[00:00:00] Alright, let's jump right into this. So with me today is Humayon Dar he is the founding Director General of the Cambridge Institute of Islamic Finance. Previously he served as managing director at Deutsche Bank, ag London, c e o of Darma, BMB Islamic, and Director General of Islamic Development Bank Institute.

[00:00:23] For the last 12 years, he has been running an Islamic financial advisory and advocacy conglomerate. In this role, he has emerged as one of the most influential advocate of Islamic banking and Finance he continues to play an influential role in Islamic Business and Finance.

[00:00:40] The awards programs he has founded are market leaders and their respective fields. Global Islamic Finance Awards are the leading Islamic financial awards program in the world. Islamic Retail Banking Awards are now in their eighth year right. Dr. Dar thank you for coming. It's a pleasure to have you. No, thank you for the invitation. It's it's always a pleasure talking to you. Great.

[00:01:02] So, I'd like to start with basically what got you into Islamic Finance and kind of tell us your story about how you got started in Islamic finance and what interested you.

[00:01:12] Thank you for this question. I I got exposed to Islamic Economics, banking and finance at my university. The first university I attended, international Islamic University in Islamabad. That was in 1986. And the university offered instructions in Islamic economics, banking, and finance. And I believe at that time it was one of the very few institutions, probably the only institution offering instruction in Islamic economics, banking, and finance.

[00:01:45] So that was my first exposure to the field. And honestly, when I was. This was my, this was in 19 86, 87. So I started my undergraduate BSE honors in economics with a specialism in Islamic economics in 1986. And I finished this in 1990, followed by a master in Islamic economics, which I finished in 91 from the same university.

[00:02:15] So that was my first exposure because at that time, Islamic banking and finance was not very well developed, especially in Pakistan. So most of us who were studying Islamic economics and finance, this was about theoretical constructs, about the whole thing. And my intention, like other undergraduate students, was not to pursue a career in Islamic banking and finance because there were very limited opportunities at that time.

[00:02:45] In 91, when I finished my studies at the university, I was fortunate to get a scholarship to study for MFI in economics, followed by a PhD at the University of Cambridge. So first year MFI was a taught course during which we had to make a decision about our PhD research. And I proposed to my PhD supervisor that I would like to do something related with Islamic economics, banking and finance.

[00:03:17] He agreed, and I ended up writing half of my dissertation on profit loss sharing in Islamic finance. The other half was on share cropping in agriculture, which in terms of theoretical structure is very much similar to what happens in the name of pls in Islamic finance. After that actually my my active career started in Islamic economics, banking, and finance.

[00:03:43] First as an academician, I went to Lara University, where I founded, along with Professor John Presley, the first ever. Master program in Islamic economics, banking and finance offered by any university in the Western Hemisphere. After about eight, nine years at Lara University, I was invited by Deutsche Bank to become part of their global Islamic finance team, which they were in the process of making.

[00:04:15] So after a brief, I think about six months, I was offered a managing director position responsible for structuring of Islamic financial products with a focus on she assurance. That was the time when I really got exposed to the practice of Islamic banking and finance. We came up with a very innovative range of Islamic structured products, however, there was a criticism as well because very a lot of people, they thought this product range was very aggressive. However, with the passage of time, now, for example, most of the Islamic, what does that mean? Very aggressive In what sense? Aggressive means. We actually exploited a concept, which is called wa'd.

[00:05:00] At that time, wa'd wasn't very well known in the industry, and I'm talking about 2006, 2007. Even myself, when I before joining Deutsche, I was not aware of the potential of wa in structuring of Islamic financial products. This was idea of one of the managing directors GUI po. He was a very smart structural, and he, along with some other structuring guys, he came up with this idea of developing wa into an option based solution, which could be used for structuring of a wide range of Islamic financial products.

[00:05:38] Because the technique virtually allowed us to replicate in a sharia compliant way, economic profiles of any conventional product. This was considered as very aggressive by the market. So if, for example, if there was a wine index offered available in the market, we were in a position to offer the economic profile of that wine index initial area compliant way.

[00:06:07] So many people, they did not feel comfortable, I think primarily because this was a new thing, and they could not draw parallels between what happens in Islamic financial market anyway. All the products almost all the products offered by Islamic banks and other financial institutions, they are benchmarked with respect to interest rate.

[00:06:27] Anyway. Okay. And this was one second. Let's let's sorry if I'm interjecting here. Let's I would like to go over two things. First is if you could give us an example of what, how wa'd works why assuming the word promise in Arabic basically is that's why, did I hear it correct?

[00:06:45] Okay. So wa'd means promise. I'm curious as to how the, that would work. And then I'm not sure I quite caught the wine index example that you gave, so perhaps you can I don't know. Explain that to me. I didn't really get what you were saying there. All right. Okay. Let me I think, okay we went too quickly into the things.

[00:07:05] Okay. And this is probably my very complex kind of introduction. What is a very simple concept? Okay. In Islamic legal theory, the primary or basic unit is wa not a contract. In English law, for example, contract is the primary unit of doing everything. In case of Islamic law, a promise is normally not binding.

[00:07:36] It becomes binding in circumstances when the EE calls upon the promisor to do certain things. Given this nature of promise i e its non-binding ness, and It being an, a kind of offer by one party, for example, when I promise to you that I would buy this pen from you for 10 10 pounds, or I would sell this pen to you for 10 pounds on April the 10th.

[00:08:11] Now, you would have an option to call upon this promise on April the 10th if it is in your interest. If you don't find this promise useful, you would simply ignore it and would not call upon that promise, and hence no contract would to take place. Okay? So promise is only one leg of a contract, and this is a very unique feature of Islamic law.

