Shari ah Aligned Portfolios Balancing Ethics & Risks

Salam alaikum everybody. Good afternoon and welcome everybody in our session. Uh I would like to welcome every single one of you to our Sharia online portfolio balance balancing ethics and risk. Today we're going to talk about the Islamic finance move into more complex and multiple uh uh multipolar word questioning the emerge around I am I am today fortunate and lucky to meet the expert matters and the leader in this uh in this sector. So today we're going to talk about so many things around Sharia compliance.

I would like to start with Mr. Akbal. I am sure many of the many of the guests here they know about Islamic finance and Sharia but for the people who doesn't know about it can you briefly explain what is Sharia compliance at the same times risk and opportunity most of the investors they are facing especially we are living in very fragmented multipolar world

thank you very much Mariam so there is a Quranic word called yanfas that which is good for mankind. To me, the sectoral definition of Islamic finances, anything which makes the world a better place for all is Sharia compliant. How we structure it, how we package it, how we present it to our Sharia boards is not the essence of the transaction. It is the impact. It's also that we are living in a world which is multipolar which is shifting between del globalization between them and us.

Islamic finance is about putting money into the productive real economy. It is about connecting the financial economy with the real economy. And in a world where there is so much of them and us, Islamic finance is actually all about us, humanity as a whole. Islamic finance is not a subset of the global financial system. It is actually a proposition which is there to bring everyone together to make this world a better place for all.

Whether it is in venture capital or whether it is inmemes or whether it is in private equity infrastructure in all those areas the fundamental question which is Sharia asks is is value being created is this transaction making this world a better place for all. So from that perspective that's the broad definition. What was the second part of the question?

The risk and opportunities uh for the the agent in fragmental uh multipolar we are living at the moment.

I think from a GCC perspective today we have a very unique opportunity as the world shifts from uniolar to multipolar as the world gets more delobalized and fragmented. We are very fortunate in GCC to have visionary leadership to have economic stability, political stability, continuity. These are the founding pillars and in my view when we started Islamic finance it used to be $200 billion industry and we used to talk about it it is going at 15 20% peranom but today it is a $3 trillion industry it is going very very fast but the essence of Islamic finance is it authenticity and the impact which it has and that is the measurement And there are huge opportunities. And Islamic finance has always talked about the role of government is capitalism with a moral perspective. Government as a referee, not as a player.

And when government plays, it plays with the private sector, not against the private sector. Private sector is the ultimate way to have a competitive economy. Islamic finance is also about making sure that the asset management model should be prioritized. The banking model will always be Sharia compliant. It will never be Sharia based because the BIS regulations, the risk bage guidance makes it almost impossible to have riskreward sharing which you talked about.

Yes.

So asset management offers us the opportunity. government as allocators of capital for VC, for technology, formemes, for private equity, for infrastructure and then choosing the best asset manager for each asset class to have a maximum impact. This is a new way of thinking and I believe this will bring a stability and growth to our markets.

Thank you so much. Building on that I would like to ask uh Mr. Muhammad

because both Islamic finance and ESG often relies on screening. Okay. And many criticize that the Islamic uh this approach is basically avoiding the haram instead of bringing great values or more economical to the investors. So how should Islamic private equity evolve beyond screaming? Okay.

And bring and becoming very genuine agent to the positive change.

Yes. I actually um brother Ibal already set the scene.

Yes.

That um Sharia or Islamic law is to promote good. So we actually have to um um enhance the definition of Sharia law in terms of banking not just focus on prohibitions. And we have inspiration from people like Imam Al Gazali from the 12th century. He said that um Islamic law is about preserving religion, life, um property, human dignity, uh intellect etc. And another scholar Ashar from the 20th century said that Islamic law is about enhancing society uh protecting human dignity, family values, equality, etc.

So if if we focus on things like this, we'll find that these values fit in very nicely with ESG investing that major private equity firms have been doing. So just to give you an example, uh TPG has raised more than $18 billion through a rise fund concept that they've been using. KKR has launched a global impact fund 2.8 billion. So just to give you an example, TPG has invested in a company called Dodla in in India.

