Ep.74 - The Problems with Islamic Finance & the Case for Bitcoin with Harris Irfan
Islamic finance is today a multi-billion-pound industry. The growing Islamic consciousness of Muslims east and west has coincided with a scepticism towards the interest-based capitalist banking system. The financial crisis of 2008 compounded the belief of many Muslims that the global financial system is a gambler's paradise, a house of cards built on foundations that contradict the certainties that underpin an Islamic economy. For some, Islamic finance is a solution to these ethical dilemmas. Our guest this week is an insider turned sceptic.
Harris Irfan takes on the essential purpose and complexities of Islamic finance and questions whether it has fulfilled its lofty Islamic objectives. Harris is the author of “Heaven’s Bankers: Inside the hidden world of Islamic Finance”, a detailed and insightful book exploring the Islamic finance industry's internal machinations and contentions. He was the co-founder of Deutsche Bank’s world-leading Islamic finance team, served as global head of Islamic finance at Barclays and is widely recognised as one of the world’s leading authorities in the industry.
In this discussion with my co-host Riaz Hassan, he talks candidly about how much Islamic finance depends on a capitalist riba-based architecture. He recalls his part in acquiring funding for the Makkah clock tower, a project he now regrets. This is a fascinating look at the players and motives of an industry. Harris also offers his views on Bitcoin as a more Islamic alternative above the gold standard, traditionally accepted as a stable shariah-based currency.
Harris is an investment banker with a degree in Physics from The University of Oxford and over two decades of experience in Islamic finance in London and the Middle East.
Thanks to the team: Riaz Hassan, Musab Muhammad, Reem Walid, Adeel Alam, Ahaz Atif and Umar Abdul Salam.
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This is a largely accurate clean verbatim transcript. Please refer to the original programme where incomplete or unclear.
Harris Irfan: So, of course we don't think of Makkah, we don't visualize Makkah anymore as the Ka'bah, we visualize it as this absolute monstrosity that towers above the Ka'bah itself. And as I say, I led the structuring into the financing of that and in some senses, I guess I was blinded by and we all were blinded by the innovation of a Western investment bank, the Deutsche bank, being invited for the first time into the Holy City to finance real estate. And I didn't realize that I was very naively participating in the wholesale destruction of my own heritage.
Muhammad Jalal: Islamic finance is today a multi-billion pound industry. The growing Islamic consciousness of Muslims, east and west has coincided with a skepticism towards the interest based capitalist banking system. The financial crisis of 2008 compounded the belief of many Muslims that the global financial system is a gambler's paradise. A house of cards built on foundations that contradict the certainties that underpin an Islamic economy. For some Islamic finance is a solution to these ethical dilemmas. Our guest this week is an insider turned skeptic.
Harris Irfan takes on the essential purpose and complexities of Islamic finance and questions whether it has fulfilled its lofty Islamic objectives. Harris is the author of 'Heaven's Bankers, Inside the Hidden World of Islamic Finance', a detailed and insightful book exploring the Islamic finance industry's internal machinations and contentions.
He was the co-founder of Deutche bank's world leading Islamic finance team, served as global head of Islamic finance at Barclays and is widely recognized as one of the world's leading authorities in the industry. In this discussion with my co-host Riaz Hasan, he talks candidly about how much Islamic finance depends on a capitalist riba based architecture.
He recalls his part in acquiring funding for the Makkah Clock Towers project, a project he now regrets. This is a fascinating look at the players and motives of an industry. Harris also offers his views on Bitcoin as a more Islamic alternative above the gold standard traditionally accepted as a stable sharia based currency.
Harris Irfan is an investment banker with a degree in physics, from the university of Oxford and over two decades of experience in Islamic finance in London and the Middle East.
Riaz Hasan: Harris, I know that you are well steeped in Islamic finance. In fact, you've been around, in the very genesis of modern Islamic finance in the late nineties. So I wanted to start this podcast really, before we get into the weeds of your insights into Islamic finance, I want you to cover something that is kind of ubiquitous to us all, whether we're Muslims, non Muslims, or any other persuasion, which is the issue of money, money and debt. Because I find, although that we use money and we are accustomed to money, very often, we forget what the purpose of money is and what the purpose of debt is. Just start off by enlightening us on how money should be viewed.
Harris Irfan: So this is an important question, and I think it's a question that the Islamic finance and Islamic banking industry has very specifically failed to adequately address and hence why I have formed certain views about the Islamic finance and banking industry. So the first question we should be asking, you're quite right, is what is money. And it's not a question that should be asked only of orthodox economists, I thinks it should be asked of heterodox economists. It should be asked of anthropologists, of philosophers, of theologians and possibly even physicists and really the ideal nature of money is that it is a medium of exchange. It is a store of value and it's a unit of account. Unfortunately, in the modern world, it's become a commodity to be traded. So we trade cash flows with each other in the form of bonds, for example, and other intangibles, we treat money as something to make money out of.
We charge interest on loans and that is riba. Riba is any excess or surplus. It's money out of money. Our entire banking system is based on money creation, which is something I think we can talk about later. So if we ask the question, what is money? We should say it has no real value by itself. It's to exchange value of real goods and services, what we call the real economy. And that's, I think the right starting point.
Riaz Hasan: A lot of people have talked about the issue of where money came before debt and where the debt came before money. So I know there's a number of economists out there from David Graeber and others of that ilk who talk about debt being the actual fuel for driving money and the creation of money and why we use money.
And also I wanted to just kind of cover why, even in earliest times, money was viewed as an instrument to beget more money as you've just. So there's instances in the Bible, in the Torah about how money was used, how money lenders used to perhaps usurp money and usurp, the actual wealth of other people using money as a tool.
Could you expand upon some of the thinking that you have behind this and how riba came into being and how it was perceived even in biblical times and then following on into Islamic times as well?
