← LSE: Public lectures and events
LSE: Public lectures and events
Global Calls for Economic Justice: the potential of Islamic finance
01:20:33
Loading summary
Transcript66 lines
- [00:00]
A
Well, ladies and gentlemen, good evening. My name's Ross Cranston. I'm a visiting professor here at the lse, but I'm also a judge just over the back fence there at the Royal Courts of Justice. And naturally, I was a little bit late meeting the speakers because I was the closest. I want to welcome you this evening. This is the sixth of this series of annual joint Harvard Law School LSE public lectures on Islamic finance and their purpose. I'll just wait for these people. Their purpose is to provide students, faculty, but also the public with a better understanding of what is meant by Islamic finance so that they can understand how it works in practice and they can also understand where it might be going in the future. And if you come in the past, there's always been a great audience, as there is tonight, really enthusiastic, wanting to know more about Islamic finance. Now, as many of you know, Islamic finance is an alternative method of financial intermediation and investment. And although its practice is based on religious edicts and precepts of Islam, much of today's actual practice can be linked back to practical developments initiated by the industry in the 1970s. And we'll hear some of that tonight from our speakers. So, in comparison with conventional finance, it's a relatively new and young and still growing sector. What is interesting in particular to me is the underlying hopes and aspirations, because much of the underlying features resonate with the great concern that there is at present internationally with the global economic fabric. And in calling for more economic justice, as many people are doing, and we've got our tent city outside St Paul's here in London, people are reflecting that concern, that finance must address the concerns of ordinary people. And Islamic finance asserts many interesting features which support that goal. For example, insisting on tying financial transactions to real economy, the prohibition on speculation, the prohibition on financial gain through the use of interest, and so on. Now, of course, there is discussion in the media that the actual practice of modern day Islamic finance can only partially claim to have successfully delivered what it has set out to achieve. And again, we're going to hear some of that about some of that tonight. But with this emphasis on greater ethics in finance, Islamic finance does appear to offer a new platform to the Muslim world, but also more widely to address these ethical concerns. So I'm hoping this lecture is going to shed some light on the achievements and also the limitations of Islamic finance, but we'll also emphasize the potential for the future. Now, we've got two outstanding speakers tonight, as we've had at past lectures, but we're especially Pleased tonight to have first of all, Mr. Mukhtar Hussain. Mukhtar is a graduate of the University of Wales. He's delighted that his father is here and we're very pleased to have his father here as well. But Mukta has gone on to great things since those days at the University of Wales because he's now a country head of HSBC Malaysia. But as well as that has had a huge experience in finance, not only with hsbc. He started with Samuel Montagu. He then has worked in the Middle East. He's worked here in London. In 2005 he was in London here as the global head of Principal investments and private equity. In 2008 he was appointed as the global head of HSBC Amana and he moved to Malaysia and there, as I say, he is not only involved with HSBC but also has other activities such as being Vice President of the Malaysian International Chamber of Commerce and Industry. Our second speaker is Professor Volker Meenhaus. Professor Nienhaus was a professor of Economics at the Universities of Trier and Bochum, but he was also President of the University of Marburg until 2010. He has a link with this country because he is a visiting professor at the Henley Business School at the University of Reading. But as well as that he is also active globally. He's an adjunct professor at the International center for Education in Islamic Finance in Kuala Lumpur. And as well I see he's visiting professor at the Qatar Faculty of Islamic Studies. So two excellent speakers. Experience both in the academic study and also the practice of Islamic finance. And I'm sure you're going to learn a great deal from their presentations. So I'm going to ask Mr. Bukhtar Hussain to start and then we'll move on to Professor Nienhaus and then I'm going to invite questions and comments from the audience.
- [07:10]
B
Bismillahirrahmanirhim. Mr. Chairman, distinguished guests, ladies and gentlemen, Assalamualaikum. And a very good evening to all of you. I'm both humbled and honoured to be standing before such a distinguished audience of academics, students and practitioners. Let me start by thanking both the LSE and Harvard for the invitation to speak on both a topical and emotive subject, namely the role of Islamic finance responding to the calls for global justice. But just before I begin, may I say thank you to my father who is in the audience this evening because without you, Dad, I wouldn't be standing here. Thank you so much for coming. In the 20 minutes or so or less that I have been asked to address you I'll try and navigate, ladies and gentlemen, through a number of both macro themes that relate to the banking sector, as well as some of the specifics around where Islamic finance is today and the journey that it will need to travel to assume greater relevancy in the world of financial services going forward. So let me start with the simple theme of what is an economic crisis? Well, economic crisis, as all of us will know, are not new phenomena. They've been frequent occurrences. Unfortunately, it is the case that history hasn't taught us many lessons because crises continue to occur with an alarming regularity. Often the anatomy of a crisis starts with confidence, followed by overconfidence, exuberance and then foolhardiness leading to irrational behavior, a crash followed by a witch hunt, and then hopefully a. A sense of reflection and hopefully reform and renewed growth. Human emotions travel up and down with these cycles in considerable ways and means. My former colleague Stephen Green, now Lord Green, wrote in his book Good Value that there are many lessons to be learned in talking about the global financial crisis from which shock and fright has emerged. Lessons for banks, for governments, for regulators, ratings agencies, investors and borrowers. Banks, many of them, became over geared and too dependent on wholesale funding, that is raising money from the wholesale markets rather than from depositors, too focused on short term profits at the expense of the creation of real long term value. Regulators did not pay enough attention to liquidity management in banks and were so not prepared for the storm when it broke. Ratings agencies were too ready to work with financial engineers in the banks to help them create investment vehicles which apparently had high credit quality, but which as it turned out, did not stand the test of illiquidity. Investors chased yield and profit growth and forgot the too good to be true test. And borrowers too often succumbed to the temptation of jam today which would profit too freely by lenders. In the public mind, banks have been at the epicentre of a storm of rage. The public standing of bankers is now at the lowest level of decades. I think we probably rank below traffic wardens in terms of popularity today. This is really and largely as a result of the sins of arrogance, greed and untrustworthiness and callousness which are hard to forgive. The perception that some have taken pay and bonuses in vast multiples of remuneration of ordinary, hard working and socially valuable people for indulging in an alchemy which has blown up in their face and required huge bailouts or prodigious cost to the taxpayer, has ignited much concern around the world. And clearly, ladies and gentlemen, some of these themes lie behind the considerable outcry that is visible today. And a new order will need to emerge. Let me take you back to 2009 and a communique that came out of the G20 meetings held in London and it said the we start from the belief that prosperity is indivisible, that growth to be sustained has to be shared and that our global plan for recovery must have at its heart the needs and jobs of hard working families, not just in developed countries, but in emerging markets and the poorest of the countries of the world too. And must reflect the interest not just of today's population, but of future generations too. We believe that only sure foundation for sustainable globalization and