Who is Islamic finance designed for? Well obviously it's designed for the banks, as they are staffed with human beings and the whole reason for their existence is to make as much money in as little time as possible for the shareholders and investors.
So if we put aside the behavioral aspect that humans, both individually and collectively, are predisposed to amass as much franked paper and stamped metal as they can over the course of their lifetimes, who is Islamic finance for?
Looking at the type of product the bankers are developing it does not seem that the industry is for the average Ali or Farouk on the Muslim street. Instead it seems that the industry is focused on the product side on a tiny sliver of a small segment of the Muslim population, the high net worth individual or ultra high net worth individual. And of course the ubiquitous (at least in conversations with Islamic finance marketing people), elusive and secretive family office and institutional investor.
On the lending side as well it's hard to find competitive and serious products that loan money to individuals, or finance the entrepreneurs that run small- to medium-sized businesses. Instead the industry seems to want to deliver Sukuk for multinational oil companies, or real estate firms who want to erect fanciful, overpriced glorified business parks and luxury flats.
By and large the industry is not lending money to the man who wants to open up a small café in Birmingham, or to a factory owner in Delhi who wants to buy or lease some industrial equipment, or the community leader who wants to build some basic, but affordable houses in Yemen.
Instead the Islamic finance industry giants are, much like a flurry of lemmings stampeding towards oblivion, trying to create a Shari'ah-wrapped private wealth management and investment banking model based on the system that is collapsing in the US and Europe.
It has been this way for years, but monumental collapses like Unicorn Investment Bank or Gulf Finance House, to name a few, have taught the industry nothing, and there seems to be little change in business models, personnel or product development. There is scant democratization in Islamic finance, nor universality nor altruism.
But only a fool would think that a business like Islamic banking is there for the purposes of philanthropy. However, that doesn't mean that news of the development of an Islamic hedge fund should be greeted with a standing ovation. Who is this product for?
The term 'Islamic hedge fund' is in itself an oxymoron and although the one in question is technically a tracker within an Islamic wrapper, when it first launched in a pre-credit crunch 2007 it did not attract a great deal of interest. The bank behind it now hopes that it will meet with a much more favorable reaction in the middle of a global recession.
However, with a minimum investment of $25k, the vast majority of the bank's regular customers will not have enough money to invest in this fund. 'Islamic hedge funds' are not new. The Dubai government sunk $200m in a suite of 'alternative' asset management products in 2009 and since then things have been very quiet on that front.
Other Islamic hedge funds have been lost without a trace, but product manufacturers are still trying to come up with the Golden Islamic Hedge Fund Egg for their UNHWI clients as well as more exotic real estate products and more private equity. All these products are aimed for a very narrow segment of the market and personally I don't think that's where the action is.
Africa is a very new market for Islamic finance - the same as southern Asia. But it's in places like this where Islamic finance has captured the imagination of the masses, and there is a reason for that. It's because the banks and financial institutions there have lowered their sights from the mega-wealthy to average mortal and whose business model is based on lots of small fees on small accounts, as opposed to a few big fees from a few big accounts.
Surely Islamic banking is about simplicity and sustainability what drew me to the sector was that it was refreshing, purported to be based on ethics and was trying to solve problems in a simple, moral and transparent way. Simplicity defined. So more power to the Pakistani Modarabas and savings schemes of Sudan, because this is where the future is - not in trying to compete with discredited Swiss banks and Wall Street titans, as that is just a lose-lose scenario.
© The Islamic Globe 2011