Harris Irfan: Yeah. So you've used the example of David Graeber which I think is a very good example. He's of course, an anthropologist first and foremost, and many economists will disagree with him. Economists mostly will say money originates as a barter. And he will say that money originates, or he would say, he's passed away now, that money originated as debt. So his theory is that before money there's debt and 5,000 years ago, agrarian societies have created elaborate systems to buy and sell on credit because no coinage has been invented. So these IOUs circulate in a community and are a form of money and we can then start to extend that.
We say that early civilizations held surplus commodities in temples, which were effectively industrial concerns. So commodities are lent to merchants and because the priests of these temples can't audit profit loss attributable to each merchant, they make it easy for themselves by charging the merchants interest on the amount that's lent out and interest is lent at a sorry, these commodities are lent at a fixed rate of return and merchants continue to lend to each other and interest proliferates in society. So collateral of course gets demanded and collateral is usually in the form of grain and livestock, for example, but if that's insufficient to repay, then one's own family. One's children become debt, peons, bonded labor or slaves.
And so you have this situation where slaves are not just those who are conquered by neighboring civilizations and neighboring countries, but they could be anyone and debt leads to slavery. So of course, violent coercion is the primary enforcement mechanism.
And that ensures that debt is passed down through the generations, which is why, for example, we can read in the Bible, the law of Jubilee, the governor of Judea in the fifth century BC. He institutes the law of Jubilee, which is that the slate has wiped clean every seventh or Sabbath year and debt peons are returned to their families.
So we see that Judaism, Christianity and Islam, outlaw interest for the sake of fairness and equality and social justice. But of course today we see a sort of creeping normalization of interest and usury and riba. The church allowed the financiers in the middle ages to circumvent the law against interest being charged on a loan by allowing three contracts to be executed between counterparties, what they call a contractium trinius so that it would give the effect of a loan with interest.
And today in the Islamic finance industry, we see a similar event taking place, which is the creation of this synthetic contractual structure called organized tawarruq, sometimes it's referred to as commodity murahaba which is essentially also a synthetic proxy for a loan with interest. And it is offered by Islamic banks.
I can't remember the stats, it might be something like 95% of all of the Islamic banks activities are conducted through the tawarruq or commodity murahaba which as I say, is essentially a very synthetic transaction. That is of course, because they operate within a system, a monetary system which requires them to create money from the act of credit creation. And again, that's a fairly complex topic that hopefully will unfold.
Riaz Hasan: You've come onto an area of interest now, which is a bit more contemporaneous in terms of the financialization of society as such that we see today or the over financialization of society. Firstly, how has that been allowed to happen? Not just from an Islamic financial point of view, but generally across the board in society. And we see the role of private banks and we see the role of creation of money because when we are young, we just think about money in terms of a household budget. We think money is finite. We get money from somewhere and then we spend the money, but there's a totally different philosophy to this with the merchant banks and with private banks. So could you expand upon this role of why it's not just the institutions or the governments that create the money or the federal reserve, but it's actually these private institutions that have a role in creating some of this money that keeps going round and creating unnecessary pressures like inflation and everything else.
Harris Irfan: Well, it's interesting you mentioned when you were young and I made that mistake when I was young as well, because I assumed that money and finance and economics was an unworthy subject and something that I wasn't interested in, wasn't worth my time and I made a huge mistake in believing that. I studied physics at university and that is what I thought was important to me. I used to run a university Islamic society, and we once invited an Islamic bank to talk to us about this subject and I remember being very unimpressed, although they wore sharp suits and spoke very fancy jargon, I didn't understand any of it and they didn't connect with us.
And that was a huge mistake because they made me believe that finance and economics were irrelevant to my life. And actually it's potentially the most important subject that any of us, whatever discipline or field we're in should understand, because if we can solve the monetary system and the financial system, we can solve everything.
And I think that they weren't able to explain the subject very well simply because they didn't understand it very well. And they missed a perfect opportunity to explain to a group of bright young people who wanted to do interesting and potentially influential things with their lives what was the importance of a just halal economic system.
So now we come onto what is the world like today? What is a financial and monetary system like today? Well, my contention is that the financial system is broken. I believe that empirical and statistical analysis of economic history has been wiped from the university curriculum and therefore economic reality is not really part of the syllabus that is taught in universities today.
I think that there's a lobbying and a selective, there's a lobbying and there's a funding by large corporations of MBA schools and economics faculties. That means that there is a selected amnesia which has resulted in huge tracts of economic history being ignored. And what I think is happening is people are being fed a dogma by priests who speak Latin and they speak in a language which obfuscates, and doesn't help us to understand the reality of what's going on.
So we, the lay people, watch the news every day, people talk about GDP and they talk about monetary policy and money supply and we don't really understand what they're saying. And we assume that the priests who speak Latin must know what they're doing. They have a direct line to God. But actually we don't need that.
We don't need any intermediaries, we can learn this subject for ourselves. It's actually not very difficult. Economics as it's espoused today by modern economists is more of a religion than a science. It's dogma. It's not based on empirical fact it's models are false, it's models demonstrably have failed.
We can see examples of that 2007, 2008 financial crisis. There were bailouts in the trillions of dollars. Boom and bust are a recurrent cyclical event. We often contend, I mean, society contends that the fault must lie with the managers of the monetary system and the financial system. But my contention is it's a system itself, which is at fault.
We can change the managers as much as we like, the end result we're still gonna get to the same point because our incentives are inherently flawed. I think that government and central bank policy has been consistently ineffective. The financial crisis of 2007-2008 is a perfect example of that.
Also the late 1980s in the United Kingdom, higher interest rates did not curb the money supply and did not reduce inflation as the economist told us it would. So, as I say, the logical conclusion is the fault lies with the system. And what we see is a dogma that preaches financialization of the economy.
GDP, Gross Domestic Product is the primary measure of human progress. And therefore has led to an unbridled pursuit of profit. And governments and corporations make decisions that yield short term benefit, but a long term loss. What is happening is our exchange value increases, that's GDP, but our experiential value decreases.
And the example that's used by a Greek economist called Yanis Varoufakis is the example of a forest fire. So when a forest fire takes place, GDP goes up, exchange value goes up because you are paying for fuel and Fireman's wages for equipment and transport to get to the fire. But you are reducing experiential value.
