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Book Review: 'Heaven's Bankers' by Harris Irfan

Shariah banking is a $2 trillion industry thanks to trade in emerging markets.

By connect

Aug. 6, 2014 2:44 p.m. ET
Balancing the altruistic ideals of faith with the need to turn a profit has never been easy: Look no further than the Book of Matthew for an early example of what history's most famous carpenter-cum-rabbi thought of money changers in places of worship. But while Judaism and Christianity historically had strict prohibitions against usury, today it is Muslims who adhere to the most stringent rules regarding finance of the three.

Islamic banking is unique in the world of finance, mostly because of what is prohibited. There are some straightforward bans: No investing in businesses that deal with products considered haram, or forbidden, most commonly pork and alcohol, but also Pop-Tarts (gelatin) and some aftershave (alcohol). Speculative bets are barred, and transactions must be based on real assets, not cash flows. By far the most significant rule is the prohibition on charging interest. The ban is meant to reflect the particular ethical responsibilities bestowed upon financiers: Profits and losses should be shared between debtors and creditors.

Many Muslims believe this risk-sharing approach can help remedy our broken financial system, even if it's difficult to square with mainstream, conventional banking. But a new book by financial industry insider Harris Irfan claims that many of the practitioners of Islamic finance have abandoned this honorable aim in an effort to keep up with the sophisticated tools of Western investment banks.

In "Heaven's Bankers: Inside the Hidden World Of Islamic Finance," Mr. Irfan, an observant Muslim, charts a course from seventh-century Arabia, where Muslim traders invented the precursors to modern checks and trusts while plying the Silk Road, to the 1970s and the establishment of the first Islamic commercial lenders in Dubai, as well as the short-lived "Islamization" of Pakistan's economy. But it's the turbocharged present that is the focus of the book: Islamic banking, otherwise known as Shariah-compliant banking, is now an industry approaching $2 trillion, thanks to soaring trade in emerging markets such as Malaysia and the United Arab Emirates.

Heaven's Bankers

By Harris Irfan
(Constable, 347 pages, £20)

Mr. Irfan has been a key player throughout much of this contemporary boom, having co-founded the team at Deutsche Bank DBK.XE +2.13% that pioneered modern Shariah-compliant derivatives. He became the global head of Islamic finance at Barclays Capital in 2009, and is now a managing director at European Islamic Investment Bank, one of the few U.K.-based Shariah-financing boutiques. The book provides an up-close look at the tactics Western banks, like Deutsche, Goldman Sachs GS -0.90% and HSBC, HSBA.LN +0.26% have taken to win over 1.6 billion Muslims world-wide, who for years either had to park their religious principles to participate in the global financial system or accept mediocre returns.

But along the way, Mr. Irfan also provides numerous examples of how Western financiers, determined to win over the faithful, have diluted Shariah standards in pursuit of commercial advantage: Bankers delete the word "interest" from deal documents in favor of Shariah-friendly language; Islamic investors wittingly and unwittingly fund businesses where alcohol and pork products are consumed; and Islamic scholars find their names used to suggest that they had given approval to deals they had never reviewed. In one instance that remains murky, a $2 billion Islamic bond deal by Goldman Sachs was sunk after a fatwa, a religious edict green-lighting a deal, failed to pass muster with skeptical Muslim bankers. Even when Western banks go out of their way to accommodate the faithful, things can border on the surreal. Mr. Irfan describes one comic case in which Deutsche Bank is left pondering how a deal that justifies its Shariah credentials by trading real assets can be completed without clogging up the mailroom with millions of sacks of Egyptian fertilizer for years on end.

It's plain, though, that many Western bankers treat Islam as a nuisance: "I don't care about the Shar-eye-ah stuff!" yells one New York-based banker as a cross-border acquisition deal runs into religious requirements. On the flip side, many Muslims, Mr. Irfan argues, also turn a blind eye. Even while chasing a deal to fund a five-star hotel and gigantic clock tower in Mecca, Deutsche Bank finds some companies prepared to settle for Shariah-lite. "I don't understand why you guys need to overanalyse things," the bankers are told by the finance manager at Saudi Binladin Group, the kingdom's biggest construction company. "Just do the deal. Draft up the docs with a structure that roughly works and print the damn thing." Eventually the company loses patience and the deal folds, but not before Deutsche's reputation in Islamic finance is made—in a city where non-Muslims are forbidden, no less.

