Heaven's Bankers by Harris Irfan

Author:Harris Irfan
Language: eng
Format: epub
ISBN: 9781472105066
Publisher: Little, Brown Book Group

‘I think that some of it is socially useless activity.’1

Adair Turner, referring to the derivatives industry

and its role in the post-2007 global financial crisis

Deutsche’s wa‘d technology had opened up new horizons. Whilst its salesmen and -women criss-crossed the Middle and Far East selling exotic structured investment products to the private banking departments of Islamic financial institutions, Sheikh Hussain and the Deutsche skunk works structurers were more concerned with addressing the gap risk that Islamic institutions suffered as a result of their inability to hedge their macroeconomic exposures. Here was a real issue facing the industry: a ticking time bomb of unhedged currencies and rates on a massive scale, not some esoteric trophy investment baubles for the ultra high net worth Gulf prince. Billions of dollars’ worth of institutional exposure, not the crumbs of a few tens of millions in speculative nibbles in the hope of financing one’s next megayacht.

Treasury departments of the Islamic institutions knew they had a problem. The Islamic Development Bank, a multilateral development-financing institution owned by fifty-six member states, was haemorrhaging cash as if it were funding a war. It simply couldn’t swap dollars for euros or vice versa on an ongoing basis without resorting to the conventional markets. It couldn’t enter into rate swaps or currency forwards. Islamic institutions everywhere were funding long-term assets with short-term deposits. Without a Sharia-compliant solution to managing these risks, their volatile existence was owed to booming equity and real estate markets in the Middle East. For now, at least.

Some institutions pretended the problem didn’t exist. Turkish institutions, in particular, wouldn’t even use the word ‘Islamic’ in their name for fear of upsetting the country’s secular sensibilities. Instead they were ‘participation’ banks, though the commodity murabaha trades that were their lifeblood lacked the participation that classical Islamic concepts of risk-sharing demanded. Their notions of what constituted Sharia compliance were at odds with almost everywhere else in the Islamic finance industry: they discussed Islamic ‘repos’ – or repurchase agreements that enabled them to borrow money against liquid assets held by them such as bonds – using interest-bearing Turkish inflation-linked bonds that somewhat stretched the definition of sukuk. They were content to transact swaps on a conventional basis despite their outward adherence to Sharia principles, on the basis that there was apparently no alternative.

Even in conservative Islamic environments, treasury departments of banks often entered into currency or rate swaps and forwards on a conventional basis, simply because the effort involved in preparing the necessary documentation was so daunting, and the process of Sharia certification so alien to departments whose staff were generally sourced from conventional banks. Do the trade, hide it in the books, and almost no one will know. What’s the harm – it’s only a hedging transaction, right? It’s not as if we’re trying to profit from these trades, or selling investments to the bank’s customers. We’re just protecting our institution from external risks.

The Sharia structuring process and legal documentation was indeed daunting. Regional Islamic banks in the Middle East and

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.