rising prosperity for all is an open world economy based on market principles, effective regulation and strong global institutions. A new form of capitalism for a world that is interconnected, globalized, complex, now G20, not G7 and based on where we are to go. And many people, and I quote the Chinese Premier Wen Jia Bao, who've argued that the new capitalism should be nourished by a vision which owes much to Adam Smith's theory of moral sentiments in which over speculation is subdued by controls and in which values other than profit, such as natural task and confidence, are recognized for their true worth and for their crucial role in socio economic well being. So is it surprising that in the public mind, free markets are under suspicion? The capitalist system at heart is about trust. The word credit derives from the Latin word creder, meaning to believe. So a credit crisis is, by the very meaning of the word, a crisis of confidence. If we were to restore trust and confidence in the markets, we must address what is at heart a moral question. Trust and confidence can't be restored overnight and they cannot be restored by a process of fear. They have to begin with the recognition of a moral dimension. The truth is that the value of our business is dependent on the values with which we do our business. Capitalism needs to integrate moral values with shareholder value. At HSBC we've tried to embed values across the whole DNA of our organisations. Charles Addis, one of our early chairmen, famously remarked that the ultimate basis for all economic conception is ethical. We've tried to live up to that principle every day. That means we take a conservative approach to investments. We take deposits before we lend, we look for the long term and work to maximise value in a sustainable way. In my 30 years at HSBC, both in the conventional bank and at HSBC Amarna, these have been and remain the overriding guiding principles. Neither we normally nor the industry get this right always. However, one of the reasons HSBC survived through this crisis is the recognition that conservative and pragmatic practices consistently applied across continents and business cycle mean that we are prepared for a storm wherever and whenever it arises. We have never taken any taxpayer money throughout our history and and hope the need to do so will never arise. The current chairman of hsbc, Douglas Flint, observed that that is why the recent crisis has caused a proper introspection to the role that banks play in society and we should all welcome this. Banking is, as we all know, not simply about money. It's about helping individuals and organizations within society to meet personal and corporate objectives by facilitating access to financial capital and protecting value for those who make capital available, namely depositors, payment mechanisms, the provision of long term credit, trade finance, hedging, risk management, products and the list goes on are but a few activities through which banking groups contribute to today's financial system and thereby support the activities that drive underlying global growth. Society cannot function without an effective financial system that delivers values to those it serves at an intermediation cost that is proportionate to the value created. Somehow, many participants, not just banks, lost sight of this basic principle in the run up to the financial crisis and the consequences have been inevitable. There is no doubt that the scale of regulatory reform underway will allow the opportunity to re architecture the global financial space. The new industry will have to demonstrate that it allows social values for the underpinning of confidence and foundations of global growth. And that is indeed its greatest contribution. Let me move on to the theme of economic justice and firstly to say that the importance of justice as a human value is common across a number of religions, including Islam. As is the recognition that human failings can severely endanger a society's well being, particularly through excessive debt. John Adams, the second president of the United States, said there are two ways to conquer and enslave a nation. One is by the sword and the other is by debt. So the question arises, what's the role of Islamic finance? Well, in Malaysia, where I have the pleasure of living and working, Tansri Zarina Anwar, the chairman of the securities Commission, observed that the virtues of Islamic finance need to be unlocked Further. Public good, ethics, shared values, governance and real tangible contributions to the economy hold the key to innovation and growth. Profits involving a higher social purpose and objective represent values that create not just economic returns but but also comply with universal ethical standards. Putting all of these in place will strengthen the universality and acceptability of Islamic finance, enabling it to offer a distinctive value proposition. There are Four conditions to be satisfied for a transaction Ladies and gentlemen, to be compliant from Sharia, firstly, the asset being sold or leased must be real, not imaginary or notional. This eliminates a large number of derivative transactions which merely involve gambling by third parties who claim compensation for losses suffered by the principal party. Second, the seller or lessor must own and possess the good being sold or leased. This means that the seller bears part of the risk and reward of the lease. Thirdly, the transaction must be a genuine trade transaction with the full intention of giving and taking delivery. And fourthly, debt cannot be sold and thus risk associated with it be borne by the financier, him or herself. The Islamic financial system can also minimize the severity and frequency of financial crisis by injecting greater discipline into the financial system, linking credit expansion to the growth of the real economy, ensuring that creditors undertake careful and thorough underwriting of risk. So, in theory, that sounds good. Where are we in reality? Well, ladies and gentlemen, in reality, the Islamic financial services industry, which as the Chairman has said is roughly about 50 years old today, accounts for about a trillion dollars worth of assets. That's about 1% of the total financial landscape of the overall financial services industry. Some may argue that allows plenty of space to grow, but it is an uphill climb. And there's no question that the real challenge that this industry faces is how does it grow from 1% to 5 to 10%? Because this growth will come in stages and it will come over time. Why am I confident that that might happen? Well, let me share with you a few basic ground rules and reasons. Firstly, it's entirely conceivable that in the footprint of the Muslim world In the OIC countries, there are 1.6 billion people where penetration levels of finance remain low. In mature markets such as Malaysia, the percentage of total assets that are Shariah compliant has already exceeded 20%, and this may well double over the next decade. Maturity has also been attained in markets such as Saudi Arabia, Kuwait and the uae, unsurprisingly. But new opportunities lie in large population countries such as Egypt, Turkey and Indonesia, where industry penetration levels are relatively low between 2 to 4%. Secondly, as the industry achieves greater scale and maturity, the institutional framework that lies at its foundations will have to improve. This includes legal foundations as well as innovation on new products and structures which will have to appeal to both conventional and Islamic investors. As we know, the global sukuk industry, which HSBC had the pleasure of leading through the issuance by the government of Malaysia of the first sukuk in 2002, today is an industry that has grown to about US$140 billion. Thirdly, attractive demographics, transaction economics and growth markets will attract capital. There's no doubt that in areas such as project finance and structured wealth and Takaful, which is Islamic reinsurance, there are considerable opportunities. This is an industry where much of the commentary is always about the asset side of the industry. Yet much of the opportunity lies in looking at the liability side of the industry and what that may drive in terms of behavior and access. I think it's also important that one keeps a reality check of what are lofty ambitions. I think the reality of Islamic finance is that it complements the, not competes with the conventional industry. It provides an alternative for consumers looking for ethical banking delivered in a way that sits well both in terms of cost and conscience. But the industry, if it is to grow, needs to grow through many counterparts all working together. New entrants and existing players need to work together because institutions acting on their own or acting in isolation in domestic markets won't create a global