you are putting your excess liquidity as Rabul Mal into the bank as Mudarib. That's not a creditor-debtor relationship where you're giving a deposit on interest, you are investing your funds into the treasury of the bank for the bank to then undertake activity which is Sharia compliant, monitored by its own Sharia scholars. And we have to follow taqlid to an extent, because we're not going to be able to get into the ins and outs of how all of that works. We have to rely upon someone checking and doing all these things and the return that comes back to you is a Sharia compliant, mudarabah return. Now it's a separate question whether that's right to have the profit share in such a ratio, that you're mimicking the same rate on the high street, and that's a separate conversation.
Speaker 1:And I think that if we were to go back to true islamic financing principles, where you know we had perhaps more on the equity side of financing, where there's more of a recognition of wealth being spread amongst communities, then clearly that's the wrong thing to do. You shouldn't't be adjusting your Madaraba profit share to such an extent that actually you end up with the same APR or high street rate as an interest rate would be. I think what we've got as an opportunity as an industry, and the fintechs in particular, is to say well, how can I go back to grassroots and show the world at large, starting with my first customer being Muslims, that Islamic finance is about delivering a much more just equation between the entrepreneur and the manager of those funds? And that's where you say, well, I'm not just going to ask how cheap can I get this guy's money. I'm actually going to say I'm going to put this money to use, but let's find a way to spread that in a more just way amongst community.
Speaker 2:And is that the thoughts you've been having for a while, until you eventually met your co-founder, yunus, over at Nesta, and you thought, okay, this is a feeling that both of you had been feeling for a while, yunus, over in Islamic banking, you had left investment banking and gone back into law. You were a partner at the time at Norton Rose, but over in Dubai, and, as Eunice describes, I'll always remember at that Nesta dinner, a boring conversation between an accountant and a boring lawyer, as he put it, over a phone call whilst he was on a train, and together you guys had, almost separately, come up with the same model, which is now what Nestra is today.
Speaker 1:Yeah. So I'd been working with Eunice for about seven years before that conversation and I'd done probably about I don't know six or 700 million pounds worth of deals with him as my client. So we'd got to know each other really well and, as is the case, you know, when you're working quite late hours for a client you become friends and you know you kind of meet each other when you're in the same place and you know you chat. So you know we found ourselves in that space. I think it was the case of ideas coming together. Yes, I mean, I had probably got myself into a position where I'd put things into a business plan, so I had been jotting things down, being that I'm the lawyer, I'm thinking, ok, well, what is it that's missing? And I think what had frustrated me at that time, and this kind of was all leading up to that conversation, was a lack of product for myself. Again, the theme is what's in it for me? Selfish again, selfish Mohammed, like the home mortgage product when I was 16.
Speaker 1:So throughout your life you kind of struggle to find investment opportunities. Either go into a mutual fund if you have to have $250,000, you know, wholesale investment into a mutual fund. Now we can break it up. We've got other ways to get in, but back then you would only be able to get into a fund if you had a wholesale investment. Really, yeah, you couldn't get in if you had less than. I mean. You could go down to 100,000 euro, but that's not accessible to most of us. You know you can't do that.
Speaker 1:So you could go into equities, into a fund, if you wanted a proper manager to fund, to manage your money. You could set up a brokerage account and do it yourself. You could put money into the Alrayan Mudaraba account, which is still the only fixed income account that exists in the UK. But that was kind of it Gatehouse as well. That's good to hear that there's two. So those are the only options, and I'm kind of sitting there thinking, okay, well, I can't just save up with my friends and buy a buy to let property, because that's going to take me forever if that's the only way that I can get fixed income back. And so I was jotting down ideas as to how we could maybe use the skill set of what we do in our day jobs and create something which might then become an investment product.
Speaker 2:At that point, what were you doing with your own money? Were you using the services of Islamic banks in the Middle East?
Speaker 1:No, no, I was doing buy-to-let properties Really.
Speaker 2:Yeah, okay, just together with your friends, financing them yourself, yeah.
