I was a contended busy bee corporate banker, happily bogged in to structuring working capital lines, export refinancing, retiring import liabilities and funding large scale projects. Back then, it looked fulfilling and somewhat convenient experience underwriting financing facilities, rationalized by the few renowned C’s of credits including credit worthiness, collateral, cash flows, capacity etc. In essence, all I use to do is to lend money and get it back timely, and don’t forget the accrued interest, that my principle must have earned during the period. “All I needed to fret about was, my exposure to the borrower and his ability to repay it, irrespective!”
Into an Islamic Bank
It was some four years back, that I serendipitously landed in to an Islamic Bank with the delusion that, it is a similar business with a few Arabic jargons to master, and may be some incremental documentation complexities. So, expectedly, I googled for a glossary on Islamic Finance. Back then, to me, the move to an Islamic Bank was nothing more than a career diversification, adding few attractive bullets to my CV, and naturally to my career prospects as well.
Not just Arabic Jargons to master – Realizations
Nevertheless, it doesn’t take me more than a month’s time to realize that, there is a lot more to it than mere Arabic terms. Being a front office banker, it takes you to be a go-getter, not only in your interaction with the client, but also with the in-house quarters of the bank, most importantly the risk approvers, and that required me to come to grips with the tricks of the trade. Something that baffled me in the early days, was the client’s curiosity in not only knowing an Islamic Banks offerings, but also in my ability to differentiate it from the conventional products.
I was to hear out the customer need, his business model, and then craft a Shariah compliant financing facility thereagainst, and lastly but most importantly sell it to the sanctioning authority to get it going. It was not a ‘one size fit all’ proposition, as there were contracts (defined by Islamic commercial law) underlying each product, with their limitations, prohibitions and risk sharing covenants. Even a minor tweaking of the standard transaction structures makes it a tradeoff between authenticity versus innovation, and required endorsement from the Shariah Advisor.
The Sacrosanct Shariah Compliance
There were inherent and implied rights and obligation, risk and rewards for each phase of the transaction. I was also told that Shariah Compliance is the USP (and perhaps the niche) of this form of financial intermediation, and therefore to be observed as nothing less than being sacrosanct. “Zero Tolerance on Shariah compliance” in the words of my Group Head (my boss’s Boss) still echo in my ears. The intimidating fact of it was that, the non-conformity to Shariah underpinnings, leads the income from the transaction to be cleansed in to charity funds.
What’s wrong with the Balance Sheet?
Following my intuitive pursuit, I recognize that it is not just the shareholders equity, but almost all of the left-hand-side (funding side) of the balance sheet was operatingon profit loss sharing basis. A major pie of the deposit base is contractually agreed to operate on Profit loss sharing basis. Moreover, on the right-hand-side(lending side) market risk of the inventory/assets financed was to be taken care of, in addition to the legacy credit/counterparty /default risk. Assets leased have to be on my balance sheet along with all its risk and cannot just be treated as a liability owed by the lessee.
Funding the Real Assets – No More Debit-Credit Liability Rollovers
Along this time, going through the ‘getting my hand dirty’ phenomenon, I recognized that I do not have the luxury to offer liability rollover to my clients with a mere debit-credit punch-in and cannot carry on with financing their financing mismatches.
The assets with all their corresponding timing of recognition of profits, reporting and presentation of the transaction were also an altogether different ball game.
Asset Liability Anamolies
Moving up the ladder, getting to know a bit of the bigger picture, I recognized the challenges in the overall Asset-liability management, wherein it was a fixed term and fixed returns asset side funded by on-demand saving deposit base offering a market based varying returns.
Though, a lot has been argued on the contemporary Islamic Banking in its forms versus substance on being a mimicry of its conventional counterpart. But my journey from a conventional to an Islamic Banker has been a challenging yet happening experience. Those, who are at the helm of the business, knows that it’s a lot different and are optimistic that it is going to be an alternate financial system in the time to come!