Warning: Ethics Depicted in Picture May be Smaller Than They Appear
In my earlier post analyzing the Awal Bank L/C I spent a bit of time speculating on the transaction as a disguised money on money loan and the potential role of Bunge in the second leg, the purchase on a spot basis of the commodity back from from AlGosaibi/Awal Bank. The necessary step to get funds to AlGosaibi for the loan.
As they say (and they are right), reading is fundamental. I could have saved a bit of time by looking a bit closer at two documents I had printed out.
Today having posted on the BNPP lawsuit against ADIB, I decided to finish off the ADIB topic by commenting on the two latest submissions by ADIB and Fortis' counsel in the Fortis Case (NY Supreme Court Reference #601948/2009) - Documents #78 and #79. Documents I had printed out on 9 July!
Right there on the first page of the 9 June 2010 letter from George O. Richardson, III, Esq. of Sullivan & Worcester, Fortis' counsel, was the revelation that Bunge had informed ADIB of the precise nature of the transaction via an email prior dated 7 April 2008 - that is, prior to the date ADIB agreed to confirm Awal Bank's letter of credit. ADIB's SWIFT confirmation to Fortis was sent 16 June 2008 as per Document #24 Exhibit #2. Some two or so months later. By the way, that document (not the Bunge 7 April email but the copy of SWIFT confirmation of the LC) was submitted by ADIB as part of Nuhad Saliba's Declaration. Ms. Saliba is Head of the New Countries and Global Wholesale Banking Department at ADIB.
The Bunge email was sent by Rachel Wong of Bunge SA Geneva to Naeem Ishaque, Manager Financial Institutions at ADIB. There are a variety of copy parties but their affiliations are not clear from the message. The email is Exhibit #1 to Exhibit A in the Richardson Letter (Document #79).
So what did the Bunge email say?
"Section 15. Structure This is a structured transaction whereby Discounting Bank [AA: Fortis though at this point Fortis name is not mentioned, perhaps because Bunge was still shopping the second confirmation] is required to discount or fund the Instrument in favor of the Beneficiary once the documents are deemed in compliance at its counter, Applicant [AA: AlGosaibi Trading] will on-sell the Goods to another Bunge affiliated company ("Bunge Buyer"). Once Beneficiary receives the discounted proceeds under the Instrument, Bunge Buyer will effect sight payment to the Applicant immediately. Applicant will enjoy the cash financing during the Tenor [AA: the 360 days from acceptance of documents until payment] before repaying the Issuing Bank [AA: Awal Bank] on maturity of the Instrument."
This effectively demolishes ADIB's argument that it thought this was a trade transaction and that somehow it was tricked and so inadvertently and innocently defrauded. ADIB is clearly an active and knowing participant in the transaction which equally clearly is a "money on money" loan. Some might say that transactions like this are a fraud against the Shari'ah. (With respect to AA's position please see the last sentence).
It also raises a very fundamental question about ADIB's earlier legal arguments in which it and its counsel claim that the bank did not see this was a structured transaction and had no inkling that it was participating in a money on money financing.
ADIB's learned counsel at Dewey & LeBoeuf have set a high standard of knowledge in their previous pleadings. They asserted that because Fortis Singapore advised a L/C for the same goods and in fact the same documents, Fortis Netherlands - half way across the world - was deemed to know this with respect to the Awal LC it confirmed.
Therefore, it seems highly appropriate and fair to apply D&LB's standard to ADIB with even more rigor because ADIB operates from a single country. Thus with the greater proximity one would no doubt expect that the knowledge at ADIB permeated every level of that firm, including the chap who makes the tea.
Some might also be tempted to remark that there is a repetitive pattern here with "Islamic" banks of much less than كلام شريف in their legal pleadings as in the case of TID v BLOM.
Heeding the admonition of Imam AlGhazali, AA will remain silent on all these points.
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10 comments:
Thanks for the analysis
Leaving a bright career in conventional banking back home(though I don't know how long that would have lasted) and presently working in one of the better known shariah compliant investment companies in Kuwait not because of money that was offered but because earning Riba had become a burden on my conscience, I am shocked and disgusted at the fraud that takes place in the name of shariah compliance.
I know and have seen that shariah compliant banking is a viable model. However, the quarter profit targets given by shareholders and the market makes you walk a thin line between shariah and non-shariah complian which I rather not walk.
On a related topic, I had written a post if you are interested.
http://2paisa.wordpress.com/2010/07/26/whither-islamic-finance/
Vanguard
Thanks your post.
I'll put up a link to your blog on Islamic Finance.
I agree that IF is viable. And that much of what is done in the name of IF is scarcely Islamic. Like patriotism, religion is often used by scoundrels for their own purposes.