Speaker 1:Okay, without debt, so typically buying the property. So you know no more than a couple, two or three. You know effectively earning the revenue and you know the thing with that model is you can maybe pull out if you're in an established area, maybe 4% or 5% gross, but by the time you've it's certainly not tax efficient, by the time you've paid maintenance costs and everything else. You know you're dropping that down all the time, you know. And obviously there's a capital gain on the other side, hopefully if you're in the right place, but your fixed income return you can't retire off it you know it's a very small amount of passive income.
Speaker 1:So these were the things that were going through my mind and I jotted them down into a sort of makeshift business plan of ideas, and that's where Eunice and I started talking and came together.
Speaker 2:Yeah, Nesta, Today would you describe it as a platform that helps businesses to raise finances in a Sharia compliant way on the one side. On the other side, a way for the community to invest into Sharia compliant projects and sharia compliant returns.
Speaker 1:So it sounds like you've spoken to my co-founder because that's, exactly how he describes it.
Speaker 1:He says nesta has got two business. Uh, businesses is two different sides of the same coin. On one side and really the the, the financing out to commercial sme, is to power the second side of the business. Yeah, so on the one hand, nesta is a non-bank financial institution. We're a regulated FCA, regulated FI in the UK. Which is so important to have a regulatory badge because it gives consumers confidence that when they deal with you there's actually a financial policeman behind the scenes checking up on you on a regular basis. And when it comes to consumer confidence, that cannot be underestimated. So a lesson for anyone out there if you're looking at how to invest funds, I'd always try to find a regulated business to deal with because it just is safer. But on the one hand, we push out financing. So that's where the commercial SME element comes in and that's again part of the passion. I think that was the bit that Eunice brought into the equation. I'm the other side. He brought in the passion. I think that was the bit that Eunice brought into the equation. I'm the other side. He brought in the passion because, as a real estate banker, he was providing financing to customers. So he saw the gap in the market where, after the global financial crisis, the segment which was 500,000 to two and a half to 5 million that was underbanked even in conventional finance. So he saw the opportunity to effectively support the backbone of the economy, which has always been the SME. So on the one side, it's about pushing money out the door in a Sharia compliant format. And then my side of the coin, the bit that I maybe brought in to the equation my selfish need to have a fixed income product was how do you then make that investment accessible by people of all types? So, whether you're a family office, a high net worth individual, an institution, or where the passion is the retail customer that might be just saying I've got a few thousand to put through an ISA, how do you make that available to them so that they are sharing the same quality of asset that institutions are getting on lending business, to use conventional speak and the regulated part you mentioned.
Speaker 2:That's so, so important for you guys, but you fought really hard took us 18 months 18 months to get the licensing for this, because a product like this had never really existed before. Yeah, what does that? That seems a little bit odd that no one had thought of this business model beforehand. What was so different about the license that you attained.
Speaker 1:Well, it was like setting up Islamic Bank of Britain. We were the first time that a Sharia-compliant business was doing it. That's the key thing, and to this day, I don't think anyone else has got this type of category license either. We're the only ones in town with this type of license.
Speaker 2:So the main difference is that you're not just collecting and distributing the money, you're doing it in a Sharia compliant way through a Madaraba.
Speaker 1:So we went through the sandbox, initially at the FCA, and we kind of said to them, outside of the actual application, if we came to you with this concept, how would this fit? And the team didn't know anything about Islamic finance, despite having set up banks. You know very large organizations and it's now the PRA that regulates banks rather than the FCA, so they don't talk to each other as regulators because of you know, segregation. So we had to explain to the FCA how Marabaha works, how IJARA works, and those concepts then needed to be explored by the legal team. We had to think about how do they fit into the regulatory environment, needed to be explored by the legal team. We had to think about how do they fit into the regulatory environment. And could you have a business that is undertaking fixed income financing solutions falling within the regulations as a credit provider?
Speaker 2:Without being a bank, without being a bank.
