Islamic Banking: Solutions and the Ways Forward: Part-1

بِسۡمِ ٱللهِ ٱلرَّحۡمَـٰنِ ٱلرَّحِيمِ

In the name of ALLAH, the Most Gracious, the Most Merciful

Islamic Banking: Solutions and the Ways Forward

For 25 years I built Islamic finance at the highest levels.

 A complete path back to real Islamic economics — from £10 to a fruit seller all the way to replacing fiat itself, rooted in one hadith about selling dates. It is long. It is raw. It poured out in one sitting.

Solutions and the Ways Forward

Let’s have a recap of the first four parts:

Part 1; My explanation of how I saw 95% of the deals I executed begin with strong Islamic principles and end up as debt, through detailed, relentless amendments to the underlying Islamic ethical structure

Part 2: A detailed analysis of the regulatory environments that banks choose for themselves, which means that lending is around 3x more efficient than actually investing and conducting enterprise

Part 3: the grenade – how credit creation results in this efficiency now being 30x in favour of lending, and how profitability of each dollar of lending is 40x each dollar of investing

Part 4: Critical analysis claiming that Islamic banks have deliberately, and with full aforethought, chosen this path of banking, and thus never had any intention of implementing the demands of our religion. How this makes a mockery of our Deen and damages Muslims

So, now, in Part 5, we move to looking at solutions. The first thing I will say is that no effective solutions can be delivered whilst we are still in thrall to Islamic banking. And we are, and there is no sign of it ending.

So, even the most basic of steps I outline below are existentially at risk of occurring because of the existence of Islamic banks.

My position, as unflinching as always, is that there can be no better step for Muslims than to abandon and dismantle the cathedral of Islamic banking today. Immediately.

Notwithstanding that, let’s jump in.

I see that there are 3 levels of our approach in looking at ways forward:

1- Riba in our personal lives

2- Delivering products

3- Systemic change

The first step involves a sincere inward introspection. Where is Riba in our lives? I will not accept that answer that some people will say there is no Riba at all, because that is hardly credible. I use a bank for payments purposes and banks are monuments to Riba, and even if I don’t take a loan or use credit products, by having a bank account I am inserting myself into this machinery.

So, where is Riba in your life? Be honest, and then intend to remove it. Or remove it as much as you can. This process is the most difficult of all the steps. It is why, when people ask for the solution, and I say “Avoid Riba”, people often get angry and say that is no solution.

To that I then say we need to have more Taqwa, and that gets people even more angry. We are slaves, and we are slaves to Riba, rather than slaves to our Lord.

I will not water down my heartfelt advice – Muslims: Avoid Riba.

Given that I personally was involved in Haram (conventional investment banking and then Islamic Riba) for over two decades, and with some level of “success”, when I finally was able to accept the humility to go through this stage, and be fiercely honest with myself, my total rejection of Riba resulted in a downward delta that is difficult for most people to replicate. I did not have riba just in Islamic loans or credit products, I had Islamic Riba coming out of my pores, and was inhaling it with every breath, and it flowed in my blood. I lived it every day, and I made money from it.

Of course, I was surrounded by scholars who told me otherwise. This is Islamic, this is Shariah compliant. This is good.

But my brain, with decades of lived experience of this industry, and my eyes, and my heart, told me otherwise. I was outwardly fed excuses and compromise to ease my indecision. Inwardly, my heart already knew. I had to surrender.

(Islamic) Riba was in my clothes, in the toys of my children, in what I fed my family. This acceptance was the most difficult moment in my life. I had Riba in my blood, and I was slowly injecting it into the blood of my family.

So, I stopped. My humility finally emerged, and I became a servant of Allah. I stopped immediately and I resigned from my post of Global Head of Islamic Structuring at JP Morgan.

And the material results were devastating.

But I finally discovered what it meant to be a Muslim that fears Allah and seeks only His pleasure.

Everyone has their level and their path, and this was mine.

This is the path I encourage everyone to take as their first step, and it is monumentally difficult.

The second step is products.

Ok, this is probably what most of you have been waiting for. Islamic ethos with respect to capital is quite simple. Don’t do bad things with your money. Invest, circulate your capital. How else can you pay Zakat every year and not see your wealth reduce every year. Make your capital work for you.

Back to it – capital is not a new concept. The act of capital moving through society is also ancient. I have nothing new to add to these concepts. I merely position a layer on top of this to posit what I see as positive movement and allocation of capital for Muslims. Capital has a nature, and it is unremitting, It knows no boundaries, Ethics is a word for people, not capital. Capital is relentless. It will move. It will move from those those who have it, and it will move into opportunity. Capital knows no religion and no God.