That's why in certain cases I use quotations around the world "Islamic".
There have been objections to your point of view - by some who I would characterize as serious parties. While they have a variety of arguments, there are three related topics that I would be interested in your thoughts on:
(1) Putting aside the qard hassan, can there be debt in Islamic finance? Or is Islamic finance equity only? With all the implications these imply.
(2) "Ease" and "The Middle Way" As I understand the teachings of Islam, a Muslim may eat pork if there is no other food and he is starving. Is there an analogy in financing? In order to build up an Islamic finance alternative, are IF practitioners allowed to engage in non Shari'ah compliant structured transactions? If so, is that temporary? Or if we can get partially to IF is that better than remaining stuck in conventional (non Shari'ah) financings? And so the partial state of true IF could be longer term.
(3) Practicality - The IF you describe requires a great deal of due diligence. Can the depositor do the work necessary to evaluate where to place his funds? Primarily I'm thinking about the average Abdullah on the street with a relatively small amount of money. How does he find a way to invest and make a return? Especially in the era of paper money where inflation may erode the measure of value. My dinar today might buy a qantar of dates. But ten years from now only .9 qantar. (Which I suppose leads to the interesting topic of Islam's view about paper money, inflation etc).
Look forward to hearing back.
Best
1)
It depends on how you define debt. Leasing provides a very good example of conventional asset backed financing that is very close to islamic financing. Simplistically speaking, in a conventional lease, the lease originator or lessee owns the equipment and lends it to lessor. The transaction documents however mention the equipment value as loan and charge interest on it. In Islamic Finance, this will be replaced by Ijara and transaction documents would show the lessee renting out the equipment. From financial perspective (IRR/NPV calculation) the effect would be the same to the extent that the rent amount would be equal to interest amount. However, if things go wrong, the Islamic finance lease/ijara should be decided as a rent transaction as opposed to conventional leasing transaction where it might be treated as a money loan.
It all boils down to your definition. Though in both cases lessor owns the property, but from accounting perspective one may be treated as debt and other equity.
The question here is not whether there can be debt in Islamic Finance. The question is are we allowed to charge interest on debt and the answer is NO.
2)
Till sometime back (when I did not have a chance to work in Islamic banking) I was a strong proponent of "middle way" using the argument that it took almost 500 years for conventional banking to reach from its roots in streets of Italy to where it is today. We should give Islamic Finance at least 50 years if not half that or more to reach maturity.
However, from my working, dealings and the information that is being posted about Islamic banks (most recent being the ADIB case highlighted by you) I have realized that the most of the sponsors behind Islamic banking do not have sincere intentions. Large number of Muslims are reluctant to bank with conventional banks hence it presents a huge untapped potential/market. So by labeling conventional products as Islamic or structuring them to appear as such, they are trying to reach this market.
We have a saying that most islamic banks structure the products so that it follows the letter of the law but not the spirit of the law.
Recently National Bank of Kuwait (largest and most profitable bank of Kuwait) has acquired Boubyan Bank (islamic bank). NBK and its shareholders do not and should not care about Islamic banking and from what I have been hearing, changes are coming in Boubyan bank in terms of kind of products being preferred that do not follow the spirit of the islamic law. NBK has no mandate to promote islamic banking. They are interested in profits (and they should be) and intend to make maximum profits in Boubyan Bank by just following the letter of the law.
3)
I was implying that an IF should do extra due diligence when making investments compared to conventional institutions because in addition to ensuring that investment generates a decent return, they have to ensure that the investment meet the islamic finance criteria in terms of nature of business etc. Till couple of years ago, it would have seemed absurd for an average person to carry out due diligence for depositing his money but the credit crisis has put those all those notions to rest. However, I am not sure what benefit would have accrued had he done due diligence. With Chuck Prince dancing, nobody would have a reason to doubt that Citibank or others are as good as dead.
Take the example of Gulf Bank in Kuwait. On paper, it was a sound bank. Derivative transactions with one party was enough to bring it down. Even a highly sophisticated investor would not have any idea what is in store for her if she deposits her funds in Gulf Bank.
I can suggest that we should have islamic rating agencies, islamic audits etc to help an average investor but it has been proven time and again that the bank could easily maneuver transactions/accounts and get the ratings/approvals required.
To answer your question, he is expected to do at least that level of due diligence that he would do when placing money in conventional bank.
Will get back to you some other time with respect to inflation and paper money etc as it has already become very long.
I might have raised more questions with my replies or might not have correctly answered your question. Please let me know. I enjoyed exercising my brain for coming up with answers and as such would request you ask them as it would help me learn more about it.