[00:08:38] Because of the optionality built in Ahad, it can be used in a number of in investment banking products where an optionality is required. Okay? In fact, a new theory of Islamic options is based on the i the application of WA in Islamic financial products. Okay? So this is because of this optionality.

[00:09:06] What's that like, like an example of like a wide contract? Give me a gimme, like a practical. Implementation of this wide you're basically saying, okay, a wide is a promise, but it's not obligatory. But I mean, just from, you know, the word a promise is a promise. I mean, if you promise something, you have to deliver it.

[00:09:28] It's certainly not, I don't think it's Islamic to promise something and then not do it. But if if, okay, I promise if I promise you to deliver something and on the day of delivery, you're like, Hey, I don't want it, then sure. That makes sense. I don't think you're obligated to take something that's given to you if you don't want it.

[00:09:47] But this is all theoretical. So far what you were mentioning was theoretical. I'm wondering if there's like an actual like, implementation of this that could help us like actually understand what, how this actually works. Sure. For example, if I promised to sell one Apple stock to you for $200 on April the 10th, right?

[00:10:14] Yeah. And on April the 10th, if the market price of Apple stock is $250, the promise given by me will be in money for you. You will call upon it and force me to sell the Apple stock for $200 to you when the market price of the stock is $250 in the market. Right? So in a way, this promise, which I have given to you, it has given you an option to call upon when the promise is in money.

[00:10:57] If on the other hand side, the market price of apple stock was $150, while I had given you a promise to sell Apple stock for $200, you would not be interested. You would just walk away. Okay. Right. But that's just an option, right? That's just a buy that's just a call option, right? That's right, yes.

[00:11:20] This aspect of promises can be combined with quite a number of other structures like Mora Baha. Now, when you combine promises with a Promise with Mora Baha, this would bring you economic profiles of a call option or put option, depending on whether this is a promise to sell or promise to. The simple example I gave to you of an Apple stock promise, there was no option premium involved.

[00:11:53] I just, you know, gave you a promise and this gave you an option whether to call it upon or not. Okay? However, I would be only foolish if I am giving these options or these promises to you for free. So I would like to have some kind of commitment from you enhance something similar to an option premium.

[00:12:16] This is something which we can do with the help of aha contract at the start of the transaction based on a. . So because of, you know, combining what with something like Mora Baha, this would give us an an ultimate structure which would allow us to have access to economic profiles of everything.

[00:12:44] Now, this is a simple example. If we use two words, okay. I'm just struggling here doctor to understand like, what's the point of this? Like, we're just, I mean, you're basically saying okay, if we can combine a wide with aha, then we get like a call option, for example. But there's, there already exists call options.

[00:13:11] So what are we doing right now? Are we just like, What's the point of this entire exercise? Are we just like justifying? Why are you, is this like, to make an argument that call options are halal or is it being looked at as a different product or I just don't get it. Like, what's the point here?

[00:13:33] Yeah. Basically this is only the start of the more complex structures. Okay. So when we combine these two promises or two option contracts in a smart way, this would give us structuring a product which would allow us to get the economics of a chosen index, for example, s and p Titanic or whatever.

[00:14:01] Right. Or any other index which is available in the conventional markets. Okay, this is something I can explain only inwards, but that becomes very easy to explain when we use a whiteboard. Okay? The simple thing is that, you know, when two parties enter into promissory arrangements whereby one party promised to sell something for a price known, and sometimes, or most of the times, that price is determined by a formula.

[00:14:37] Okay? So one part is promising to buy, the other one is promising to sell the same thing, okay? Which this would give rise to a definite sale in the mo in the future. So, in other words, combining two promise contracts would take away the optionality of the individual single promise giving rise to a forward sale contract.

[00:15:06] Now, forward sale contracts in Islamic finance are not considered permissible. In general. Combining two words would give us the economics of forward sale contracts. Okay. This is something, this was new and this is still considered as an innovation in the market. So when I use the word, so you're saying it gives the economics of a forward contract.

[00:15:32] That's right. Right? Yes. So the applications of the, of a forward contract and this other combination of wives that you did the use cases of them are exactly the same. Right. The use cases, what? The use cases are the same between this Yeah. New product and a forward contract. That's right.

[00:15:54] Yes. And the actual impact that the forward contract and the two odds are the same as well. Right? That's right. You know, coming back to this simple thing is, and even if, like, why not just use no contract, no forward contract conventionally cannot be used. Okay. Initially a compliant way.

[00:16:15] Okay. So if you ask for, but you are mean you have a forward contract, but you did it, you got it with the combination of two odds. But at the end of the day, what you end up with is a forward contract. Absolutely. That's right. Yes. Before that is a forward contract. Yeah. That look. A conventional forward contract scholars would say, this is not acceptable in Islamic finance right now.

[00:16:43] We came up with a Sharia compliant forward sale contract, which would give the economics of a conventional forward sale contract, right? And when I said in the beginning the market found it aggressive, it was because of this nature of this one, something which was deemed as impermissible i e a forward sale contract on Do Jones index so and so.

[00:17:10] But this technique would allow us to actually use a Sharia compliant forward sale contract. And many practitioners in the market found it objectionable. Right? , for example one application of this one was creating a short selling technique. Now, before that, and even now, most people would say that short selling is not acceptable in an Islamic framework, but our technique allowed us to come up with the asharia compliance, short selling technique, and the market wasn't, at least a segment of the market found it something too much to accept, right?

[00:17:51] . . this, the this was my, okay. Coming back to the question was how I got involved in Islamic finance. So when I moved from Lara University into investment banking this was my introduction to the practice of Islamic Banking and Finance because the nature of the products we worked on during that period was controversial.