There's no forest anymore and you've reduced environmental value. So it's a bit strange, you know, that neoclassical economics has established a framework for measuring our progress and for valuation methodologies, such as what they call discounted cash flow, which prioritizes short-term gains over long-term sustainability.
And in extreme example, it would lead to desertification of a land rather than long-term sustainable farming. So it's not really based in reality, it constructs false models. And hence why I use the term priest speaking Latin, because it's almost as if they deliberately don't want us to understand what's going on.
And I'll often bring this subject back to the subject of money itself. Of money supply. Fiat money is money that is decreed to be so by the government. So Dollars, Pounds, Euro, Yen are all types of Fiat money and central banks have control of the supply of Fiat money. They can manipulate that supply.
They can print more of it, it's a colloquial term, they don't literally print more of it. There's methods by which they do that. And we can talk about that later and that helps them to deal with economic crises, these boom bust cycles. It also allows banks to operate what's called a fractional reserve system, which means that they can create new money through the active lending.
So every pound that you deposit in the bank. They're allowed to lend more than one pound, typically about 10 pounds. So they've created nine new pounds whenever you deposit money. Now that seems to me against all common sense. And yet we accept that's the way the monetary and financial system works.
And that has allowed a culture of what I call high time preference. This is the borrow spend consume model and there's a professor called professor Saifedean Ammous who talks about hard money versus unsound money, sound money versus unsound money and he describes the modern Fiat business model as follows:
number one, you find anything to sell, even at a loss, doesn't matter. Number two, you borrow from a central bank that 2%, a very low interest rate. Number three, you give a credit card to consumers at 20%, a very high interest rate. Number four people are now in debt for stupid things that they don't need, but it's okay because money loses value anyway.
So you may as well spend it. And number five, as a result, guess what happens? GDP number goes up and apparently human society has progressed, but meanwhile, we've destroyed the planet and put toxic waste into our rivers and filled our landfill and we keep changing our cars every two years and our mobile phones every one year.
And we deplete the earth of natural minerals and so on and so on. So this is very strange to me, this false incentive that has been created by the borrow-spend-consume model, which is caused by Fiat money has led to a world defined by GDP. It measures the exchange value of goods, not experiential value of our lives.
It doesn't measure literacy and mental health and divorce and suicide rates and environmental pollution. And so we live in a joyless place, this market society. And what I find as a result is the society's innovation and inventiveness is actually decreasing because our time preference is going up. We prefer to spend money and replace things more frequently because money devalues fast.
We throw money into socially useless ventures. We build in obsolescence into our products. We don't mend things. We throw them away and we buy new things. The resilience and sustainability of society is decreasing. Look at mental health problems today. Look at the youth, look at gen Z and millennials. I mean, there are a lot of, there seem to be a lot more societal problems, particularly mental health issues today than there were when I grew up in the seventies and eighties. I think we're desertifying our planet and we are destroying society in the process. So I'm very, very concerned that we have this almost religious dogma that is being preached to us that is given us high time preference. But I think that's fundamentally very bad for society.
Riaz Hasan: It's interesting that you should say that modern syllabus is, and what's being taught to our young people doesn't actually teach us the the true essence of a growth minded society. Some may find it a bit conspiratorial or however, but you know, it's something I think perhaps we need to think about in a bit more detail, but also fractional reserve banking was quite interesting because I always viewed fractional reserve banking as the fact that banks have to keep a certain amount of deposit in their coffers if you like. So every pound they lend, they have to keep a, I never thought of it in terms of the way that you've just kind of expressed it, which is that they can create that money at the touch of a keystroke which is essentially what's happening. And that's something, you know, it kind of throws you out of kilter almost if you like.
And it's something that I think it took me a long time to kind of appreciate as to how that actually works. How could an institution, which is not even a government, just create money out of thin air on the actions of a keystroke.
Yeah, but what I wanna do is try and come on to contemporary Islamic finance, if you'd like, and I know you are well steeped in the industry and you've been in, in the industry since perhaps the modern industry began. I wanna take our listeners .Back to the time where this was first muted in terms of contemporary, Islamic finance, and also what happened during the time that Riba was outlawed at the time of Rasulullah ﷺ and this time, because Muslim societies operated, they bought and they dealt and they traded and they did various things.
Where was the element, was there an element of, of interest throughout those ages and why is it only now that we are learning to appreciate that well, actually modern finance doesn't deal with our needs and it's only really within the eighties, maybe the nineties that we've started really seriously looking at alternative Islamic finance or riba free finance, if you'd like.
So could you take us on that journey to how this all developed?
Harris Irfan: It's very interesting though, there's a book by a gentleman called Benedick Koehler, and I think it's called something like Islam and the Birth of Capitalism, something along those lines, Early Islam and the Birth of Capitalism. He contends that Islam is responsible for the development of early capitalism. The kind of thing that we saw that seeped into Southern Europe, and a lot of Europe believes that, you know, modern capitalism originated in places like Venice, for example. But his contention is actually many of the methods and even the financial instruments that were ultimately used in Europe originated in Arabia.
And I think there's a lot of truth in that. When we look at the life of the Prophetﷺ, his life as a merchant, the kinds of business that he did as a mudharib, as a manager of other people's money the methods by which he shared profits, the methods by which he negotiated with others, the methods by which he negotiated treaties, how he prevented preying on the weak and the vulnerable.
We'll find many examples of hadith that have incredible wisdom in them. And, you know, today we have modern institutions and organizations which deal with monopolies and mergers, for example, and consumer protection rights. And in many senses, we can trace back the origins of many modern innovations that protect the consumer or otherwise create for example, contractual structures that are good for society, things like trust, for example, trust law originates in Islamic law. Believe it or not the waqf, the endowment, the very first one in Europe was, or one of the very first, sorry was Merton college, Oxford which was one of the first colleges in Oxford university in 1264.
