The Iranian Association of Islamic Finance held an international webinar on “Islamic Investment Bank: Driving Force to Revive Islamic Finance” on the 2nd of July, 2024 at 2:00PM Iran Standard Time.

Speaker: Mohammed Shahid Ebrahim, Professor of Finance, Durham University, the UK

Dr. Ebrahim in the beginning of his lecture referred to assessing Islamic banks, compared contrasting contemporary Islamic banks with their conventional counterparts, saying there is not much difference as both banks operate in the financial sector of the economy.

Contemporary Islamic Banks

• Asset Side (Murabaha/ Bay’ al Inah/ Tawarruq, Ijarah) Facilities

• Are these the optimal facilities? No!

• Why? The Qur’an and Sunnah allude to asset-backed risk-sharing securities.

• Pricing: Linked with ribawi Int. Rates.

• Presence of Gharar (Excessive risk)

• Business Model: Profiting [losing] from an upward [downward] sloping Yield Curve.

• Sustainability: No

• Shari’ah Supervisory Board: Superflous

Conventional Banks

• Asset Side (Collateralized Loan/ Personal Loan, Financial Lease)

• Are these the optimal facilities? No!

• Why? These are fragile, rent-seeking securities.

• Pricing: Ribawi Int Rates.

• Presence of Gharar (Excessive risk)

• Business Model: Profiting [losing] from an upward [downward] sloping Yield Curve.

• Sustainability: No

Then he pointed out to underinvestment under Ribawi debt and Banking-Murabaha, stating the increase in the debt obligation due to the lack of free cash flows culminates in a ‘debt trap’ and stifles the ability to undertake future growth projects.

Regarding curing financial fragility, the professor of Durham University noted the first step is a mechanism to mitigate risk-shifting (& Strategic Default Extinguish Put Option to Default (of borrower) by using a Special CWM (i.e., a Preferred Stk.)

Note: This facility cures financial fragility by complying with but contradicts

Second Step is a mechanism to mitigate underinvestment (& Predatory lending) for employing participatory lease financing to mitigate.

Note: This facility complies with but contradicts

Somewhere else the presenter talked about contemporary Islamic banks, stressing

• Business Model: is based on the arbitrage between long-term assets and short-term deposits. The model works when the Yield Curve is upward-sloping. It does not work in a downward-sloping yield curve.

• Securities underwritten are mainly plain vanilla fragile debt ones.

• Long-term unsustainable.

As to the investment banks, Dr. Ebrahim emphasized that

• Business Model: is based on helping clients with financing, research, trading and sales, wealth management, asset management, IPOs, mergers, securitized products, hedging, and more.

• Securities underwritten can be resilient (risk-sharing on the downside and reward-sharing on the upside).

• Long-term sustainable with diversified businesses activities.

“For a truly Islamic Banking Architecture, we need an Investment Bank to help its retail counterpart match: (i) short-term funding via Asset-Backed Securities (ABS) with short-term deposits; and (ii) long-term funding (again via ABS) with longterm deposits. This segregation of assets will mitigate the risk of bank runs.

The profits (and losses) of an investment bank are contingent on the efficiency of the underwriting process. For instance, covenant-lite securities (like asset-based ones) may trade at a discount to the convenient-heavy (ABS) ones.

This architecture will dissipate Systemic Risk far and wide instead of concentrating on the banking system. The cost of banking bailouts will be reduced. This is due to the fact that our Shari’ah-compliant architecture does not allow fragile (i) ribawi or the (ii) current Banking-Murabaha Facility.

The stand-alone current Islamic Banking architecture is not sustainable due to disintermediation” the lecturer mentioned.