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Speaker 1: Hello, and welcome to another edition of the Odd Thoughts Podcast.

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Speaker 1: I'm Tracy Alloway and I'm Joe Wisental. So, Joe, do

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Speaker 1: you remember we had on one of the authors of

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Speaker 1: that three thousand page book called A History of Interest Rates?

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Speaker 1: Oh yeah, that was a really uh that was a

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Speaker 1: really early episode in a really good one. Yeah. Everyone

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Speaker 1: should go back and listen to that one, by the way. Um,

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Speaker 1: but I'm curious, did you ever actually read the book?

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Speaker 1: Should we pause here and give people some time to

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Speaker 1: go back and listen and then and then like resumed, No,

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Speaker 1: we're going to keep going. Answer my question. Did you

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Speaker 1: actually read the book? No? No, I want to, but

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Speaker 1: it is huge, and if it isn't a massive I'll

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Speaker 1: read it one day. But no, I'm not gonna lie.

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Speaker 1: I haven't ready yet. Okay, Well, the secret is most

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Speaker 1: of it is charts, um, but you should still read

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Speaker 1: it because it's really good. And when I read it,

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Speaker 1: I thought one of the most interesting things in there

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Speaker 1: was actually history of interest rates. I guess that's obvious,

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Speaker 1: but a history of moral attitudes towards interest rates that

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Speaker 1: is really interesting because we tend to think about, you know,

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Speaker 1: just interest rates as being these things that are sort

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Speaker 1: of mechanically set by conditions in the economy and so forth.

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Speaker 1: But we know that at the edge of things things

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Speaker 1: like usury paid a loans, we do have caps that

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Speaker 1: we consider to be excessive on interest rates. And different

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Speaker 1: cultures at different times have had different views on borrowing. Yeah,

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Speaker 1: and different religions too, although actually a lot of the

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Speaker 1: most major religions have very, very unfavorable opinions of usury.

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Speaker 1: So if you go back and read the Bible, for instance,

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Speaker 1: I'm pretty sure there are some passages in there that

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Speaker 1: basically tell you you shouldn't be putting any money in

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Speaker 1: a bank. That's interesting, I should read that. We should

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Speaker 1: find those passages. Okay, so I've I've just given you

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Speaker 1: like a week's worth of reading homework. The reason I

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Speaker 1: bring it up is because one of the religions that's

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Speaker 1: probably most famous for having an unfavorable attitude towards charging interest,

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Speaker 1: to put it mildly, is Islam uh. And there's a

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Speaker 1: whole industry that's been created around that notion to basically

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Speaker 1: allow people to invest in certain assets and to put

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Speaker 1: their money in banks without charging interest and breaking a

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Speaker 1: primary concept of sharia law. Right. So from what I understand,

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Speaker 1: and to be honest, I don't understand very much, but

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Speaker 1: there are the Koran lays out I believe, some rules

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Speaker 1: about how avoiding interest. So then there's an attempt to

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Speaker 1: create financial instruments that avoid violating the Koran but serve

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Speaker 1: a similar purpose to bonds and borrowing. That's right. And

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Speaker 1: the reason to bring it up is because something really

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Speaker 1: interesting actually happened in the world of Islamic finance just

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Speaker 1: a couple of weeks ago. And we're going to have

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Speaker 1: someone on who's watched the development of Islamic finance over

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Speaker 1: the past I mean almost a decade really, and he's

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Speaker 1: going to explain to us how this industry really grew

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Speaker 1: and what the most recent event might mean for the industry.

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Speaker 1: Let's do it. So our guest today is Frank Kine.