Its statutes of endowment are almost a word for word translation of an equivalent or equivalent awqaf, endowments in Jerusalem and Baghdad and elsewhere at the time. And the reason for that is because the what's his name? Walter De Mare, sorry, yes, I think that's his name. He was the head of the Knight's Templar and would've been in Jerusalem at the time that these madrasas were set up.
So he obviously brought that knowledge back with him and set up a college at Oxford. So we see many of these innovations seeping into Europe that formed the basis for what has now become modern capitalism, but it's a sort of warped, turbocharged, distorted version of the caring merchant capitalism that it was always intended to be.
And the principles set out in Qur'an and Sunnah and Qur'an of course, is very clear on trade being halal and riba being haram and there are very clear pointers on this and the hadith is a collection of the wisdom of the actions of the Prophetﷺ. For example, the establishment of free markets, people asked him whether he would fix the prices of certain commodities because price was a rising too fast and he said, actually, Allah is the one who controls prices. And he knew that if he set prices, if they're fixed by man, that would lead to an injustice. And so we have the concept of free markets inherent in our faith at the same time as protecting the weak and the vulnerable.
So for example, not allowing the traders to go beyond the city walls, to meet the caravans and trade before the other merchants, therefore manipulating prices. You know, there's a huge wisdom in that. And then we see the codification of these principles by the scholars who came in the centuries after the death of the Prophetﷺ.
And the codification has led to this body of jurisprudence called fiqh al mua'malat, which deals with our interactions with each other and with our business counterparties and in Islam, there's no concept of you know, it's not personal, it's only business. There's no such concept as that. Everything we do in business is personal.
Our morality is at stake every time we do business with somebody else, we can't justify bad behavior just because it was business. That's part of our inherent moral character. So these are the principles upon which the Islamic finance industry started, the modern Islamic finance industry which I would say started around 1963.
Which was the Mit Ghamr experiment, so this is a town about 80 miles from Cairo. And in 1963, a famous economist set up an experiment, it was a sort of a social bank, which took in deposits from local people and invested as deposits in local industry. And of course, a return from those businesses would manifest in a return to the depositors.
So it was a true form of risk sharing and later on became a social bank. Then what happened by 1975, there was the establishment of the first largest Islamic bank, commercial bank called Dubai Islamic bank and at the same time, the Islamic development bank, which was a multilateral. And now at last, you see the commercialization of this experiment.
So with the first, I'd say 10, 20, maybe even 30 years, Islamic finance was somewhat experimental and started to become commercial, but remained parochial, unsophisticated, expensive and it took probably up to about the mid nineties, perhaps the late nineties, when HSBC came on the scene to really grow it into a global industry.
And actually I was invited to a little evening soiree in the city of London in 1996 by someone called Iqbal Khan who had invited, who was then the head of, had just started an Islamic division at HSBC, which was to be called HSBC Amana and he invited a very famous scholar called Sheikh Nizam Yaquby and during that evening I learned what it was to create a sharia compliant financial system, how these products might work, what benefit there was to society. If we had products like this and that evening set me on a path to discovering more about Islamic finance. So when I eventually transitioned from my career in conventional investment banking, I moved to Dubai in 2001 with Deutsche bank.
And a lot of clients came to us and said, well, it's wonderful you're here, Deutsche bank. I was the first banker on the ground in Dubai. It's wonderful you're here, but can you do these deals on a sharia compliant basis and being investment bankers we kind of blagged our way and said, yes, sure we can. But of course we'd never done this stuff before.
So we learned at the feet of the scholars and probably the most famous of those were Sheikh Hussain Hamid Hassan, who was in many senses, the grandfather of the modern Islamic finance industry. And we created some incredible techniques that had never been done before and created some products that had never been thought of before and pushed some real innovation into the market.
And for a couple of years we had a hundred percent market share because nobody had ever seen anything like this before. And it was a very profitable time. But of course, all good things come to an end. And even though we had managed to invent an entire segment of this new Islamic finance market, the products that we had and the techniques that we had invented came to be abused by the industry, including by our own bank. And as a result you know, things started falling apart. I'm, I'm happy to talk about that a little bit, if you think it's interesting.
Riaz Hasan: I think Harris, you've given us a good synopsis on where the industry was and how it's developed till the present times.
One thing that often intrigues me is especially about banks that are claimed to be Islamic is the fact of how are they capitalized? You know, where does their money come from in order to lend to us? Is it our deposits that go into, for example, HSBC that they then kind of pool and then lend out as parcels or as mortgages to other people?
Is it the fact that they create their money from somewhere else or are they just imitating the way Western banks normally operate, which is to create money from a keystroke? That being one thing, what I, the other thing I wanted to kind of explain to our audience is an Islamic bank. The face that we see of Islamic bank is just the retail element, which is how we get our Islamic mortgages or how we get our Islamic investment products.
But there's a whole earth arm of Islamic banking, which is about financing, big deals or corporate finance, if you want. So could you just explain how that operates within a contemporary Islamic bank?
Harris Irfan: At one time, I thought it was possible to have an Islamic banking and finance system that upheld maqasid al shariah and was a force for good.
I thought it was possible to have technically excellent Muslims, ideologically aligned, doing extraordinary things and still being highly profitable. And then as I said, at Deutche Bank, we created this new market. We developed all these techniques. And then we invented a technique which was called the double wired Total Return Swap, which was a black box to replicate the returns of any financial instrument in sharia compliant manner.
And it became our Manhattan project. You know, the Manhattan project was the creation of the atomic bomb before Hitler, the allied scientists gathered in Los Alamos and they split the atom and the energy they released had to be used wisely and ultimately an aggressive sales culture at these convention at these investment destroyed the market for these products. And at that point, the veil was lifted for me. And I started to understand a little bit more deeply what was going on here. So how are Islamic banks capitalized? Let's come back to that question. Well, you're quite right. Our deposits work in the same way as the deposits in a conventional bank.
Now you may say, well, hang on. So if I put a pound into such and such Islamic bank and they can lend out nine pounds of new money against that pound, they've created nine new pounds. Yes they have because they operate within the same regulatory and legislative system that the conventional banks operate.