[00:18:15] This exposed me to a lot of new and innovative techniques of structuring Islamic financial products. And since then I have specialized in Islamic financial innovation. And this is something I enjoy very much. So my, my active career in investment banking was between 2006 and 2011 when I decided to set up my own Islamic financial advisory business outta London.

[00:18:46] So since 2011 till today, I am running my own business from London. So this, I believe, is a sufficient answer to question number one, how I got involved in Islamic banking and finance, right? Yeah. So whenever when I hear something I gotta dig in because I know that yeah, I mean, it's fresh in the mind.

[00:19:07] So what is the purpose of Islamic Finance in your mind? So like, for me, for in order for Islamic finance to actually be Islamic, it actually has to have a, an impact, a and use cases that are different from traditional finance or else, you know, what's the point of going through this exercise of just replicating, you know, traditional tools.

[00:19:37] But I don't know, giving them, you know, different names, different combinations, adding some complexity. What's the point of that? If it's not e either like serving different use cases or, having a, having less of a sort of a societal expense, having more benefit to society beyond just, you know, making Muslims feel good about using the product.

[00:20:05] Beyond that what is the purpose of Islamic finance in your mind? Right. I would come to this question in a minute, but before that you know, when I got exposed to the practice of Islamic banking and finance I got excited that we were in a position to replicate. any conventional product.

[00:20:24] And I used to think that this was a real innovation in Islamic banking and finance. But with the passage of time now it's over 20 years since I got involved in Islamic finance practice side, I have observed that the real objective of Islamic finance, which was to offer an alternative to conventional banking and finance, which was more, just more socially responsible and which was more humanistic, I should say, in nature.

[00:20:58] That is something we have ignored in product development and offerings of such products by Islamic financial institutions until now, by and large, Islamic banking and finance has all been about. Offering a Sharia version or Sharia compliant equivalent of a conventional product. If we have a conventional mortgage in the market, an Islamic bank would be offering an Islamic mortgage.

[00:21:28] If we have a credit card, an Islamic credit card, and the list goes on and on, this has served only limited purpose. This has actually given Muslims a choice whether to go for a conventional product or something which is being offered in the market as Sharia compliant. Okay? And this is a value addition in itself.

[00:21:53] It has a definite relevance to a conservative segment of the Muslim population who were looking for an approved halal product in the market. Like, you know, if K FFC was there in London, I live in London, my kids if they wanted to have kfc, and if no Halal K FFC was available, my children would not be very happy about this one.

[00:22:18] Now I can take them to a Halal kfc, but when I, the halal chicken is actually prepared different from the non halal in terms of like the way it was slaughtered. So, and the theory behind it is that, you know, the Halel way of slaughter actually is you know, better for the animal in terms of decreasing the amount of suffering that the animal actually has to go through and the amount of pain endures.

[00:22:44] And then also there's other you know, benefits related to just the health. This is you're consuming. But is there. It would not be like the same. You would probably not feel the same about this example. If it were just like the same exact preparation of the chicken went on.

[00:23:00] But there was like a stamp on it. It would, this would not be any value added. Right. I'm actually talking about the end product. Okay. Halal KFC and non halal KFC from consumer's Viewpoint are exactly the same thing. The new but they're not in terms of other considerations there. Right.

[00:23:22] So there has to be some practical implications that are different. You're right. The halal chickens probably taste the same as non halal chicken. There's no consumer ability to, but, That's fine, but the animal, if it could talk, would tell you it was different and perhaps there are other health benefits to halal, but So is there like practical benefits to

[00:23:47] the Sharia compliant versions of the traditional products? I guess this marginal benefit Okay. To Muslims or in your case to the animals. Okay. Although this could be controversial, a lot of people might say the stunning an animal is actually better than slaughtering it. Okay. So I don't want to go into that detail, but the point is, we come up with something which is almost the same in terms of consumption.

[00:24:14] And this and similarly an Islamic mortgage, of course. Okay? When we say an Islamic mortgage, there is a process, Sharia compliance process, which makes it an Islamic mortgage. So I'm not questioning it. I actually, I'm an advocate of that kind of process. However, the end result, the economic profile of a conventional mortgage and Islamic mortgage are exactly the same thing, right?

[00:24:41] When, for example, I have an Islamic mortgage on the house in which I'm sitting right now when Bank of England changes the base rate, my mortgage home purchase plan plan, which I have bought from Aian Bank, okay? I'm not trying to promote it because this product has been withdrawn from the market anyway, okay?

[00:25:04] So, conventional mortgages, the rates would go up, my monthly payment would go up as well. So the, in terms of economic behavior of this product is exactly the same as any conventional product. But this isn't that just proof that it's not Islamic? Isn't that proof that it's not compliant if the actual product has the exact impact of a the thing that we're trying to avoid, isn't that proof that it's not Islamic and it was mislabeled as Islamic?

[00:25:33] No, this is not the proof. Okay. Because a lot of things, they look seemingly similar, but they are different. So how are they different? That's, I guess the question. They're different. Legally they're different. Say in my case, if I give you example of my mortgage, I actually don't own the house. Okay. This HO House is owned by a Rayanne bank.

[00:26:00] I am only a tenant with this. This is not the case in case of conventional mortgages and I Okay. Doesn't that make it worse though, ? I mean, whether this is version seems inferior, whether this is superior or inferior. This is not the question right now. The question is whether it is the same as conventional or not.