Speaker 1:And bearing in mind this was under a category of financial institution, a non-bank financial institution category. So, yeah, it took 18 months, but we kind of knew that we didn't want to rush. You know, we were both, you know, I guess a bit more older as founders, so we kind of had had the benefit of some experience under our belt, for sure, and we took the decision that we would uh, wait and do it properly.
Speaker 2:We didn't want to go any other route other than get the badge because a lot of people, a lot of founders, would have found a different route or thought maybe we could go down a pointed representative route, for example, yeah, yeah, an ar route, or well, you, you guys couldn't really do that because it wouldn't have been Sharia compliant would it?
Speaker 1:Well, I'm not sure how they would work. I mean, you have to work on someone else's rails and obviously that's an analysis to see how that works. But it was interesting for us because at the same time as going to the FCA, we were actually evaluating what the banking software would look like, so the IT infrastructure and at the same time as making the decision to go for an FCA license, we had maybe two different solutions on our shortlist and neither of them were Sharia compliant platforms. And so, in conjunction with that decision to go to the FCA, we said, okay, if we're going to do this, let's build the platform from scratch so our tech stack.
Speaker 1:we've got our own developer team and the tech stack is built from literally a blank sheet of paper. So we sat down with our tech team and we said, okay, well, this is what we want to do. How do we create this from the ground up so that it's robust, first of all, and scalable, because we wanted to build it in a way that could have hundreds of thousands of users at any given point in time, wherever they are in the world. But critically was our own infrastructure, so we didn't have to go to anyone else if we wanted to make changes. And that was very important for us because down the road, we did see the day where third party banks would say okay, we'd like to white label your product. So, if you can, if you can give them an API into your platform and integrate them and their customers have access to the same asset class. We wanted that, but we thought that six years before. We're now at that stage. Now we're talking to digital banks.
Speaker 2:So much more forethought going into your planning than it did at Kestrel because we almost did it by accident.
Speaker 1:Oh really.
Speaker 2:We did build our own rails, we built everything ourselves, and then banks did end up coming to us asking can we make use of your APIs? But it was never part of the original plan, right? So I hope that it worked out that way, but you guys were thinking about it six years in advance.
Speaker 1:And now you're speaking with digital banks, are you? Well, we're back to when I was that sort of investment banker, or trying to be that investment banker, because when I was at the Bahraini Bank, one of the projects was we needed to procure a core banking system, so we had Ian White helping us evaluate, but I think we were looking at three different solutions and I was part of the selection team looking at spending millions.
Speaker 1:You know this was a big system and prior to this, I'd helped Islamic Bank of Britain buy their core banking system. Do you think they still use it today? I don't know if they use it today or not, because I've lost touch with them in terms of the back office functions, but we were helping them, and all of that because we had to integrate our products into their system. So I had this. I was this lawyer, but I was doing some weird stuff with IT. So when it came to developing our own tech stack, I was thinking well, I know what's going to happen down the road. You know when you scale, other people are going to want your product and they're not going to want to lose their customer. They're going to want to give their customer their own branding experience. So let's try to build that from now to make it available.
Speaker 2:So right now as a customer. If I wanted to come in and invest into a Sharia compliant project, I would log into Nesta, sign myself off as a high net worth, individual or sophisticated, or that I understand the risks that are involved, yeah, and then I could pick between a number of buy to let projects um, maybe it's like a dentistry that's renovating or you know something else of that nature and I can pick and choose each individual project to invest into there and I would see a return that would be generated over like a three to five year period. Is that correct?
Speaker 1:Partly partly so. The concept is correct. So as a customer, you are empowered to build your own fixed income portfolio. That is absolutely correct. So whether you're going to the Nesta Invest app or you're going through the platform, you do your onboarding. Our customers are 1,000 minimum, sort of in multiples of thousands effectively. So for us the definition isn't high net worth, individual, it's do you pass an FCA appropriateness test and then obviously there's a know your customer aspect to it. So you're on board and you have access to the ecosystem.