What matters is here is us. How do we want capital to move? What outcomes do we want?

Why am I spending time on this before products? Because products must be the result of all of this. Products are not entities that stand up and are assessed by modern metrics. Products are the result of our intentions, and they must express those intentions clearly and without doubt. If they fail to do that, then product must be deemed to be a failure, regardless of scale, usage, or profitability.

What is a good outcome for these products? In my view, and I have written about this, a sincere Muslim working to feed his family is the apex of Taqwa. Not the CEO, not the regulator, not the rules maker, not the millionaire and not the tech founder.

So we must direct capital to this servant of Allah. This could be a fruit seller on the street, or a doctor looking to open a new practice, a book seller, someone who makes furniture. And we can expand these ventures by degrees. A fruit seller then becomes a global importer / exporter of agri goods. A doctor becomes a new hospital wing, the book seller becomes a heavyweight publisher, the furniture maker becomes Ikea. They are all doing the same thing, just on a different scale. They are the same, they are no different.

A solution for one must also be a solution for the other. There can be no other way.

So, given our base, and our intent, we simply remove all obstacles that would otherwise prevent capital flowing as per our desire.

We are asserting our control over capital in our possession. We are demanding now that capital will move according to our values, to our criteria. The capital still does not care, it is like a horse chomping at the bit, it wants to move. We simply wait, and point it in the right direction, and let it fly.

The actual product is a consequence. You have the capital. You declare you are a servant of Allah. That in itself is enough. You direct your attention to legitimate and valid targets for your capital, and you let it go.

The product must appear, it cannot fail to appear, if all of this is in place. For a fruit seller, just go and speak to him. Understand how capital constrains him. Does he need capital to buy more fruit? Will inventory finance enable him to scale? Does he need a bigger cart to push down the road. Will moving to a shop expand his business.

Understand your target, and the answers will emerge naturally.

Bu failing to understand, by seeing the product as yours, and not his, you will send capital on your terms, on your metrics, and you will devise a product that suits you, and you will find a dissonance. Sooner or later, your product will not deliver what he needs, and he will fail to deliver what you need. You have let your capital master you. You have distanced yourself from the primal aims set down for us.

Now, once we understand how our capital can benefit him, and then in return it must benefit us, now we sit down and design the mechanics of what the product should look like. This is technique. The specifics of that technique will vary according to the dynamics that present themselves to us.

This will apply, in every single step I have outlined, to a £100 product for the fruit seller, and a £1bn investment to a conglomerate.

Is there anything in the manner in which you deliver your capital and your requirements (the contract) that will hinder or prevent him? These aspects must be dealt with both to your and his satisfaction.

Are their controls around his market that might limit the effectiveness of your product? Deal with them.

How will you receive your benefit? Will it be direct capital returns? Will it be an exposure to his expanding business? This is a matter of clarifying your preference and correlating it with the beneficial outcome he can expect.

We also look at size here. Does he need £10, does he need £100. He is unlikely to need £100,000. So, we must ensure this amount is delivered effectively to him. Not that he we invest £10 and he receives £7 due to friction. We must remove this friction.

The product does not exist if we do not remove this friction. The solution is not to turn him away and say we will only deploy minimum £1mn, but to find a way to serve him. This is a deep endeavour. It will involve frictionless deployment of capital, and frictionless delivery of return. This will force us to look at digital assets and tokenisation.

Because we are not here to help one fruit seller. We need to help thousands. And we need a system that is repeatable, and scalable.

And how do we know if he actually manages to use our capital effectively? Maybe he is so used to his existing capital level, that the injection of further capital makes him err. He doesn’t know how to use it. Well, we must guide him. We must understand his business as well as, or even better than him.

What if he does effectively use our capital and makes returns, and then underdeclares this return to us? Are we going to stand next to him all day and count his money? How do we manage this agency risk. We must now understand his business better than him to identify the potential leakages, and plug them.

How do we know he is a reliable and honest person? Do we check this before deploying capital? We must, so how do we do it.

All these answers will emerge at a speed that is commensurate with the effort you put in to understanding the issues that exist in this market.

Let us examine some realilstic concerns we would face in such an investment, and how we can approach them

- Is the person trustworthy? Well, we don’t know. Especially, as would be likely, this capital is being sent inwards from different countries. How do we assess credibility and honesty checks? We would need to use our imagination a little. We can find someone to vouch for him. But how do we know the voucher is himself credible? We could find a local person to act as an intermediary or vetter, who would then lend his personal opinion on that person. The intermediary, or agent, would be responsible to source 10, 20 honest traders. And he would have the local presence to make that happen.

