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Portfolio Interview: Four Frustrations of an Islamic Financier: Toby Birch, Birch Assets

Friday, July 03, 2009

Portfolio Interview: Four Frustrations of an Islamic Financier
Toby Birch, Managing Director of Birch Assets Limited and author of The Final Crash

When I published a book in 2007 – forecasting a crash in 2008 – I thought there was no solution to what was then a crisis in the making. This was why my first training course in Islamic Finance proved to be a personal epiphany. I could not understand why the other participants could not grasp the obvious benefits of a financial system based on balance, sustainability and ethics. Perhaps they were so caught up in the web of imbalanced banking that their hearts and minds were closed. I for one was stunned by the wisdom of the Prophet (pbuh) and how well these principles could work for western finance. Sadly, the theory is a long way from fact in its current financial practice.

1. Products

From forecasting the crash, I understood the importance of being attentive to gut instincts and how initial impressions are usually the most informative. The first sukuk I came across offered geared share classes and appeared to promote the yield enhancement of packing Indian workers as tightly as possible into their accommodation blocks. Neither of these ‘benefits’ struck me as being particularly Islamic. Over time I have come to see ever-closer mimicry of western products in the pursuit of milking money from the Middle East. What I still don’t understand is why a Muslim investor would look to buy investments that westerners are queuing up to sell, frequently locked in fund pockets or stuck behind ‘gates’ which offer an entry but no exit. Surely the crisis has shown us that complexity is not clever. I guess it comes down to the age-old principle of aping the leading power of the day by replicating their architecture, fashions and even financial systems. Perhaps one should not be so quick to judge given the historical precedent to copy but a time is coming when developing countries will overtake their ageing and debt-ridden counterparts. Surely it is now obvious that Islamic financial principles offer a role model for the future, once it has grown out of its adolescent and fashion-conscious phase.

2. Conferences

It may seem hypocritical for one who has benefited from being funded by sponsors but Islamic conferences appear to be flag-waving affairs that bandy western terms such as growth rather than stability. It is the nature of Islam to seek consensus and this approach appears to dominate the tone of many conferences. The credibility of some of the sponsors and their role in the credit crisis also beggars belief; yet still they show no shame. Speeches are rarely controversial and those who seek to push the boundaries with supposedly sophisticated products seem to have little to fear in terms of censure. Like the Internet boom of the 1990s, anyone who dares to question ‘innovation’ is deemed to be a dinosaur destined for extinction. The other frustration is that the focus is almost entirely on Finance and not much about Islam, other than offering a token prayer at the beginning of proceedings. Perhaps Muslims feel self-conscious or old-fashioned discussing religion in front of westerners. I for one would rather hear more about hadith and less about hedge funds. More importantly, at this crucial stage of forming the foundations of this vital system, the philosophical debates should be at their most vocal and vociferous. Instead there appears to be little passion outside of cyberspace.

3. Consultants

Probably one of the most frustrating of all the aspects is that of the broker or middle man. There appears to be a dichotomy of advisers where some embrace the concept of sharing risk and reward. Others seemingly take the view that the best way to make money is to offer expensive services to a captive audience rather than take any risk themselves. They typically come to the table with high fixed fees and hefty hourly rates. It is reminiscent of the gold rush in the Victorian era where the prospectors would get their hands dirty while the spivs simply supplied the tools of the trade in the form of picks, pan handles or prostitutes. Inevitably the extra layers of cost translate into products with a premium price but inferior service relative to western counterparts. Not only are these products bland and poorly diversified but investor services rarely match those of conventional offerings in terms of accessible information and support. The protection of information is putting up artificially high barriers to entry for smaller and more innovative providers. The stifling of competition is hardly a sound basis for the future of Islamic Finance. Big banks will end up being the only institutions that can afford large boards of scholars and the industry is in danger of becoming a closed shop. Islam spread thanks to its transparency, clarity and leadership by example; features that are lacking in today’s financial services.

4. Co-ordination

There are several fine organisations dedicated to the promotion of Islamic Finance across various jurisdictions. The problem is that they are not well co-ordinated with each other. Like inter-religious intolerance, Islam has its own intra-religious factions that act as a stumbling block in presenting a united front to the failure of western finance. President Obama put it succinctly when he referred to being ‘defined by our differences’. If anything, the great strength of Islamic countries lies in the fact that in spite of the difference in detail there is at least a common philosophy. One can still co-operate without compromising core beliefs and if anything, the diversity of views and skill is a strength to be nurtured rather than stifled by uniformity. Just as Hannibal created an army with multiple languages and skill-sets to take on the Roman Army, surely there is a leader out there who can unite the different arms of Islamic Finance. At present it remains something of a cottage industry at a time when there should be a production line of scholars. This is where copying the West is beneficial, in terms of technology and economies of scale, rather than slavishly replicating speculative products. A good start would be the centralised delivery and publication of all fatawa for scrutiny by practitioners and academics alike. The ‘wisdom of crowds’ is a proven method of providing expert scrutiny of ideas and research, so successfully utilised by western scientists.

Having highlighted the shortcomings of Islamic Finance it may beg the question as to why I am complaining. I complain because I care. Even now I still turn down well-paid conventional jobs, choosing the risky option in a young, fragmented industry. It is because Islamic Finance is the right thing to do. Doing the right thing is uncomfortable and unrewarding, like being ridiculed for writing a bearish book when markets were riding high. At the risk of sounding pompous, something inside won’t let me deviate from the path that will ultimately benefit the world economy and more importantly offer a sustainable alternative for generations to come. America’s strength was built on the self-sacrifice of the Founding Fathers who were stewards not salesmen. It is time for all participants in this industry to do likewise.



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