In this exclusive detailed interview with Dr Mansoor Durrani, we gather an extremely useful insight into contemporary practices of Islamic banking and finance (IBF). Dr Durrani is one of the most accomplished Islamic bankers in the world, and his insight into IBF is highly helpful in understanding some of the most important issues facing the industry.
You have been with NCB for quite a few years now. Please tell us how is it like working in Saudi Arabia in general and at NCB in particular.
After finishing my PhD in private equity (PE) from an Islamic perspective, I tried to set up a small PE fund. The objective was to invest and manage the fund in line with my research findings in a 100% Shari’a-compliant manner. My fundraising efforts used to bring me to Saudi Arabia. When I could not find enough takers for my Islamic PE fund, then I started looking for a job. Islamic banking was (and still is) almost non-existent in India. So for practicing Islamic banking, Saudi Arabia was a natural choice. And within Saudi Arabia, NCB was the largest bank with a clear vision and commitment to move towards Islamic banking. NCB was better placed than others, so I joined. After spending a decade at NCB, it seems to be the right decision. Alhamdulillah!
Although a lot of business lines at NCB are Shari’a compliant but essentially it remains a conventional bank. What is your take on working for a conventional bank? This is an important question for the fresh graduates of IBF, who are looking for a career in Islamic financial services.
Over the past decade, NCB has very rapidly brought its businesses under Shari’a compliance. As a result, NCB’s retail banking is almost entirely Shari’a compliant. Similarly, a vast majority of our corporate banking business is Shari’a complaint and NCB’s asset management arm is one of the largest Shari’a-compliant fund managers in the world. So this is factually incorrect that NCB “remains a conventional bank”. And whatever tiny areas are outside Shari’a, there is full commitment to make NCB a 100% Shair’a compliant bank within a short and specified timeframe. I think we must give the credit where it is due, disregarding the fact that NCB is my current employer!
In your observation and opinion, how Islamic is Islamic banking? Given
“IBF not only has the potential to replace conventional banking, but it is also the need of the hour in the face of imminent economic collapse across the globe.”
“This is factually incorrect [to assert] that NCB [is] a conventional bank… Whatever tiny areas are outside Shari’a, there is full commitment to make NCB a 100% Shari’a compliant bank within a short and specified timeframe.”
the current state of affairs of IBF, do you think it has potential to replace conventional banking and finance, especially in the countries with Muslims as majority?
It is important for a business model with religious underpinnings, like Islamic banking, to be vigilant and keep questioning “how Islamic?” all the time. I also like asking this question in my writings and presentations/speeches. But when Islamic banking practitioners (or even outsiders) deal with this question, we tend to jump to conclusions that are usually out of context.
Very often, both corporates and general public compare the “quality and sophistication” of conventional banks that have existed for about four centuries with Islamic banks that are around for just about four decades. Within this relatively short timeframe, the theoretical and practical advances made by IBF are not too bad. We could have done better, but given some constraints, global awareness about the possibility (if not full availability) of an alternate financial system is quite an achievement.
Also, the “market” (both corporate and retail) should realize that Islamic banks or the supply side of the capital are only one side of the story. The “market” or the demand side of the capital should endeavor to develop a deeper understanding of the core philosophy and value system beneath the Islamic banking. Unlike conventional finance, IBF is clearly not just about money. Once this concept gets clearer, the market or masses will start managing their own expectations and at the same time will demand Islamic banks to be Shari’a based (pure equity, musharaka, mudaraba, etc) rather than merely Shari’a compliant (murabaha, tawarruq, etc).
To answer the second part of your question, IBF not only has the potential to replace conventional banking, it is the need of the hour in the face of imminent economic collapse across the globe. And let me clarify that there is no “religious bias” in this answer. There is a pure and simple logic behind this viewpoint. The present economic and financial system across the world, including Muslim-majority countries, is not indigenous. It is imported lock-stock- and-barrel. It is entirely based on interest, speculation and statistical deception. For instance, not a single country in the world gives accurate and credible data about economic growth or unemployment. And we all know how LIBOR was being rigged. So a more stable and sound economic/financial system has to be completely devoid of interest, speculation, opacity and should be equity-based, where the currencies are backed by tangible and finite reserves. Looking ahead, these fundamental factors of Islamic financial system have the potential to automatically put it in the driving seat.