- We could also examine ways to reduce the risk of the trader just taking our cash and disappearing. Is it possible to use our investment to directly pay the wholesaler who sells to our trader? Can the agent play this role? This reduces one risk

- We could create nodes of traders, say 10 traders, and inform them that an investment into one of them becomes their group responsibility (and they would all receive investments). The failure to repay by one of them, through an act of bad faith, would result in the whole group having all incoming capital suspended. This would force their dynamic to create their own built-in risk mitigants. This could be better than any external measure we could take

We have to start thinking asymmetrically when we face asymmetrical risks.

Could we send the agent to the local mosque to obtain character references for the traders?

How can we then build a record of data that can be used to reduce risk. Once the trader has completed a cycle of capital investment, and is ready for the next, his risk in our eyes would reduce compared to finding a new trader to make the first investment with. This informs us we must capture data that can help us understand risk.

Each one of these approaches would have a commensurate approach in an institutional size investment.

Let us also look at appropriate contractual structures

Islam provides us with a suitable range of contractual forms to support capital investments. These range from Mudarabah, Murabaha, Musharakah, Wakala, Ijara and so on. I will not explain them in detail here, as a simple public search will provide the detail for the reader.

I am somewhat reluctant to rely on these Arabic names; however, because I have seen each of these named contracts can, very easily indeed, be manipulated to deliver lending and Riba. I know, because I did this, and I did it very well. And scholars approved this every single time.

Rather, let’s consider some types of structures that could be suitable in our fruit seller context.

We could simply buy the goods from the wholesaler and then on sell them to the fruit seller. This is Murabaha. However, we should then be prepared to take asset risk while we own the assets. How are we going to manage the risk of the fruits being lost, stolen, or destroyed, or the risk they might be low quality – how are we going to check. We could appoint the fruit seller himself as our agent to perform this role. So he would go to the wholesaler, buy the fruit withour funds as our agent and then sell the same fruits to himself with a mark up so we make profit and he pays this increased price to us at the end of the day once he has sold the fruit.

This is a very bad solution. We are just inserting ourselves in the middle of a transaction we have no right to be in. Why are we buing and selling fruit from thousands of miles away, and we don’t know anything about the product or the market. And then why are we pushing all the risk onto the fruit seller, because once he buys from us, he must pay the mark up sales price or be in default. This makes no sense, This is Shariah creep. This is Riba creep.

And this is precisely what happens when we have failed to put ourselves through the process in Step 1. And this is how Islamic banking works.

Instead the servant of Allah who ties in this capital, and its application, with his Akhira, will not do this. This is not Ihsan, this is not excellence. It is paying lip service to our Lord.

Any structure in which the financier cannot meaningfully bear operational risk, but demands guaranteed recovery, has already failed — regardless of its Arabic name.

I have realised that the intentional use of Arabic names for contracts in Islamic banking is often a ruse — a mechanism to deflect scrutiny and to gatekeep understanding. I refuse to play this game.

I also claim that this stance is aligned with classical Muslim commercial practice. Historical Muslim traders did not announce that they were entering into a Murabaha or a Mudarabah. They explained, plainly, what they were going to do, who bore risk, how profit would arise, and ensured that it was fair for both parties.

The transaction came first. The label came later.

Another option we have is to frame a contractual relationship that actually follows from what is occurring. We are delivering capital, and the fruit seller will decide what to buy, at what price on a particular day. He will also set the sale price. He will know what is in season, what is in over supply and will act accordingly. We are giving him freedom to do this. And we will thus have necessarily analysed, beforehand, his capability to this. This is important.

So, we could say – we will give you £10, you do as you see fit, and we hope and expect you to make a profit, and let’s share that profit 50:50. This reflects what is actually happening, the risks we are actually facing, and the outcome is that we benefit if he benefits.

This is Ihsan delivered in a £10 investment.

A person familiar with Islamic finance may tell me this is a Mudarabah. I will look at him and say: I do not care what name you attach to it. I am describing what is actually happening. It is fair. It is transparent. Both sides benefit together, and both sides face risk together. If you wish to give it a name, do so afterwards.

Let’s look at another option. We might be concerned that the fruit seller will buy £20 of fruit from the wholesaler on the day, and he might sell 75% of that in the day, and the rest is unsellable. He might decide the first £10 of fruit he sold was his own purchase, and the remaining £10, of which only half was sold, was out purchase. What is stopping him from telling us that I used your £10 to buy fruit and only sold half of it and had to throw the rest away.