industry. Let me end with something of a wish list about what the industry needs to do if it is to become material and therefore offer choice to consumers. And some of these are well rehearsed themes. But there's no doubt that standardization for the industry remains a critical, overlying objective. The necessity to have standardization of documentation, legal practice is necessary so that rules, regulations and rulings are not in any ambiguity or doubt or doubt over enforcement. Institution building. We have seen in this industry a number of global institutions, IofI and the IFSB come to fruition. IILM in Malaysia also is another important industry initiative to provide short term liquidity to an industry that is desperately in need of it. But beyond these things, I think it's critically important that the industry continues to educate and engage. It's critical that a systematic approach is taken towards education and research lies at the very heart of this. But sometimes, ladies and gentlemen, it can be very important to demystify a religion. And a good example of this is the Hajj exhibition which is currently going on at the British Museum, which has attracted huge interest and reliably told over 20,000 visitors in the first month since its opening. What does that tell you? A thirst for knowledge, a thirst for curiosity. This is something that we need to do. Globalization and innovation. For Islamic finance to have an appeal, to have a global offering, not just local offerings, it's very important that more effort is spent in terms of innovating the next generation of products, risk management and governance. It's clear that The Islamic financial community also has a lot of work to do in terms of improving, improving its governance models and improving its risk management processes and procedures, particularly at a time when there is so much regulatory change in the overall industry. So let me conclude by saying that the Islamic financial industry has both promise and appeal for it to achieve its goal of increasing relevancy through enhancing scale, both connection, enhancing scale. Bold leadership, ladies and gentlemen, is what's required. We need the leaders of this industry to move together. JK Galbraith once famously remarked, all great leaders have had one characteristic in common. It is the willingness to confront unequivocally the major anxiety of the people of their time. This, and not much else is the essence of leadership. Islamic finance has a role to play in the new architecture of the financial services industry that is both emerging and evolving. We should not forget that one of its great virtues, or the virtues of a crisis, is that great reforms happen following a crisis. If you look at the Asia example Back in 1997, 1998, Asia made a virtue out of that crisis by undergoing very significant financial reforms, which meant that it's tolerated the current financial crisis remarkably well. My fervent hope, ladies and gentlemen, is that some of you in this distinguished audience will play a role in building a larger and more sustainable industry that meets the promise of its potential and offers customers choice. Thank you very. Much.
- [25:30]
C
Well, ladies and gentlemen, it's my great honor to be here. I'm not quite sure whether it is a great pleasure because it was a great pleasure before I was told to condense all this in 15 minutes. So global calls for economic justice, the potential of Islamic finance in 15 minutes is quite a tough job. So probably I can only rush through some of my slides, but I think they will be available afterwards for those who would like to take a second look at the slides that can be provided. Actually, if as an academician I'm looking at this subject, I would say there are long discussions, century old discussions about principles of justice. What is justice? We have religious teachings, we have political philosophy, we have economic theory. And many, many people have come up with answers, what is justice? And it boils down more or less to two basic principles, namely that we should have something like a participatory justice, where everybody has an opportunity to contribute, to earn a living on his own. And sometimes there are ideas of distributive justice, that the outcomes of such a process, even if the process as such is a fair process, is not really acceptable. So these are the, let's say, major points that you can find in a huge literature since I think, 2,000 years. But the topic now is that in addition to this, we have global calls, which are very urgent calls, which are calls for action, for concrete actions. And behind these calls we have religious movements, we have human and civil rights movements, we have green parties, etc. But the two most important ones right now, I think are on the one hand, Occupy movements dealing with finance and justice in finance. And on the other hand, we have political uprisings, we have the Arab Spring. And this also is a problem. It was a problem of justice, lack of justice in these countries. So these policies also come up with claims they would like to see something changing. They are for, for example, employment and income opportunities for everybody. The they are for minimum wages or at least for minimum living standards for everybody, they claim, or they ask for fairness and dignity. You remember that dignity was a major call at the beginning of the Arab Spring in Tunisia. But of course, financial system reforms, not so much in the Arab Spring, Although I think it is highly important to reform the financial systems in the Arab Spring countries because they are focused very much on the discredited political and economic elites of these countries. So we need a much broader financial system in these countries. But that of course is the main claim or the main call of the Occupy movements. Financial system reforms. Then we have some ideas about poverty alleviation. In particular, religious movements calling for this. Social Security, health, housing, education. That is what people would like to see in a different way, as it was and as it is provided by our recent capitalistic system. On the other hand, there are some points against which these movements argue. For example, the growing inequality. So in the United States, 20% of the richest people own 87% of the wealth of the country, for example. This is seen as a very unjust distribution, distribution of wealth, similar the distribution of income, unemployment, a very pressing problem, youth unemployment in particular. Many countries of the world, very strong in the Arab Spring countries, political systems calls for changes in political systems. They are thought to be either autocratic, authoritarian, that is the Arab version, or inactive, that is the Occupy Wall street version. But political systems have also lost a lot of credibility. Unbridled capitalism, that is, I think, catch word and a catch all phrase. It means that there are arguments against excessive debt, socializing of losses, privatizing of profits, impoverishment of the middle classes, et cetera. So there is a huge basket of arguments what should change and why it should change. And somehow you can link this to the discussion on principles of justice, which is a very long which has a very long standing tradition. Now, how can we relate this to Islamic finance? Now it is, first of all, there is a frame. The frame is the Islamic economic system. There are some claims that an Islamic economic system can, for example, create more solidarity that it can provide, let's say, Social Security in a better way. However, usually this is a part of the Islamic economic system which is not directly related to Islamic finance or where it is not primarily addressing finance. So within this frame and within this call for an Islamic economic system and economic reforms following an Islamic economic philosophy, we will only focus on those claims and and calls which are addressing Islamic banking or capital market issues. The claim roughly is that because of the prohibition of riba, that is interest qahrar, that is uncertainty, that is gambling, there is only finance for the real economy. There is support for entrepreneurs. There is mobilization of additional savings that could be put for productive use in the entrepreneurial sector. No reward without risk. Participatory finance. Initially it was the call for profit and loss sharing. And the idea that if you do profit and loss sharing, the collateral for this is the business plan. It's the capacity of the entrepreneur. You don't need additional collateral, except what is, for example, the object of this transaction itself. And without that, you can unfold the entrepreneurial potential of an economy. In particular, you can bring in new entrepreneurs who are not already part of the established business class. Because if you are asking