Heaven’s Bankers: Inside the Hidden World of Islamic Finance

  • Book Title:
 Heavens Bankers
  • Book Author:
Harris Irfan
  • Total Pages
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  • Prologue
  • Note on Transliteration
  • The Quiet Revolutionaries of Masjid Al-Samad
  • The Nature of Money
  • The Gentler Face of Londonistan
  • The Rocket Scientists of Deutsche Bank and the Billion-Dollar Scholar
  • The Skunk Works Specialists
  • The Doomsday Fatwa
  • Standardizing the Industry: Accelerating Chaos or Bringing Order?
  • The Credit Crisis and Islamic Finance
  • When Sukuk Go Bad
  • The Regulator Strikes Back
  • Arbitraging Islam: The Great Vampire Squid Arrives
  • The Future of Islamic Finance
  • Acknowledgements
  • Glossary
  • Notes
  • Index


The Square Mile in the City of London. It’s ten o’clock in the evening and in the still buzzing hive of Deutsche Bank’s corporate finance division my glazed eyes are staring at now meaningless numbers on the screen. I need to put this bid to bed and get out of this dungeon. When I sleep tonight, my exhausted mind will not be capable of dreaming of anything except numbers appearing in random sequences across rows and columns. Some nights, if I’m lucky, my brain will be a little more active and my dreams will feature death-match grapples with clients or desperate attempts to courier a bid document before an impossible deadline. A few days ago I dreamt that I stepped into the lift with my colleagues and we plummeted twenty floors to our doom.

I have not ordered a late meal at the office: even if I eat at midnight, it will be in the comfort of my home instead of in this corporate slave ship. A bitter November wind is funnelling down Old Broad Street bringing near horizontal drizzle with it. Down below, I can make out the sound of umbrellas snapping out of shape against the onslaught. At least when I’m done tonight it will be late enough for me to charge a cab to the expense account, and travel in relative luxury the twenty-five miles to my home in a sleepy village in commuter-belt Surrey.

The investment bank’s head of oil and gas is striding towards me with an enormous cigar jammed in an enormous grin. Despite his brash American accent – and even louder braces – his Southern-style courtesy and folksy manner make him a rarity among his peers. If he wants to chitchat about life and the universe I’m happy to oblige him, even though nothing would be more welcome to me right now than if he volunteered to finish off my bid document.

‘Kinda late for ya, huh?’ Something about his mannerisms and speech suggests his career was inspired by J. R. Ewing in the well-known TV series Dallas. It is perfectly normal for those at my modest pay grade to be here at this time, and he knows it. I am tired and irritable, but he warms to

my less than warm response.

‘Sheesh, you know, maybe you need to be working for a real team making real money. See, these bastard PPP guys have got you picking up scraps from the lowly table of third tier clients.’ He chews on the end of his cigar thoughtfully. ‘You need to reassess, buddy.’ A dig at my boss, who advises companies on the financing of government-sponsored ‘public– private partnership’ infrastructure projects.

It’s clear he hasn’t come over to chew the breeze with me. Despite the grin, he seems to have a more purposeful air about him than is usual for our occasional chats at the water cooler. Feigning small talk with a random audience, J. R. casually turns to address the small gathering of late-night devotees huddled around computer terminals, most of them junior financial modellers whose thankless job it is to crunch numbers for people like me to interpret, repackage and convert into bid documents and financial contracts.

‘Yeah, well, I would kinda like to save one of you guys from your bondage and have you shipped off to the sunny Middle East. You could be out there building up our investment banking franchise, covering yourself in greed and glory, tax free bonuses, soaking up the sun on the beach, pool parties, Russian hookers in hot tubs, ya know, that kinda thing.’

One of the junior analysts perks up, keyboard clickery temporarily paused, but J. R. has turned towards me, raising an unlit Partágas (Series D No. 4, natch) to his lips. I’m looking at my screen again, pretending I didn’t hear him. I have work to do and I want to go home.

The analyst is keen to know more. Is the bank opening a new office?

Where? Do you need a financial modeller? J. R.’s answers are vague and do little to satisfy the youngster’s obvious interest. He is told that the bank is looking at the broad corporate finance picture in the Middle East and that the main board has decided the time is right to ramp up its activities out there.

‘I think project finance skills will be the critical element in our new business model’, continues J. R., thoughtfully rolling the well-chewed end of his cigar between his fingers. I’m still looking at the screen but I can sense he is waiting for me to respond. A pause, followed by, ‘Yeah, I’m looking at taking on a guy senior enough to build up the franchise, but young enough to be close to the transacting side of the business, ya know, someone who can sell a deal internally within the bank and externally. It’ll be all about greed and glory.’

I’m still looking at my screen, although I’m listening. ‘Does he get a company Porsche?’ I ask.

He lets out a short, high-pitched laugh (now he knows he has piqued my interest) then says, ‘Bankers out there are kinda more Mercedes men.’