[00:26:29] Okay. A lot of people, okay, they might find this Islamic mortgage where they are not. Owners of the house as of now, but potentially they would be in future, they might find it a useful, more useful product as compared to a conventional one. This is a matter of preference. Okay. The end result, because I know that although I am not owner of this product this house right now, but in future, if I fulfill all the obligations pursuant to the contract, which I have signed with the bank, I would become the owner of the house, just like any other person who has taken mortgage from a conventional bank.

[00:27:11] So this is, there are differences in the process, and these are important. These are important differences like you mentioned in case of halal, you know, the slaughtering thing, you know, slaughtering even in case of halal, there are so many processes. In most cases, the animal is stunned and then slaughtered.

[00:27:29] Okay. And the scholars, they say this is acceptable as well. Okay. Some other conservative people, they would say, no, this is not acceptable. However, so, so I guess, just to just to make sure that I guess to find a a principle that I think that we agree on, which is that, you know, when Islam says, okay, this is, do things this way, as opposed to this other way, there's a reason, like there's a there's a there's logic behind it.

[00:27:56] And you know, in the case of the, okay Halel, zk, right? There's logic behind that process in terms of. You know why Islam encourages us to do it that way, as opposed to some other way. And I guess my argument is that, okay, if there's if we have two identical products, one of them we know is compliant.

[00:28:21] The other one we're trying to ascertain whether it is share compliant or not. But as far as we can tell the everything about this other product is identical to this first product that we know it's not share compliant, then for sure this second product that we're assessing does not serve any Ali that the first one didn't.

[00:28:45] And therefore it, from a Sharia perspective, it doesn't make sense to say this one is Haram, but this one is . There's no. There's no logical reason why this second one would be halal. If the first one was not considering their impact is the same. The way they work is the same. The consumers experience is either the same or in fact inferior to the first one.

[00:29:14] There's no argument that can be made to say, okay, this one actually this is why Islam per permits this one, but prohibits the form.

[00:29:26] First thing is that, you know, I think this is a misunderstanding of Islamic financial products to say that, you know, this product Islamic is almost identical with the conventional product. The only overlapping thing between an Islamic mortgage and a conventional mortgage is pricing. , all other aspects, they are different.

[00:29:50] The contracts are different. But you said ownership user experience was the same. The user experience is only part of the thing. Okay. The user experience comes from the pricing. Only. My criticism if I have to criticize Islamic banking products would be that, you know, Islamic financial products are priced with reference to an interest based benchmark.

[00:30:16] Okay. This is why they behave in more or less the same way otherwise. Okay. These two are very different products. Now the question arises can we benchmark an Islamic product with an interest based or interest related mechanism or index? The Sharia fraternity has taken a view that this is possible.

[00:30:42] This is acceptable as long as the item being bought and sold is Sharia compliant. Okay. And it's a it's a technical permissibility and I would tend to accept it. Hence when I would like to criticize Islamic banking and finance, it would be only with respect to that aspect. Otherwise, I would deem an Islamic product as a Sharia compliant and a conventional product, which is not recognized in Sharia.

[00:31:17] I would, let's be with you. I would be with you. Let's talk about the differences between the products as you say, because they say because you mentioned that, okay, these are entirely different products, right? For example, like this Islamic mortgage. Help me understand how they're different.

[00:31:33] Because I and as far as I can tell, they seem the same. But perhaps I missed something. Yes. Number one, you know, the huge difference is in terms of ownership rights, okay? In case of a diminishing muha or ija based mortgage, the one I am using, okay, now I'm not the owner, okay?

[00:31:56] Conventional mortgage guy would be the owner of the house, right? And this is actually a huge difference. And secondly if something goes, the tax implication of this one is completely different as well. . Okay. This is why a lot of people, especially when it comes to commercial property, they would prefer an Islamic mortgage over a conventional one because I would not be showing if I want to, I would not be showing this as a, as my asset with full rights.

[00:32:29] Okay? This is why Suku and quite a number of other transactions, they are, and they should be treated as off balance sheet items, okay? Because of this kind of ownership related differences, Islamic products from legal viewpoint, they are treated completely different, okay? From the conventional products.

[00:32:55] If and I'll give you an example of another, so what, another, so, so, in the case of the, in the Islamic Mortgage. You don't own the house, but you have an obligation to buy it, right? You have an obligation to buy it over the term of the mortgage. No. No. I don't have an obligation. I have an option.

[00:33:14] And this the way the deal is structured, I would like to buy. Okay. But you're, you actually have, if you don't actually continue to purchase the remaining equity in the house, you'll be in default of the contract. That's right. Yes. So you do have an obligation to buy it. Not obligation is the wrong word.

[00:33:36] Okay. I have an option. Okay. And the way the product is structured, in most cases, I would find it in my interest to exercise that option. Yeah. But if you're saying that you're being default of the contract, then you don't really have an option. And if you had an option, you wouldn't be in default.

[00:33:53] You exercise. No, in, in most cases. No. In most cases, the Islamic bank would be happy for me not to go ahead and buy. That's cause the capital gains. Okay. No. If I default, if I want to walk away from an Islamic mortgage, I would be a big loser. Okay. So banks, okay. They would be happy if I want to move away from my contract.

[00:34:23] I, I'll give you another example to clarify additional mortgages in traditional mortgages. In fact, in 2008, in certain cases, that's exactly what happened. Right? I mean, in certain cases we were giving out these loans because they were happy to see people default and for them to take over the property.

[00:34:39] Yeah. Look, this similarity, okay. No, my point is that, you know, it, a similarity doesn't make anything shitty. Repugnant. It doesn't. If this one thing is similar in looking in feeling, then another one, it doesn't mean that this is not Sharia compliant. I would say that in terms of economic profile is actually determined by the price, because the price is more or less the same.

