Is Islamic Banking Really Islamic? An Insider's view with Harris Irfan

Islamic finance as an ethical alternative to interest-based banking and capitalist economic system. The creation of new money through lending, the concept of river-based economy, and the need for a halal financial system.

The speaker reflects on his involvement in the construction of the Makkah Clock Tower, expressing regret for being part of a project that destroyed historic sites and buildings. He explains how he was caught up in the excitement of financialization without considering the long-term implications and social impact.

Investment banks abuse the concept of Islamic finance by operating as fractional reserve institutions, creating money from nothing. This goes against the principles of real risk sharing and a pure form of mudaraba in Islamic finance.

Fractional reserve banking is a regulated practice by central banks where banks can lend out more money than they actually have in deposits. This system originated from the 16th century when Goldsmiths issued more receipts for gold than they had in their vaults, effectively creating a fractional reserve. The government's loose controls on money supply and credit creation led to financial economy outstripping the real economy, resulting in crashes like the 2007-2008 crisis.

The fractional reserve system underpins all banking, including Islamic banking. The fundamental basis of manufacturing financial products is money creation through the fractional reserve system, which goes against Sharia law. This makes Islamic banking an oxymoron as banks create money from nothing, violating the principles of Sharia compliance.

Muslims living in Britain who want to purchase a house may consider Islamic Banks and finance instruments as an alternative to traditional banks. However, there is cognitive dissonance regarding the viability of these alternatives. While some Muslims are working on developing more wholesome financial products within the Islamic finance industry, it remains a tiny minority. The speaker encourages discernment in supporting the Islamic finance industry but expresses disappointment with its stagnancy.

Islamic finance uses a contractual structure called commodity murabaha to circumvent the prohibition of usury. This practice is similar to the medieval concept of contractum trinius, where multiple contracts with different aims were combined to allow lending and interest. The normalization of usury has led to disregard for original Church law and a blind eye turned by modern Financial Services industry.

Real Economy Risk Sharing Risk sharing in finance involves creating financial instruments that allow businesses to raise working capital without burdening their balance sheets with debt or diluting equity. An example is the profit participating note, which allows investors to directly participate in financing business activities and earn returns based on shared profits. This approach aligns financiers with the success of the business and promotes ethical economic practices.

Impact of Financialization Financialization has led to inflation, excessive borrowing, and poor financial decision-making. The current economy encourages high time preference behavior where people borrow, spend, consume excessively without investing for the future. Returning to a real economy risk-sharing basis can lead to more measured and calculated financial processes by aligning financiers with businesses through partnership arrangements rather than traditional borrower-lender relationships.

Muslims face challenges in finding trusted institutions for managing money according to Islamic principles. The emergence of Islamic fintech companies offers investment platforms that cater to ethical and Halal products, addressing the needs of modern generations. However, many investment products are touted as Halal but still contain deceptive contractual structures.

Challenges with Islamic Finance Many high-repute Islamic scholars endorse financial products, but they may be captive to the system and unable to see beyond narrow focus. Banks often ignore provisos on products like commodity trading, leading to problematic transactions. Scholars' views are not adequately reflected in final product offerings.

Importance of Scholar Involvement Scholars should be involved from day one in financial transactions for Sharia compliance, rather than being brought in at the last minute. Their intimate involvement is crucial for ensuring Halal investments and avoiding red flags for Muslim investors.

Some scholars understand the reality and requirements for issuing a fatwa, while others rely on third parties. The quality of Islamic verdicts depends on how well they understand financial products like fractional reserve banking. Competent scholars have views on modern financial instruments and their role in developing the industry.

The Doomsday Fatwa: A Controversial Creation After the Mecca Talus project, Deutsche Bank created a technique to replicate financial returns from any instrument, including Haram ones. This involved using an organized vehicle to distance Islamic investors from the underlying Haram asset and give them apparently Halal returns. The technology was initially intended for legitimate hedging purposes but led to the creation of devious products that caused controversy in the Islamic finance industry.

Consequences of Mismanagement and Criticism Deutsche Bank's misuse of its black box technology resulted in aggressive sales tactics for exotic interest rate derivative products in the Middle East. A press conference statement by a senior executive sparked criticism and accusations of creating 'Doomsday fatwa' which allowed for devious financial products within Islamic finance. Eventually, Sheikh Hussein Hamid Hassan took control over product vetting and marketing as a response to this controversy.

The speaker reflects on the concept of making illicit businesses appear halal, using a chicken and chip shop as an example. He discusses how in his universe, anything can become halal, even if it involves money laundering or unethical practices.

Despite the challenges, governments are passing legislation to accommodate Islamic banking. However, this often supports a fractional reserve system rather than offering a true alternative to interest-based banking. The focus should be on finance serving the real economy and businesses, not just tweaking regulations for Islamic products within banks.

The Goals of Shariah and Financialization The speaker discusses how the financial system has benefited a small group at the top, leading to societal decline. He emphasizes that following only the letter of the law without considering social implications and broader objectives of Shariah is detrimental. The shift from sound money (gold standard) to unsound Fiat money has led to inequality, environmental pollution, perpetual war, and misleading measures like GDP.

Return to Sound Money: A Solution for Societal Progress The speaker advocates for a return to 'sound money' as it historically led to periods characterized by peace, stability, scientific advancement in human history. He criticizes Fiat money for contributing directly towards climate change and argues in favor of Bitcoin as the most Sharia-compliant form of currency ever invented.

The speaker advocates for capitalism as a means of wealth creation, emphasizing the importance of free markets and fair distribution. He highlights that while modern capitalism has led to inequality, the core concept aligns with creating wealth in a good way and using it responsibly. The narrative includes examples from Islamic teachings about protecting consumers and vulnerable individuals within trade structures.

In Islamic capitalism, profit pursuit is allowed within halal boundaries without fixing prices and exploiting vulnerable people. It includes institutions like endowments and zakat to ensure protection for everyone at every level of society.

Erdogan's Struggle with Interest Rates Islamic countries, including Turkey under Erdogan, struggle to escape the riba trap despite interest being Haram in Islam. Even leaders like Erdogan and Imran Khan have faced economic challenges due to orthodox policies and IMF loans. The global North exploits the global South through economic orthodoxy.

The Need for a Radical Alternative Leaders like Erdogan could consider radical alternatives instead of returning to orthodox economic policies. Countries in the global South should reject IMF influence and adopt decentralized currencies like Bitcoin as legal tender.

The BRICS countries are discussing de-dollarization at their annual conference in South Africa. There is a debate about the decline of American hegemony and the potential for a new global currency. The speaker hopes that BRICS will consider transitioning towards implementing a sound currency based on historical data.