They don't have any special passes there and they are required to do so by the regulations. So they engage in money creation, just like any other conventional bank. And it's at that point that you think, well, all this time that I've spent trying to create these very fancy contractual structures, which themselves are based on Sharia and are Sharia compliant.
It doesn't really matter how Sharia compliant the veneer is. If the framework underneath it is still the traditional fractional reserve banking system, because that is money creation, it's money out of money, which is the definition of Riba. And therefore that must be haram. So once you realize that point, you have to also realize that there's something fundamentally not right about Islamic banking or the Islamic finance industry in a wider sense, operating on this same framework.
And maybe we need to change that framework. You then ask the question about retail versus corporate investment banking. So as retail customers, we would walk into our high street bank and we open checking accounts and savings accounts, and we take a mortgage and, you know, perhaps there are other products that these banks offer us.
Of course, there's a separation between retail banks and large wholesale investment and commercial banks. And the work that I did with Deutsche and Barclays and others was primarily investment banking and also asset management. And these, obviously this type of banking deals with large corporations and government institutions and so on.
So for example, we would typically help a government to raise, say a billion dollars in a type of Islamic bond called a sukuk or we would help a company acquire another company using a form of what's called leverage finance. So they would take out a loan, which had been cleverly structured in some way to give the effect that it was fully sharia compliant.
But of course, the whole time it's based on a financial institution that engages in money creation through the act of lending. So, no matter how hard we try within the existing system to create fancy contractual structures that are Sharia compliant themselves, we may be trying to meet the letter of the law, the letter of Sharia, but we're not meeting the spirit of Sharia.
And in fact, this led to a, this one example of a debate within the industry was when we created this black box technology that allowed us to replicate the returns of any financial instrument in a supposedly sharia compliant format. This was a failure to adhere to the spirit of the law. And it led to a very public spat between Sheikh Hussain Hamid Hassan, who was, of course the chief architect of, of Deutsche bank's Islamic finance division and Sheikh Yusuf DeLorenzo who called it the doomsday fatwa. And there are, as I say, other parallels with historical attempts to circumvent religious law, such as the contract of trinius and the tawarruq that I mentioned earlier.
Riaz Hasan: I think what you're essentially trying to say also is that somehow the means are kind of contaminating the ends that we are seeking from this whole project here.
Which is an interesting thought to assess actually, because we as people on the street, just see the end product, right? We, we see the end product in terms of us trying to abide by a riba free transactions and so forth. But I just wanna go back to your investment banking days.
Cause you mentioned a very interesting incident or an interesting project that you're working on, which is the Makkah Towers, which I presume everybody who's been on Umra and on Hajj has seen the gigantic clock tower that sits aside the, Haram you know, which most people think is a gross travesty against the whole sanctity of the Haram if you like.
But you were actually involved in the financing of that project, right? So what are your thoughts now, looking back on the whole experience of why you did that in the first place and what it has led to and what kind of impacts that it's had on our moving forward?
Harris Irfan: It's a very interesting point. In 2002, I led the structuring, which is a form of financial engineering of the financing of Safa Tower, which is one of the seven towers that you'll see. Often when I do lectures about this subject, I'll show a picture of Makkah and in this picture, you'll see this enormous clock tower and these surrounding towers, and then right in the center of the picture is this tiny little black dot and that tiny little black is the Ka'bah.
So of course we don't think of Makkah, we don't visualize Makkah anymore as the Ka'bah, we visualize it as this absolute monstrosity that towers above the Ka'bah itself. And as I say, I led the structuring of the financing of that. And in some senses, I guess I was blinded by and we all were blinded by the innovation of a Western investment bank, being Deutsche bank, being invited for the first time into the holy city to finance real estate.
And I didn't realize that I was very naively participating in the wholesale destruction of my own heritage, the detonation of historic sites in surrounding mountains into billions of pebbles. And again, the team that I was working in observed the letter of the law by designing contractual structures that met the technical of fiqh al muamalat, but we failed to observe the spirit. And I think the reason for that is because Fiat money encourages us to engage in projects that may have questionable, long term social values. It means that those of us who are privileged like bankers to sit close to the tap of money, the money spigot i.e. the central bank, where money is created, it makes those people much richer in the short term, but at the expense of social values of culture of history and so on.
So it gives us this high time preference by borrowing, spending, and consuming as fast as possible. And I often use that example of Abraj al-Bait,, the, the towers, as an example of you know, is this really progress in economic success? It's actually destroyed history and the fault again, lies with the monetary system I believe.
Riaz Hasan: Just coming back to the ordinary person on the street and how we view Islamic banking as such, for us actually, however, the misgivings of the industry are that you've kind of alluded to at the moment for us, it offers a way out. It offers a riba free way of buying a house, it offers us some way of not letting our money be devalued just by, you know, keeping it under the mattress.
So how should the ordinary person view this? And then how do we make sense of this? Because although there are misgivings with the industry and we've already painted that there are certain fundamental truths in terms of why it's akin to normal Western banking... but for us as transactors onto that system, we are just bounded by the fact that we are doing a transaction, that in our view, hopefully is riba free.
And then I think following on from that question is, in your view, how should the industry then change? What are the changes that we are looking for from this industry? Or can it change, you know, does it matter that the fact, you know, wherever they source their money from, does it matter to us in terms of us getting that halal mortgage for us ourselves?
Harris Irfan: Yeah. Wow. That's a really challenging question. And I'm gonna do my best we could talk about this for days...
Riaz Hasan: so because the other thing I've noticed also is that there's only 2% of market penetration for halal mortgages, especially in the UK. And that's extremely low, I thought that was gonna be a lot higher.
So, you know, what are we doing? Where are we going?
Harris Irfan: So on this subject, I'm afraid I'm gonna demonstrate some cognitive dissonance at the risk of being called a hypocrite. On the one hand, I know that the framework that underpins Islamic banking is inherently non Islamic because it involves creation of money out of money.
And yet, on the other hand, I encourage people to use the Islamic finance industry because it's all we've got for the time being. And also there are a lot of Muslims employed in that industry. And perhaps the more Muslims who are aligned in a particular way there are in that industry and can in influence it, perhaps the greater, the chance for real reform.
