“If I have to share the losses, I don’t just pile into sub-prime”

Alt Twit logo 2Tarek El Diwany

This article is part of a series on faith and finance.

On 23 October 2013 Public Spirit was formally launched in Westminster at an event which saw a panel of distinguished guests debate the question: ‘Can public faith help rebuild the link between morality and markets?’ In this response to that question, Tarek El Diwany highlights the need to challenge the ‘MBA consensus’ that shapes the financial sector, and proposes that Islamic financial norms, such as lenders and creditors sharing risks, offer a realistic starting point for making change.

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I worked in the world of secular finance as a financial market trader, for several years. Then I crossed over to the world of Islamic banking and finance, because I felt it would reflect the sort of values that I have, and that I have come to accept, and I became Muslim at that time as well. I think I should make it clear that I’m not at all happy with the direction of the Islamic banking industry; it has largely become an exercise in charging interest and adding Islamic labels to the process, but that is another story. I travelled widely in the world: I worked in South East Asia; I worked in Indonesia, Malaysia; I’ve worked in Europe a lot and the Gulf. One thing that is very clear to me is that the sorts of discussions that you have in the East, I would say actually, not just in the Muslim East, but in the East generally, are very different from the ones we have in the West. They tend to be normative, people talk about what should happen in the world, whereas we are brought up to talk about things in a much more descriptive way. For example, my economics professor taught us what would happen if tax rates rise, not whether tax rates should be higher or lower.

That kind of normative discussion is absolutely central to Islam, and I think to faith generally. And I really do think that we need to get a balance between the tackling of issues at the level of action, as Francis was saying, and people who can inject normative discussions and bring that into the private world of banking and finance here in the West. The discussions that people have, I feel are too constrained by the corporate setup; people are very subject to group-think, they are very afraid to speak out, they are afraid to challenge the MBA consensus that has been learned by 20 colleagues who are sitting with you around the table in the bank head office, or wherever you may be. There is a kind of self-selection, a recruitment process of like-minded individuals who have the same kind of degrees, the same methodologies of thinking. To actually start to challenge that takes a very brave person, but it really does need to be done. And it needs to be done within the corporate world, I think. It is all very well politicians talking normatively about what should be done, but do bankers actually listen?

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“In finance today people are very afraid to speak out; they are afraid to challenge the MBA consensus that has been learned by the 20 colleagues who are sitting with you in the bank head office.”

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Where are the bankers here, today? I know that they would be perfectly happy for us to talk till kingdom come, as long as we don’t do anything. So, we have to try and somehow reach out and engage with the banking community, and with the finance community generally, and somehow bring these discussions of ethics and morality into play. We need somehow to move beyond merely firefighting the problems that we have at a political level. We don’t want to get trapped firefighting; we have to have a strand of thought that is talking about where are we going in the long term. And likewise, that needs some kind of change in the political structure, because politicians don’t tend to look much past the next election. It is a very rare politician who does that. It is all about the short term, if you need to change the system in education, or healthcare, or finance, it might take 20 or 30 years, and it is not really going to have any political payback.

So, how do we arrange our structures to enable the right thing to be done? When we talk about morality and ethics, researchers tell me that the ethical framework develops as you grow older. As you mature you start off thinking about, ‘How can I have all of that box of chocolates for myself’, and then you get a little bit older and think, ‘Well actually I wouldn’t look that good if I ate the whole box myself’, so you start to think within an ethical framework conditioned by what other people might think. And then the final step in the development of morality and ethics at a personal level, is actually doing the right thing. It is no longer what other people think, it is doing the right thing, and this is the ultimate development. And everybody answers that question differently, and they have the right to, and we have to encourage them to do that.

But the problem once you move into the ethical domain and starting thinking ‘Do unto others as you would have done unto yourself’, is that it brings up the problem of differences in ethical perspective. For example, Liz might be very happy to lend to me at 5 per cent interest, but I, as a Muslim, would regard that as usury and a very dire sin. So, we are back to square one. What is the value system that we are going to adhere to, and this is one of the problems among the faith communities: apparently small things for you, or small for me, might be very big for you, or very big for me. And therefore, we are not actually able to join together and leverage the power of the very large community of faiths.