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Speaker 1: He is senior business columnist for Arab News. He's also

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Speaker 1: a veteran business reporter at the National and he's been

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Speaker 1: in Dubai for a very very long time. Dubai is,

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Speaker 1: of course a center of Islamic finance and he's going

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Speaker 1: to break it down for us. So Frank, thanks so

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Speaker 1: much for joining us. Pleasure, Thank you, Thanks for having

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Speaker 1: me happen. I send you years by the way, So yeah,

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Speaker 1: Islamic finance has been here for considerably longer than ten years,

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Speaker 1: but I think it's fair to say that it has

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Speaker 1: taken off in the last decade or so, and especially

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Speaker 1: since the Global financial crisis two thousand and nine, which

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Speaker 1: as we all know, began as an infection in the

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Speaker 1: Western banking system asset related infection, and which ended up

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Speaker 1: bringing down almost bringing down the world financial system. And

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Speaker 1: of course this also affected this part of the world

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Speaker 1: very seriously. Dubai almost went bust. It was helped out

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Speaker 1: by its brothers Down and Abud Abbey. But many Islamic

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Speaker 1: financial commentators after the Global financial crisis pointed to the

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Speaker 1: fact that this was all the fault of conventional capitalism,

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Speaker 1: of conventional finance, and that if there had been an

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Speaker 1: Islamic financial system in place, it would not have happened

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Speaker 1: because Islamic finance is less risky than conventional finance. It

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Speaker 1: is mapped by real assets. You wouldn't have had very

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Speaker 1: high risk, low quality assets that brought about the Global

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Speaker 1: financial crisis. Those those couldn't have happened. You couldn't have

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Speaker 1: borrowed against them um. So therefore, the idea was that

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Speaker 1: if the global industry took more notice of Islamic financial precepts,

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Speaker 1: we'd be a lot safer. That was given a big

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Speaker 1: boost in two thousand and thirteen in Dubai, in particular,

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Speaker 1: when his Highness, Sheik Muhamma had been rushed Ontoon, the

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Speaker 1: ruler of Dubai declared the ambition of the emirated to

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Speaker 1: be the what he called the capital of the global

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Speaker 1: Islamic economy in the In the three years since his

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Speaker 1: Highness declared this goal, Dubai has boomed as a center

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Speaker 1: for the Islamic economy. And that's kind of where we

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Speaker 1: are now. All right, Well, let's take a step back

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Speaker 1: for a minute, because that was a really good overview

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Speaker 1: of Dubai's ambitions in Islamic finance. But walk us through

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Speaker 1: what the goal of Islamic finance actually is. Joe and

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Speaker 1: I talked about it a little bit in the intro,

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Speaker 1: but give us some more detail, right, and sort of

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Speaker 1: what I'm curious about is, to what extent is it

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Speaker 1: about finding loopholes to create things that are not interest

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Speaker 1: but sort of serve as interest type payments, And to

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Speaker 1: what extent is it if are they about fundamentally different

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Speaker 1: types of financial instruments? Okay, well Joe will look. I mean,

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Speaker 1: I must tell you straight up that I am not

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Speaker 1: an Islamic scholar. I do not issue fat wise. If

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Speaker 1: if if I could issue fat wise, I would not

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Speaker 1: be a financial journalist on the pistons that I'm earning here. Um.

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Speaker 1: So I mean I will, I will give you my

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Speaker 1: amateurs view. And it all goes down really to what

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Speaker 1: is interest in conventional fin anounced interest is the profit

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Speaker 1: that money makes itself. That will not wash in an

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Speaker 1: an Islamic system because money cannot make a profit. Only

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Speaker 1: assets can make a profit, and money is not regarded

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Speaker 1: as a physical asset. So interest in in Arab because

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Speaker 1: called riber and and it is haram, it is forbidden um.

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Speaker 1: But instead it's replaced by profit share. And there's nothing

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Speaker 1: wrong with profit shares, and nothing wrong sharing the fruits

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Speaker 1: of labor or or your sound management of an asset.

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Speaker 1: There's nothing wrong with that sharing that profit. So that's

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Speaker 1: what what replaces it. But the reason they're allowed to

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Speaker 1: make such big claims for the risk free nature and

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Speaker 1: the ethical nature is that assets have to be backed

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Speaker 1: by by Sorry, all profits have back by real assets

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Speaker 1: that as to be something behind them. So that's why

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Speaker 1: they're able to say that it's risky. And you know,

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Speaker 1: I mean, there haven't been huge runs on Islamic financial

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Speaker 1: institutions in the past and the way that they have

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Speaker 1: been on Western institutions, So to that degree, you know,

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Speaker 1: maybe they have a point there. There is also another

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Speaker 1: point where you know, it's world worth making that at

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Speaker 1: one point four bigger Muslims in the world, and if

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Speaker 1: you can appeal to them to put their money into

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Speaker 1: an Islamic financial institution rather than a Western conventional institution,

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Speaker 1: then that that is a very big market. So you

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Speaker 1: can you can make a lot of money out of it.

