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The worries about Sharia are getting in the way of common sense regarding better opportunities in finance

When I wrote up the piece on the sensibility of the concepts contained in Sharia finance I knew there were undercurrents everywhere that would react to the words Sharia and Islamic which would blind folks to the concepts that exist underneath those apparently inflammatory words. 

Sense about sharia | Economist

Contrary to some hysterical talk, nobody seriously suggests the use of Islamic penalties in any democracy. Nor is there any reason to fear Islamic finance: a campus discussion about zero-coupon bonds does not mean usurers will be flogged in Harvard Yard. Nor can anybody object if two citizens settle a commercial dispute on Islamic lines, or any other principles to which both freely adhere. In the English-speaking world there is a custom of arbitration, which has created a space in which religion-based arbitration services are accepted, offering Jews, Christians and Muslims a simple, cheap (and from their point of view, divinely blessed) way to settle disputes.

This week we have also seen Germany come out with comments about racial integration.

The Economist piece refers to the work at Harvard since 1994 on Islamic Finance.  The matters of concern about Islam and Sharia law are for another day and another blog.  Here i do want to separate the embedded values about finance contained in Islamic Finance and how they can help us Westerners see new ways to approach finance that will help us.  It is clear the approaches we have been taking are not working and just look here which includes the latest fraudclosure scandal to see the results. 

The promise of the Sharia approach is to share risk between lender and borrower.  This concept allows for future changes in circumstance that is inevitable.  This is not the only new approach available, but there are no others being presented so here is the first.  Western economies are in bad shape with a new structural unemployment in existence that will ensure consumer deleveraging and lack of purchasing capability.  This is an important addition to the debate about the future of consumer finance.

We can keep doing it the old way and expect different results (the definition of insanity) or we can seek different models.

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Written by Colin Henderson

October 17, 2010 at 23:27

Posted in Uncategorized

Faith-based finance; intro to Islamic Sharia Finance | The Economist

The Economist has a few articles including this one that is an excellent primer on Islamic finance.

The whys and wherefores of Islamic finance

THE modern history of Islamic finance is often dated to the 1970s, with the launch of Islamic banks in Saudi Arabia and the United Arab Emirates. But its roots stretch back 14 centuries. Islamic finance rests on the application of Islamic law, or sharia, whose primary sources are the Koran and the sayings of the Prophet Muhammad. Sharia emphasises justice and partnership. In the world of finance that translates into a ban on speculation (or gharar) and on the charging of interest (riba). The idea of a lender levying a straight interest charge, regardless of how the underlying assets fare in an uncertain world, offends against these principles—though some Muslims dispute this, arguing that the literature in sharia covering business practices is small and that terms such as “usury” and “speculation” are open to interpretation.

Written by Colin Henderson

September 5, 2008 at 09:16

Posted in Islamic finance

RBC and BMO dabble in Sharia products

This has to be a harbinger of things to come. The story is worth clicking through to as it describes the sale of Aston Martin to a group that involved some Kuwaitis. The deal had to be structured to reflect the interest of the Kuwaitis and to conform to Islamic finance principles.

The story goes on to note RBC and BMO have hired experts, and plan to expand their offerrings in this area.

Canadian Banks & Insurance

In February, Royal Bank of Canada hired Zaher Barakat, who teaches Islamic banking and finance at Cass Business School in London, as head of financial products for the Middle East.

RBC is targeting a variety of clients in the region, including sovereign wealth funds, private banking arms of local banks and government pension funds. While the priority is to market the bank’s existing services and products into the Middle East, RBC is planning to enter the Islamic finance market, Mr. Barakat said. “We are working now on one fund to transform it to be sharia-compliant,” he said.

Bank of Montreal, through its London institutional management group Pyrford International, manages sharia-compliant products for Middle Eastern clients and is expanding the offering, said BMO spokesman Paul Gammal.

Walied Soliman, a Toronto-based lawyer at Ogilvy Renault, said
“Canadian banks haven’t been as quick either on raising money from the
Middle East for financial institutions in Canada or in terms of
offering up structured products or issuers for investment in the Middle

But that may be changing, he said. “Canada is very
quickly getting onto the radar of [sharia] investors and other issuers
looking to engage in M&A transactions with Canadian issuers, and as
a result we’re going to see growing interest in Canada and the bankers
will adapt to that and learn more about the sector as the demand grows.”