The industry remains arcane and poorly understood, and often facing accusations that it is somehow linked to terrorist finance: Saudi Binladin Group will forever be overshadowed by the estranged son who ran a rather prominent terrorist network. Banks "are concerned that trading with Islamic financial institutions might somehow taint their own reputation, as if those institutions must by definition have a greater degree of exposure to laundered terrorist money," Mr. Irfan writes. He might have done more to vigorously confront this prejudice.

Given this book's topic, it will find relatively few readers outside of the financial industry. This is a pity, because aside from opening a window into this fascinating world, Mr. Irfan's career provides a case study in the challenges of balancing profit and principle.

As Mr. Irfan assesses the deals he structured at Western investment banks, he realizes that Shariah isn't ultimately being served by the mainstream banking world. Geert Bossuyt, former head of Deutsche Bank's now shuttered Islamic unit, concedes that perhaps "a bank is not an Islamic concept." But Mr. Irfan concludes that for all Islamic finance's shortcomings, its introspection is a source of strength—so long as it can refrain from the self-congratulatory impulses of Western banking and reassert its social mission. His message ought to be recited by bankers of every creed.

Mr. Hunter is a markets reporter at The Wall Street Journal in Hong Kong who previously covered finance in the Persian Gulf
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Heaven’s Bankers: Inside the Hidden World of Islamic Finance by Harris Irfan, review: 'noble intentions'

Is sharia-compliant banking just a way of twisting the rules?

4 out of 5 stars

Islamic finance is, today, a trillion-dollar industry
Islamic finance is, today, a trillion-dollar industry Photo: Rex Features

8:00AM BST 19 Jul 2014

Even those who assume to know something about sharia – Islamic law – are reticent to make claims about Islamic finance, so complex is this area of law. So when the phrase “sharia-compliant” first emerged in Western financial sectors in the early Nineties, it was seen as little more than an ethical-religious system on the fringes of mainstream financial markets with one main message: the prohibition on charging interest.
Yet today Islamic finance is a trillion-dollar industry with many financial institutions, corporations and governments keen to embrace it as a profit-making alternative to mainstream financial dealings.
Harris Irfan is an insider on two fronts. He is a Muslim and also an expert in finance and commerce. He has worked as an investment banker in Europe and the Middle East and been head of Islamic finance at Barclays; he also founded Cordoba Capital, an Islamic finance advisory firm. Irfan is a man with a mission: to show that Islamic finance might be able to make a real contribution to our economic woes. He asks the reader to consider whether the Islamic world can “bring something of benefit to the Western world, and vice versa”.
This is no mean task, but Irfan uses his own professional and personal experiences to weave together an accessible and interesting story. We get an insight into the birth of the Islamic finance system in the Fifties, to the establishment of the first Muslim banks in Saudi Arabia and the Gulf States and the gradual recognition by Western banks of the enormous profit potential in structuring products on a sharia-compliant basis. Traditional clerics were flattered with the attention and remuneration offered by the giants of the banking industry in exchange for their expertise. The prevalence of sharia-compliant bonds, or sukuk, ensured that Islamic finance went global.
While this book isn’t full of jargon, it helps to know something about how the investment industry works. You also need to have some sense of Islamic history and religious concepts – though there is a helpful glossary. But the religious commentary does not overcomplicate the narrative. Anecdotes about the life of the great eighth-century Muslim legal scholar Abu Hanifa, the financial workings of the Ottoman Empire and the modern controversial Pakistani scholar Taqi Usmani all add weight to Irfan’s history.

Islamic finance uses a risk-sharing model. Simply put, in a typical risk-sharing arrangement such as equity finance the parties will share the risk as well as the reward of a contract. In an interest-rate-based debt contract the risk is transferred from the financier or lender to the borrower, where the financier retains both the property rights claim to the principle and interest but also to any collateral.

Though he is broadly a supporter of risk-sharing schemes, Irfan does include the opinions of Muslim scholars who question just how “Islamic” this approach is and whether it offers a real ethical alternative to mainstream investments. Is it simply a clever way of twisting the rules to allow you make as much money as before?