Speaker 1:The bit that's different is we don't do just do buy to let. In fact, what we do are three products. One is a bridge financing solution, which is up to 12 months, and then we have a development financing product, which is I always describe it as a lower d development financing, more like a refurbishment financing product, which is up to 24 months, okay, and then we have the buy to let, which is up to 36 months, which? And then we have the buy to let which is up to 36 months, which is the one that is I would call a specialist in conventional finance. We would call it specialist lending. So it's kind of your commercial property that has got a few units maybe they're not all rented out. There's maybe a lease coming to an end and you need to re-gear your lease or take it. It's more of a specialist product. It's not your high street buy-to-let product and all of our products are between 12 to 36 months, so very short term.
Speaker 1:So as a customer let's say you've got 5,000 pounds you want to put that through your ISA. So you set your ISA up with Nesta, you fund your e-wallet and a deal pops up. You get a notification which says there's a deal which is paying, let's say, 8%, and it's a 12-month bridge. You say, well, that's quite nice. I like the location of that, I like what the developer's going to be doing with this particular asset. I'll take £1,000 off that. So you just simply click on that deal and you type £1,000 in and you're in that deal now for £1,000.
Speaker 2:And you do that to build up your portfolio. So you're really empowering the investor to build up their own. That's the idea, fixed income portfolio. Two questions though do you guys want to get to a point where someone could just say like, look, I've got 50 000 pounds here, you guys take it and you guys manage it as you see fit, and I'm happy with this kind of range of return that you guys can give me, but I don't want to have to go in and pick each individual project myself and assess and do the research. Is that the direction you guys are headed?
Speaker 1:in yeah, so we have a product which is a Wakala product, where that is offered to family offices Okay, and that's a family office facing product where someone is putting a few million in and they don't want to make that decision Okay, and so that's more for liquidity kind of arrangement. So that's there already. And, interestingly, one of the recent hires that nesta has made is a new head of asset management who is a veteran from deloitte, your old shop. Yeah, was there for about 30 years, set up its m&a advisory business in saudi arabia okay, and looked after his islamic finance business in the middle, and so he's recently joined us and his role is to try and build all of these additional products that we're talking about. And the exciting one that we're looking at actually is bringing IJARA in the next few months as well, which will be our second product sitting side Murabaha Okay, so we'll have Murabaha. We've got Murabaha already. We got wakala for family offices, for funding line arrangements, and then we've got ijara coming online.
Speaker 2:And does this address the imbalance that we kind of mentioned at the beginning of the podcast, where you said a lot of Islamic finance transactions are heavily skewed towards debt as opposed to equity? Is that the direction you're heading in?
Speaker 1:So that's an interesting question in itself. But I think the fundamentals behind that question don't change with us. We are in the fixed income space. So, coming back to those earlier remarks that I made, you've got equity risk transactions where you might be doing a musharaka or a mudaraba or a joint venture or private equity. That's obviously half of the industry. The other half of the industry is your financing, your debt-based transactions. That's where we play. That's our authorization with the FCA that we work in.
Speaker 1:So all of our transactions are still fixed income, albeit secured fixed income, but around a debt financing structure. So even EJARA, when that comes through, will be very much in that space as being a fixed income solution. It's not going to be a transaction where you suddenly find the rental benchmarked off you know fair market rent, for example. That wouldn't work from a regulatory point of view and I'm sure you know from some of the others in town. You then fall foul of some of the SDLT issues when you start moving away from the way in which the alternative finance rules work in the UK. So we're going to work within the framework that we have. Sure, I mean, you were there last week at our Roundtable Roundtable, yes, and you saw that in the last budget, some of the work that we've done on the UK's Islamic Finance Working Group actually found its way into the budget. So there is more happening, but it's all happening within that debt framework.
Speaker 2:It's not happening within the equity framework, and I wanted to talk to you about that as well, because you said something very interesting at that roundtable where you thought that the way in which grassroots communities and us as an industry are engaging with politics right now, we've got it all wrong.
Speaker 1:Yeah.