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Speaker 1: And I think that marketing aspect of the whole concept

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Speaker 1: of Islamic finance is very important. But it, you know,

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Speaker 1: it is a valid thing. It is an alternative way

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Speaker 1: at looking at finance. Before we get to the research

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Speaker 1: story that's been in the news, I want to go

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Speaker 1: back to something that you said in the beginning of

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Speaker 1: your true when you said you're not an Islamic scholar,

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Speaker 1: you're not in a position to issue fatwas and you're

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Speaker 1: on the sort of measly salary as a journalist. Yes,

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Speaker 1: I'd like to underline that, Joe, if I could, I

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Speaker 1: conclude from what you're saying then that within the Islamic

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Speaker 1: finance industry there is a role for the people who

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Speaker 1: are in position to declare that a specific instrument is

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Speaker 1: Islamic finance compliant, and that that seems like it must

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Speaker 1: be is somewhat critical and therefore lucrative role in the

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Speaker 1: whole thing. Yes, you're dead right, and that's a very

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Speaker 1: good point to make, and that in some ways gets

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Speaker 1: to the hearts of the thing that we're going to

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Speaker 1: talk about a bit later. Um, so that the people

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Speaker 1: who actually make decisions of called scholars, they are experts

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Speaker 1: in Islam. Most of them have a level of expertise

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Speaker 1: in finance and accounting too. Combine these together and you

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Speaker 1: get and and it's any scholar. These people are very

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Speaker 1: well paid. Indeed, there aren't there many of them. Run

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Speaker 1: about two thousand and thirteen, there there there was an

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Speaker 1: absolute rush around the world by Western banks who sought

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Speaker 1: potential for Islamic finance, and they went hiring these guys

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Speaker 1: on you know, big big bucks. In many cases, there

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Speaker 1: was just one man sitting in an office in Wall

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Speaker 1: Street with a stamp that was his, his fatoire stamp,

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Speaker 1: that was his authority to declare that deal Islamic compliance

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Speaker 1: Sharia compliance. But they made an awful lot of money

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Speaker 1: and it was a very limited pull of people. And

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Speaker 1: of course you can see with you know, this sort

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Speaker 1: of small number of people making decisions. They can each

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Speaker 1: go their own way. There's there's no unified structure to it,

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Speaker 1: or rather that there are there are too many structures

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Speaker 1: to it. So and and that really is part of

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Speaker 1: the problem. Really. All right, well, Frank, you've you've learned

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Speaker 1: into the recent news event perfectly UM and what it is,

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Speaker 1: let me try to break it down for our listeners

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Speaker 1: who haven't been following all the business news emanating from

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Speaker 1: the Golf region recently. There's an energy company called Danicass

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Speaker 1: and it's based here in the UAE and UH. I

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Speaker 1: think about five years ago or so, it issued seven

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Speaker 1: hundred million worth of Sharia compliant debt to Cook's UM. Now,

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Speaker 1: since that time, the companies had a little bit of

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Speaker 1: trouble getting payment from some people that owed it money,

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Speaker 1: some producers I think one of them was in Iraq,

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Speaker 1: and so it's had to restructure it's debt now. A

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Speaker 1: couple of weeks ago down it basically announced that it's

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Speaker 1: Islamic bonds, the seven hundred million worth of debt that

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Speaker 1: have been sold in two thousand thirteen were no longer

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Speaker 1: Sharia compliant, they were illegal, and because of that they

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Speaker 1: would be redeeming them and swapping them for something else.

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Speaker 1: And this spooked a lot of investors, to put it mildly, right, Frank, Yeah, yeah,

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Speaker 1: it did indeed, because I mean it's kind of unprecedented.