It's it's a dairy company and basically um what the company does uh it provides uh feed stock veterinary services to small farmers who maybe are looking after cows. Um and it gives access to banking system so that the farmers get paid a fair price for for the milk for example and they're sure that they're going to receive the payment etc. So Dodler supports 250,000 farmers uh in hundreds of villages in India. So TPG is just a good example

where you make good returns plus you have a social impact you do some social good and I think that's a good model for us to follow uh for an example from our capital zone example in UAE we've invested in a company called data flow

okay

and one problem we have in this region a lot of doctors engineers nurses they come from all over the world and we don't know what type of qualification that they have they have a certificate but is this valid or not so data flow pro basically verifies uh it's called primary verification services. It verifies the qualification of professionals especially who come to the UAE. So inshallah this investment will be a good financial investment for our capita but it will also provide some other social benefits to the UAE. So I think that's just an example of the type of investment that we should be making.

I'm sure you guys are leading the changes and uh promoting uh the Islamic finance and G. Let me go to Mr. Barisma and uh you know we are we are operating around very uh fast growing industry. So where do you see the most meaningful growth within the Islamic finance product mandate?

Yeah I think from our perspective where we see the growth is really the opportunity for equal access as we were talking about earlier. So on Monday um you know we announced under the leadership of his excellency chairman Elzabi the Magata ecosystem here in ADGM and really the vision of Magata is to bring and create the world's first centralized scalable um and standardized capital markets ecosystem anywhere in the world and you know with the lens that we look through from the IATA initiative um it's a focus on all assets but really to start it's around uh structured products and and fixed income and if you look at these markets number one they're fragmented all around the world um when you look at conventional and Sharia compliant products number two they're very expensive and number three is they're inaccessible because of a lot of the costs the minimums are so high most people can't afford to even buy these products especially in structured products and ultimately I think it was uh said earlier but We try to view through the Magata initiative and my company Halo that I founded is powering the technology of of this ecosystem. But we need to look through it through the lens of conscious capitalists. This is what I always like to say. I'm a conscious capitalist and it's about equal opportunity.

So when you look in the structure product world, yes, are there Sharia compliant structured products that exist? Yes, there are. There's a few banks that offer them. Um, I find it very ironic that some of those banks offer Sharia compliant products linked to the S&P 500, which is uh not Sharia compliant, but there's an additional 200 to 300 basis points in fees just because the rapper is Sharia compliant. Um, there might be a variety of reasons why that is, but I don't believe that that's fair.

Why based on someone's faith should you pay another 300 basis points in fees? And so the vision of Magata is to utilize technology and a standardized framework here within ADGM to be able to solve these challenges, make the fees a lot more palatable for people to um ultimately um take within their products and more importantly make these products accessible to investors of all faiths and and investors of all wallet sizes. So with this standardized Sharia framework that uh we're developing right here in the ADGM with tokenization and with technology ultimately we will all have an equal opportunity to Sharia compliant structure products fixed income in a transparent efficient and scalable way.

Very interesting. I really would like to ask Mr. What would you tell the Islamic asset manager to move from compliance lens to build portfolio which is bring long-term uh value to the client?

Well, I think Islamic asset management managers all across the world are trying their best to get authenticity, transparency, better governance into their asset management platforms. When you invest into a portfolio company, you cannot have a better governance than what you have in your own company as an asset manager. If you have transparency, if you have high impact uh platforms and you also have the linkages with ESG and CSR. So at fudger capital we have a foundation in which we give 10% of our management fees and 10% of our carry and what do we do with it is to again work to make this world a better place for all so when we have integrity we have competence without integrity there cannot be any competence in the history of Islam when the prophet was migrating from Makkah to Medadina he asked his companion who is the best navigator. So he said amongst us is Hamza your uncle but he said no who is the best?

He said this person is not a Muslim and he said is he the best? He said yes he is the best. So Abu Bakr said but how can we trust him? So Rasool Allah said if he is the best then he would have integrity. Nobody becomes the best without integrity.

