Islamic Finance and the New Financial System. Alrifai Tariq

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      Tariq Alrifai

      Islamic Finance and the New Financial System, An Ethical Approach to Preventing Future Financial Crises

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      Islamic Finance and the New

      Financial System

       An Ethical Approach to Preventing Future Financial Crises

      TARIQ ALRIFAI

      Cover image: © iStock.com/dblight, © iStock.com/tunart

      Cover design: Wiley

      Copyright © 2015 by John Wiley & Sons Singapore Pte. Ltd.

      Published by John Wiley & Sons Singapore Pte. Ltd.

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       Library of Congress Cataloging-in-Publication Data is Available

      ISBN 9781118990636 (Hardback)

      ISBN 9781118990698 (ePDF)

      ISBN 9781118990681 (ePub)

I dedicate this book to my wife, Andrea, for her support and encouragement. Without her efforts, this book would have not been finished on time!

      About the Author

      Tariq Alrifai has been involved in Islamic finance for more than 18 years. He is an active public speaker on Islamic finance around the world and a leading authority on Islamic funds and investment products. He has written for prestigious publications such Euromoney Books and the Harvard University Forum on Islamic Finance, and was a contributing author of Contemporary Islamic Finance: Innovations, Applications and Best Practices, published in 2013. He is often quoted in print and electronic media, including the Financial Times, Bloomberg, Reuters, and CNBC Arabia.

      Tariq was previously the Global Director of Islamic Indices at S&P Dow Jones Indices. He also served as vice president of UIB Capital, a U.S. – based private equity firm. Prior to this, he was vice president and manager of HSBC Bank's Islamic Finance Program in the United States. In 1996 Tariq founded Failaka Advisors, which was the first-ever organization to monitor and publish research on Islamic funds.

      Tariq holds an MBA from DePaul University in Chicago and a bachelor's degree in international business from St. Cloud State University in Minnesota.

      Acknowledgments

      A lot of time and effort was spent researching this topic and gathering data. This would not have been possible without the support of the following people and organizations:

      ● Advisor Perspectives, Inc.

      ● Elliott Wave International

      ● Federal Reserve Bank of St. Louis Research Division

      ● KFH Research Ltd.

      ● Merk Investments LLC

      ● Professor Emmanuel Saez, Department of Economics, University of California, Berkeley

      ● Professor J. Lawrence Broz, Department of Political Science, University of California, San Diego

      ● Zerohedge.com/ABC Media Ltd.

      Introduction

      Monday morning, September 15, 2008, I was sitting in my office settling into my daily routine when I heard a lively discussion among my colleagues who were gathered in our reception area. It was not uncommon for them to gather there and chat, since it was the only open space other than the meeting room where we could all talk. It was also where we had a flat-screen TV mounted on the wall blaring CNBC all day. I never paid much attention to it.

      That morning, the chatter was different. I got up from my office to see what the day's topic was. What I saw was my colleagues staring at the TV in disbelief. “Tariq, get over here and check this out,” said one of them. “We're screwed,” said another.

      In 2004, I had left my vice president's job at HSBC Bank in New York to join a start-up private equity shop in Chicago. The new firm was to be the U.S. investment arm of a Bahrain-based Islamic investment bank. The bank was also new, having been set up less than a year earlier. I was hired early on to help set up the U.S. operation and build the investment team. Management and shareholders of the bank believed that to be a world-class bank, as they strived to be, they must build up an investment capability in the United States. It was determined that private equity (PE) was the expertise they needed to develop, as they already had a good amount of expertise in real estate, which is a traditional favorite asset class among Middle East investors.

      Since the dot-com bust in 2000, private equity had become one of the hottest asset classes on Wall Street, later spreading to Europe, but the Middle East was still way behind in developing a PE industry. Middle East financial institutions were envious of the high returns PE firms in the United States were generating. Middle East investors were successfully courted by these firms and invested heavily in some of the largest shops in the business, such as Carlyle Group and Thomas H. Lee Partners. All the big Wall Street firms also had PE arms and were generating high returns for their investors.

      The Bahrain-based bank decided that launching a U.S. private equity office would be the best way to develop expertise in PE and eventually bring it to the Middle East. For the time being, the U.S. office would hire professionals from the PE industry and invest in U.S. companies using equity from the Middle East and leverage/debt from the United States. Thus, not only were we reliant on our parent bank for equity, we needed to source leverage locally through banks and specialized lenders that catered to the PE industry.