The book takes us right up to the present day with the Bin Ladens and Bob Diamond both making an appearance. Irfan provides an interesting comparative case by discussing the recent controversy surrounding the Archbishop of Canterbury, Justin Welby. Irfan speaks of the embarrassment when the archbishop condemned the high-interest-rate practices of the payday lender Wonga, only to find that the Church of England’s own endowment fund was an investor in the company. Irfan shows that ethical finance is a concern for other religious traditions and that in matters of wealth, morality matters.

His concluding chapter ponders the future of Islamic banking after some sharia-compliant finances were unfairly equated with funding terrorism and banks and corporations began to close down their Islamic wings.

But while there has been scaremongering over the issue, he also acknowledges those Muslim financiers who feel that they have failed to truly bring something worthwhile to the banking sector to both Muslims and non-Muslims.

Irfan’s intentions might be noble, but I suspect that here in the West he faces a real struggle. The big banks and companies hit by the financial crisis are determined to recover and some are increasingly wary of Islamic banking for all kinds of reasons. To this many might add that Muslims have bigger issues to contend with than the complex and arbitrary nature of sharia-compliant finance.

Heaven’s Bankers: Inside the Hidden World of Islamic Finance by Harris Irfan
368pp, Constable, Telegraph offer price: £18 (PLUS £1.95 p&p) (RRP £20, ebook £12.34). Call 0844 871 1515 or see

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Heaven's Bankers by Harris Irfan, book review: How high deals of Islamic banking were brought low


Thursday 17 July 2014

Immediately after 9/11, international banks profiled their Middle Eastern account holders in meticulous detail. There was a general suspicion that they were aiding terrorists. The account holders reacted by transforming their clean money to the Gulf states, triggering a regional explosion in bank assets, stock markets and property.

The simultaneous rise in Islamophobia in the West encouraged a multitude of young and bright Muslim bankers and financial experts to migrate to the Emirates. The sheikdoms welcomed them by creating freehold property zones. The scene was thus set for Islamic finance to emerge from a curiosity on the margins to become a lucrative global enterprise.

Harris Irfan was amongst those who migrated to Dubai. As soon as he arrived, the ruler established the Dubai International Financial Centre – "a square mile of real state on a patch of desert with little surrounding infrastructure". The sole purpose of the Centre was to develop a thriving Islamic finance industry. In Heaven's Bankers: Inside the Hidden World of Islamic Bankers, Irfan relates the punch-drunk story of what happened next.

As a discipline, Islamic economics has a much longer history than indicated here. Its roots can be traced back to the more hopeful times of 1960s and 1970s, when there was a great deal of talk about "Islamic resurgence". Committed Muslim scholars everywhere were trying to develop alternatives to capitalism and socialism. The goal was to develop an economic system based on Islamic principles that outlaw interest and speculation, insist on limiting uncertainty, and aim at promoting equity, responsibility, and social justice. Since then Islamic economics has developed into a sophisticated theory and practice.

During the 1980s and 1990s, Islamic banks mushroomed in Egypt, India, Iran, Malaysia and Pakistan. But before the boom chartered by Irfan, Islamic finance was a limited local affair. One of the first experiments was the Mir Ghamr Savings Bank in Egypt, a small profit-sharing institution that did not give or receive interest, engaged in commerce and industry, sharing its profits with depositors. It was more a vehicle for savings and investments than a bank. Later Islamic banks followed a similar model.

Things changed when the "rocket scientists of Deutsche Bank", Goldman Sachs, HSBC and other big boys arrived on the scene. They saw Islamic finance as an opportunity for quick profit. Muftis and Mullahs were hired at footballers' salaries to make some of their product "Sharia compliant", and bankers such as Irfan to sell them to an unsuspected Muslim public. Soon we had products such as sukuk (the equivalent of interest on bonds), hilah contracts (which substituted bank charges for interest) and Islamic finance became embroiled in hedge funds, derivatives and other dubious instruments justified in the name of Islam.

Irfan tells the story of high jinks and deceitful behaviour with great relish. While he is rather reverential towards "billion-dollar scholars", he does expose their knack for finding religious justification for every seedy product. The debate between scholars attacking and defending Islamic finance is particularly illuminating.In the end, Irfan realises that Islamic finance is nothing but a confidence trick.