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“Capitalism is a kind of religion. The choice is not therefore between faith and the existing model; it is a question of which faith are you going to choose.”

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“People are too constrained by the corporate setup”

I’m sure there are a lot of Christians, Muslims, Jews, Hindus, who also have a prohibition of usury in their scriptures, by the way, who would love to get together and provide an alternative to Wonga and to 20 per cent overdrafts, which are also very substantial rates of interest when they start to compound. But we don’t actually get together. Why? If you could leverage the power of the faith communities and lobby effectively, professionally, like much smaller and much less well funded organisations do lobby, then maybe we would start to get somewhere. And maybe if we could actually light some candles and develop some new concepts – local banks lending interest free maybe, finding a way of doing this; instead of complaining about the darkness we would hold that candle up. People would see that actually faith communities are relevant, it is no longer some sermon or some Friday khutba in the mosque; it is actually an opportunity for me to go and solve my problem by borrowing interest free from this institution. Again, we need to find a way of actually putting the talk into action, and I have tried in Islamic finance to do that in my own community, and I just want to mention a few things in that regard.

People have often asked why religion should interfere with finance, and why there is such a thing as Islamic finance – we don’t have ‘Christian finance’ after all, and we don’t have ‘Jewish finance’. People just refer to ‘finance’. Why is Islam suddenly coming so prominently into the issue? My answer, and I say this very often, is that capitalism is a kind of religion, and we have to accept that it is not, therefore, a choice between faith and the existing model, it is a question of which faith are you going to choose. Capitalism makes very fundamental value judgements, and that is the hallmark of a religion. Money is the measure of success, for example. That is a big value judgement.

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“It is no good going back to the old model that failed, to try and stoke up another property boom, to help politicians get re-elected or just to get people’s asset values above their mortgage.”

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We measure the success of a company in profit, we measure the success of a country in GDP – what about happiness, what about social stability, what about environmental protection? If you have the wrong unit of measure, you get the wrong policy response. We are not dealing here with an issue of, ‘Should faith have a part in the financial system?’ It already is a basic part of that system, and it has taken over our world to the extent that we don’t even recognise it anymore – which is why we can sit in that room of bankers, our 20 MBAs, doing our group-think. And actually we are missing some very fundamental points. So, I do believe that a system of finance based on risk sharing in which we actually try to share the risks and rewards of business and of financing, that is absolutely essential. It is no good going back to the old model that failed, to try and stoke up another property boom, whether to get re-elected or to get people’s asset values above their mortgage. It is just not going anywhere, and I believe it actually could collapse very quickly, we could be in another crisis within two or three years’ time, because these fixes, these druggy-type fixes are having a shorter and shorter effect on the economy.

But anyway, if we have a system where I, as a financier, share your losses and your rewards, it would make me very much more careful about whom I invest in. If I have to share losses, I choose my projects much more carefully. I don’t pile into sub-prime backed by the security of your property or your business; whereas if I can secure my loan at interest against your business assets, then I’ll simply lend to the richest people, and I’ll lend to the government, because the government can tax. So, it turns out that within this interest-based system of financing, capital goes towards those who are already rich, because they have got the most collateral to offer. Whereas in profit and loss sharing, capital goes to those with the best projects, because I can only get a return if you make a profit. Now this is very fundamental, and until we encourage the financial industry to share more of the risk of the real economy, and be less a parasite that gains in good times and bad at the cost of the overall system, until we address that fundamental issue we are not going to move much further forward. That is a paradigm change; it is long term; it is normative, and Francis I absolutely agree that, yes, we need food banks – we are firefighting at the moment – but we have to find a way of balancing the two and having a dialogue which helps all of us in the faith communities come together and act against this problem.

Tarek El Diwany is a director at Kreatoc Zest Limited and author of The Problem with Interest and Islamic Banking and Finance.


The image of Canary Wharf is included courtesy of Umar Shuaib and has been released into the public domain.

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