for collateral in addition to the project itself, you must have these collaterals. You must already be rich to get finance. And if you do financing, that was the claim or the idea on profit and loss sharing basis, you check the business plan. And if that is good, whether this guy or girl has some assets behind himself herself or not, you go on with financing. So no speculation. All these are very nice, let's say, features. And if you add, for example, the Islamic capital market, where we have specific types of Islamic commercial papers, the cook and where we have an equity market, then we could come to something altogether. In theory, to a system that has a superior quality with regard to the allocation of productive resources, to better distribution and also to more systemic stability. Coming to the claims from my first slide, this would help with regard to employment and income opportunities. It would create new employment and new income opportunities. It would hardly provide for minimum living standards. That is a matter, for example, of zakaria and Social Security. So we leave that aside. But it would help to create more fairness. Let me put it like this. Just those things which we should. We should. With which we should address Islamic finance. So employment, income opportunities, fairness, financial system reform, poverty alleviation and prevention of excessive debt. If that could be achieved by Islamic finance, it would be great achievement. And I think Islamic finance has the potential to achieve the this. It can make a difference. But now some buts. First of all, support for entrepreneurs, mobilization of savings, no risk without reward, participatory finance, no speculation. Is it the reality? I have a very big question mark. It is doubtful. We have predominantly in Islamic finance, short term trade finance, longer term finance, if it is there is mainly for real estate. More specifically, if you look at countries such as Dubai for speculative real estate ventures, yes, that is real estate. It is real. Nevertheless, the value is to some degree fictitious. We have increasingly project financing for public infrastructure. The growth of Islamic finance is not that the masses are moving in, but it is that more and more government initiatives are pushing Islamic finance and project developers into Islamic finance. Islamic finance tranches. We have pretty little corporate finance, very little if any small and medium sized enterprise finance. On the average. There are always best practice examples somewhere in the world. But I'm just talking about the average of Islamic finance as I can see it. And we have sophisticated techniques to minimize the risk from transactions. So legally speaking, yes, there is a risk. But if that risk is minimized to one minute of holding an asset, it's not really taking the risk from the entrepreneur and not really giving him relief in his business. On the other hand, what about finance for the real economy? Is it really the case that Islamic finance as it is practiced now closely links finance to the real economy? Well, to some degree, yes, but to some degree there are tendencies and strong tendencies that are decoupling finance from the real economy. On the one hand, we already now have techniques which are widely used. Maybe not for the right purposes, but nevertheless they are widely used where the real asset is only notional tavaruk and commodity murabaha. At least some forms of commodity murabaha. Yes, you need a real asset. However, if it is platinum at the London Metal Exchange in order to cover up a financing transaction by trade contracts, then this is not real financing trade. And you can do it quite complicated with three parties involved in order to prevent being criticized that you are circumventing the prohibition of riba. So we have now, however, debates about Islamic repos, which actually means you're getting liquidity for lending securities. How you can do it without interest, I don't know. At least there are some ideas that have been put forward in conceptual papers which are developed between Islamic financial institutions or organizations on the one hand, and conventional institutions dealing with swaps, derivatives, etc. So that is one thing. The development of Sharia compliant, what I would call functional equivalence of conventional structured products is going on. We do have options, we do have Islamic swaps and we do have so called plaques, which has not been accepted widely. However, it just shows you how far the thinking goes. The idea of swaps is that you invest as a Muslim investor in a Sharia compliance manner, and then that special purpose vehicle in which you are investing in a Sharia compliant manner is swapping its returns against the returns of another SPV which is investing in other forms of finance. So this was praised as a very innovative and progressive form of Islamic finance on one side. On the other side it was called a doomsday fatwa. Those Sharia scholars who have approved that have been criticized heavily and some of them reportedly have withdrawn their approval to this type of plaques, meaning giving the Muslim investor the returns of non Sharia compliant investments. Even if that is withdrawn, what is of concern is that you get approvals from Sharia scholars, prominent Sharia scholars, for this type of thinking, for this type of instruments. And that in a way shows path of Islamic finance, which does not close or link finance to the entrepreneurial real world. It moves in a way which we have seen in the Western world. It is trading securities, trading financial papers within the financial sector. And that of course was much more profitable than just financing the real entrepreneurs, the real enterprises, roughly speaking. I know it's very, very simplistic, but if you would get all the returns you can get from financing the real economy, the maximum you could get is the real growth rate of the economy, which may be 2% or something like that. That is quite boring. A banker would like to have double digit growth rates, double digit returns, and you can get it only by transactions within the financial sector. And the reason that you can earn it is that you have expectations which are different from the expectations of the one with whom you are trading. That is high risk, but high profitable. And for a very long time this went perfectly well. So we see the replication of such instruments also in a Sharia compliant manner. There is a debate going on clearly, but already the fact that this is the frontline of financial engineering in the Islamic finance is really something that worries me. So we have prototypes of securities derivatives for trading within the financial sector, and then we have very inadequate, adequate corporate governance structures. Suppose the claim is taken seriously that the ultimate risk bearer in Islamic finance are the providers of funds. That means if you put your Money. In an Islamic bank, you are providing funds and that means you have to take the risk. If you take the risk and not the shareholders of the bank take the risk, then somehow you should be reflected or you should be placed in the governance structure of such an institution. The ultimate risk bearer who has not a say on what is going on with regard to, let's say, risk, return characteristics of the products, risk strategies, etc. That is a very strange thing. However, in Islamic finance, most banks, all banks, as far as I know, are conventional shareholding joint stock companies. And there the shareholders have the final say. The shareholders are those who appoint the board of directors and the board of directors or the shareholders also appoint the Sharia scholars. The ultimate risk bearers are not in the picture. The same with Takaful. In Takaful, the Takaful operator does not take a risk. All the risk, it is a kind of a mutual insurance, is left with the, with the participants. Again, the companies are in the legal form of shareholding companies and the ultimate risk bearers don't participate in any decision. So governance structures are not very adequate and I think there are even some problems with sustainability, systemic risks that are not fully recognized. Namely, what happens if you really would pass on the losses from your maybe wrong investment decisions to your shareholder, to your depositors, once the depositors realize that they might not get 100% of their money back? I'm not quite sure whether they are so altruistic or not business minded that they would say, well, don't worry, you have done good things with it, you tried, but it was a failure. Most probably they will withdraw their money and they will withdraw it and you have something like a bank run if that happens. However, even in countries where you have a deposit insurance scheme, this is not effective because deposit insurance is