So I think asset managers are well advised to make sure that in their platforms and in their portfolio companies they have authenticity, integrity, meritocracy, good governance and high impact i.e. that when you become successful nobody's going to take all the money which we have with us. We give back

and the give back is part of the way you create a more equitable and a better world. I agree with you actually Islamic finances became universal now is no longer focus on Islamic countries or religious people because we started to see a lot of commercial banks now the introducing Islamic products although because it has a universal meaning uh and it has an impact investment which is take me back to Mr. Muhammad and uh you know impact investment has deployed tools like catalyst capital patient risk tolerance capital. How should Islamic private equity engage in those catalic opportunities?

Yeah miam so you mentioned a catalyst investing um basically this is invest investors who are willing to accept a lower return uh maybe to invest for a longer period. So for example uh mostly we invest for 3 to 5 years uh those investors are willing to accept investing for like 10 to 12 years for example and just to give you one example from my own country Bangladesh uh there's an institution called B um it started off as a micro lender has 6 to 7 million customers in Bangladesh and now it's spread to other countries in Africa and Asia and the way that they look at or assess their returns is not just financial. Um so for example 90% of the customs are women. So woman empowerment we know that women are treated like secondass citizen in many countries. So the that target is to uplift the woman in that society.

Look at financial resilience. I was in a village in Bangladesh and there's a river and I suddenly see a big boat come and there's a big structure on the boat. So I I asked the people what is this? They said it's a mobile school for children because children from this village can't go to a proper school. So they brought the school to the to the village.

So I I think in Islamic finance we don't need to reinvent the wheel. Maybe we can partner with B. They're not Sharia compliant but we can very easily structure micro finance in a Sharia compliant manner and we we should look at those. Maybe the sovereign investors are willing to take a low return invest for a longer period or the development banks the first session talked about that from Kazakhstan. So I'd encourage um like Moubadala uh PIF uh in our region the big sovereign wealth funds uh to look at uh these catalysts or impact investing especially in uh less developed countries.

Yeah, I think uh before people thought just the oil and gas companies should contribute to the society which is no longer the case. I think it's a general responsibility to have an impact and return to the society which is everybody plays really good role uh from that. So since we are living in very evolving and changing and uh we live in very innovative time where we see technology and we see artificial intelligence. I really would like to ask you Barisma uh how can technology reshape and expand Islamic finance and does that enable more personal allocation within the financial?

Well, I think technology and AI is changing everything. Um as we talked about earlier I I run a global technology company both for conventional um products and now with a specific lens on Sharia product through chairman al- Zabi's Majada initiative and when you look at AI I think is very interesting in general and and this doesn't matter between conventional and Sharia but just what is it does to the human population and and there's a lot of people who are worried about the displacement of jobs and I would remind people that uh there was a recent report that was done I think by uh KPMG that 90% of its um survey participants said that they actually lose money when they're implementing AI that they have not seeing any ROI. So I encourage my team to put the ROI in AI as our little inside joke. But what we see with AI is it just allows us to be a lot more productive. And when we're a lot more productive, it allows us to be able to collect a lot more intelligence, provide better customer experience and user experience for our clients.

Um, and it also allows us to be a lot more scalable. So, we're able to do more with our time, which I think is really, really powerful. I think we're in the very early stages of what AI is going to do to society. I do not think it's going to be as scary of what people say it's going to be. We adapt just as we did after Henry Ford's assembly line.

But when you look at through the lens of maga and sharia compliance and technology, I think blockchain and smart contracts can play a really prolific role at least from my view and my seat of being able to standardize and scale and automate the manufacturing of these products. You talked earlier and I totally agree with you and I view the same thing in just the structured product world. We shouldn't look at is it conventional if it's or if it's Sharia. We should be looking at what are good for our portfolios, what's good for the world, and what's ultimately required to be able to hit our retirement goals and our ethical values, which I really appreciate you guys talking about that. And those are a very fine line to balance, right?