[00:35:07] And hence, we have a similar kind of experience. We say that what's the point, right? Otherwise, these two are different things because pricing is actually very important. And from here, actually, I come into a territory where I act. I agree with you Now, if economic behavior of the product and the experience as a customer, I I have, it's exactly the same thing.

[00:35:34] Then we say that, you know, in terms of The economic value proposition of Islamic financial products, they haven't added any value at all. Okay. And then some people say, then what? What's the point of going through all this process if the end result was exactly the same thing? Okay, here I am with you to question the practice of Islamic Banking and Finance.

[00:36:02] So far the My difference with you would be only that I still deem that on technical grounds, whatever Islamic banks are doing, it is Sharia compliant. But they have failed to add value to the process. They have failed to become more just, they have failed to offer a better product to the customers.

[00:36:25] They have failed on so many other social fronts as well. And this failure should be highlighted so that in future they improve on these. Okay, now and this is some I actually write thought of the day on social media on a daily basis. It's called Todd. And lately I have been emphasizing on this thing, you know, if Islamic banking and finance has not brought any value addition, other than the products being halal, the practitioners of Islamic banking and finance should be concerned about the sustainability of Islamic banking and finance in future.

[00:37:07] because about one third, you know, whatever you have raised with me, about three fourth of the Muslim population, they have that kind of perception of Islamic banking and finance. I e bluntly, they would say, this is not Sharia compliant. , okay? People like me I we have worked on these products. We know that technically these are different products.

[00:37:33] Islamic banks are offering Sharia compliant products. But the question is Sharia C compliance see sufficient? Should we stop here? The answer should be, We have to come up with products which should attract not only the captive Muslims, but non-Muslims as well. So if I offer a product, I as an Islamic bank, if I offer a product in the market, if this attracts Muslims and non-Muslims alike, then we are adding a value.

[00:38:09] And unfortunately, Islamic banks haven't added that kind of value so far. Right? Yeah. No, I agree a hundred percent. With especially what you said at the end that ultimately when we'll know that we made it in Islamic finance and the products that we offer and the innovations that we made, we know that we'll that we've made it if non-Muslims are using the products as well.

[00:38:30] If our products are exclusively used by halel conscious Muslims then I think there's a very good possibility then that what we sold was the word halel and not really anything else on of practical value that is. So, yeah, no I appreciate your candor there.

[00:38:48] So what do you think the road ahead looks like for Islamic finance and how do we get the industry out of just. You know, replicating traditional products and into actually use cases that are unique and products that offer value that is not currently being offered by traditional, you know, banking and finance.

[00:39:08] And the world knows now how flood the traditional banking system is and how much in need of improvement it is. It is. And now is the time, if any, for Islamic finance, I think to step up and really offer some practical solutions to that the world can benefit from. So how do you see road ahead for Islamic finance and how can we actually become more sort of, useful in the things that we offer?

[00:39:35] In my view, the future of Islamic finance lies in not the banking sector, but outside it. And unfortunately this is not this doesn't sync with the statistics we have at hand. When we look at the growth in Islamic banking and finance industry on an annual basis, the rail growth comes from the banking sector.

[00:40:00] Okay, banking sector is about 70 plus percent of the overall is Islamic banking and finance. So remaining 25 to 30% is Islamic capital markets very small, about two to 3% microfinance and so on. I would like to see the Islamic financial assets, which are by the end of 2022. We estimated they are now about 3.47 trillion US dollars.

[00:40:30] So I would like to see a shift away from banking sector assets into non-banking sector. Developing Islamic finance in the non-banking sector would be more feasible from sh Sharia authenticity viewpoint. W the non-bank, Islamic financial institutions would be in positions to come up with the products which could be differentiated from the conventional products.

[00:41:03] Banks. They're very highly regulated and the regulators would not like an Islamic bank to experiment too much with the the product offering. Hence, I would say that their hands are tight. And this was the choice of the Islamic finance guys. They went into that territory, and if they are facing these restrictions, this is part of the game.

[00:41:25] So I believe if we want to improve the authenticity cautioned of Islamic finance, we have to move away. We have to gradually migrate our assets from banking sector into non-banking sector. . Also Islam. When we say Islamic banking, we are referring to Islam. Islam is a very compassionate religion and it's not unique in this one.

[00:41:56] Christianity is compassionate as well, and so is Juddaism and so many other religion whenever we refer to more so. Right, of course. Ok. No, we would like to say this thing. Ok, . And when we are using the the word Islam, we should have, you know, that compassionate thing because Islamic banks are banks.

[00:42:15] They have borrowed all the tools of conventional banking. If there is a default, for example, they would like to impose a default penalty. However this default penalty would be given away in. Okay. A conventional bank would keep that money as their income and Islamic Bank would not be able to book that money as their income.

[00:42:37] But as you said, the consumer experience is the same. It's a, when I default against a conventional bank, they impose a default penalty. When I default against an Islamic bank, they do exactly the same thing. So what's the point? Okay. And in the Quran it's very clear, you know, in individual dealings if I have borrowed some money from you and the due date was today you come to me to collect the money and I say, I can't pay you.

[00:43:05] Sh and recommendation is that you should give me more time, you should be more, you know, show some mercy and consideration and so on. This is written in the Quran, okay? Which is a book we all respect and we kiss and we read and we look up to it. When we look at the practice of Islamic banks, this is opposite to this one.

[00:43:26] Whether this is willful default or a default due to circumstances, Islamic banks would like to behave like conventional banks. Okay? I think, okay. If we want to develop Islamic finance as a more socially aware phenomenon, then we have to bring the power of charity into Islamic finance. And there is already a lot of discussion and recognition of this one in the form of what is now emerging as an Islamic social finance.