He is a "charlatan", suffering from "incoherent pietism" and "cognitive dissonance". The very institution of the bank, as it operates today, is intrinsically un-Islamic, forcing bankers such as him "to squeeze a square peg into a round hole". It is a refreshing confession. It will upset the pious eager to find "Sharia compliant" institutions for their hard-earned cash. But it vindicates what so many intellectuals have been saying for decades. One failure, albeit a monumental one, should not mean that the search for an ethical Islamic economy should cease. In fact, it begins all over again.

Ziauddin Sardar is the editor of 'Critical Muslim

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The Islamic Origins of Capitalist Enterprise

Harris Irfan | Posted: July 12, 2014 3:25 am
BY: Harris Irfan
Book: Heaven’s Bankers; Inside the Hidden World of Islamic Finance
Author: Harris Irfan
Publisher: Constable & Robinson
Pages: 347 pages
Price: Rs 999

The work of Abu Hanifa [in 7th century Iraq] and others like him on the fundamentals of jurisprudence, followed by the codifying of commercial law, would eventually lead to the development of a widespread money economy, with gold and silver giving way to paper notes. At first, traders relied on prophetic injunctions against usury or uncertainty in transactions or manifest examples of immoral behaviour. As scholars like Abu Hanifa built upon prophetic traditions, cheques and letters of credit followed naturally and before long a market-oriented capitalist economy — underpinned by an ethical code — was thriving in the Islamic world.

Arab and Persian merchants forged trade links with India and the Far East, becoming indispensable in the chain of trade between East and West. An Arab merchant from Baghdad might travel to Cordoba in Spain, taking with him a letter of credit — a suftaja — to be encashed on arrival by an agent, part of a network of money transfer that came to be known as hawala. Indeed the hawala would go on to influence the development of the agency concept in common and civil laws throughout Europe. The saqq — the forerunner of our modern-day cheque — allowed the early banker to become indispensable to every trader as a guarantor of paper money at markets and cities throughout the Islamic world…

Muslim traders would share the profits of their ventures with their sponsors in a pre-defined manner that would come to be the hallmark of Islamic economic activity, an investment partnership that modern Islamic banks refer to as musharaka and mudaraba. An exchange economy became the framework for Islamic merchant capitalism.

Within a few centuries, the Crusaders would encounter Arabian merchants and carry their new-fangled ideas — such as the trust law encapsulated in the Waqf and the agency concept intrinsic in the hawala — back to the Mediterranean. Not only would the techniques of commerce and finance filter through to medieval Europe, but also an entrepreneurial spirit which had been less widespread before. Ironically, given the negative connotation that “capitalism” has today — with all its implications of greed and selfishness — it was the Islamic world that institutionalised capitalism and brought it to the West in the form that we are familiar with today. Somewhere along the way, “Islamic” capitalism — of the type which Abu Hanifa legislated in favour of, and that afforded protection to the weak and the needy – became diluted…

Although earlier banking systems like the hawala method of money transfer were still widely in use, and the 100,000 pilgrims travelling annually to Makkah continued to make use of the suftaja bill of exchange to draw money at their journey’s end, court records of Anatolian cities show that interest-based lending was a frequent and apparently tolerated practice. Most disputes were in relation to small-scale transactions from person to person, with interest rates ranging from 10-20 per cent. There appeared to be no attempt to conceal the interest-bearing nature of the transaction and indeed, the local pious endowments became important providers of credit in major urban centres. Though some clerics denounced the practice of charging interest as incompatible with Sharia, the majority adopted the pragmatic view that  disallowing the practice might harm  the community.

Ottoman merchants continued to make use of the business partnership models such as the mudaraba, or investment partnership, which typically financed long-distance trading ventures without resorting to a fixed interest charge… However, little development of an Islamic system of economics and finance took place during the 600 years of Ottoman power. As European money-lenders gained in prominence, eventually Ottoman practices fell into line, and it would not be until the middle of the 20th century that Islamic finance would reassert its identity.

Founder of Cordoba Capital, Harris Irfan has headed Islamic finance at Deutsche Bank and Barclays.

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