Written by Colin Henderson

July 11, 2008 at 00:52

Posted in Uncategorized

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Lloyds TSB launches Sharia business account

 We have touched on this opportunity before, and Oz has written extensively on the topic.  Well Lloyds have implemented across all their branches.

Thousands of Muslim businesses across Britain will be able to bank according to their faith from today, as Lloyds TSB launches the first high street Islamic business account in the country. The account, which complies with Islamic law (Shariah), is available across the bank’s 2,000 branches, and will be open to the UK’s estimated 100,000 Muslim firms.

Source: Finextra: Lloyds TSB launches Shariah business account


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Written by Colin Henderson

April 3, 2007 at 09:16

North American and European mobile banking has a lot to learn from Afghanistan people

This is an amazing piece of work on mobile money (Hat tip to Chris Skinner for this link), but it is more than that.  It speaks to intrinsic value and the creative ability of people to develop banking and money systems for themselves with the tools available.  Here the tools are things such as goats, seeds eggs and gold.  The competition in this environment is hawala, an informal but trusted method of couriers.

This is Afghanistan.  Jan Chipchase is someone I first came across at LIFT in 2007.  Then he was with Nokia, and is now Executive Creative Director of Global Insights at frog design, based out of Shanghai. This Afghanistan project is funded by the Gates Foundation.  One of the many remarkable elements of this Afghanistan project is that I recognize all the town names, and not for good reasons.

If all you do is spin through the powerpoint entitled ‘JanChipchase-themobilefrontier-vFinal’ you will realise this is an amazing story.

Relevance to Bankwatch:

It shows how little we understand the power of mobile in North America and Europe.  In fact when you get right down to it, despite the inconveniences, North American mobile services do not have much additional functionality than M-paisa in Afghanistan.  In fact many banks do not even have the capability of sending money from one person to another electronically.


There are four attachments in the post and they are worth the click through.  Here is my summary to whet your appetite.

Mobile Money, Afghanistan: Researching the Mobile Frontier

The idea of mobile money became concrete in 2007. In that year, after a pilot
program supported by the United Kingdom’s development aid organization and
Vodafone, the Kenyan mobile network Safaricom launched its M-PESA service.
M-PESA permits person-to-person money transfers via mobile phone using an
extensive network of M-PESA agents throughout the country. The sender initiates
a transfer via text message and the recipient of the message goes to an agent to
collect the cash. As of late 2010, M-PESA had over 12 million subscribers and had
become an integral part of Kenyans’ everyday lives.


Salid has experienced radical change enough times to know the importance
of spreading around his investments—over the years he has put his money into
livestock, gold, and most recently, property. A peek inside his wallet reveals a bank
card and a wad of Afghanis (AFN), the local currency, and US dollars.

She has a bakht account with Kabul Bank, which is a special lottery-style
account through which she is entered into regular draws for prizes that can include
anything from cash and computers to cars and even apartments. The principles of
Sharia law forbids the payment of interest on bank accounts, but local banks get
around this by paying mafad (benefit), and they incentivise savings through a variety
of means including bakht (luck) or qismat (fortune) accounts.

While the (M-Paisa) transfer was indeed inexpensive (AFN 25, USD 0.55) and seemed
secure, Mariam became ashamed when her friend told her how inconvenient it had
been to pick up the money.
This friend had spent two hours trying to cash out the transfer before she was
successful. Over an hour was spent combing the streets of Kabul trying to find an
M-Paisa agent, who upon hearing her cash-out request, said he didn’t have enough
money on hand, and asked her to return the next day. This person was located on
the fourth floor of a nondescript office building in downtown Kabul, with nary a
sign on the street or on the building to indicate the presence of an M-Paisa agent

Farooq maintains that it’s not his responsibility to ensure the IDs provided by
customers are valid. “How would I know if an ID card is real? Anyone can get one on
the street for AFN 500 (USD 11), or by knowing the right person; it’s not my problem
if someone uses a fake one. How can I tell? Maybe M-Paisa should just accept
thumbprints like the hawala agents. Then people that can’t read can use it, too.”



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Written by Colin Henderson

April 10, 2011 at 16:56

Posted in Uncategorized

“Islamic finance is a medicine for economy” | Linar Yakupov in Tatarstan

I continue to be fascinated by product design in western banks and the sheer lack of innovation despite a clear permanently different business and consumer environment.  By innovation I don’t mean higher or lowers fees and interest rates.  What about the substantive design of products? 