[00:44:00] So w work-based institutions card, Hassan based institutions, and the role of zakar and Sukar. You know, I think Islamic finance has ignored the power of charity and giving and philanthropy. Okay. In future, if the, this aspect of Islamic finance is augmented in Islamic financial institution, this would give a lot of power to Islamic.

[00:44:30] Finance movement, this would become relevant to anyone Muslims and non-Muslims alike. I think we have underestimated the power of charity. Okay. And this is something there is a realization about it, and I think once this is internalized, we would see the emergence of a new Islamic finance relevant to the needs of everyone in the world, whether in the western world or in the in the eastern part of the world.

[00:45:02] No, that's great. I think that you're right with regards to the the role that charity can play in filling a lot of economic roles that are not being filled right now, using the hardship that many feel. I think with regards to the penalties on on debt, I think their core problem here is that the loans are not given as charity, right?

[00:45:24] These are not charitable loans. They're for-profit loans and therefore they behave as for-profit loans. 

[00:45:31] Any advice for people who are looking for Islamic finance products or perhaps people who wanna work in Islamic finance? I would say that, you know, although Islamic finance could be criticized for a number of reasons, but we have to be patient like, you know, this is although now it's about 50 years when Islamic banking started in its modern form, but it's a new way of doing the things.

[00:45:58] And given the limitations, you know, jurisdiction, limitations, legal limitations facing in a macroeconomic framework, okay. A lot of governments are still hostile towards Islamic banking and finance, even in the Muslim world. So given all these limitations, whatever Islamic banks and financial institutions have come up with, that should be appreciated.

[00:46:23] Okay. However, at the same time, we should be we should play the roles of activists. We should continue to highlight certain problems with the practice of Islamic bank banks and financial institutions so that they try to improve on those things. And there is a lot of improvement, I must say when I look at the contract like Mora.

[00:46:48] When Muha was introduced in Islamic banking and Fi finance in the 1970s, its implementation was very dodgy, I should say, in a lot of cases. The processes were not followed. But now wherever we find Moha being used its application is very authentic. All the Sharia protocols are being met.

[00:47:12] I have come across some Sharia audit reports now, and about 15 years back if 15% of sample of Mora based product was drawn for auditing purposes, we would find about 35% cases where there were some issues. That nu number now has gone down to less than 5%. So this means that Islamic banks, they have improved on the Sharia protocol side.

[00:47:43] And this is because the Sharia governance frameworks have been developed and implemented in different parts of the world. Sharia has been a focus, but I think from now on economics side of the the story should be emphasized as well. Yes, we are happy to consume Halal financial products, but at the same time, we should be looking for the qualitative improvements in the products, making them.

[00:48:18] If not very superior to convention, at least marginally superior to the conventional financial products. And this would happen, I believe, with the increased use of financial technology, FinTech in if financial FinTech phenomena phenomenon is more democratic. Okay? And the costs could be less as compared to the previous or the old models of financial intermediation.

[00:48:50] And a lot of the things which were not possible previously, like, you know, they are possible because of, you know, crowdfunding platforms and possibility of involving very large number of people, not only from within a jurisdiction, but globally as well. So the kind of products we can now develop, they could be global products.

[00:49:12] Now, for example, if we come up with a global work based in a jurisdiction I'm just using . If we come up with a global work, f which is structured around an Swiss foundation. Okay. And if this is marketed globally to Muslims and non-Muslims alike, this could raise big billions of dollars on an annual basis, which could be used as which could be used for good causes of choice of people.

[00:49:46] Similarly, I think we have to. Open up as consumers and of course on the supply side, the structures of Islamic financial products. We have to open up our minds to certain things which we would not like to consider at all. And I have been talking about the power of lottery and raffles. Now I know that in your mind you're saying, this guy is crazy.

[00:50:13] He's talking about Islamic financing. No, I I'm still thinking about the miha that you mentioned. Cause I have a big problem with Miha

[00:50:23] soha. Basically you say, okay, this, let's say a car is worth, you know, the price of a car is $10,000. You say, okay, well I'm gonna sell it to you, but it's $15,000. Pay me over two years. Right. That's how, yeah, that's right. Yes. So, I mean, didn't you just like guarantee the amount of interest that you're collecting on the car?

[00:50:47] No. In the case of like a traditional loan, you would just sell the, you would give the guy a or girl you would give them a loan and then charge them interest that they ended up paying early. You would calculate, let's say what did I say, 15,000 over two years. So you would say, okay, the interest I collect is 5,000 over this next two years.

[00:51:09] If the person pays early then the interest that they actually end up paying is less. But in the case of Baha, the seller actually guarantees the amount of interest that they collect , regardless of when the person pays. And in the case of default, it's the same they'll seize the asset or whatever.

[00:51:27] So, I, so.

[00:51:32] If you want that just, no I think we have dis Yeah. We have discussed in general the problems. Okay. However you know, the moha doesn't work the the way you have described. Okay. And actually I have problems with that. The way it's working now, Moha, actually, now it, in terms of its economics, it's exactly the same as an interest based loan.

[00:51:55] Okay. It's Sharia . So if, for example, if there is a seller, no, it's not worse the guarantee amount.

[00:52:07] No, it's, you paid early, still paid the same price as if you paid over the entire period of the loan, basically. This is what I'm saying. Okay. This is not, it happens. Okay. They're, most of the Moab has, they allow now early payment rebate. Okay. And for me, Personally, I don't like Ali repayment rebate because if this was an authentic moha, then the guy should be paying the full amount, even if he's in a position to pay Ali.