Speaker 2:And that we're coming at it from an inclusivity point of view, that Muslims aren't able to access this and, with the current temperature and feeling around Muslims and Islam in the Western world, the idea that putting Islamic in front of a financial product appears insular and Muslims just trying to become even more separate from the rest of society. You think we should be going down a different path?
Speaker 1:I've been talking to political parties for some time, trying to engage with them, to do it slightly differently, and certain MPs who are in those political parties. In fact I've got a call later today with one of them to talk about this. Look again, I'm not in the UK, I sit outside of the UK and I'm talking from a position of a little bit of experience. I won't say that I've got a lot of experience, but I look into the UK these days.
Speaker 2:I would say, you've probably got more experience than most people.
Speaker 1:I look into the UK with the benefit of seeing how different countries have approached these topics, and so my response may seem counterintuitive, but I take the view and, look, I'm working with governments, trying to get governments to Islamic finance. I'm working with banks around the world. I'm working with, obviously, customers who are taking Islamic finance. My range of interaction is a bit different to your average person. No-transcript that people will hear is one of economy and growth, and so I I actually wrote a position paper where I put forward an argument which was in a post-Brexit Britain, how do we get the UK to get the benefit of foreign direct investment from different parts of the world and to treat the Muslim world as a block in terms of that policy? And so I think, if you talk the language of finance, it breaks down barriers. Now it it has an impact in terms of DAWA, clearly. But my strategy had been let's use our arguments to bring money into the UK as our main argument and piggyback off that the work that's required in the domestic market. You still need to do it. I'm not saying ignore it, and, as you know from that working party group, I'm far from that. I've been working, you know, for Nesta. We've had two changes of law just being used by Nesta that comes from lobbying HMT and HMRC, one in 2022 and one in 2023. So we're not going to give up on that. But if you're looking for real seismic change, I think you really need to be talking the language of governments.
Speaker 1:And so my thoughts were how do we support big UK businesses? So, for example, airbus consortia between France, germany and the UK building aircraft how do we support that company? How do we support Bombardier on rolling stock and so many other businesses? Well, one way that you could do that is to recognise that those products are being sold into the Muslim world. You know you need light railways in the whole of the Middle East. At the moment they're building their rail infrastructure. So if you could support those businesses by looking at FDI and looking at those transactions through the lens of export finance, then that's a way that you bring foreign money into the UK, supporting UK businesses.
Speaker 1:And suddenly you're having a different conversation with the government. So you're saying to the government we can unlock billions of dollars of inward investment into things that we produce in the UK that are supported by UK export finance. And the way that you do that is to acknowledge that this is going into the Muslim world and therefore those transactions need to be structured in a Sharia-compliant way. By the way, this is how we would do it, and so you end up having a conversation where they're thinking okay, this is supporting our economy, this is UK PLC, this is supporting an industry that we support, and it's supporting exports out of the UK into a market that we're very comfortable selling into. And this comes on the back of you know, sitting down with UK Export Finance and other players like this who do engage in Islamic finance. They're ready to do it.
Speaker 2:So, in a nutshell focus on the foreign direct investment.
Speaker 1:Yeah.
Speaker 2:Show how the Muslim world has been doing this and there's a big untapped opportunity in there. The benefit basically then trickles down to the Muslims here in the UK without it getting wrapped up in politics and getting figures certain billionaires from other parts of the world just starting to talk about how Islam is such and such and doing such and such in the Western world. It's just focused on the universal language of money.
Speaker 1:And look, that's one example. I mean the paper that I wrote at about half a dozen different examples of things that we could do to attract investment into the uk and to push that uk sort of uh you know, marketing in a post-brexit world uh out into into the middle east. And I honestly think you have to talk that language because that's the only language people understand and can people access that paper just publicly. Yeah, they can contact me.