A parting thought:
The more I ponder on Islamic banking, more I believe that an Islamic financial institution from asset side should be like a merchant bank (an almost extinct class as it is more easier now to make money through synthetic products than actual value addition) which used to make money from facilitating trading in goods through simple L/Cs to various structured transactions.
Looking forward to your thoughts on this.
In answer to your question 2, most islamic banks have stopped after reaching mid-way. One could justify it as half is better than none at all. True, but that would have held if you are on your way to full islamic banking and in transition. The way banking is being done at the moment, they have stopped completely at midway and most of them are moving backwards.
The example of ADIB LC transaction is a case in point. If this is midway, I say lets stick with conventional banking. At least we are not fooling ourselves or the shariah board this way.
How can one consider a transaction to be kosher if the approval was obtained by misleading the Shariah board.
Vanguard
Thanks for your posts and apologies for my belated response.
Debt
Besides a pre-set interest rate (either fixed rate or a fixed margin over some floating benchmark) a central concept of non Shari'ah compliant finance is that the borrower owes back the money borrowed irrespective of the outcome of his project. Unless of course the debt is tied solely to the project and is specifically non recourse.
One interpretation of Islamic finance is that by its nature there can be no guarantee of return of principal in a transaction. Nor is there any interest allowed on capital One gets a pre-agreed share in the result. Both of gain and of loss.
If that is the case, there are some very fundamental consequences.
In terms of the relationship between the provider of capital and the user of the capital. To use conventional terms - lender and borrower.
As well as the lender and depositor - where an intermediary ("bank") provides the capital. Deposits are no longer the conventional deposit but arrangements where the depositor specifies the projects or has a mirror image arrangement with the intermediary. The intermediary is only liable in cases of gross misconduct.
This view has some follow on implications.
Accounting - what belongs on the intermediary's balance sheet - what are its assets and liabilities.
Capital ratios - equity is weighted heavier from a risk perspective than debt.
Vanguard
Middleway and Structures - Part 1
One of my roommates in college was (still is) an Orthodox Jew. Many times when I'd ask a question about beliefs of Judaism, because he knew of my study of Islam and the Arab World, he would preface his response with "Well, you know like our cousins (the Muslims) our faith is one of orthopraxy not orthodoxy like you Christians. Meaning not that there weren't beliefs involved in the faith, but that much of being a good Jew or Muslim was complying with the letter of the law and the ritual.
Apropos of that some examples.
I once asked someone to explain Muslim prayer to me by way of a live demonstration with tafsir. We nipped down to our local masjid. When thereafter I attempted to pray, a sheikh walking by remarked "shirk" in the middle of my sujud. Later I asked for an explanation and was advised that my left ankle was at the wrong angle. Not only was my prayer thereby invalidated but that failure was an expression of disbelief.
I once asked someone involved in reviewing the "Islamicness" of transactions to explain to me why a mortgage loan from a conventional bank say ADCB was not Islamic when a loan on the exact same terms (except for the prepayment penalty) from say ADIB was.
His response. You fall in love with a woman. One thing leads to another. A son is born. If you have a piece of paper saying you're married, the child is legitimate. If not, he's a bastard. What difference does the form (the piece of paper) make to the content of the relationship?
One might I suppose argue that there is a difference between "marriage" and المتعة. Much as there is a difference between a real and a structured trade transaction.
Middleway and Structures - Part 2
One argument that often comes up in the Middleway discussions is that the attempt to implement Shari'ah compliant banking into an economic system that is not Shari'ah compliant is doomed to frustration. To mix metaphors, times and ideologies, the equivalent of saddling a cow.
If we accept the central argument of إقتصادنا للسيد محمد باقر الصدر
then there is a fundamental difference between the capitalist, socialist and Shari'ah compliant economies. Since the financial sector is at the heart of the economy, then Islamic banking in today's environement is transplanting a human heart into a horse.
And even if there isn't that fundamental difference, there are still institutional impediments. The legal systems in the MENA region are by and large non Shari'ah legal systems. Equipped to deal with non Shari'ah compliant transaction dispute settlements. What do we make of the fairly standard law for jailing someone for bouncing a check? What would the Prophet (SAAWAWS) have done in such a case?
So is it that perhaps the Middleway is the best we can achieve in the circumstances in which we find ourselves? And then that prayer 3 times a day is preferable to no prayer at all?
All that being said, you will notice that I am a fairly fierce critic of Abu Yusuf "Islamic" banking. So there must be some content. Some honest effort.
Let me know what your take is on this topic.
Vanguard
By the way suggest you think about incorporating your responses here into a post on your blog.
Sadly, not everyone reads the comments. And that is where a lot of the real value on blogs occurs.
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