You hail from India. We think that our readers would be interested to know from you what is the future of IBF in India. As of today, there is no regulated Islamic bank in the country. Do you think that the Indian government and banking regulator would ever take a sympathetic view on IBF?
India has the second-largest Muslim population in the world. So in terms of market size, it is as big as any large-sized Muslim country.
However, Islam is not only meant for Muslims. It is for the entire humanity. So IBF too is not an exclusive Muslim domain. If allowed to be implemented at a larger scale with the right business models, the entire Indian population can benefit regardless of their faith and belief.
As an Islamic banker, despite its permissibility, I am personally averse to murabaha structures. But at times we have to look at clients’ needs and tight timelines. etc. And, murabaha can be put together fairly quickly, while meeting Shari’a requirements at the same time.
Establishment of a robust IBF sector requires political support. And that does not exist in India at the moment. Having said this, I strongly feel that quite a few Islamic banking products can be offered within the existing legal framework in India. For instance, no regulatory change is required for setting up and running private equity funds (which is the core of Islamic banking in my view). Similarly, micro-Islamic finance schemes can be offered on a profit-sharing basis without much fiddling with existing rules.
“To date, [Medina International Airport] is the only airport in the world, which has been funded with 100% Shari’a compliant financing.”
I have also advocated offering “educational musharaka” products to financially support students aiming for post-graduate and doctoral degrees in top universities and colleges in India and abroad. This would serve dual purpose:
Help developing top quality human resources (not just Muslims, non-Muslims should also be offered); and
Save young and bright students from getting trapped in fixed-interest repayment obligations right at the beginning of their career.
India presents a mix of challenges and opportunities. In the overall scheme of things, two biggest challenges are:
Those who have ideas and risk appetite do not have excess (and access to) capital, and those who have excess (and access to) capital are short of ideas and risk appetite; and
Top-quality human capital is in short supply when it comes to Islamic banking. I come across youngsters, with due respect, who are less employable in the top corporates/ banks are generally looking for Islamic banking opportunities. And this is not an India-specific issue. I have noticed this across the world.
NCB has won a lot of project finance mandates under your leadership Please share with us some of the landmark projects in which you have been involved in a leadership role in 2014.
I have been extremely fortunate to have led NCB’s project finance business over the last 10 years. As you would know, project finance structures are used for large infrastructure projects like water & power, metals & mining, oil & gas, petrochemicals, airports & highways, etc. All these projects fulfill core socio-economic needs of a modern society and require large balance sheets to fund. Being the largest bank in the Middle East, NCB’s strong balance sheet has allowed us to play a leading role in structuring and financing many such deals in Saudi Arabia and beyond. While making money, we also fulfilled a key Shari’a requirement of nation-building.
I have been involved or led over 30 high-profile deals with an aggregate value of US$100 billion. NCB’s own commitment in these deals has been close to US$10 billion. Over 90% of them are Shari’a compliant. Almost every year, we have one or two deals that are wining prestigious “Deals of the Year Awards”.
Most of the Shari’a complaint project finance deals NCB has been involved in are based on simple murabaha- based structures. Is it due to the nature of project finance or is it the case that NCB lacks the sophistication of innovation and structuring?
[Smiling] I think you are only looking at the list of our 2014 deals. Last year we closed a number of corporate finance deals or re-financings with quasi-project finance features.
This is why they were structured as murabaha.
But in our entire project finance portfolio of over 30 deals, a vast majority of them are istisna’-ijara or wakala-ijarah. Only a handful are murabaha. As an Islamic banker, despite its permissibility, I am personally averse to murabaha structures. But at times we have to look at clients’ needs and tight timelines. etc. And, murabaha can be put together fairly quickly, while meeting Shari’a requirements at the same time.