triggered by the bankruptcy of the institution. But if the institution passes on losses to the account holders, the institution is not bankrupt, it will be bankrupt after the bank run. But that means out of your 100, you may have left 50 or something like that. And that is also not reflected in the regulations, in the capital adequacy ratios, etc. I know I'm painting a very critical picture here and I don't say that each and every bank is working in this way and behaving in this way. Clearly not. But there are tendencies in the industry which driving the industry further away from an industry that can meet the claims of global justice, that can meet the claims of, let's say, reform of the financial system, fundamental reform of the financial System, it's becoming more and more conventional. Now what is driving the system that is here on the right hand, the growth of Islamic finance to a large degree is due to the fact that conventional banks made an inroad into Islamic finance. It was profitable in particular investment banking and clients in particular in the Gulf region were asking for Islamic products. So Western banks either offered Islamic products or set up Islamic subsidiaries of or bought banks and converted them into Islamic banks, Sharia compliant banks. But of course their main purpose is not promoting the cause of Islam or global justice. It's the bottom line. I mean, if Deutsche bank is offering Sharia compliant services, I'm pretty much convinced that it is because of the profitability of these services, not because Deutsche bank would like to see a better globally just Sharia compliant world. And unfortunately, what could be, let's say a break to this development is not functioning very well. It should have been the Sharia scholars, but the Sharia scholars have approved all these things. All my critical arguments are not products which have been forcefully rejected and refused by Sharia scholarship. No, they have the approval of top scholars. Not everything was approved by each and every scholar. So there is still a debate amongst them. Nevertheless, all the advanced banks have their prototypes and they all have actually more or less the same top Sharia scholars, which is another big issue. And so seemingly this tendency for this tendency, there is no countervailing power, there is no balancing power. And that of course is a problem. Nevertheless, there are potentials. There are potentials. If the critique is raised publicly and taken seriously, if you take the benchmark which is Islamic, and that is not just the catchword that the banks invented for marketing purposes. If you take that seriously, then I think you must come up with something more distinct from conventional finance and you must take the claims more seriously. And that means in product development you have to go for more participatory finance. In regulation you have to reconsider the systemic qualities of Islamic finance. It has a huge potential of also, let's say the collapse of the real estate market in Dubai. Islamic finance was not only participating in that real estate market. It may even be that the insistence on each and every transaction must be based on a real asset has even contributed to this asset bubble. So here there are some systemic instabilities that should be addressed. Market discipline. Well, I mean about the best practices examples. Now I'm talking about generally, let's say critical trends. But of course next time I could talk about the best practice practice examples. They are, they do exist and we should propagate these best practice examples and we need more public awareness. That means in particular academic studies and programs and academic research should be encouraged. However, last word of warning, if you start doing cross country analyses with econometric data, econometric methods, don't forget that the figures you are using are sometimes very faulty. Bank scope data often are misclassifying banks. They have huge gaps. And don't forget the regulatory environment and the different accounting principles. So that if there are different accounting principles in different countries, the same item in the balance sheet may have different content for different countries. So some of the proofs of the superiority of Islamic finance by such cross country analyses are very weak. And in addition, claiming that Islamic finance has proved to be superior compared to conventional finance. Yes, if you look at the global player, that's right. But if you look at 1000 something banks in Germany with a strong deposit base, with a local mandate, it has not fared better. We have bailouts, we have near bankruptcies in Islamic finance as we have it in that part of the world. So comparable things. And finally, because this 1 trillion was mentioned, it is an impressive figure. I mean you should not compare it to the overall financial volume, financial assets. Compare it to something that is more comparable. And to me something that is more comparable would be the volume of socially responsible investment and ethical banking. And that has globally a volume of 3 trillion, three times the whole global Islamic finance. And that's where you are competing with and that's where you need more than just the minimum ethics, just not in alcohol, pork, that's not enough. So the expectations are much higher. And so far I think there is still a gap in delivering what is expected. Thank you very much.
- [48:01]
A
Well, look, I'm sure we could probably spend the rest of the evening with Mukhtar and Professor Neenhaus just debating between themselves. But now is your opportunity to make comments or ask questions. And typically we have lots of questions. So what I think I might do is take two or three together and then ask the speakers to comment. I see a chap right up the back.
- [48:28]
D
Hi, thank you very much for a very informative session there. My question is basically Professor Timur Kuran. He suggested that the inability of Islamic legal and political institutions to sort of evolve led to some sort of path dependent effect whereby Islamic economies were unable to sort of respond to the evolving socio economic dynamics during the Industrial revolution and after that as well. And that in itself was sort of, he argues, underpinned by some development of formal and impersonal institutions propelled by the Enlightenment philosophy. To what extent do you feel to the panel that Islamic economic and financial institutions are converging or needs to sort of converge towards this Western liberal institutional framework and sort of is this why sort of the Islamic finance currently replicates conventional finance in terms of risk transfer, inefficient capital allocation and so. Or do you feel that the sort of Islamic finance industry needs to couch itself within the architecture of a new economic and institutional paradigm that emerges from Islamic economic theory? And is that even a possibility given the sort of dominance of capitalist.
- [49:51]
A
Okay, thanks very much. Now I saw another hand over here and then I'll take the lady up the back.
- [49:59]
E
Thank you very much. There's been the global Islamic finance industry, just to mention the students was actually meeting in London at one of the posh hotels and discussing all these issues. But anyway, my point is that I agree with a lot that was said, but if we want to debate, we have got to be even more critical, especially at a time when there is deleveraging going on for those who don't know what that means. Meltdown. Now, what I felt was missing by the two speakers was you've got to make these things very clear. Black and white Islamic finance has been divorced from its holistic approach, namely a moral political economy. I didn't hear that at all. Although they were good presentations. You know, you cannot look at the eye or the head of a body in isolation. So I'd like comments on that. And I'm not talking cloud cuckoo land, this city. There was another seminar in the Gulf, given what's happening in Bahrain. For those who know what's happening in Bahrain, a center for Islamic finance. Qatar is planning to be a hub. And do you know what they have announced? Qatar. I'm not saying they're the perfect regime, but they are banning what is called Western financial institutions with Islamic windows. Now that raises very interesting suggestions. Finally, final point. Everyone talks about Islam being anti financial usury, compound interest. I would humbly submit a deeper critique of Western financial usury. Capitalism is a cartel. 97% of the money supply in this city and globally is by private banks. So the issue is really about eliminating financial oligarchy and having public control of their right to create finance. And that is the Islamic vision of money. Thank you.
- [52:03]
A
Right, thanks very much. And just the third question up the back, thank you.
