Dr Zainab Radhi: A social justice financial system
A personal note in light of the recent events in Christchurch:
I was fortunate to meet with Zainab and spend a couple of hours with her in the studio recently for this recording - personally it was an enriching experience to learn more about the Muslim community that is now part of NZ - I'm saddened as all NZ is around what has happened recently and offer up genuine heartfelt condolences to those impacted by this terrorist attack.
Dr Zainab Radhi
A social justice financial system
We’ve covered already how blockchain technologies a la decentralised financial systems can help create a type of social justice financial system – so what about Islamic Finance?
If there's disruption up ahead, think about where it will come from, how it will help you as an investor (or harm you) and how you can prepare for new ways of building, storing or transferring wealth. The disruption up ahead that I'm talking about isn't just from technology, it's from the masses who've been excluded from the current financial system. What systems could work to assist is one question - but I have another question: What other systems currently work?
Continuing on a theme which may disturb our traditional thinking around in traditional financial markets in the west, we’re looking at the tools of Islamic Finance.
After the Islamic/Ottoman Empire, Islamic Finance lay dormant for centuries only to reappear (relatively recently) about 100 years ago. Now Islamic Finance (IF) is one of the fastest growing areas in the banking industry today – Why is this? Is it because of the growing population of Muslims (currently around 1.8b) or is it possible that their financial system works better than that in the West? The Islamic financial system represents a global market of USD 2.2 trillion annually.
I'm keen to know if some of the IF tools out there could assist in the following areas:
-Risk shifting. Risk shifting has many connotations, the most common being the tendency of a company or financial institution facing financial distress to take on excessive risk. This high-risk behavior is typically undertaken with the objective of generating high rewards for equity owners — who face little additional downside risk, but may garner significant extra return — and has the effect of shifting risk from shareholders to debt holders. See . The GFC was a great example of risk shifting – who footed the bill for bailing out the banks and who came out unscathed here?
- Financial exclusion. There’s not much for delivering financial services and advice to those who are unwilling or unable to pay for it. As a side effect however a large proportion of the world are trapped in poverty as a result. This is a problem that affects everyone so yep, may pay to front-foot this one.
-Mis-aligned interests. A creditor only wants to see the debt repaid plus interest, they don’t care how it happens.
-The death of the interest rate. In an overly simplistic model, as money supply increases, the cost of money goes down. Investors are forced into taking much higher levels of risk today to generate a meaningful return.
The world bank has put a mandate on Governments of the world to put all options on the table to assist people from all walks of life to become ‘financially included’ – see
How is NZ responding to this? Currently, NZ does not offer any Islamic Financing alternatives like assisting buyers into homes without using traditional mortgages. The current system excludes a huge portion of the country that cannot pay interest without getting into conflict with their beliefs.
'The market’s not big enough’, with only about 60,000 Muslims in NZ I get it - it's not a profitable exercise. I wonder though, do we have to be a vegetarian to try the salad? Let me ask you this, if given the choice between borrowing to purchase a home at a 4% interest rate on a $1m home vs paying 0% on a $1m home but have a ‘silent partner’ who would instead get a share of the gains/losses in that property, what would you choose? Wouldn't it be great to have the framework in place for a regulated genuine, peer to peer shared-equity platform for house/business financing?
Enter the word Musharaka – Musharakah is a joint enterprise or partnership structure in Islamic finance in which partners share in the profits and losses of an enterprise. This isn’t risk shifting, this is risk-sharing.
Finally, it should be noted that Islam does not solely own the IP on banning interest – Judaism and Christianity do also, with examples in NZ like https://kingdomresources.org.nz/about-us/ and the Liberty Trust http://www.libertytrust.org.nz/nutshell.
Whether Islamic Finance is divine or merely a shadow of something divine is beyond the scope of this podcast, but importantly for this podcast centred around developing wealth, anything and everything which can assist Kiwi's in doing this more efficiently and more equitably, should be looked at.
Where to find Zainab? Check out http://www.smartstartbusiness.org.nz
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