From Farmers to Financiers: Treading the Path of Financial Evolution

Copyright © 2015 Hussain Kureshi. All rights reserved.

ISBN

978-1-4828-3071-2 (e)

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

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04/14/2015

DEDICATION

Dedicated to the farmers of the world who may not all have benefited equally from the developments of the modern world.

FOREWORD

Many years ago, when I was contemplating a job move from a safe and supposedly secure position in a British Commercial Bank, I had an interview with the Vice President of International Internal Audit for a rapidly expanding US Commercial Bank. Bearing in mind that this discussion took place in the late 1970’s, when the world was still developing and adapting to computerisation, he said a very interesting thing to me that has remained in my head to this day.

Touch all the paper. Is what he said. After I took the job at the American Bank I understood much better what he meant. Today I understand it completely. The meaning at that time was …..Take a look at everything, try to understand it and draw your own conclusions. Nearly 40 years on I have become much better at doing that and, rather fortunately, I have been able to communicate with many people who have come under my sphere of influence, that this is a worthwhile pursuit.

Hussein’s book, which is his third, is exactly that. It is a personal journey of understanding whereby he attempts to touch all the paper, join up the dots, express a point of view and thereby encourage us all to do the same.

As the late Nelson Mandela once said Education is the most powerful weapon that we have. Please enjoy this educational work in the spirit in which it was written to touch all the paper.

Wassalam

Daud Vicary Abdullah

9 March 2015

PREFACE

The idea behind this book was not as coherent as my previous 2 works, Contracts and Deals in Islamic Finance, A User’s Guide to Cash Flows, Balance Sheet and Capital Structures and Financial Engineering in Islamic Finance, the Way Forward, A Case for Islamic Derivatives. The focus on these 2 works was specific. However, when one studies a financial system with the intent to replace it with an alternative, one tries to go back to the roots of a system, or should I say to the very beginning.

In this work I did not refer to the economic systems, farming systems or financial systems of any one particular civilisation be it that of the Sumerian Turks or any other civilization. It seems that as humans we can learn of philosophy from the ancient Greeks, of Law from the Romans, but for trade we need to look closer at the civilisation around the Meditteranean.

I attempt to explore the logic or the intuition behind the developments that take place in a system that evolves from one based only on farming, then barter to trade and cross village trade We explore then the development of currency, credit and financing. I assume that the trajectory of development I have worked with happened in thousands of eco-systems throughout history, ach with their own gestation periods and nuances. Certain systems may have survived, others may have vanquished, with war, famine and plagues playing out as the major stress events that threatened the very existence of any system. Other systems may have lost their particular identity, by being absorbed into larger systems, or by combining their resources with other eco-systems to develop a mega system.

This living in the Developed World, have lost the link to the pre-modern world, those of us living in the Developing World have recourse to not only glimmers of the future, but we can readily access glimmers of the past as well. Much of the developing world is agricultural in nature with, the method of bringing goods from the farm to the markets are very much the same as they ere a few centuries ago. In some case the same families have been carrying out their trade for more than 300 years.

The way to read this book, is not to expect an ending or a nice sweet conclusion. In the age of modern media, we have been accustomed to someone wrapping up the story for us. Human history is too vast and complex to be wrapped up in a conclusion, and unless one has a pre-visioned conclusion in mind there is also hardly any need to make one. My incentive behind this effort was to retrace how we as humans evolved systems of trade, and the journey of picking my thoughts led to the publication of this book.

ACKNOWLEDGEMENTS

I want to acknowledge Mr. Daoud Vicary the President and CEO of the prestigious International Centre for Education in Islamic Finance who inspired me to think beyond the surface, to scratch the surface and to have the confidence to come up with my own conclusions. My observations thus are exactly that just mine, and they may not seem so credible to a reader but then again so what. We passed through a Global Financial Crises, or at least the Developed World did, where opinions of rating agencies were exposed to be unsound, practices of some of the most credible banks in the world were found to be rather dubious. Yet, much of the savings of ordinary citizens are channelled to financial products developed by and on the advice of the very same banks who have been caught red handed not once, but several times, be they in Libor rigging scandals, metals prices rigging scandals, currency exchange rates manupilation scandals and so on. The very same top 10 largest banks in the world are responsible for these scandals and yet the insurance companies, fund houses and governments of the world trust the money of their customers and citizens with these same banks. Why?