We need to be able to hit our retirement goals, but we also need to be able to um hit and meet our ethical values. And you can do both, you know, through investing. And so the way I view it are what are the right investments for yourself and more importantly uh for the world. You always want to be doing something bigger than yourself in my humble opinion. And then let's make it available in both a conventional rapper and a Sharia wrapper.

And you can do that in a really scalable way through smart contracts and blockchain. And that's a big thing that we're going to be focusing on with Magdata. But it really starts with the standardization. So what we are doing with the maja initiative is really bringing in the Abu Dhabi Inc. institutions to be able to create this framework and have a really collaborative approach in regards to that.

So it really starts there with a standardized framework that we can then take and ultimately scale not just within the UAE and not just within road uh regionally but ultimately globally. it's important to turn the hub um of Islamic finance and make it here in in Abu Dhabi.

Um thank you so much. Of course, technology is one element, but giving Islamic uh Islamic finance is the fastest growing segment. What other capability we are expecting to build worldclass Sharia asset portfolio?

I think the biggest thing is human talent. It will be very important to have graduate training program where graduates could become part of an Islamic financial institution. When we I founded HSBC Ammana, our first 60 graduates came from all kinds of different backgrounds and all of them without exception today are CEOs, CIOS of very large institution. So the first thing which you need is human talent. The second thing is to integrate with Sharia and be transparent with Sharia scholars and benefit from their wisdom and the proactive engagement with Sharia scholars to guide us to how to make these products more authentic, more transparent, more impactful in order to deliver the business model which is required today in a fragmented in a broken heard the financial systems have got inherent systemic risks and today I want to spend one minute on technology today digitalization is taking away the biggest systemic risk i.

e financial intermediation and the co-mingling with payment systems are being segregated and separated. This is the best thing which could have happened for both conventional and Islamic banking. As it happens, we will have much more stability in the banking system.

Yeah.

In diversification within it. Totally agree.

So I think we are running off time so I'm going to have final thoughts to Mr. Muhammad because

no just to pick up on the previous questions. I think Islamic banking um we need to move away from what I call the Muraba syndrome.

Yes.

Um unfortunately um what we try to do we try to imitate a conventional product which isn't totally Sharia compliant we put an SPV we put a Muraba in the middle going back to the expression is put a Sharia wrapper instead of trying to do that going back to what the bad said we need to create real Islamic products. Yes.

So for example, private credit has been booming in the last few years. And if you look at the Sharia compliant versions, you you see there's a Sharia rapper and if you look at the underlying contracts, they're not that compliant. We really need to work hard to create authentic Islamic products. So for example, at our capita when we started 30 years ago, we we did the first leveraged buyout transaction in a share compliant man in the US. At that time equity investment is very shar compliant but you couldn't get the leverage.

We spent months and hundreds of thousands of dollars working with lawyers to come up with a sale and lease back structure and that has become like the industry standard. Now everybody accepts that as the Sharia standard. So I think we need to work harder uh to make sure that we don't take the easy route with the Sharia rapper but to have authentic uh real Sharia component products going forward

uh complementing what you what you mentioned I believe technology and the platform how can we scale up the finance product and to be mainstream uh adopted globally

well that's the beauty of what Maja is It's the thread that connects the infrastructure that already exists in Abu Dhabi uh and in the UAE. We already have the ADGM which already has issuance programs that you can utilize. We already have exchanges like ADX which we can utilize. We already have banks and a a CCP like 80 clear. We h all the pieces are already in place.

We just need to bring them together through technology and ultimately through innovation to be able to make these products more transparent, more efficient, and more accessible. And I think that in my humble opinion that ADGM is the best place to be able to do that because it is flexible, it's credible, and it's innovative. And that's what's really powerful about what the chairman and ADGM have been doing here in a wide variety of different industries. and um and so ultimately I think technology will be the driver of the next great wave of Sharia compliant uh adoption in my respectful opinion.

I agree with you. I think we need to conclude right uh I believe we will see more transformation in the Sharia compliance and Islamic finance and uh thank you so much to our speakers and I really thank you for attending this session.

Thank you very much. Thank you.