- [52:08]
B
My questions are short. Do Islamic banks separate the retail and investment functions and do they have a different fractional reserve ratio and if so, what is it?
- [52:21]
A
Thank you very much.
- [52:25]
B
Thank you very much. For a diverse range of questions. Let me Kick off perhaps by making one observation and it needs to be made up front. I don't think anybody is suggesting today that the Islamic financial system is perfection personified. It's very much work in progress and it starts from a pragmatic where are we today and where do we need to evolve to. So to your question, I think the reality is we're still building an industry with an infrastructure that will move closer towards the model that Islamic finance essentially promises to work off, which is, you know, an equity based model. What we are working on is a debt based model essentially where the parameters of the legal structure are already confined and configured and we're trying to grow something alongside of it. So that is going to take time. Is it going to happen quickly? No. Okay, so it's a journey, I think. To the second questioner, let me just simply say that ultimately the availability of capital is governed by shareholders, whether it's a public institution or a private institution. If you look at the statistics, you'll find that actually public institutions are the majority providers of capital in most financial marketplaces. And I mean listed institutions with broad shareholders. So yes, there's always space for private institutions to come along and provide and complement that capital. And that would be welcome if it were to occur and it is beginning to slightly and that will happen again over time. To your question around is there separation of retail products? Yes, there is. To the extent that they are managed separately and they are in fact from a legal and a regulatory point of view, there is a segregation that is there. The fractional reserve point would probably take at least four hours to question. So I'll take that up separately with you.
- [54:41]
C
But I think the reserve ratios are the same for Islamic and conventional banks at least.
- [54:47]
B
Yeah.
- [54:48]
C
To the first question you referred to Timo Quran and I think there is a nice reply, not actually to the latest book because it was written two years before, but the main arguments have been covered by Umar Chopra in a book that was published in 2008, which is. I forgot the title. But it is not an economics book. It has a much broader title. I think it is dealing with the Muslim civilization and what went wrong. And he is covering many of these arguments. I think now I take the the first and the second question a little bit together. You said that Islamic finance was divorced from the moral economy where it should be. They were never married. My comment is this. They have two very different origins. The one, the Islamic finance, or let's say the Islamic economics movement. To me it started in the 1940s in Pakistan when it was about the creation of an Islamic state or a Muslim homeland, then British India. And it continued. And the idea was to have something different from what was known at that time. So it should be an economic system, neither communist nor capitalist. And therefore the idea of equity based finance came up and that was a political program. Islamic finance in practice, as we can see today, emerged somewhere completely different. It emerged in the Gulf in the 1970s, in the mid-70s, after oil capital became available and after the first genuine Arab banks were established. Until then to the mid-70s, virtually all banks in that region were Western banks, British and French banks in particular. And then the first Arab banks were established, however conventional ones. And a few Gulf merchants, for example, came up with the idea that the financial services they were used to from conventional banks should be provided in a way which is in line with their religious beliefs. And their religious beliefs came down to Sharia compliance. What we see today is more or less Sharia compliant. And they never thought of changing the whole system. And what happened later on was a kind of a wild marriage. Namely, representatives of the actual practice of Islamic finance, which is, as you rightly said, largely debt based, took arguments to defend and propagate their models from the political movements and from the academic writings where profit and loss sharing, participatory finance and all the beautiful consequences if we would have an equity based system were elaborated. But that was never the reality of Islamic finance. So on the one hand there is one pillar changing the whole system, on the other hand, getting Sharia compliant equivalents to what they already had and what they needed. For example, the financing of trade, which is not very productive, it does not create much jobs. Production creates jobs was never a main focus of the Islamic economists. They looked at the entrepreneurial activities and they emphasized the productivity of assets. So you can see a lot of differences between the outlook of the practitioners of Islamic finance and the, let's say, those who provided a different Islamic economic system. And now back to the first question. I think yes, there is a conversion. It's possible because we now have a broad movement that we need something which is not only a debt based finance. And although I'm criticizing Sharia scholars for approving all fancy debt based instruments, that means they are very pragmatic. They see the need for that instrument. If the banker puts this proposal on the table and explains it, they find a Sharia compliant solution for whatever product you need. I'm over exaggerating only a little bit, but why not come forward with products which are more participatory? They are not ideally profit and loss sharing. And they are not using the old contracts like musharraqa, mudaraba, etc. But they are using something which was already there like sharecropping contracts with limited downside risks. You can come up with proposals of very new risk return, risk reward profiles. And I'm pretty sure once you make a convincing point for this, you can also get the Sharia clearance for it. And there is a public debate going on and there is frustration to some degree and there is pressure on this Islamic financial institutions and there are people who are really trying to change it from within so we can support these people. And I think it may not end in a marriage and it will probably not in this generation, but we can prepare, let's say the marriage in two generations from now. Finally, a word on money creation. I'm not really, I'm not really, I don't want to go into this too deeply but I don't think that for the time being the fractional reserves system as such is the major problem. It was criticized very long for inflationary effects. Inflation is not the major issue. However, you can criticize the fractional reserve system for completely different reasons which I will not explain now.
- [60:08]
A
Okay, now I'm going to become very judge like and I'm going to limit the questions and I'm also going to limit the answers. I've got someone here, here and then I'm going to take the lady right up the back. So two people here.
- [60:26]
B
And short.
- [60:27]
F
Hello, my name is Halim Abubakri. My first question is for Professor Volga Volker. Sorry. Why did you trace the origin of Islamic finance to 1940s? Why? Because the practice of Islamic finance was recorded by the companions of the Prophet Muhammad. And in fact this is one of, in some of the, some of the documentation. These are some of the most authentic sources maybe outside potentially the Quran because.
- [60:58]
A
Great.
- [60:59]
F
Yeah, that's the first one.
- [61:00]
A
Then secondly, we only have one question per person. This is also very important, very quick.
- [61:05]
F
Okay. I recently spoke with one of my bank manager. I requested for Islamic, you know, finance alternative for, you know, bank retail banking. And he told me that it's nothing like that, that what they have is more or less like conventional banking clothed with Islamic finance. So what do you, what do you think about it?
- [61:27]
C
Is this really true?
- [61:28]
F
You know, is this obviously what it's been offered as, you know, so called Islamic finance or.
- [61:35]
A
Okay, good. Now the lady here.
- [61:39]
B
Hi. My question about regulations. Conventional banking's regulations develop through self regulated. However, Islamic finance regulated through the scope of Sharia's law, what do you think the view is going to develop for Islamic banking or finance? Is it going to be self regulated or is it going to be developed within a certain scope which comply with Sharia law?
- [62:05]
A
Good, that's a good question. And then up the back.