‘Well, I wouldn’t be interested then.’ Another short laugh and J. R. turns to the other database drones, orders them good-naturedly to beat it and get a life, and walks away. But the bait has been cast.

Nine months later, I am installed in a serviced apartment in the heart of Dubai’s rapidly expanding metropolis. The phone rings – it is my wife telling me to switch on the television. It is the afternoon of 11 September 2001 and, several time zones away, New York and Washington are waking up to a day that will define a new geopolitical era. What will follow is an extraordinary growth story in the Middle East region, catalysed by the sudden injection of repatriated Arabian Gulf money (though that story itself is not the purpose of this book). But it is this growth story that has led to the explosion of interest in Islamic finance.

The consequential rapid increase in Islamic assets seems to have been comparatively less affected by the economic crisis of 2007–8 onwards. The global Muslim population of 1.6 billion remains heavily underbanked, and though growth slowed a little, it did not plumb the depths of the conventional banking industry. One industry source believes that whilst the first trillion dollars of Sharia-compliant financial assets took forty years to build, the next trillion will be created within the next two to five years.1 Others are even more hopeful.2

In France, Muslim women are banned from wearing the headscarf in schools and the full-face veil – the niqab – in public. Ironically, verbal and physical abuse of Muslim women increased after the niqab ban.3 The Netherlands, too, flirts with a ban on Muslim face veils, and one prominent politician campaigns to have the Quran banned, comparing it with Hitler’s Mein Kampf.4 In Switzerland, the birthplace of the International Red Cross and the Geneva Conventions, 57 per cent of voters in a referendum approved a ban on the construction of minarets over Muslim places of worship, legislation that prompted even the Vatican to denounce it as an infringement of religious freedom.5 And the United States, too, is starting to

succumb to hysterical Islamophobia. Right-wing conservatives applaud as Oklahoma voters approve a constitutional amendment banning the use of Islamic law, or Sharia, in court.6

Their narrative is unequivocal: one neo-conservative group contends that immigrants to the United States sought ‘freedom from the discriminatory and cruel laws of Sharia’.7 For such groups, allowing for an alternative frame of reference when considering marriage, divorce, inheritance or personal finance represents the thin end of the wedge – a perversion of the freedoms that their forefathers fought for. In their world view, covert jihadis

– holy warriors – work to bring down the US Constitution, with violence being their most obvious and unsophisticated tool.

‘I believe Sharia is a mortal threat to the survival of freedom in the United States and in the world as we know it’, said US Republican politician Newt Gingrich in a 2010 speech. ‘Stealth jihadis use political, cultural, societal, religious, intellectual tools; violent jihadis use violence. But in fact they’re both engaged in jihad, and they’re both seeking to impose the same end state, which is to replace Western civilization with a radical imposition of Sharia’.8

To neo-conservatives, Sharia is a monolithic system of medieval oppression: unless it is crushed at source, one day Americans will be forced to pray in mosques and watch public beheadings.

But there is another, more nuanced, view. Reflective observers might discover that Sharia is perhaps far removed from notions of cruelty and punishment. In fact, for the vast majority of Muslim history, a body of Islamic law has developed to accommodate the progression of human civilization, favouring tolerance over intolerance and forgiveness over punishment.

That same research might show Sharia to be more than a collection of archaic and irrelevant laws. It might show that higher moral principles and universally accepted notions of justice are the defining characteristics of Sharia. And nowhere are these notions of justice more apparent than in the body of Islamic jurisprudence related to social and economic interactions. This body of law, crafted from holy scripture and classical scholarly works, has now found its way into the sophisticated modern-day transactions that some of the world’s largest banking institutions conduct.

I did not set out to become an Islamic banker, though as a Muslim it had always been foremost in my mind that understanding and practising conventional finance would be a means to an end. Back in the early 1990s, at the start of my career in the financial services industry, Islamic finance presented itself to the layman as a curiosity, an alternative method of financing, ethical financing dictated by a cultural need, and very much on the fringes of the mainstream financial system.

How was it that Islamic banks were able to offer products and services that conformed with the prohibition against usury, or riba in Arabic (literally an excess or increment)? And is that what Islamic finance was about? No riba? Or was there more to it than that?

Indeed there was. My journey to becoming an Islamic financier was a result of being in the right place at the right time, as are many things in life. Around the same time that I arrived in Dubai, the ruler of this tiny emirate in the Arabian Gulf decreed the formation of the Dubai International Financial Centre (DIFC), a square mile of real estate on a patch of desert with little surrounding infrastructure, and no clearly discernible means of earning a solid revenue stream.

The development of a thriving international Islamic finance market would be a cornerstone of the DIFC, building on Dubai’s existing reputation as a port city and a regional hub for trading. Deutsche Bank, as one of the very first investment bank licensees in the DIFC freezone, won the mandate to provide strategic and financial advice to the government on the creation of this freezone. Despite my junior standing in the firm, as the sole investment banking representative for the bank in the region I unexpectedly had the opportunity to help shape the future of this emirate as a regional financial centre, in the same vein as Singapore or Hong Kong.