The tile of this post is a provocative statement I located at Islamic Finance Expert that will likely meet mostly deaf ears in the US however when we dig beneath the surface , there is merit to the statement when we appreciate it speaks to the methodologies and product design employed by banks to fund business and retail loans.  So US readers, please bear with me.

The western capitalist and financial approach is naturally designed to be one of animosity.  It is a highly one-sided affair whereby the debtor has only one approach available to them which is maintain all the terms and conditions of the debt.  In contrast the creditor owns all the terms and conditions and is always in charge, particularly when the circumstances change and those new circumstances always add to the rights of the creditor.  Whereas there is no change in circumstances that could arise whereby the debtors position could be advantaged over the creditor. 

The opposing capitalist argument would be that positive changes in asset values or profits from business ventures all accrue to the debtor, with no advantage to the creditor.

The very design of this structure is designed to become animus immediately upon a change in circumstances.

What is it about Islamic Finance that it different?

The source of the statement in the title of this post came from someone I was listening to on BBC news.  Linar Yakupov is a financier in the central Asian country of Tatarstan, a state that is part of the Russian federation.  Most Tatars are Sunni Muslims.  The point of the BBC piece was to point out the dramatic shift in commerce here since the opening of Russia and the dramatic increase in importing and consumption of Halal foodstuffs.

The piece continued on to note the increase in consumption of Shariah or Islamic Finance – the financial version of Halal. 

I have noted here before some of the aspects of Islamic Finance back in the 2006 – 2008 period, and it fell off my radar during the credit crisis.  But my approach back then was merely noting the demographic shifts in western countries and the opportunity that created for western banks.  I see now this was a limited view of the opportunity.

Is the economy really that bad that we need innovation in product design?

This is a new normal.  I just do not see how traditional approaches to financing can be the only means to an end in this environment. 

The newer and deeper message promoted by Yakupov and others is that Islamic Finance is a better alternative and one that could navigate the gyrations of capitalist economies particularly as we look out at probably 10 – 20 years of economic re-engineering caused by:

  • western business & consumer deleveraging and the impact on asset values
  • unemployment absorption & geographic reshaping (think Detroit & Pittsburg)

These shifts are enormous and US, Canada, UK and Europe are all being impacted.  History tells us that post crisis periods create genuine industrial and business innovation.  This occurred in 1870’s and 1930’s.  Richard Florida points out that there is nothing like severe downturns to generate innovation in The Great Reset.  The 1870’s created heavy industry and railroads.  This was a dramatic change.  Innovation such as the assembly line and large factories really took hold post 1930 and the resultant consumer boom lasted until now based on continual growth.  Those innovations in the 1870’s and 1930’s were more than simply the equivalent of a new web model.  They involved systemic shifts in commerce and business.

Financial design worked well so long as everything grew reasonably steadily and bank product design followed along and supported that path.  But what happens now that that bubble is burst.  Does current product design support consumers and business effectively in times of continual doubt and the working out of structural unemployment and the new value of assets particularly housing which have average new price variances across the US of incredible proportions.  (Saginaw-Saginaw Township North, MI $59K to San Jose $630K).  The important note is that the average prices have taken a new form as industry and business changes produced dramatic unemployment where economies were strong prior to the economic breakdown.  I also note that the link where I located the average prices above notes NA for Detroit.  Seems a bit ostrich like of them. is closer to the mark displaying homes in the between < $28K up to >$65K ranges.

It is hard to imagine how banks can operate rationally with such shifts occurring.  The results are neither good for banks nor consumers.  Banks will simply exit the Detroits of the world and that sticks with the one-side model referred to above.

Some specifics on Islamic finance that could work for the post crisis world

Interview with Linar Yakupov.

Principles of investment that support local and infrastrucure: 

  • Firstly, according to Shari’ah principles – TIIC doesn’t participate in business connecting with gaming, alcohol and pork production etc. Yet another important moment, to which I would like to draw attention is the fact that TIIC will maximally distance itself from the oil patch. Generally, the investment company will be the additional lokomotive for the diversification of our economy – not only in Tatarstan but in other regions of Russia. 60% of investment will be for our Republic, the remaining is planned to be invested in projects of other regions of Russia.

Helping people help themselves:

  • In the Halal Industrial Park the facilities for successful completion of the cycle are provided in order to solve this problem – from the farmer to the consumer. HIP will unite the whole circulation of production flow: from the small and medium-sized businesses’ employers, engaging in manufacturing, to the consumer. Linova-Trade, the special company promoting the production of HIP, has been setted up yet. It will start the activity from the next year.