- [62:08]
B
Yeah.
- [62:09]
G
Okay, just. I would like to thank the speaker for this intriguing presentation. Okay, so my question is a little bit specific about Egypt or the Arab countries that has been in the process of evolution. I would say so given the fact that Egypt said turning point. I have two questions, two specific questions. What would be the lessons learned from Malaysia if we were to create a model for Islamic finance in Egypt? I currently work as the chairman of the Leasing association so I'm pretty much involved with the regulators in making such a turning point. So it's very important to learn from others. The second thing, would HSBC Emana be interested to participate in the Egyptian market given the fact that we were on the move to Islamic finest? Thank you.
- [62:56]
A
Thank you very much.
- [62:59]
C
Professor, shall I answer about hsbc? Okay, quick answers to the questions. Why Islamic finance dating back only to the 40s? Because I think you cannot compare the situation, the socioeconomic situation of the time of the companions of the Prophet with what we have today. We have a completely different institutional setup, technological setup, monetary setup, regulatory, political and all things are different. So therefore it doesn't make sense to look directly and try to implement something that was there already historically. You can get some inspirations and that's what has happened in the 40s. Second thing, Islamic banking. I think Islamic is a very powerful label for me. What I can see now is Sharia compliant banking and Sharia compliance means meeting some legal requirements. But there is a lot of, let's say deficits regarding the socio economic, moral, et cetera, background. So maybe this may make some sense to differentiate a little bit regarding regulation. I think for the time being there is a clear tendency that Islamic finance is regulated in line with conventional finance. And I think to a large degree Islamic Islamic banking is like conventional finance and institutions such as the Islamic Financial Services Board in Malaysia where the regulators work together is trying to come up with specific solutions taken into consideration the specificities of Islamic finance, but in the framework of general regulations.
- [64:42]
B
I would agree professor, with your comments. Let me take the, if I may the question on Egypt first and say two things. I think that, I mean clearly the situation in Egypt now opens itself up in terms of complementing the existing financial sector with perhaps a growth in Sharia based finance and I think clearly the intention of the government is to develop that opportunity. You will have seen the recent press speculation about raising money in an Islamic form from residents offshore, resident Egyptians that are working in the Gulf and want to send money back home to Egypt, maybe that can be raised in an Islamically compliant way. And that's a very good start to that particular process. As far as HSBC itself is concerned, we're very proud to be in Egypt. We continue to grow our business there, and I'm sure we'll continue to look at opportunities to do more business in Egypt as time goes on. I think as far as regulation is concerned, exactly as the professor has said, I mean, in a sense, the framework that exists for the industry, I have to say, and I don't say this with the bias of having been based in Malaysia, but I think one of the reasons why Malaysia has got this industry right is because actually one of the things that they've done is they've integrated the regulations in terms of commercial codification, banking regulations, Sharia regulations, all under one umbrella, so that in effect, none of these regulations conflict with each other or contradict each other. And there is a clarity of a regulatory regime where, you know, essentially everybody is very clear from the providers, that is the banks to the customers, as to what is the regulatory regime that they're working under. And I think that provides a great model, actually, for everybody else around the world, because part of the problem with the Islamic finance industry is it's regulated in different ways by different regulators in different jurisdictions. And there is no overarching sense of regulations across the global industry. And the sooner that that happens, the more quickly the industry will grow.
- [66:53]
A
Right. Thanks so much.
- [66:54]
C
Very small addition. First of all, it took about 15 years, I think. But most important is that now they also have added legal clarity for dispute settlement, etcetera, which is very important.
- [67:03]
A
Malaysia.
- [67:04]
B
Yes.
- [67:04]
A
I don't want to exclude people at the back. Have you got a question? Anyone up there? Okay, right down here. And then I'll take someone over here and then someone down here. So three quick questions.
- [67:20]
C
Yes, my question is, like, I want to raise a debate. Like, don't you think that the propaganda beyond Islamic finance is a way for a Western economy to get bailout without, like, upsetting the taxpayers? Because you said before that HSBC never, like, had a bailout from the government. Maybe they had a bailout from Islamic Finance from, like.
- [67:52]
B
Asia or from.
- [67:53]
C
I don't know.
- [67:55]
A
Okay.
- [67:56]
C
Yep, yep.
- [67:56]
A
And then I pointed to someone I don't, can't remember who it was. Anyhow, there's certainly someone over here. Oh sorry.
- [68:05]
H
Was it you?
- [68:05]
A
Yeah.
- [68:06]
I
I have a quick question. A lot was said about the pressure from the conventional system on the Islamic finance to come up with new products, new developments and how that impacts on the actual faithfulness of the spirit and the letter of the products. But my question is do you see interest the other way around? Do you see for instance regulators from us or from England or from other big financial centers coming to the Sharia scholars and saying we explore all the possibilities for how we fix our own system and that is one of the possibilities. Is there that interest to also learn from that experience or not?
- [68:43]
C
Good.
- [68:43]
A
And then down here and look I'm going to take two more questions in this frame.
- [68:49]
J
My question is addressed to the speakers, to myself and to everyone here. While it's easy to blame the Sharia scholars, the Islamic bankers and everyone that we are not really doing risk sharing and we believe risk sharing is good because it leads to greater distribution of wealth. But how can we move to risk sharing when you and I as depositors don't want to share the risk? Right. We transfer the risk to the bank and say look I want my deposit back, I want deposit insurance from the government, I want the government's lender of last resort. So when we as individuals do not want to share the risk, how can you expect the banks to go and share the risk with the corporates? Now the corporates are saying that look, since you bank did not take the risk in the first place, you're not sharing the risk with the customers, you transfer the risk to us and you get a fixed return which is interest. So the point is are we ready? Now if we all believe in the virtue of risk sharing then it should start with us. So I don't know how many people are ready for that.
- [69:48]
A
I'm not going to let everyone answer that question. Tubor have someone there? Yeah, yeah.
- [69:57]
B
Okay.
- [69:58]
C
Yeah. My question is really can we have Islamic financial system in a vacuum of non Islamic society? Like doesn't it have to be everything aligned with Islamic principles? Good.
- [70:11]
A
And there were two more there we might be immediately behind.
- [70:17]
H
Hello. I know Mr. Hussain has just come from the Landmark hotel and we've had an interesting conversation by Professor Volker from an intellectual point of view about Islamic finance. So we have the pragmatic side people who's actually doing business and providing finance and thought schools. What I'm interested to know is in the Landmark hotel did you actually come up with any think tank solution to the real problems that Dr. Volker has mentioned in terms of having Islamic finance actually be an ethical solution. You know, we are living in a world that is very different. So the way we do business is very different to the way business was done during the time of the Prophet. So we need different solutions. So one of the things that, I mean, one of the things that actually wasn't mentioned is if you can. Sure. Actually, that's it. Because it didn't really add anything.