When the news spread of our appointment as DIFC’s investment bank, we were approached by a large Saudi building contracting company on the creation of a sukuk, or Islamic bond, to finance the development of a series of towers in the Holy City of Makkah, Islam’s holiest city, and one into which no non-Muslim (let alone a Western investment bank) had ever been allowed. A remarkable coup.

As we began to cement our reputation in the region, clients started knocking at our door asking us how to transact deals – the kind of deals that they had been doing all along but this time in a manner compliant with Sharia.

My colleagues and I learnt at the feet of the leading scholars of Sharia, those sufficiently versed in both Islamic law and modern finance and economics that they are able to advise and opine on complex commercial and financial transactions, and ultimately to declare them to be in compliance with Sharia (or not, as the case may be). As a result, I was privileged to be present at the birth of a number of innovations in the Islamic finance space, including that bête noire of the financial press – both conventional and Islamic – the derivative, those exotic financial instruments that were the catalysts for the financial earthquakes that took place at the height of the global financial crisis. If a derivative is an ethereal, intangible contract, a financial instrument whose value is derived from a ‘real’ asset but is not actually a ‘real’ asset itself, then the need for Islamic finance transactions to invest in and refer directly to real, tangible assets makes ‘Islamic derivatives’ sound like an oxymoron. Perhaps it is, though I will leave it to the reader to judge.

Working across many different types of financial instruments, known in the industry as ‘asset classes’ – such as bonds, equities, exchange traded funds, real estate or private equity funds – Deutsche Bank made a name for itself as a cutting-edge creator of the most complex financial instruments in a Sharia-compliant format. After a gestation period of two to three years, the Islamic structuring team finally cracked the creation of products whose complexity in the conventional banking industry had hitherto made them apparently impossible to replicate in the Islamic industry – products that could hedge a financial institution’s exposure to macroeconomic risks, such as currency movements, or products that could give high net worth investors access to sophisticated trading activities, such as hedge funds. The market was now waking up to asset classes that had previously been closed to Islamic investors and institutions, though not without controversy along the way.

The experience had been thought provoking: was it possible to build an economically viable firm that could offer Islamic financial services on a truly ethical (or should that be Sharia compliant?) basis? Were ethics and profit mutually exclusive?

As I helped to establish Islamic finance in firms such as Deutsche and Barclays, I also delivered training courses on the principles of Islamic finance to my colleagues, from Geneva to Jakarta, some of them private bankers serving high net worth individuals, others investment bankers

playing the capital markets. Much of this book was born of the questions I was asked on those training courses and my personal experiences on the real life deals that radically changed the face of the industry. In some cases, commercial sensitivities have required me to avoid naming companies or individuals, though in all cases I have been careful to select transactions that are either particularly groundbreaking in some way, or that represent a classic study of the subject matter in hand.

As this book is not intended to be an academic reference work for practitioners in the field, I have avoided a technical analysis of the products themselves. Instead, the interested reader is directed to the Glossary and will find more detail on my blog: www.heaven sbankers.com. Bankers, auditors, lawyers and regulators may find more to get their teeth into there.

I have a deliberately paradoxical intent in publicizing these somewhat arcane mechanisms: to encourage healthy debate among practitioners and observers alike as to whether this industry that I work in is truly ‘Islamic’, and whether there is a better standard that we can collectively work towards.

Until the industry realizes that Islamic finance is predicated on a different set of rules to mainstream Western finance, a social awareness that underpins the practice of commercial and financial transactions, then an aggressive sales-led investment banking culture that ignores this fundamental ethos will always be viewed with suspicion by the end user of Islamic financial services.

Islamic finance is a discipline that is highly technical in nature, has long lead times to execution, and is poorly understood by senior management at conventional banking institutions. As a result, the inefficiencies of corporate culture, particularly at the biggest firms, have resulted in an industry dominated by those who don’t care enough about doing it right.

There are countless examples of investment banks and other financial institutions with no previous history of Islamic financial services hiring individuals who may not be able to marry the complex structural aspects of Sharia-compliant products with the commercial know-how needed to execute deals.

The biggest brand names in investment banking have wasted years in incubating a business that was badly designed from the start, an attempt to jump on the bandwagon opportunistically rather than cultivate a long-term business strategically. As a result, these influential institutions have in some cases concluded that there is no future in Islamic banking,

 though whether the Islamic finance industry should be influenced by ‘a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money’ 9 is perhaps a moot point.

And yet, despite the opportunism and cynical exploitation of an industry geared around people’s values and beliefs, in the Islamic world an extraordinary growth is taking place. Islamic finance has become the poster child for that story, with some proclaiming Sharia as a panacea for global economic woes. Is it? In an increasingly polarized environment, can the Islamic world bring something of benefit to the Western world, and vice

versa? And are ethics and morality relevant to the pursuit of profit?

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