You have led some of the milestone Shari’a-compliant transactions in project finance. Please share your experiences. Further, how a Shari’a-compliant project finance transaction is different from a conventional transaction?
Over the years, we have played key/lead roles in some of the largest power projects in the world, the largest petrochemicals complex in the world, the largest grassroots-level oil refinery in the world, and the first Islamically structured mining deal in the world. All of these were award-winning deals in the years they closed.
One transaction that I treasure most is the new Medina International Airport. Apart from providing major chunk of funding, we were the Islamic structuring bank for this landmark deal. Developing Shari’a complaint structures for Build, Own and Transfer (BOT) based infrastructure projects is relatively easier. But airports, seaports and highway are considered “vital strategic assets” for governments. So they are not offered to private developers on a BOT basis. They are developed on a Build, Transfer and Operate (BTO) basis. And this presents a Shari’a challenge because we cannot finance something that we do not own. In BTO structures, we have to build the asset/ project and then transfer the built-up projects to governments. After that, the company that develops the project retains only operational rights for a period of time to pay the Islamic banks back. But after extensive deliberations with Shari’a scholars, we came up with a fully Shari’a complaint solution for this challenge.
Till date, this is the only International Airport in the world, which has been funded with 100% Shari’a-compliant financing, Alhamdulillah! And for us, what could be a better place for this honor than Medina!
As mentioned earlier, project finance is one of the most suitable ways of implementing Islamic finance, because it deals with only tangible assets. And there are 3-4 broad structural differences between conventional and Islamic project finance:
In case of late repayments, conventional banks charge higher interest arbitrarily while in the case of Islamic structure, only actual and demonstrated extra costs incurred by the Islamic banks are chargeable as a result of delayed repayment.
The debt can be sold or bought at a discount in conventional but in Islamic structure it has to be at par.
In conventional finance, “permissible investments” out of company’s excess cash can be made wherever the company earns the highest returns. But Islamic structures restrict such investments to Shari’a-compliant assets only.
Conventional guarantees cover all possible losses regardless of what the cause is. But Islamic structures do not put the burden of guaranteed obligation on the shoulders of the guarantors for events beyond their control, e.g., expropriation, acts of war, natural force majeure.
During the recent financial crisis a lot of banks and financial institutions around the world were affected. Please share with us how Islamic banks came out of this difficult period.
The 2007-08 financial crisis was a divine gift for the concept of Islamic banking. Since Shari’a does not permit financing that is not directly linked with real assets, a number of true Islamic banks remained mostly unscathed as their assets remained more or less equal to their liabilities. This relatively inherent safety feature brought the concept of Islamic banking at the forefront of the debate on an alternate banking system that the world needs so badly. Alhamdulillah, for the same reasons, in the last 10 years since I started the project finance business at NCB from scratch, we have not lost even one dollar. This is despite the fact that we have built one of the largest project finance portfolios in the entire Islamic world.
You have been Head of Project Finance at NCB for a while. Tell us how different NCB is now from when you started?
Project finance as a concept was at a nascent stage in the Kingdom 10 years back. Building a completely new business with large-sized commitments ranging between US$100 million to US$300 million for every single deal required full senior management support.
Despite initial challenges, the board and the entire top management wholeheartedly backed this business. And they continue to do so. This has resulted in NCB figuring on top of the project finance league table for a number of years, including 2015. Alhamdulillah!
What are the short, medium and long-term plans of NCB to expand its project finance franchise? Are there any plans to tap some lucrative markets in South Asia and the Far East?
After having built a leadership position in the Saudi project finance market, the NCB board has approved to look at GCC deals, and very selectively in Turkey as well. Outside Saudi market, we are only supporting core infrastructure projects with some kind of sovereign involvement in the form of shareholding, fuel supply, offtake commitments etc.
We have no immediate plan to expand to South Asia or Far East. But who knows what the future holds!
All that NCB has achieved in project finance would not have been possible without the hard work, commitment and support of your team. Please share your views on the team and how do you motivate them as their leader.