Speaker 2:Okay, yeah, there you go, no problem at all. Okay, incredible, we are very close to time, actually, but it's been an amazing conversation. I wanted to touch on just two more things. Sure, sure, you're now a martial arts career scholar. We talked about this before. But since you've become that scholar and you've studied it over the last 10 years, how has it elevated your practice of law? Did you feel like there was a delta or a gap that you've now bridged by now taking on the scholar side, as opposed to just being the Islamic lawyer that you were?
Speaker 1:Yeah, again, it's something that I've reflected on over the last two or three weeks, because it was actually Mufti Faraz Adam who posted that he attended my graduation. That's how we all heard.
Speaker 2:And that's how you heard Adam who posted that he attended my graduation.
Speaker 1:That's how we all heard and that's how you heard. Otherwise, I had no intention of posting anything about it and I've kind of got into this snowballing effect where I had to react. I was actually sitting in a lane when that post came out on LinkedIn.
Speaker 1:And I thought I'm sitting there with my kids having Monday on the floor you know, having a meal and suddenly this pops up on LinkedIn, I'm thinking, do I say to Mufti Faraz to retract it or do I let it go? And I had to push out my own comms. And the trouble with pushing out my own comms at that point was it gets picked up by Norton Rose Fulbright, so their whole PR machine then wants to push out comms. So it kind of has snowballed a little bit. But I think reflecting on all of that has been something that I've had to do because, you know, I haven't even been. I graduated on the 10th of January, you know, I'm not even a month into it.
Speaker 1:But when I look back over the last two or three years, yeah, I think there has been something different. And I think about the work that I've been doing with clients who are, you know, very large and I won't say their names, but very large. You know, us banks, asset managers, private credit funds, people who are not your traditional names that you'd associate with Islamic finance, are coming into Islamic finance, and these are multiples of billions of dollars in transaction flow that we're talking about. And what I think I reflect on is those have come to me to work on them. And when I look at what I've done on those transactions and some of them about to be launched as sort of world firsts as well is to create something that isn't just cookie cutter.
Speaker 1:And what I've done in each of those transactions that I'm referring to at least two or three that I can point to just in the last two years is to take principles of fiqh and to apply them slightly differently to a problem that they've put in front of me.
Speaker 1:So with one client, we're unlocking a particular roadblock in trade finance. So within trade finance and within one of the asul within Islamic finance, is that you cannot have selling of debts, which is known as bay' al-dayn, which is the selling of a debt. It's something that's prohibited within fiqh unless you're selling your debt at par value, which no one wants to do in finance, because you're trying to discount typically and so that product doesn't exist within trade finance where, if you imagine, if you're a seller of goods and to make your cash flow work within conventional finance, you issue an invoice for $100 million, you want to get 98 maybe back immediately to pay your bills, you're happy to sell that to a forfeiting house or discounting house for 98, and then they will recover the 100 in 30 days or 60 days or 90 days.
Speaker 1:That's discounting that product by its core, is not permissible, because you are selling a receivable at a debt you know that's beya dane is selling, selling debts, but the benefit in what's going on is moving cash around. So can you get to that same end position without selling debt? And people have tried to do that synthetically using commodity marabaha. But I've come up with a solution with this particular us bank, where we've created a completely new securitization platform for them where they can get access to the same economics but without selling a debt. And so it's those kinds of things that have leaned on the sort of more the fiqhi side of things and, thinking more laterally, asking okay, well, what is it that is said about this contract of Wakala or this contract of Mudaraba? How can I apply it in this way to this situation?
Speaker 1:That's, I think, coming out more and more, and I'm seeing that happening increasingly, where, particularly out of the US, us clients are coming to me and saying I've got this asset class and I want to do this. How can I do it? And rather than saying to them, this is what we typically saying I've got this asset class and I want to do this, how can I do it? And rather than saying to them, this is what we typically do, I'm going back to the drawing board and saying well, if you're really serious about doing this properly, then let's sit down and have a conversation around how we can use proper principles rather than just mimicking conventional finance.
Speaker 2:These US institutions? Are they just looking to take advantage of money from the muslim world or are they muslim-based business?