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Speaker 1: I think there is one other case of Skuk being

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Speaker 1: declared her run, but it was a much smaller one. Man,

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Speaker 1: it was a long time ago, and it didn't involve

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Speaker 1: the same principle. But basically they said, look at what

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Speaker 1: your ear compliance back then when you when you stumped up,

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Speaker 1: but now it isn't, so therefore we don't have to

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Speaker 1: repay it, or rather we will make other arrangements to

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Speaker 1: repay it. It turns out on less favorable terms than

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Speaker 1: than the original Sikuk, so naturally bond holders Cirkuk holders

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Speaker 1: the same thing. In these circumstances. They weren't very happy

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Speaker 1: about this, and they sought enforcement of their claims to repayment.

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Speaker 1: There are two more installments due this year. The course

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Speaker 1: in Charaja, which is one of the emirates of the

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Speaker 1: u A, said no, you can't enforce this until we

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Speaker 1: reach a decision on whether this sharier compliance or not.

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Speaker 1: So we're in kind of a uh, you know, cheft

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Speaker 1: stick situation at the moment. They can't enforce until the

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Speaker 1: court says whether they are sharier compliance or not, and

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Speaker 1: that one happens at about December. But what they said

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Speaker 1: in their their explanation was that duties of a changing interpretation,

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Speaker 1: that these were no longer sarier compliance. And I think

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Speaker 1: that that's what spooke people, because they have suddenly declared

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Speaker 1: the whole thing, you know, in retrospective to be no

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Speaker 1: longer valid. And people who have taken out the sakuk thought, well, okay,

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Speaker 1: if if, if, if the law has changed. People to

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Speaker 1: every right to change their minds, and you know, lawyers

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Speaker 1: can change their opinion, interpretations can change. But surely there

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Speaker 1: is a legal and moral argument that these repayments have

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Speaker 1: to be met on the same terms, and that's why

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Speaker 1: people are worried. You basically anticipated my next question. Actually,

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Speaker 1: I have a billion questions now based on that explanation,

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Speaker 1: But I'll sort of rattle of three quick ones and

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Speaker 1: you can sort of pick and choose. The first is

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Speaker 1: so a the company could do it? Can the company

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Speaker 1: do it unilaterally just to clear that the bond or

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Speaker 1: the sukuk is no longer sharia compliant? Be do they

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Speaker 1: need to get a ruling from one of the same

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Speaker 1: scholars that declared it sharia compliant in the first place?

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Speaker 1: And then, finally, what's been the market reaction to the

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Speaker 1: whole industry if there is a precedent set that at

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Speaker 1: any moment a financial instrument that was deemed to be compliant, Uh,

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Speaker 1: suddenly just like nope, we changed our mind. Well, well

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Speaker 1: that's what they did. The civil courts, sorry, the Sharia

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Speaker 1: court in the U A Emirates here Sharia Sharjah will

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Speaker 1: decide whether that was the correct procedure or not. Now,

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Speaker 1: they obviously took advice both from Islamic scholars and from

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Speaker 1: lawyers who would have a heavy Sharia element to them,

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Speaker 1: So they did it on advice. That's that. That's the

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Speaker 1: line Number two was to remind me again, do they

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Speaker 1: need to get an opinion from a scholar who deemed

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Speaker 1: a Sharia complaint in the first place. Well, we're a

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Speaker 1: bit in the dark on this because they haven't really explained,

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Speaker 1: you know, broken down the process and haven't really told

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Speaker 1: us that. They said simply that it was a changing interpretation.

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Speaker 1: Now look, you know, maybe they have have discovered something

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Speaker 1: that was Sharia compliance to two thousand and thirteen when

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Speaker 1: they issued the bonds and which no longer is. But

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Speaker 1: the answers we don't really know. We're waiting to hear

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Speaker 1: all that. Lots of this will come out in court

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Speaker 1: in charger in Arabic um towards the end of the year.

