TOBY BIRCH discusses why being a non-Muslim supporter of Islamic finance can be a benefit rather than a disadvantage, but argues that the industry is not yet in a strong enough position to effect global change.
As a non-Muslim it may seem strange that I should be fascinated with Islamic financial principles. However, perhaps the strength of my argument is that my words carry more weight as a neutral. This means that I cannot be pigeonholed by western financiers as someone biased due to spiritual persuasion.
Religion nevertheless played a significant role in my formative years and many have noted that my articles are littered with biblical allusions. In 2007 I wrote a book forecasting the credit crisis called ‘The Final Crash: Addictive Debt and the Deformation of the World Economy’, which some religious groups took to be a portent for Armageddon.
Some have accused me of smugness or a degree of schadenfreude in identifying the cause, effect and consequences of the crash before it even happened. Allow me to reassure readers that I do not delight in the poverty and suffering caused by our parasitic banking system. Nevertheless, these events may well be happening for a good reason. To achieve reformation we must see deformation and a public rejection of the monetary mechanisms which governments seem so desperate to save, albeit at the cost of generations of taxpayers to come. This will not be an easy task given the ever-present power of lobby groups.
The most positive outcome of the so-called credit crisis has been a revelation over the falsehood of interest-based, fractional reserve banking. Banks have been shown not to be protectors of depositor assets but financial sorcerers: creating loans from thin air and repackaging them into toxic products. Not only are such sleights of hand inflationary but they are directly responsible for the multiple booms, busts and financial turmoil of the last four decades. The eventual outcome is asset confiscation through bankruptcy and the decimation of the middle class in the west.
With the abandonment of real money in the form of precious metals the current economic seizure was as inevitable as it was avoidable. This was proved with the Guernsey Experiment of the 19th century, which dragged the island from the depths of a debt trap to widespread prosperity by bypassing the banking system. The State of Guernsey issued its own interest-free money which with good stewardship prevented a permanent increase in the money supply by adding maturity dates to its notes. A century of public works was achieved without inflation and without a penny paid in interest.
Many wonder why my forecasts have proved to be so accurate. While writing this article I just happen to be in France so it is appropriate to quote Napoleon Bonaparte: “If I always appear prepared, it is because before entering an undertaking, I have meditated long and have foreseen what might occur. It is not genius which reveals to me suddenly and secretly what I should do in circumstances unexpected by others; it is thought and preparation.”
The great general also had an insight for finance. When he scrutinised an interest table which showed the escalation of debt through the snowball effect of compounding he said: “The deadly facts herein revealed, lead me to wonder that this monster, interest, has not devoured the whole human race. It would have done so long ago if bankruptcy and revolutions had not acted as counter poisons.”
Moving away from theory to practicalities: the reality of fund management in the arena of Shariah compliant investing is not straightforward. There are many obstacles which require big money, influence and patience. These include the necessity of paying scholars significant sums to gain approval; partnering with an Islamic bank for distribution; obtaining software or consultancy services for stock screening; and of course having the time and funding to overcome the numerous legal and regulatory hurdles. Even then there is no guarantee of gathering assets. Small fund sizes bear witness to the frustration of taking many risks but gaining few rewards. There are queues of lawyers, bankers, brokers, custodians, fund administrators and consultants waiting to take their (large) fixed fees; but there is a dearth of service providers willing to share the risk side of the equation with the entrepreneur.
On a personal level I have decided to use Islamic principles and apply them to a conventional fund. This has been derided as ‘Shariah-lite’. My only defence is that I am attempting to adapt similar principles without hiding behind corporate euphemisms such as ‘innovation’.
At the risk of sounding naïve I have just launched the Gaia Opportunities Fund with Islamic principles in mind. It invests in areas that counteract three core mega trends which stem from population growth, environmental degradation and currency devaluation: all of which are inter-related. It boils down to investing in alternative energy, precious metals and natural resources, especially food production. The catchy strapline is ‘green, gold and edible’.
Inevitably this means holding futures contracts, which are which are of course forbidden in Shariah compliant finance. The conundrum boils down to this: real assets are illiquid and expensive to store, own and trade, while electronic securities are liquid, low cost and convenient. The closest our fund comes to the core philosophy of Islam is what it does with the performance fees. We donate a quarter of our fees to philanthropic foundations devoted to sustainable projects which align with our philosophy.
Sadly we are forced to use conventional finance to effect change, as we believe the obstacles for Shariah compliance are simply too great to overcome without greater cooperation and expertise. This is in direct contrast to Islamic principles, which are the definition of simplicity and transparency: qualities that are sadly lacking in an industry heavily influenced by western investment banks.
Toby Birch is the managing director of Oppenheim & Co in Guernsey. He has been a fund manager for 20 years and is a chartered fellow of the Chartered Institute for Securities and Investment, and holds the Islamic Finance Qualification. He can be contacted at
[email protected]
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