[00:52:35] Okay, this is my personal view. However, because Islamic banks are operating in a banking framework, the regulators would like them to behave like their conventional counterparts. Okay? When I say that, you know, the, these products, they have improved. Basically I'm saying that, you know, in terms of Sharia protocol, yes.

[00:52:56] Okay. They have improved significantly. I think Okay. We have said a lot about the economic side. Okay. No. I, there is a need for improving the economic profiles of Islamic financial products, and this is where I would be in agreement with you. However, I think the difference between you and me would remain that I would still call these products area compliant.

[00:53:19] Okay. And you would like to call them just like any other conventional product and we can agree to differ at this point. Yeah, absolutely. Yeah. What were you saying about lottery and raffles? Yeah, that's interested. I think Okay. Most. Okay. They just jump up when they see something which involves a draw.

[00:53:41] And they say, this is gambling. Okay? Draw itself is not gambling. Okay? If I, for example, if I want to give a gift of 1000 dollars to people living in my neighborhood, and I don't want to discriminate, oh, because this guy is good looking. I should be giving this $1,000 to him or this if I have a gender bias, I would be giving this $1,000 to this girl.

[00:54:08] Okay? So I don't want to have this kind of bias in, in, in selection of the prize. You're gift taker. So I actually draw these are about 200 people in my neighborhood. I draw and a name comes and I give that money to that person. This is not gambling. Okay. Correct. This is recognized gift giving, prize giving, and Islam doesn't have any problems with that.

[00:54:35] Correct. Gambling. For the listeners, you know, gambling is a very specific case whereby two or more people pull their, say money or resources, pull their money, and then they draw, they have a stock stochastic process. Okay? They toss a coin and if it's heads all the money or more an amount of money more than the individual contribution would be given to that person.

[00:55:08] For example, if I. Contribute $1. You contribute $1 to the pool and we toss. Then if you win, you get $2 or an amount, more than $1, more than your contribution. That would be deemed as gambling, which is prohibited. Okay? However, if I, if both of us, we say that we are contributing $1 each, going to Islamic relief, a charity, okay?

[00:55:43] And for, to encourage people like us, so it is not only me and you. Another person standing there says if if people contribute to this charitable part, I would draw I would draw one name from the list. and I would give them an iPhone 14 Max Pro from my own pocket. This would not be considered as gambling.

[00:56:13] An independent party is giving money from their own or money or something from their own sources that would not be considered gambling. Your my money. It's a reward for giving security. You mean like if you let's say we had we were collecting money for a certain cause and then we said, okay people who contribute to this pool.

[00:56:37] I'm just I guess summarizing your example, people who contribute to this pool were, that's gonna go to this certain cause we're going to draw a name at random from the list of contributors and we're gonna give them an iPhone 14. That's right. Yes. Is that correct? And you're saying that's not gambling?

[00:56:59] The, this is not gambling. If iPhone 14 promax comes from a third party, the money is not used from the pool to buy that iPhone 14. Okay. I'm not sure. I'm not sure. No. This is no whether you agree or not. Okay. No. This is an established area principle. Okay. This is not gambling. This is not gambling.

[00:57:23] Okay. Gambling is only in order to enter the raffle. So long as there, like in your first example, there wasn't any payment regarding, you know, you wanna give out the gift to someone in the neighborhood, but there was no, you wanted to make sure that you appeared un bias. What I understood is that there's no payment from anyone in the neighborhood.

[00:57:44] You're just drawing something at random. It's like if I had two kids, for example, and I, yeah. And I had gifts and I put them behind my back and I I had each kid choose an arm and gave them whatever in order to appear on biased that I'm on board with. But here you're saying people are actually paying in order to get a chance at a prize, right?

[00:58:06] No. People are paying. Second example, a char in this example, people are paying two charity, okay? And a third parties would like to incentivize people to contribute to charity. And they say, we would be picking one of you who would receive an iPhone. Okay. And that iPhone Sharia says, as long as that iPhone, if that third party is me, I say, I will give you my iPhone.

[00:58:36] Okay. So this is not gambling, okay? This is basically a prize given to someone who is contributing to a charitable cause. Okay? But you see the hazard there, right? The hazard there is that the people who are, yes the cause is charity but the people who are contributing may be incentivized by the chance to win this thing.

[00:59:02] That's the whole idea, okay? You know, in, in order to encourage people to do more of good, if you are incentivizing them, what is wrong with that? It's fine. Although it there is. There's the hazard there is that people become addicted to these types of setups where actually addiction, they put money.

[00:59:25] Yeah. Addiction put in money, and they hope for something more than what they got in return. Yeah. Again, addiction in return. Yeah. Addiction is not necessarily a bad thing. Okay. You know, we can call it habit. We are using a word addiction to make it sound bad. If I am habitual of p praying five times a day of someone would, might say that I'm addicted to going to mosque

[00:59:54] Okay. If this is what someone says, oh, this guy is addicted to spending time in the mosque. Okay, I should be happy about it. Okay? There's nothing wrong with that one. This is only wrong choice of the word. If we want to make people. Habitual of contributing to charity. And if we devise a mechanism to make it sustainable, this is okay from Sherry Viewpoint.

[01:00:20] As long as we do not breach other financial principles. I e if someone says that, oh, because this is giving prizes is so good for raising more amount of charity, we can actually, we would look into the less marginal propensity of giving. And if, say, if we give them two mobile phones, the amount of charity going into the port would be a lot more than the price of an iPhone 14 Pro Max.

[01:00:53] Hence, we should be buying this from the port of the charity money. This would not be acceptable. . Okay. We can ask a third party to in bring more incentive. This is okay from she point. Now, if we. To use this kind of products in Islamic banking and finance, this would allow a lot more inflow of capital into the industry, and the cost of acquiring that capital would be very low, significantly low as compared to the deposit taking and so many other things.