Daoud left a career in conventional finance and began to explore the fundamentals of a financial system based on ethics. Islamic Finance has yet to go a was before its core functions use ethics as a filter before profit, but that is a lot to expect of any commercial organization. Yet, it is the work of people like Mr. Vicary and his colleagues at ISRA, AAOIFI, BNM and other institutions that have painstakingly made efforts to come up with viable alternatives. I thank them for providing the infrastructure to motivate my own curiosity.

INTRODUCTION

I have always pondered why all religions encourage believers to limit their pre-occupation with worldly desires. Be they lust for women, wealth or power. History records the names of in fact those very individuals who demonstrated an excessive desire for all three. At times they have been referred to as heroes and at other times as villians. These individuals had the uncanny ability to mobilise the energies of thousands of people to share one vision, work for it and at times to die for it. This uncanny ability has always scared me to the bone. How did kings convince their people to die for him, how did Napolean convince his peers to commit France to war, how did Hitler convince his peoples to hate Jews with such vigour. How do leaders convert ordinary husbands into soldiers and wives into widows?

We live in a different world today, where in the midst of the most powerful armies history has ever seen, and with the most powerful weapons ever created by man, we see the emergence of another very powerful tool, capital. It is capital that funds wars now, we no longer live in the days when every villager had his own sword and horse. It is capital that is used to pay off victors, to rebuild cities, to convert an economy from an agricultural base to an industrial base. It is capital that has brought the computer to our homes, as where would Microsoft be if Bill Gates had not found a financier to develop his products. Ideas need capital to become innovations, and it is likely that many great visionaries have come and gone with ideas buried in their chests as they did not find the capital they needed to bring their ideas to market. The fate of nations is controlled by capital and the amazing haste of consumerism that has been witnessed in the 20th and now the 21st century has created the most powerful co-operations the world has ever seen. The East India Company is possibly one of the world’s first company to float stocks and in an effort to control the prices for raw materials, to create new products (often by force) and to sanction new suppliers at the right price (often by force) the EIC, drew England into its vision of being a global empire. The aim of this empire was not to spread Christianity, or bear the burden of the white man and civilise the rest of the world, it was to accumulate wealth and capital.

Corporations of the modern world control untold stores of resources. Often raw materials contracts are signed with what is politely referred to as emerging markets with rather unfair terms. I do not wish to comment on how fair contracts to purchase crude oil were in the Middle East, and what power oil companies enjoyed with the governments of the Middle East, but what is wonderful to see is that the Sovereign Wealth Funds of the oil supplying countries can now buy out their buyers like Exxon, 3 times over, and that too with cash.

Corporation of the US moved out of factories in the mid West looking for cheap labour to save costs. The rising costs of American labour made it difficult for companies to make profits and still sell their goods at prices the US consumer could afford. The migration of the assembly lines to China has been so successful for China and countries like Malaysia, Vietnam, that the map of global financial power has been redrawn with China becoming the second largest economy in the world on the back of Europe and American demand.

Since the fall of the colonial world, the world map of influence has changed almost 3 times. In the early 1900s, European nations such as France, Germany, the Netherlands, Portugal enjoyed influence in much of the world with the United Kingdom being the leader. With 2 devastating world wars (a stress to the eco-systems), Europe lost its status to the United States as a dominant economic and military power. The US carefully chose the destinations of where its to spread its influence. At one angle it looked to counter the ideological difference of Socialism offered by the USSR and China. It looked to win over newly founded countries to the side of capitalism and democracy. Another