Although financial instruments created on the principles of Islamic finance are still in their infancy, they are at an important crossroads and the current crises in Dubai is a symptom of this.
If we were to examine the progress made in the development of Islamic financial instruments over the past 10 years, we would see that much of the developments have been to replicate Western financial instruments in a bid to make Islamic Finance more competitive and profitable.
However, this is at odds with what has actually occurred. Islamic investors such as those in Dubai are suffering due to institutional exposure to ‘Islamic’ type hedge funds, mortgage backed securities and over-investment in real estate. In its race to become the dominant financial sector in the Middle East, Dubai has relied heavily on leverage. A city driven by the need to be the first and the biggest could see the first and biggest bankruptcy in the region in the 21st century. Could a back to basics approach be beneficial to the markets and investors?
The fundamental tenets behind Islamic Finance; an investment based ideology, wealth creation for all members of society, prohibition of making money from money, make it perfect for investing in technologies which meet the challenges of today and tomorrow. Had all the effort that had been put into financial engineering been geared towards making investments in technology more accessible, the economies of large and small nations alike would have prospered. Everyone has seen the unprecedented growth in GDP over the past 15 years for countries such as Ireland and India due to their development of software and IT products.
Adherence to these tenets actually brings us closer to the original purpose of the financial markets, which is to match savers with those wishing to borrow money for investment purposes. Financial instruments should help mitigate risk and bolster liquidity. Note, borrowers should be using the funds for investment purposes, not consumption.
However, mortgage backed securities and variations of these became the de-facto financial instrument of choice and the resulting overpriced housing market allowed homeowners to borrow money through re-mortgaging mainly for consumption purposes. The problem with an overheated property market is sooner or later people say ‘we can’t afford it’. There comes a time in renewable energy research and implementation when governments say ‘we cannot afford not to.
Alicia Blackett, manager of iQuansys Ltd explains “the problem with the current direction of the implementation of Islamic Finance in a modern world is that it appears to be driven very much from a Western viewpoint. Financiers put their own spin on Riba and tried as many ways as possible to conceal debt. Ask most Western financiers about Khalifa and they’ll probably tell you it’s a town in Iraq. They lack the ability to develop its principle into the business world. Surely mans guardianship over the Earth and its resources means using those resources well for the benefit of everyone? We can achieve that and wealth creation through renewables. As for Zakat, Westerners have got that principle skewed too. Sukuk and Islamic mortgages were created to feed a stoked up, overheated housing market and investors were told creaming a small percentage off the top of the resultant profits relieves them of their obligations. However, lets look at the principle of sharing wealth. A functioning economy has investors financing a product, creating work and a labour force manufacturing the product and increasing their wealth through the collection of wages. Here, wealth is created for all members of society regardless of their financial position. Investing in an iQuansys Ltd technology based fund achieves that.”
There is still money to be made in real estate, which doesn’t suffer from the same default risk as MBS bonds yet provide a steady cash flow and also meet the social criteria of Islamic Finance – “social infrastructure” says Alicia Blackett.
With the downturn in the western economy and the social obligations of states, particularly the British government, there will be an increased demand for social housing whereby rent is paid by the government therefore default risk is minimised. iQuansys Ltd complements infrastructure funds with social property schemes. Such a steady but rising cash flow is also suitable for Islamic pension schemes and other medium risk ventures.
By providing low cost housing to governments, Islamic social criteria is met and also the cheap price of property now means that to liquidate the properties at a later time will provide capital growth too. “What’s important is people on the ground. We know of the property portfolios being auctioned and the particular areas desperately in need of cheap housing and match the two together to create successful purchases.”
However, it’s not just western governments who face this problem. Many predicted outbursts of violence in emerging countries such as China, South Africa due to the downturn in the economy. Before the industrial boom, many people where isolated, living in villages. The industrial boom caused hundreds of thousands if not millions of people to move to cities meaning that when a downturn came, there were large gatherings of disgruntled unemployed people with nothing to lose … Many emerging countries will face this same dilemma.
“It can be possible to replicate the profits made from cash flows generated from MBS in, say, infrastructure funds. The profit is made not by re-working basic financial instruments but by optimising the implementation process of the projects. Already, power projects based on renewables will have a significant cost saving during the life of the project. Smart metering will reduce waste. Enhanced project management skills will keep budgets on track. The important thing is to choose a company that offers the full service. That company is us”
Scholars of economic study will know that an economy is only as strong as its manufacturing base. iQuansys Ltd helps local companies in the Gulf region with partnerships, joint ventures, and developing business strategies. “That’s why we launched shariahtechtransfer – our sister website devoted to improving the skills base of students to senior managers.”
Our corporate training ensures that when a bond is issued or joint project synthesised, the participants have an understanding of the technologies and business processes that underlie it and our secure servers make the underlying visible. iQuansys Ltd tailors its investments for each client and ensures all their clients understand the technology they are getting involved in, the risks, and the likely returns. iQuansys Ltd use optimised software to improve the accuracy of those predictions as well as undertaking full market research and performing financial as well as technical due diligence on potential investment target companies.
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