Indeed, project finance requires heavy lifting on a regular basis, almost 24×7. Since we invariably structure and fund multi-billion dollar projects, they require very high level of business and financial due diligence skills, negotiation skills, high stamina to work long hours at times without weekend breaks. I was alone when we started this business about 10 years back. But over the years, we have built one of the best PF teams in the business. Highly qualified, multinational staff perfectly capable of working with top multinational clients as partners. I guess the best way to motivate your team is to lead from the front. I must admit that they are all very high-calibre professionals and mostly self-driven. So they do not need motivation from me as such [smile]!
Share with the readers of ISFIRE a typical day of Dr Mansoor Durrani. How does it start and how it ends and what is on your must-do list?
A normal day is 5 am to 10pm. Almost 70% time is spent on deal-making. This includes conference calls with clients, lawyers, consultants, etc. Reviewing and approving financing applications, attending credit committee meetings/calls, and spending time with the team to thrash out deal-specific issues. The remaining time is divided between attending school work, reading, writing, and playing with my kids. Virtually all of these figure in my “must-do” list!
Maintaining this schedule is a bit challenging. This is why I am almost absent from the “social circuit”; hardly hosting or attending late-night dinner parties [smile]. I also spend a lot of time in travelling for business.
You have busy life of a banker but it is amazing to see you involved in writing regularly for various magazines, newspapers, portals and sparing time for your charitable works. How do you manage your time between professional engagements and personal pursuits?
I have always been concerned about the quality of Muslim human capital. So I made my small contribution towards improving this situation by setting up a state-of-the-art Islamic IB school in Bhopal, India. Eastern Public School was established with one teacher and one student in 2003 in a 2-room house. It is now run out of a purpose-built and fully self-funded multi-million dollar 4-acre campus. The school has over 350 students and more than 60 full-time staff, almost 80% of which is academic. It has been bit of a challenge to establish and then manage a world-class school by sitting thousands of miles away. But everything is possible if you have passion and patience.
Besides financial commitments, I have not taken a day off for the last 12 years. Not a single holiday. All my “vacations” are spent in the school with almost 12-14 hours a day of meetings with staff, students, parents and various other stakeholders. Our team, led by a world-class pedagogical leader Brother Umar Jaffar, is doing their best to develop an Islamic schooling model that meets 21st-century requirements and at the same time can be scaled up and replicated at other places, in sha Allah.
This is a not-for-profit school. But within the school leadership team, we have a joke that it is essentially “for-loss” because even in its 12th year of operations, I am paying almost 60% of operating expenses from my own pocket More details on the school, including videos and pictures galleries are available on the school website www.e-p-s.in. An important folder in the photo gallery is named “A Decade of EPS” which demonstrates how the school is built brick-by-brick.
My other interest that you mentioned is writing. I write on both Islamic banking/finance as well as current affairs. Apart from MacMillan published book “Venture Capital, Islamic Finance and SMEs”, almost two dozen articles are published and are available online. There is now a proposal from a UK-based publisher to put them all together in the form of a book.
At the end, please share with us your views on the future of IBF. Do you think IBF has more potential to grow in Islamic markets or the more developed and sophisticated Western markets?
Ideally, IBF first needs to establish itself as an alternate model within the Islamic countries – which has not yet happened in a significant way. After proving its worth in economic growth, economic justice and sustainability, it may be presented to the Western markets. By that time, the remaining weaknesses of the present financial system will also be completely evident to the world. And everyone will be craving for a viable alternative.
For instance, when we fall sick, we do not choose the doctor based on his or her faith. We simply go to the doctor who is best positioned to cure our sickness. This is precisely what will happen when the global financial system, built on speculation and greed, will cave in. The world will be flocking towards a more stable and more equitable system. But robust political support is required to develop a sustainable alternate. Quite a bit of experimentation is required at macro level across the Muslim world. If we don’t do this, IBF will remain a fringe player in both the Islamic and Western markets.
