Islamic Finance's missing 'E' in S.T.A.R.E.

A few years ago, I tried to simplify, at a macro-level, Islamic finance to an audience, and broke it down to the acronym STARE.

S for Shariah (everything is permissible unless violation one of prohibitions: interest, uncertainty, speculation, and underlying prohibited)

T for Tax (where applicable, western jurisdictions, Malaysia, etc.)

A for Accounting (as in AAOIFI and align to IFRS)

R for Regulation (models like Malaysia, Bahrain, etc.)

E for Education (online courses, certificates, diplomas and dedicated universities like INCEIF).

Others have provided in-depth understanding of each the above elements, hence, repeating does not add value and consumes all of our limited time and bandwidth.

But, in a nutshell, if a jurisdiction is interested in planting the flag of Islamic finance hub, then, at minimum, STARE has to stare you in the face. Furthermore, the jurisdiction needs to also understand and appreciate stage of economic ‘Islamic’ development (Nigeria different stage than Malaysia), political sensitivities (includes Muslim majority countries), a high level champion (like former French Minister C. Lagarde), awareness and demand for Islamic finance (retail and/or wholesale), price of oil, and so on.

However, take a step back and stare at STARE, and realize something is MIA (missing in action). The gap is lack of inclusion and empowerment of the young, women, and SMEs. These are not only change agents and backbones of any economy today, but, more importantly the knowledge base stakeholders for economies of tomorrow. The new economy sectors in the Muslim world includes healthcare, ICT (information, communication and technology), services, etc., and led by these stakeholders.

But, where is their access to (Islamic) finance?

We must also be cognizant that a risk taking culture does not exist in a meaningful way in the Muslim world. As I have said earlier, ‘failure is a badge of shame in east and badge of honor in the west’ (read silicon valley).

Failing is Essential

Having risk capital is only, say, 40% of the solution, there must also be a culture that encourages innovation, with the understanding that failures are an important ingredient of it. The culture starts off at young age at home and continues through school. The failure is a just a feedback on the project and the backer!

For example, fast-tracking failure before it paralyzes is the key according to CEO of Deloitte.

Jim Moffatt, chairman and chief executive of Deloitte Consulting LLP, had written an insightful piece entitled, ‘Helping People Learn By Letting Them Fail Is Essential,’

‘Here are some ways to increase employees’ comfort with the risk of failure, and to be resilient when it happens:

• Share past stories of struggle. Everyone’s been there.
• Practice recovery so people aren’t paralyzed by failure.
• When I was coaching sports, we didn’t just diagram plays. We always developed a Plan B. That’s why great organizations scenario-plan. It helps people think of struggle as part of the process.
• Help people around you think like long-term investors in their own ideas and their own careers.
• The aim shouldn’t be to try to have one uninterrupted string of successes, but rather to have a portfolio of some winners and, yes, some losers.
• If someone is struggling, your job is to figure out how to get them on the right path. The real job of a manager is to help people learn from failure and move forward.
• Champion failure that turns to innovation. Find examples where ordinary failure has led to extraordinary opportunity.

Encourage failing fast. Sometimes we recognize that something is failing, and our instinct tells us to push harder to make it succeed. Knowing when to pull the plug is always difficult but is necessary.’ 

Can Islamic Finance Spark

To spark the new economy sectors, like ICT, Islamic finance needs to put on its Musharaka (partnership) hat on, and extend focus on the other ‘E,” entrepreneurs and entrepreneurship. And, folks, its already happening in selected parts of the Muslim world because a great equalizer and intermediation platform: internet penetration.

[But, lets also acknowledge the capital/risk requirements of local central banks regulations and of Basel lll, hence, compartmentalization of risk and capital.]

Lets assume the risk taking culture is slowly taking shape in places Malaysia, Dubai, Jordan, Indonesia, etc., and led by the [Muslim] Millennials, but where is the money and guidance?

The timing is extremely important, even more so than pre-Arab Spring period, as we must provide an inclusionary ‘holistic platform’ to bring the youth onto the path of contributing to the development and diversification of the economy. The competition is for shaping their minds so they can contribute positively with their heads, heart, and hands. 

Thus, it’s not enough to set-up an Islamic VC fund, itself a rare commodity like a start-up ‘unicorn,’ and typically only discussed at Islamic finance conferences. It needs to be managed locally (not money parked to a silicon valley VC) and disbursements deployed locally.

Yes, previous arguments about lack deal flow ‘not there,’ but, now, many of the more established Muslim countries with Islamic finance, I believe 15, have an emerging social-media/e-commerce (mega-trends for 2020), led by Millennials, that are waiting for funding.

If you think about it, these become Islamic finance bankable companies of the tomorrow hence, it would be creating its own feeder and diversifying from real estate. The possibilities of new customers for sukuk issuance, Ijara l(easing), takaful (insurance), etc. The journey of 1000 steps (or is it miles) starts with the first one.

We are seeing the rise of Islamic crowd funding and Islamic peer-to-peer funding, and this represents the great financial-technology (fin-tech) disruption to Islamic finance’s relevance. How many mix use towers in say, Dubai or Kuala Lumpur are you (Islamic finance) going to Islamically finance, especially now with low oil prices? Real estate has booms-bust cycles, surely mitigation and managing of such dependencies is part of the fiduciary duty of senior management and Board of Directors.

[If Islamic financial institutions will not lead or foot-drag in establishing VC funds, then corporate venture capital may just provide ‘risk capital’ as part of their strategy to acquire technology, drive diversification inorganically, showcase financial inclusion (as a USP vis-à-vis competitors), etc. It would be ideal, if Shariah compliant companies in, say, the Dow Jones Islamic Market Index from the OIC sparked the first corporate (Islamic) VC.]

Beyond setting up an Islamic VC fund, Islamic finance needs to also be part of the conversation, if not lead it, on establishing (sector specific) incubators and accelerators. These would be the feeders of funded start-ups for mentoring, testing (business model), refining, etc., and eventually graduating.

Conclusion

Meaningful, not cosmetic, entrepreneurship must become part of the Muslim government 2020 vision and budget. Selected Muslim countries have called themselves out as ‘Islamic finance and/or halal hubs,’ its time to consider ‘Entrepreneurial Hub,’ which is different than a Technology Park.

Entrepreneurship needs become a ‘must have’ in the Islamic finance vocabulary. Having a few courses at, say, INCEIF is only a beginning, its needs to feed those specializing on ‘Islamic entrepreneurship,’ (what does that mean), to start-ups, Islamic VCs, corporate VC, incubators/accelerators, etc.

 Conventional finance in Muslim world is not leading entrepreneurship nationally, here Islamic finance can, as its DNA!

What is your institution doing to encourage ‘E,’ entrepreneurship?

Rushdi Siddiqui, Co-Founder & CEO, www.zilzar.com and www.zilzarlife.com

@rushdisiddiqui