The main point:

  • Moreover, exactly the slant to the speculative instruments in the traditional finance sphere led to the grave crisis. On that score Islamic finance and banking, or ethical banks, how they started to be called nowadays, don’t allow to produce speculation and are turned out to be a sort of  anti-crisis instrument. We don’t say that Islamic finances are the panacea, but they could be the revitalizing factor for the whole economy. If this objective implements, we will be very pleased.

Sharing of risk is a core aspect within Islamic finance from International Shari’ah Research Academy for Islamic Finance (ISRA).

The nature of contracts, which requires that risk be shared by the contracting parties, exemplifies the principle of fairness and justice in Islamic Finance. For instance the partnership contract (musharakah) specifies that all the parties that share the capital in a particular venture will share the profit in proportion to their capital contributions. On the other hand, if there is any loss, all have to share the loss according to the portion of the capital contributed. This equity-based contract will also help to generate greater economic activities through the principle of profit-and-loss sharing; and the clearly defined risk-and-profit-sharing characteristic serves as an additional built-in mechanism to avoid any disputes and economic uncertainties.

Relevance to Bankwatch:

We are in changeable economic times, and everyone expects that to last for many years to come.  Today on Fareed Zakaria his topic was ideas as he seeks to understand what it will take to operate and thrive in this new world.  He interviews Robert Kaplan, Clay Shirky and Richard Florida.  (It is an hour that knocks it out of the park if the future interests you)

What struck me about the methodology espoused by Islamic Finance is not the adoption of Islam or Halal.  Rather it is the adoption of sound principles that avoid the bad and focus on the good (Umair would like that).  It is not a rhetoric argument to argue that gaming and alcohol business will not generate the innovation required to move us through these times.  Rather what struck me is the focus on non-speculative core business which in the case of Tatarstan happens to he Halal but there is no reason these finance principles cannot be applied to core businesses that operate in western economies. 

A core aspect of product redesign that banks can learn from Islamic finance is shared risk.  What if mortgages made during the period 2003 – 2007 had a proportion based on shared risk and benefit.  This would have limited the home ATM phenomenon, speculation would have been reduced, and frankly less risks would have been taken.  A product designed this way where the bank shared in the appreciation on homes would have had no interest in 2006, but what of such a product in the 2010 – 2020 timeframe?

Back in 2008 I noted the proposal by Niall Ferguson for a Jubilee as the only solution because he believes the deleveraging necessary is too large to absorb.  Jubilee means (amongst other things) debt forgiveness and Niall noted the many times this has been used in history to get past a bubble.  Islamic finance uses shared risk as a method of producing a softer landing than absolute debt forgiveness but achieves similar results.

It just strikes me that there are serious lessons to be learned from the world of Islamic Finance that can be applied to genuine innovation of western financial products that would work not just for Muslims for for western consumers, business and economies. 

Written by Colin Henderson

August 29, 2010 at 12:20

TaliyaNews : E-banking to be fully launched in Iran by March 20th

 Many things we take for granted online, are taking different routes in the Middle East.  This reasons are often driven by religion, but also by the nature of Government intervention.

For me I await this eagerly, because the combination of innovation to ensure compliance with Sharia Law (Islam) and the learning from the West’s earlier efforts, can produce interesting innovation.

January 21, 2007 6:43 AM Tehran, Jan 21, Taliya News 

Secretary of Supreme IT Council said here Friday that most Iranian banks would offer electronic banking by (Iranian) year-end (March 20, 2007). According to ILNA, Abdol-Majid Riyazi added, “The required infrastructure telecom facilities for the purpose are already provided. He said, “Information security is part and parcel in this regard, since the hackers can otherwise take full advantage of the offered e-services.

Riyazi added, “Seven banks have agreed to open 25,000 electronic accounts as of the above mentioned date.

Source: TaliyaNews :. E-banking to be fully launched in Iran by March 20th


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Written by Colin Henderson

January 21, 2007 at 02:01

Islamic banking – a new growth market?

Two new funds in the UK promoting something that is already big bsuinesss in the middle east, but this is in the UK.

Given the growing muslim population within UK, France, Belgium this could be a new growth sector.

Sharia safe investing – PSD Blog – The World Bank Group – Private Sector Development

Two new funds in the UK hope to have found an answer by offering capital funding that complies with Islamic sharia law. As reported in the latest issue of Clear Profit  (pdf)

Written by Colin Henderson

April 4, 2006 at 22:12

Posted in Middle East

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