[01:01:30] Hence, Islamic financial institutions would be in a position to spend on good causes. They might then be able to offer interest free loans. Karth, Hasan, right now, you go to an Islamic bank, they would push you out of the premises saying that, no, we are not charitable organizations. We would offer you financing on or whatever basis.

[01:01:57] Well, pre, because the money they're using it has cost them some. Some amount. Now, if Islamic financial institutions have access to cheap or free money, then they would be in a position to help people in more compassionate manner that would make Islamic finance more relevant, not only to Muslims, but non-Muslims as well.

[01:02:20] That would be the time when Islamic banking and finance would claim to be a global phenomenon. Now, you know, when we look at microfinance has become a global phenomenon. It has been recognized by way of a Nobel Peace Prize as well. Islamic banking and finance is far behind even microfinance, which is a lot smaller.

[01:02:41] Industry then Islamic Banking and Finance. Why? Because Islamic banking and finance has limited itself to the Sharia domain and to a select number of Muslims, and that's it. And it has failed to convince the wider world that it has an economic value proposition if, because we have actually chosen a banking model.

[01:03:03] Banking model is a model is a business which is costly to run. If you go into charitable sector, I believe that, you know, there would be a lot more chances for Islamic finance to show it's it's a good face to humanity. That, you know, we, we care for people. We care for good causes, and we are willing to, and we are in a position to contribute to sustainable sustainability, governance, environment, and so on.

[01:03:34] That would be the time when Islamic banking and finance would become, or Islamic Finance would become more mainstream. It would have an impact, and hopefully this would be recognized on global front as well. Yeah, no, I share a sentiment regarding the cheap capital that is needed to be attracted to financial institutions.

[01:03:56] Again, here, we'll agree to disagree on the on the lottery or I guess the implementation of the, of accessing that cheap capital. But I do appreciate your thinking sort of outside the box here. In terms of ways that we can improve the current system. Cause I'm sure you can already tell that this is something that I think needs to happen.

[01:04:17] Finally, where can people follow you? Where where are you active? People wanna ask you a question if people wanna follow your thoughts. Where can they. I am actually not a social media guy. Okay. I use LinkedIn on a daily basis, okay? Because this is a platform primarily for professionals, although lately I have found some people begging on LinkedIn as well.

[01:04:43] But by and large, I would say LinkedIn is a platform I find more relevant to my needs. So those who would like to get in touch with me, I am I, as I said earlier, I share Todd thought of the day on a daily basis on one aspect of Islamic banking and finance. I am an advocate of Islamic banking and finance.

[01:05:07] However I highlight certain aspects of the practice, which must be improved. And a lot of people, they appreciate it. Okay? I think, okay we should not be just one-sided. If we are advocating Islamic banking and finance, we should not be all praise. And if we are criticizing Islamic banking and finance, we should not be criticizing all the time.

[01:05:30] This is a manmade system. It has its shortcomings. We must realize that, you know, there, there would always be some room for improvement. A lot of people I have come across, they question the intentions of Islamic banker. And they said these guys, and they portray them as if they're devils.

[01:05:53] I don't think I, I think this is too much. Okay. These people, a lot of people I interact with, they have very good intentions and they would like to offer a genuinely authentic share compliance solution to their clientele. And many of them, they are successful in this respect as well. So, coming back to my social media thing, I think on LinkedIn if you subscribe to my thoughts, I have a WhatsApp group as well, which is very exclusive to those who follow me on LinkedIn.

[01:06:26] You are most welcome also on a limited scale. I offer advice to people who are looking for. Some kind of clarification on Islamic banking and finance. I do not reply to written questions because it takes a lot of time. So in, if I have allocated some time on a daily basis for people who would like to ask questions I share my mobile WhatsApp number with them, they call me.

[01:06:55] I find it. To speak rather than writing because as I said, this is very time consuming. I, we have quite a few programs which could be relevant for those who would like to know and learn more about Islamic Finance. We have a 10 module program called Cambridge Islamic Finance Structuring Master.

[01:07:19] We are running season three on this Saturday. We started season three with module one, which is going to be incidentally repeated in a live Zoom session tomorrow 9:00 AM London time. So those of you who would like to learn more about structuring innovative Islamic financial products, and you're most welcome to join us go to, this is being recorded March 29th.

[01:07:46] Will this be recorded? The, that right tomorrow? That's right. Yes. Yeah. The reason we are going for this repeat so soon cause because of some technical problem, the session on Saturday could not be recorded. . Okay. So then we decided to offer it again to those who missed it in the first instance.

[01:08:07] And we would be recording this session in. We have another program for the practitioners and high end executive management of Islamic Financial Institutions. It's called Cambridge Islamic Finance Leadership Program, which we hold every year at the University of Cambridge. This year we are holding it between 20th and 25th of August at Claire College Cambridge University.

[01:08:33] So those who would like to share or who would like to have Cambridge experience and learn leadership related issues in Islamic banking and finance uh, I would encourage you to apply through our website. Perfect. Thank you Dr. Houma, for your generosity with your time. I really appreciate it. I think this was a fantastic episode.

[01:08:55] If you'd like to follow us on YouTube Twitter, Instagram, TikTok, all that good stuff podcast. If you'd like to subscribe to our podcast, the Practical Islamic Finance Podcast, please do so and leave a review. If you would be so kind, that would be great. Only leave a five star review.

[01:09:09] If you have any other opinion. Don't leave your review . I'm just kidding. But yeah. Thank you very much Dr. We'd love to have you again, podcast.