Speaker 1:no, not muslim-based at all. Okay, no, well, so I'm doing the very first sharia compliant aviation fund at the moment, for a very large waste. My second one. I did the first one in the early 2000s but for one of the us uh fund managers who is sitting on, you know, billions of dollars, dollars in terms of private credit, and there's another large US bank and many, many organizations like that coming out of the US who are just interested in the liquidity and the alternative assets that come to the least it goes back to your white paper.
Speaker 2:just foreign direct investment, that's again.
Speaker 1:I call in the experiences you can break down barriers and the common language that everyone understands is finance.
Speaker 2:Sure, sure, sure, sure, okay, incredible, fantastic at the. We are over time. But I'm just just going to ask this this last point what advice would you give to a young lawyer or a young person looking to enter this industry of islamic finance? What about whether it's as a lawyer or an entrepreneur? What do we need to see more of?
Speaker 1:yeah, so look, that's a very interesting question and, um, as I alluded to earlier, uh, I think it's. It's important for us to take the time out to speak to our youngsters around things like this, whether on a one-to-one basis or to have group sessions. You know, whatever it may be, it's important to help our youngsters navigate this very complicated world that we live in. One of the common questions that I'm asked is very much this question and I think the stock answer that I would give in response to that is find a passion. You know, if you have spent time reading around the subject, you believe in something, you're passionate about something. At a personal level, you're finding that's tough, you know it's not easy. But you then start to stand out of the crowd and, as an employer, you know I'm interviewing. I mean, I don't do first interviews anymore. I'm normally brought in at the end as the person to interview, normally brought in at the end as the person to interview. Well, we normally have a partner panel, but as a managing partner, I kind of get rolled out at the end to make sure that the junior partners have selected the right member of staff and not done anything. That's a bit odd. So I come in at the end now to just sort of rubber stamp the final sort of offer that goes out. But it's the same message that I give even my junior partners when they're interviewing.
Speaker 1:When you interview someone, make sure that it's not just a cog in the wheel. You've got to look at someone that really is interested in the subject matter. So, if you're looking at law as an example, why are you joining a law firm? It's very important you know the law firm that you've applied to. Is it just one of 10 applications, which is generic? Or are you applying to that law firm because you've heard that it's great in fintech? Or you've heard that it's great in you know, blockchain technologies? Or you know it's doing the next thing in crypto, which is hashgraph? You know, whatever it may be that you're seeing that firm is into.
Speaker 1:How have you made that part of your life is into how have you made that part of your life? And so I think getting that passion and trying to discover that in yourself and then aligning it to your future employer helps you when it comes to career, because you're going into that job saying in that interview well, look at me, I've got the grades, I've got the experience, but actually what's really interesting about employing me is I know that you've done a deal here, or I know that you're exploring this particular aspect of finance or whatever it may be. This is why you should hire me, and I think that's the thing that's often missing. There's so many candidates that still come through who actually have not found what it is that's giving them the edge, incredible.
Speaker 2:Thank you. My very last question for you Is there room for another Islamic bank in the UK?
Speaker 1:My gut feeling is saying no.
Speaker 2:Okay, yeah, why.
Speaker 1:That's now two questions. Sorry, I think you've got to ask yourself what does a bank do? This is going to be a long answer.
Speaker 2:Okay, so you've got to ask yourself what does a bank do? This is going to be a long answer, so you've got to ask yourself Keep going until they kick us out.
Speaker 1:That's fine. It's just your audience that's going to get bored with us. You've got to ask yourself why do we need a bank? I think that's the fundamental question. So if you've got a bank that's offering you a current account, we've got operational needs. We need a check account. We've got operational needs. We need a checkbook. We don't need a checkbook, but you know what I mean. You've got to write a check sometimes and give a credit card and debit card and all these kinds of things to make payments. You've got operational needs with a bank account. We still write checks in the Middle East, which is why a checkbook comes out. You need a bank for that. But is the bank the best place for everything else? We think it is still so. We think that we have to park the cash in the bank for the savings. Um, but what other products do we need from a bank? Let me ask you that question a means of financing financing.