So I do often say to people, if you wanna get a mortgage or savings account or whatever, I tend to champion this Islamic finance industry, in the Islamic banking industry. I say, look, in some ways, in some senses, it's better. The devil, you know, yes, the framework is not halal, but I suppose in a similar way, if you live in a country where an animal is required to be stunned before being slaughtered and a halal certification in that country allows you to eat the meat as being halal, even though it was stunned because the law demands it then to some degree, scholars have said, well, I guess that's acceptable then, because there's nothing you can do about that.
And it's the best of a bad situation. And I guess a similar sort of logic can be applied to Islamic banks. I have an Islamic bank account. My family does. I use their products. I have to say that I'm not very happy in many ways, and I'm happy to discuss that in more detail, but you know, that is what I do.
And I try to encourage Muslims also and I completely understand, I have a good friend in the industry who is very vocal and against Islamic banks because he sees it as a form of hypocrisy and I greatly respect him for that position and he refuses to touch them. But I have a slightly different view on that.
I would like to see it reformed and I would like to see Muslims take charge of that. And you mentioned the 2% penetration rate that's the UK industry. It is a total disaster. So only 2% of British Muslim households are serviced by the UK Islamic banks, and one in particular, the largest British Islamic bank.
And I believe the reason for that, and by the way, the British Islamic banks have made a 200 million pound loss over 15 years, despite a near monopoly position and very favorable market conditions. So why is that? Well, the first reason that I point to is that all five CEOs of the British Islamic banks are non-Muslim conventional bankers.
They don't buy Sharia compliant products for their own portfolios. They don't, they hire people in their own mold. There is frankly very little cultural affinity and alignment with the people that they serve. There's no detailed technical understanding of fiqh al muamalat, there are no deep existing networks within the Islamic industry or the Islamic community.
So it's no wonder to me that they don't understand the customer base and they have a 2% penetration rate and huge losses over 15 years. So how do we reform this? Well, there's two ways we can reform this. Either, we can convince shareholders that they should be appointing management to represent the people they serve and there's plenty of those with very strong technical ability, by the way. It's not that these people don't exist, I think it will be pretty straightforward for me to set up such a team, but it's not gonna happen because the shareholders are typically Gulf ultra high net worths and institutional investors who like having a certain type of leader in place.
And I don't wanna say too much more than that because then I get accused of all sorts of things, but there's this idea of what a leader should be. And unfortunately it's not a leader who looks like me or you no matter what our technical background. So I think that that's a key reason why there's a problem, because there is a sort of perverse you know, incentive within the industry to appoint these leaders who don't actually represent their customers.
So the ownership and management of Islamic banks should be in the hands of those who care about maqasid al sharia, that's the first thing. However, there's an alternative, more radical solution. If all that's gonna happen is that we end up having managers of those businesses who are still operating within this fractional reserve banking system and are therefore not really moving the needle on what the industry should be doing and should be lobbying for, I think there's a more radical solution.
And I think that radical solution starts with non-bank financial intermediaries. And I talk regularly to what I call Islamic fintechs. Financial technology firms who are typically small, early stage companies who are technology focused, who are providing a financial service through technology.
And sometimes many of us will use, you know, apps on our mobile phone, like Revolut and Monzo, for example, to provide mobile banking services. And it's basically the static version of that. That's, that's one solution, but there's an even more radical solution, which is to tear up the rule book.
Riaz Hasan: Regarding cryptocurrencies and Bitcoin in particular and your view on the fact that Bitcoin should be looked at as an alternative currency standard. Now, I think that there's a number of things to unpick here. Firstly, there's the issue of the legitimacy of something like Bitcoin in an Islamic sense. There have been various fatwas and there have been various opinions on social media on more credible sites on big name scholars, small name scholars regarding this issue because of the publicity that's been received since 2000 and maybe 17, 18.
And then there's the issue. Why do we need a new currency standard? Whereas always the debate has been around gold or a bimetallic standard versus Fiat currencies. And there are strong opinions regarding the gold and bimetallic standards and some Muslim scholars do have opinions regarding the Fiat standard as well.
But here you seem to have introduced a third dimension into the mix, which is not common let's say amongst the majority of scholars or opinion makers on this run. So could you enlighten us firstly, on the opinions that people have regarding Bitcoin in particular and secondly, your proposal to use it as a standard of currency moving forward and why it chimes with our Islamic sense?
Harris Irfan: Well, I guess the first thing to mention is that the Ulema have got many things wrong in the past. And there are many new technologies that were invented that some of them moved to ban without really thinking through the potential harm that they were causing by banning those new technologies.
And examples of those are taps, faucets for water, whether it was permissible to use them for wudhu. Another example, which is hotly contested, by the way, is the printing press. So many Muslims will say no, no, no, the scholars didn't ban that, it was banned at some point by the rulers, but there was some, there is some evidence to show that the scholars supported that in certain cases, the Telegraph televisions, loud speakers, and now cryptocurrencies, what I am finding about the fatawa in relation to cryptocurrencies is that many of those that forbid trading or investing in or exchanging cryptocurrencies make fundamental errors in their understanding of either the cryptocurrency itself or the global financial and monetary system. And many of these fatawa are issued by scholars who might have a great social media standing.
They might have a huge following. They might be hugely respected in their fields. But they're not necessarily experts in this particular matter. And nor have they consulted extensively with individuals who are experts in this particular matter. And personally, I have come to the conclusion that Bitcoin, and I'm not talking about crypto in general, I'm only talking about Bitcoin, that Bitcoin is the most sharia compliant form of money ever invented. That's my position. So let me talk about that a little bit. And you mentioned the gold standard. Well, let's take a little bit of a step back. I remember that I was delivering a lecture in 2017 and somebody in the audience asked me, what do you think about Bitcoin?
And I had no idea what it was. So I went away and I researched it, but I'd heard of it, but I wasn't sure what it was about. And it struck me that it had characteristics that made it potentially superior to gold as a store of value, and even perhaps as a medium of exchange, which is why I now believe that is better than gold.