Alternatively, even if he does not act in bad faith so clearly, this could manifest in a natural way. A customer approaches him, and the seller gently guides him to buy from the fruit that he purchased with his own funds, not the half that he purchased with his own funds . Then the outcome could be the same as before, and the seller is telling no lies.

One way around this is to say to the seller, to mitigate our risk, let’s pool your £10 and ours together, buy the whole set of fruit for £20, and lets treat this as both ours. Whatever you sell, lets split the profits 50:50, and whatever you don’t sell, we share that cost also 50:50.

This transforms the dynamics hugely. And this is what we want, We neutralise his incentive to promote his half of the fruit. We gently merge his interest with ours, and present this investment as a joint enterprise. We both win or we both lose together.

The specialist will tell me this is Musharakah, I shall simply shrug.

The reason I will shrug is because I have seen the Islamic markets do with these Arabic contract names.

An Islamic bank will offer a Mudarabah investment account to their customer, seeming to promise share risk and reward. But if the return is lower than expected, the Islamic bank will simply offer its portion to the customer, and if that is still not enough, the Islamic bank will just pay the difference. If the share profit is higher than predicted, then the bank will point toa clause in the contract that says the bank is entitled to keep this excess as a reward for delivering excess profit. And this guaranteed return is benchmarked to interest rates

The outcome is a deposit with interest. This is still a Mudarabah contract.

For Musharakah, Islamic banks in Pakistan deliver financing to their corporate clients via Running Musharakah, This sounds great, like our product with the fruit seller, right?

Well, no, not quite, What they actually do is predetermine what return the bank requires, benchmarked to an interest rate, and split the profit share in the banks favour. Lets say the bank wants 6% per year, and then the profit share would be 90:10 in favour of the bank, and once the profit for the year hits 6%, the bank will now change this profit share to 0.001 – 99.999 in favour of the customer. If the required rate of 6% is not reached, the company knows the bank will pull this revolving credit line very rapidly, and thus will just declare the higher profit and pay the 6%.

This is how we take a classic Musharakah contract and turn it into a loan with Riba.

This is why I dislike using Arabic contract names. I prefer to focus on the reality of the financial arrangement, because that is where justice either exists or it does not

And this game, played against nobody other than our Lord, goes on and on and on and on. It does not end. I am tired of this.

To illustrate this with an Islamic structure that is public, I selected a Sukuk transaction, and made a two hour video, breaking it down as a structurer can. I only used the presented legal prospectus as information, with no personal inference. The key was I know my around these complex 250 page documents, because my job was to create them, In the 2 hour video I systematically explained every step, how the Islamic market took a classic investment into property, label a Sukuk al Ijara, and converted it, step by step, using complex structuring techniques, written into the public contracts, into a bond with Riba.

This is not an accident. This is a pure, relentless, deliberate flight towards Riba, with great intent, and not away from Riba.

This video is still on youtube somewhere.

My point is that the structures present themselves, once we understand the nature of the business we are investing into. They will very likely have Arabic names that represent them, or they may not. This is not important.

Back to our £10 investment

I can tell you, with certainty and lived experience, that the level or preparation and thought that goes into this is more significant than the deployment of £500mn in a global Islamic financing product.

This process articulates our Deen much more effectively. Ihsan Is not in size, it is in quality.

The exact same process applies to our doctor, the furniture maker, the book seller, and their respective conglomerates. The details will vary, of course, but the process cannot.

Specific skills are required in the technique of creating the product, and that is natural and desirable.

You might say, and you should that such work is not possible to arrange a £10 investment into a fruit seller. And I will agree with you.

But we don’t change any of our underlying positions and process that brought us here. We cannot. To do this is to reduce the Amanah we have so carefully crafted. This complaint of too much work for £10 is simply our capital screaming at us. You want to do all this work before you release me? No, you are insane. Forget all your nonsense, just let me go.

This is a voice we must ignore. We control the capital. The capital does not control us.

We assert this control by expanding our thinking. We must do all this before we deploy, so how do we make it worthwhile for us.

The answer is to create the framework that can then fund 100,00 fruit sellers across the globe. This likely means operating in different countries and different currencies. Traditional routes to move money are highly inefficient, especially on amounts of £10. We must identify more efficient rails systems. We must identify how to exchange currency effectively. We will see that some of these problems have already been solved today. We turn towards them.

We are manufacturing the world we want, and that we demand. We do not let the system tell us what is not possible. Instead, we understand what we must do, because we are servants of Allah, and we make it happen.

Precisely the same process will apply to a £100mn investment into an agri exporter. The same; Nothing changes because our “Amanah” and our desire has not changed. Only the scale has.