Speaker 2:Financing is the big one yeah, um, personal loans as well, to understand, um, a big issue that comes up these days are student loans. Yeah, that's obviously a government initiative, but, but from a Sharia perspective, we're still lacking. But, aside from spending, just a means of safely storing your wealth, a way of spending that wealth and then a means of trying to not perhaps live beyond your means but get some sort of loan towards large financing. That's really the main mechanism of a bank.
Speaker 1:So, bearing in mind the points that I made earlier, which is how the current islamic retail banking setup in the uk hasn't worked because, um, the market size is not big enough and when you have a small balance sheet, you can't deliver shareholder value and profit into the bank, my, my answer remains you can't have a islamic bank doing all of that. You could have a global bank doing that. Yes, if they're interested, but they're not interested. So the question is how do you deliver all of those products, which, I agree, are the needs? You deliver that through a different uh route.
Speaker 1:It doesn't have to be a bank. A bank carries with it lots of regulatory bank regulatory oversight. That has capital consequences. That has something called risk weighting. So whenever you provide a financing out to a customer, you have to set aside capital depending on the riskiness of the underlying transaction. Those all are barriers to entry for a bank to do islamic finance in the uk, because the cost is too high for you to operate that model and make money. That's why we failed so far. The size of the market is too small and the costs in the business and the banking model are too high. But you can offer all of those products as a non-bank financial institution, for sure. Again, why Nesta exists and others exist is to replicate those products without having all of those constraints around them, and delivering those same investment products or financial products is perfectly possible without a banking license.
Speaker 2:So, to sum it up, if someone were looking to do this right now as an entrepreneur selfishly, I'm just talking from my.
Speaker 1:Are you setting up a bank?
Speaker 2:the regulator's listening, no, but everyone's scared of the regulator from a branding perspective, make it for all as well, as you're immediately putting yourself into a box in this country by slapping islamic on the front. So that's number one. Number two trying, it's got to be right, hasn't it?
Speaker 1:I mean having having your products accessible by everyone, but not not mimicking conventional finance. So you want to attract yeah, you want to attract others by differentiating your product and saying to them i'm'm an Islamic bank, so you're getting more from me, or you're getting a different proposition. I'm more sustainable, I'm into ESG, or whatever it may be. You've got to show them why you're different. It's being mindful of that, for sure.
Speaker 2:I mean just thinking back to our earliest days of Kestrel, we marked ourselves ourselves as ethical as opposed to islamic, and we ended up in a weird situation where we kind of were not capturing our beachhead market, which were the muslims, and there were so many ethical plays at the time in the fintech space that we weren't really differentiating ourselves there. So we were kind of, in our effort to become everything to everyone, we were kind of becoming nothing to to nobody. But that could be an interesting space some people end up falling into.
Speaker 1:Yeah, I'm not convinced about the ethical argument. I think the way that you attract consumers is to say to them if you go to a financial institution that's conventional, they have a model which will pay you a rate of return and this is talking about savings specifically. Obviously it doesn't apply to other products. They will give you a return where they're trying to get your cash from you as cheaply as they can and they'll benchmark against each other. But if you come to an Islamic investment house or call it a bank, if you're true to Islamic finance principles, the starting point of your relationship with your customer is not to ask yourself a question how cheaply can I get this guy's cash? It's to say they're going to be a partner with me in investing in the community and we're going to do good things together and when those good things return profit, it means that they'll get a superior return. If you start having that conversation amongst ourselves, then the return potentially is going to be higher and that's your magnet, that's your dawah to bring other customers in.
Speaker 2:Incredible. Okay, there's a lot more I want to say, but I think we're going to have to end it there on time. But, sheikh Muhammad Parajah, thank you so much, just Muhammad is fine.
Speaker 1:Assalamu alaikum, wa alaikum assalam.
Speaker 2:Thank you for listening to the Muslim 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, as-salamu alaykum, and see you next time.