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Speaker 1: So so we're not entirely certain. Um. Now in terms

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Speaker 1: of market reaction, you know, people have been worried because

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Speaker 1: this could happen to you know, many others. Uh. It's

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Speaker 1: as you said, is is the precedent setting which seems

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Speaker 1: to be the issue. If this could be changed so arbitrarily, um,

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Speaker 1: you know, then where does that leave all the other

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Speaker 1: you know, hundreds of billions trilligions worth of dollars worth

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Speaker 1: of scoop debt that's out there in the world. So

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Speaker 1: one of the solutions to this um that people have

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Speaker 1: been proposing, including yourself, and one of your recent columns

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Speaker 1: is to standardize some of the fundamental requirements of sikuks

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Speaker 1: and Islamic finance. And I can see the benefits of

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Speaker 1: doing that for sure, But then I think that Islam

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Speaker 1: itself is a religion that is very open to interpretation. Yes,

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Speaker 1: you have the Kuran, but you also have the Hadids,

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Speaker 1: you have Islamic scholars all issuing their own sets of advice.

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Speaker 1: It's very open to interpretation. So how realistic is it

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Speaker 1: to actually standardize sure your finance. Yeah, well, well I

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Speaker 1: don't I don't think it is really you know, it's

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Speaker 1: to standardize it on a on a global scale at all.

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Speaker 1: The the two big centers of the Islamic financial and

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Speaker 1: economic activity in Southeast Asia and here in the Gulf.

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Speaker 1: In the Middle East. Malaysia in particular has been the

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Speaker 1: most developed of the Islamic financial and economic markets, and

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Speaker 1: quite a Lumpur has done a fair job of making

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Speaker 1: itself the the Asian capital for regulatory standardization of Islamic

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Speaker 1: matters and bonds in particular the Middle East. On the

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Speaker 1: other hand, however, even even in Southeast Asia, the Indonesians

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Speaker 1: do not have to recognize decisions of the Quala lump authorities,

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Speaker 1: but they are relatively small, so it doesn't always matter. However,

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Speaker 1: in the in the Middle East, which arguably is a

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Speaker 1: bigger market, potentially more assets here um and a bigger

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Speaker 1: well a comparable comparable population, you would think that Saudi Arabia,

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Speaker 1: Buffain and the UA, between them, those are the three

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Speaker 1: leading Islamic centers here in terms of finance. You would

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Speaker 1: think that they between them would be able to get

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Speaker 1: together and organize something called called the Gulf Fatwa Authority,

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Speaker 1: the Callegi Fatwa Authority or something like that. So far

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Speaker 1: that has eluded them. Babaraine seems to be the regionally

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Speaker 1: recognized center for regulation. The UAE, as part of its

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Speaker 1: drive to be the capital of the Islamic economy, also

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Speaker 1: attempted to put its unification of regularly standards here. Saudi Arabia,

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Speaker 1: which you would have thought had the sort of moral

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Speaker 1: Islamic claim and being the biggest economy, you would have

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Speaker 1: thought that they would have led the way, but they

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Speaker 1: don't seem to have as yet. So these these three

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Speaker 1: centers of pulling against each other and they have not

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Speaker 1: managed to organize themselves into a single unified unitary regulators.

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Speaker 1: It is difficult different to the different regions. Countries have

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Speaker 1: fundamentally different objectives, like what is the sort of where

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Speaker 1: are the dividing lines? Why is it so difficult because

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Speaker 1: they have their own way of doing things and I

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Speaker 1: guess that they're there's a proprietary element to it. You know,

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Speaker 1: they want to keep their own systems in place. They

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Speaker 1: want to have their own regulatary standards. The comparison that

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Speaker 1: that has been made to me in the past is

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Speaker 1: with hallow food. Hallow food has to adhere to certain

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Speaker 1: minimum standards in preparation and storage wherever it is in

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Speaker 1: the Islamic world. But hallow food in Kuala lump or

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Speaker 1: will look and taste very different from hallow food in

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Speaker 1: Saudi Arabia or Lebanon, So you know it's taste really

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Speaker 1: you know, it goes down to global taste standards and

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Speaker 1: you know, similar kind of things applying finance too. Practices

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Speaker 1: have have grown up over years that haven't accepted a

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Speaker 1: standard by the people in Malaysia. Different standards have pertained