So let's look at periods of human history. When gold was a global standard, the Islamic golden age is the perfect example. We had 700 years of a golden age defined by a single currency that was globally used. Whenever we have seen ages of man in which gold was a global reserve, currency trade has been borderless and fluid.
We've had minimal tariffs and restrictions. There's periods of political and economic stability. There is scientific and creative progress because mankind has room to entertain higher pursuits. And we end up because of the nature of gold, because it's a sound of money with chemical durability, it's robust, it's fungible, divisible, it's decentralized. It has a high stock to flow ratio. In other words, there's a lot of it in the ground, but there's a very little flow over time. So it extracted at about 1% per annum. All of these characteristics make it what we call a sound money and sound money, always results in low time preference, a state of mind, a human state of mind, which leads to deferred gratification, investing in our future.
Which is something that's very Islamic. We believe in sabr, in patience. We discipline our nafs, our ego. We train ourselves doing Ramadan. We believe that our physical, our mental health is important to us, our spiritual health. And when we create time for ourselves, we have time and space for higher pursuits.
Now, of course, you know, human beings, are very high time preference. We borrow a lot. We have massive personal debt. Households have, you know, two jobs minimum. We live to service our debt. And this is because financial institutions are incentivized to lend as much cheap money as possible. So the characteristics of sound money, encourage deferred gratification.
And I believe that a sound money has to incentivize this behavior and gold did that once upon a time. And gold was a traditional money of Islam. Hence why many scholars refer to and say, you know, only gold can be the money of Islam? Well, actually there's nowhere in fiqh, nowhere in Sharia that tells us that only gold can be money.
Money can actually be anything that we wanted to be if the custom of the land, you know, deems its own, but it should have certain characteristics, which I've just described. And therefore there's no reason why Bitcoin cannot also be a form of money. And sure. Today it's not used widely, of course not. We are little over a decade into a very long project and, and therefore, you know, it, hasn't quite established that status as a medium of exchange, but it's certainly establishing a status as a store of value. That I'm absolutely positive about. I know many people, including myself who use it as a store of value. So it certainly fulfills one condition of being a currency of being a type of money.
And therefore, I am personally convinced that it has all of the characteristic and attributes to be deemed a sharia compliant form of money and it incentivizes a lot of activities in human nature that leads to a more just, more fair, more equal society.
Riaz Hasan: Okay so let me try and present a couple of counter narratives to that point of view Harris.
Firstly, it's a question of when we look at things that are used as a standard, such as a bimetallic gold standard or even Bitcoin, which is a scarce commodity as well, and which can only be mined in certain quantities over time. The argument often used is that and I think this is from traditional Keynsian principles is that when money supply is needed in an economy for examples in times of pandemic, that we've recently been through, in times of war, in times of other natural calamities, that where you need to generate demand in order to make an economy sustain itself, that suddenly that scarce supply becomes a massive disadvantage and that it restricts the economy in terms of the way it functions.
And then also is the control of the supply really because who controls this supply. We know that in terms of goal, it, is it a matter of people or a government, you know, trying to get as much supply as possible and keep it in their coffers in Fort Knox or what have you or in Bitcoin in the same in your wallets and then this issue of supply brings us onto another aspect, which is about who controls these exchanges, especially for Bitcoin.
So we can see increased regulation of this instrument now, which is in place with either the central banks who are trying to issue their own form of virtual currency CBDCs, or with even government regulators who are increasingly putting pressure on these exchanges to behave as they say, and free itself from other nefarious uses.
So how do we then look at the, your proposal in the light of these, essentially these two arguments?
Harris Irfan: So let's first of all, deal with money supply. And this is a common criticism of Bitcoin and indeed gold that when there is a crisis, you can't print moderate more of it. Actually I would contend that.
One would have much less susceptibility to financial crises and boom bust cycles if one has a sound money. The less sound of money, the more susceptible the economy is to boom bust cycles. So the fact that we say, oh, well, if you have a infinitely printable money supply, that means you can deal with boom bust, or why do you have the boom bust in the first place?
And I always believe in solving the disease, of preventing the disease in the first place. And I believe that's what sound money does. So that would be my counter argument that traditionally gold did not lead to these sorts of vicious economic swing. And I believe that a return to a sound money system would do the same.
We can't do that with gold anymore because gold of course was expropriated in 1933 by Roosevelt and is manipulated and is not in control of private citizens anymore. So gold would not be able to fulfill the function of a true global reserve currency, which is sound and decentralized. It would no longer be decentralized.
So is there an alternative that is decentralized? Well, I believe Bitcoin is. And you mentioned exchanges. A lot of people blame Bitcoin, because it can be, exchanges can be hacked. It can be stolen. Things that happen on exchanges can be manipulated. We've seen collapse in cryptocurrency prices recently because of a couple of things that have happened in the markets.
And these are criticisms of the exchanges themselves. But to me are not criticisms of bitcoin. So exchanges of course suffer from the potential that they might not be regulated. And therefore, you know, your money is at risk. There's a famous saying that amongst the Bitcoin community, not your keys, not your coins.
If you don't hold your own private encryption keys, then you don't hold your own coins. If you have devolved that to an exchange, to hold your coins on your behalf, you don't own those coins. So if they're hacked, you may lose them. And I believe in self custody and that's one of the beauties of Bitcoin is that you can have custody of your coins yourself through what's called a cold storage wallet, which is basically like a flash drive and it stores your private encryption keys, and it allows you to access your Bitcoin, which are stored in a decentralized ledger. What they call the blockchain, a decentralized ledger that is spread throughout the world across millions of nodes.
And this is the idea of decentralization that no one party or no one small group of people control the currency and can manipulate it. And that I think is the beauty of a decentralized sound money. And that's why I think it's very essential to human progress. You also mentioned CBDC, which are central bank digital currencies.
So we may have heard of this concept of central banks saying, well, this crypto thing's pretty interesting and I want my citizens to also have access to digital currency. So what I will do is I'll create a digital version of the dollar or the pound or whatever, and this will be my central bank digital currency issued by the bank of England.