- [71:22]
A
And then the chat next to you.
- [71:27]
B
Yeah.
- [71:28]
C
My question is as to if there are foreign entities or bodies that might be able to play a role in facilitating changes, and if they do, can they still hold it to be like a global justice? Or are these changes and reforms that need to be made to be undertaken by the Islamic societies themselves?
- [71:47]
A
Great. Okay, why don't you start?
- [71:50]
B
Okay, a rich menu of questions. Let me start with the first one. Are we the beneficiaries of a bailout? Very simply, no one, because our Islamic finance business is essentially 12 years old. It started in 1998. The institution itself started in 1865. So we haven't had a bailout ever. And we've never used funds from any party to sustain our existence. So the answer to that one is no. In terms of regulators, I think maybe, if I may, Chairman, you'll allow me to digress, because I think there's an important point to be made here. The entire regulatory architecture of the financial services industry globally is going through a huge change. A change driven by capital requirements as far as Basel III is concerned, a change driven by responses by regulators to what's happened and therefore reform processes. So there's a, you know, quote unquote, there's a model change going on. What does that mean? That means that there are going to be increasing levels of capital applied to making goods and services available in the financial services industry. So the cost of finance is going up because the cost of capital is going up because the regulators are demanding more capital in the system to stop a situation of systemic failure from happening into the future. So you've got a scenario where there's much more regulation, much more capital. The second piece of this, and it's important for people to remember, is actually equity as a percentage of what equity finances in the world, never mind theory, but the practice is actually equity doesn't finance very much in a volume basis around the world.
- [73:44]
C
So.
- [73:45]
B
So if you look at equity as measured in private equity funds, venture capital funds, micro finance funds, actually it's very, very small. And, you know, the challenge is to Grow it. And I agree with Professor Nearhouse that we have to grow it, there's no question. But it's going to take a long time for it to attain a scalability where it comes to being able to compete or offer a material enough choice. And in the financial sector services world, it's scale that gives you the ability to price competitively. If something isn't scalable enough, you won't be able to price it competitively. And therein lies the dilemma and the challenge. Equity, by the way, in the world of financial services is now being given a much higher capital weighting than debt. So actually what's happening is a division of debt and equity. Once upon a time, banks, for example, could do both debt and equity financing. The cost of equity today is rising very significantly and it's driven by the regulators. In terms of other questions that have been, you know, posed, let me simply say this. I mean, you know, somebody's question around, can you have an Islamic system in the vacuum or in the conflict context of a broader non Islamic system? I think the reality is you start somewhere. So in a conventional system, you offer those clients that want an ethical solution, those customers that are prepared to look at an alternative solution, you offer them the solution. What makes that solution sustainable is if consumers buy that provider that particular product. So for example, in a very simple example, if you offer a conventional mortgage as opposed to a Sharia compliant mortgage, what you've got to hope for is that there's enough demand for the Sharia compliant product and it's demand led, consumer led. And that's what creates then the proposition in terms of availability and then scalability, foreign entities and reforms. I don't quite understand your question, so I'm not able to answer it. Do you want to repeat your question?
- [75:58]
C
Whether or not foreign powers can make change or should it be undertaken purely by the society?
- [76:05]
B
I think it's a mixture of both things. I mean, I think what happens, you know, in the world at large is you take wisdom from wherever it arises. Ultimately you will look at experiences and best practices from elsewhere and you will then look to localize them in terms of your own solutions in a domestic environment. And that's what we've kind of seen globally happen everywhere. So everybody looks at their own domestic circumstances, see what they can do to change them, but they will take a very careful look at global best practice elsewhere.
- [76:36]
C
Maybe just add to the last point. I would not like to see foreign powers intervene somewhere. And you also can take the worst practice examples you can learn from the Mistakes you don't have to repeat all the mistakes that others have already made. The question, the second question, the first you have covered, the second question was about interest of regulators approaching Sharia scholars. Yeah, I'm aware at least of one case and I think there are a few others where, for example, the Central bank of Luxembourg wanted to clarify or clear that the fund structure that is available in Luxembourg, which has some advantages over other legislations, is acceptable from a Sharia point of view. So they want to position Luxembourg as the hub for Islamic Sharia compliant funds in Europe. Similar things are happening, I think in Ireland and in Germany. We have the funny situation that the regulator is doing advertisement for Islamic banking, but nobody comes. So maybe you could open a branch in Berlin, Frankfurt. But these are a few exceptions. There are rare exceptions, I would say, concerning risk sharing. I mean, that is a very, of course, ongoing debate. Of course I'm not prepared to share the financial risks if I'm not benefiting from the returns. So the average saver of, let's say one of the banks giving a return, getting a return of 25% on equity, was the meager average rate on savings accounts. So giving this, and if I would know what risk is taken with my money and having not an effective deposit insurance, I would be worried very much about it. However, knowing what, where the money goes to, knowing that maybe you screen for socially responsible investments, etc. What is done in ethical banking, I might be willing not to lose my money, but I think you have to manage, not financial risks, risks in the financial sector, but you have to manage risks in the real economy, entrepreneurial risks, that I think is much easier to be done. The volatility of financial markets is by far larger than the volatility, let's say, in the real economy. So these risks are manageable and I would be willing, if I know that it is according to my preferences, to forego, let's say 10, 20, 30, 40% of whatever I could get as a maximum return, not knowing where the money is going. So it is a matter of education. But I think there are processes and there is a growing awareness that using the finance for certain purposes does matter. It may make a difference. Islamic finance in a vacuum. I think you have answered that one and think tank solutions. There are many think tanks coming up with proposals. But what I have not seen is really a kind of a theory of transformation. How can you start not in a vacuum? The world is as it is. And how can you not through a revolutionary act, but through evolution, achieve something which is more in line with the ideals of is Islamic finance. I think there still needs to be more research. There are more theories of evolutionary transformation. And here again we can look at transformation processes all over the world to find inspirations.
- [80:02]
A
I'm going to draw it to a close. These LSE students who are looking after the microphones in the room have to get back to the library. I know, but apart from that, we have to be out of the room by 8 o'.
- [80:13]
J
Clock.
- [80:13]
A
I want to thank our two speakers. As you can see, every year this is always a great success. These public lectures, huge amount of interest, not enough time. But come back next year. I want to thank Mokta and Professor Neenhaus very much.