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Speaker 1: in brain and they have diverged and they don't want

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Speaker 1: to have to pull them back. You know, there is

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Speaker 1: no as Tracy said that, you know, there's an awful

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Speaker 1: of interpretation in islam Um and you know the financial

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Speaker 1: ratory systems reflect that. So, Frank, when you talk to

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Speaker 1: people on the ground here in Dubai, how much concern

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Speaker 1: are they expressing over the Stanic gas situation and how

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Speaker 1: do they see it actually playing out? What they think

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Speaker 1: that it can damage the Islamic economy and and that

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Speaker 1: it can it can damage Dubai's attempts to the you know,

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Speaker 1: the center of the regional Islamic system. Now how it

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Speaker 1: plays out, the court, I'm sure will be lobbied by

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Speaker 1: Islamic financial people in in in the course of the

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Speaker 1: next few months, different interpretations will be put. The court

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Speaker 1: in its its sharreer wisdom world decide. I mean there

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Speaker 1: must be wrong for some elements to compromise. I think personally,

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Speaker 1: if Dharma were to sweeten the terms of the replacements

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Speaker 1: of kuk Uh, you know we say are offering that's

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Speaker 1: a fairly straightforward commercial decision. By then, if they were

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Speaker 1: to do that, then you know, we could be halfway

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Speaker 1: there and that the whole episode could be left behind. Alright.

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Speaker 1: Fascinating conversation. Frank Caine really appreciate you coming on. I

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Speaker 1: had read several pieces about this, and I think I

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Speaker 1: have a greater understanding now about what's going on than

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Speaker 1: I had from any of those that really appreciate you,

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Speaker 1: uh joining us this week on odd Lot. Thanks a lot, so, Joe.

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Speaker 1: One of the reasons I'm so interested in this whole saga, um,

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Speaker 1: it's not just because I'm here in the Gulf. It's

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Speaker 1: also because a lot of these arguments are being mirrored

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Speaker 1: in other Western bond markets throughout the world. So, you know,

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Speaker 1: you have these big movements for green bonds, for impact investing,

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Speaker 1: and you're really seeing the same discussions like should we

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Speaker 1: standardize the requirements for something to be labeled a green bond?

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Speaker 1: And what exactly are we trying to achieve through impact

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Speaker 1: investing And everyone has different interpretations of what that is.

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Speaker 1: So a lot of what we're talking about when it

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Speaker 1: comes to Islamic finance you could extrapolate to some other

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Speaker 1: hot new areas of the financial industry. You know what

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Speaker 1: it made me think about, and this is not meant

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Speaker 1: to be alarmist or anything, but I was thinking about

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Speaker 1: the role of the Islamic finance scholars issuing the approval

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Speaker 1: of Sharia compliance and thinking about there's that similarity to

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Speaker 1: the role of the ratings agencies pre crisis, and then

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Speaker 1: the idea that suddenly, you know, of course in the US,

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Speaker 1: suddenly a triple A isn't a triple A anymore. Suddenly

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Speaker 1: a Sharia compliant, uh, financial sukuk is no longer Sharia

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Speaker 1: compliant anymore. So you know, I don't I have no

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Speaker 1: reason to think it's going to spiral or anything the

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Speaker 1: same way our situation did, but it did feel to

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Speaker 1: me like sort of a slightly analogous situation. Yeah, I

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Speaker 1: guess it's a totally unexpected development, right, You think something

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Speaker 1: is triple triple A, you think something is Sharia compliant,

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Speaker 1: and then suddenly it isn't it's not. Yeah, No, I

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Speaker 1: really that was very interesting. All right, son, we leave

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Speaker 1: it for today. Let's leave it there on Tracy Alloway.

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Speaker 1: You can follow me on Twitter at Tracy Alloway and

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Speaker 1: I'm Joe wisen't though. You can follow me on Twitter

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Speaker 1: at the Stalwart. You can also follow Frank Caine at

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Speaker 1: Frank Caine Dubai, and you can follow our producer Sarah

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Speaker 1: Patterson on Twitter at Sarah patt with two teas. Thanks

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Speaker 1: for listening,