For example. Now, what does that really mean? To me? That means ultra surveillance and ultra control because now the government has sight of literally every single transaction that I do of my movements everywhere. And I do not like that. I don't want the government to have that much control over me. I believe in a separation of state and money.
Ideologically, I believe in that I do not believe that government should have the right to control money or to control me. Sure, there should be laws in place to prevent bad behavior. But my fear is we'll get to a situation where, you know, we'll get to the supermarket to buy whatever it is, meat, let's say from the butcher and we'll present our mobile phone to tap against the payment machine and it says, sorry, you've already consumed a kilogram of meat this month. You can't buy anymore. I don't want to have that level of control over my life and I don't want that level of surveillance. I come from a community, the Muslim community in the UK that feels set upon, that feels ultra-surveilled by the government.
We've seen scandals like the Trojan Horse hoax for example. I don't want to be in a position where the government can spy on me even more. And that's the situation that many people in marginalized communities feel in many parts of the world which are experiencing political and economic turmoil in Lebanon, in Gaza, in El Salvador, in Afghanistan, people are turning to Bitcoin as a means of economic freedom.
The Irani people are being starved to death because the US is withholding 7 billion dollars of their own reserves, which are stored in the US banks and the fed. Now they won't release them because they don't like their political preferences and they don't like their government. So they've decided to starve people to death.
If you have control over your own money, you won't be beholden to a foreign government, especially if that foreign government has control of the entire world's global reserve currency. So that's what Bitcoin represents to me. It's freedom from exploitation. It's freedom from censorship. And I think that's extremely important when we talk about Bitcoin.
Certainly when people ask me, should I buy Bitcoin? What I say to them is these are the reasons why you might want to believe in Bitcoin, if you want to make money out of it. That's great. Good luck. I hope you do well, but please don't take anything I say as a recommendation to buy or trade it. I am only advocating for Bitcoin because I believe in freedom from oppression and an economic reality that is aligned with my faith.
That's why I believe in it on a long term basis. And I buy and hold and I expect to hold it until I retire so many years in the future. I don't intend to trade it on a daily, weekly, monthly, or even yearly basis. That's the basis on which I use Bitcoin as a store of value. And I hope one day it would become a medium of exchange as for any other cryptocurrencies.
I don't touch them at all because they all fail the test of sound money as far as I'm concerned and therefore what I see nowadays is a lot of people trying to justify and halalify gambling essentially, and that I'm I'm not interested in endorsing that. Sure, there might be some interesting technologies at play.
They may well be, but as forms of money, I don't see anything other than Bitcoin as a sound form of money. So if you agree with the ideology, if you agree with the idea of a sound money, then yes, Bitcoin is a good thing to take a serious look at. But if your game is to play as a day trader, that's not for me to comment on.
Riaz Hasan: The essential argument that you're painting is almost akin to a libertarian argument around Bitcoin, which is initially the reason why the project was initiated in the first place, which is to be free of government interventions. And we can see it now from our Muslim hats on, in terms of living in the west, that we don't want that control or things to be manipulated where people can pull the plug as you say on, for example, Afghan foreign reserves. However, this then does contend with the fact that you also propose that it should be used for the good, right, which is to alleviate poverty, to remove injustice, i.e. from the global north to the global south, or, Western countries dominance in terms of the financial dealings of countries like Syria or of Afghanistan or Sudan or anything else.
So how do those two then rub against each other, those two contentions rub against each other and then what is the sense of Bitcoin and Islam? Because I think what I'm trying to address is yes, it may be a an instrument to create more independence in terms of your currency but then how does that equate to what we as Muslims should feel?
Not just Muslims living in the west, but Muslims may be living in Muslim majority countries, right? So that where the government then controls the currency.
Harris Irfan: It's very interesting that people often ask me, well, hang on, are you libertarian? Are you a socialist? What are you? And I say, I'm Muslim, right? I have a set of values that accords with my faith and we believe in free markets.
For example, we have certain leanings towards libertarianism. I think Islam although not explicitly advocating for separation of state and money, I think that it tends us towards that natural position. At the same time we believe in protecting the weak and vulnerable in society and caring and alleviating poverty.
For example, we have a wealth tax, Zakat. Now, if I look at Bitcoin, I see two characteristics that make it perfectly aligned to the Islamic economic model in our ideology. Number one, it's anti riba because you can't create it by printing it. You have to mine it or earn it. And number two, it's anti inflation because of course we've seen quantitative easing in the last few years, which is a process whereby money is created. The money supply rather is increased and it's created by a central bank's own balance sheet so that the bank reserves at the central bank, the private sector bank reserves are increased so that the central bank can buy bonds and other financial instruments from the financial sector, thereby increasing the amount of money that banks have access to in order to circulate it within the wider economy.
And in the long term, it helps to reduce interest rates. So of course, what happens is the banks end up lending more consumers, borrow more, they buy more stuff. They don't need asset prices go up. The banks have first access to that new money supply. Therefore they can buy stocks and bonds in real estate.
And so on prices rise at an incredible rate. This is inflation. The people further away from the money spigot, which is ordinary people have less of a chance to use that money when it's created it trickles down to them in the end. And by the time it gets to them, prices are too high. So this is inflation.
So we end up in a situation where the rich get richer and the poor get poorer. And that is because of money creation. And Bitcoin does not allow that to happen because you can't create Bitcoin from Bitcoin. Sure, in a Bitcoin world, we may see institutions that lend at interest of course, but they can't create new Bitcoin from nothing and that's the basis of the fractional reserve banking system. And I think it's extremely important that we have a monetary system that fights inflation and riba in such a way and that's why I think it's almost perfectly aligned with the Islamic economic model.
Riaz Hasan: Harris, It's been an absolute pleasure talking to you about a lot of these things and I'm sure we could go on for another hour if we were allowed to.
Harris Irfan: And thank you very much for having me. I'm almost concerned that if you have me back and I have nothing left to say .