Empty Vessels And All That Jazz

Zeemax #105
Re Islamic Financial system
Thanks again. By a perfect Islamic society, I assume you mean a society in which citizens make a collective effort to practice the tenets of Islam and the laws are based on Islamic scriptures and precedents in Islamic jurisprudence. How to achieve unanimity on what constitutes a perfect Islamic society is an issue in itself.

But assuming such a `perfect` society can be created without the `wrong guys` winning, the Islamic financial system still sounds very convenient for the borrowers ie rich Muslims and very debilitating for lenders ie poor Muslims.

The aims of honor and justice are the basis of laws and citizens collective efforts in some `nonIslamic` countries, too including those where interest-based financial institutions operate.

Here, regulatory authorities and legal and legislative oversight are nothing but `check and balance` mechanisms to ensure transperancy, honor and justice in the financial system on behalf of millions of small/large investors/depositers who cannot individually go out and verify whether their bank is making rightful claims to them about its lending activities and accounting practices. Given thousands or millions of lenders and borrowers, these mechanisms would be required in a `perfect Islamic society` too.

If borrowers/lenders can find ways to cheat the system in a `nonIslamic` world, they can certainly do so in a `Islamic` world.

Hence, whether the bank is `Islamic` or `interest-based` in its method of operation, or the punitive laws are deemed Islamic or not deemed Islamic are side issues in pursurance of honor, justice and transparency in public financing.

The key to pursuance of honor and justice is public awareness and good working institutions of goverance responsive to the public interest. In countries where more than 50% of the public is illiterate and on subsistence, courting the political turmoil of bringing out the already well-fed influential religious factions and their well-fed influential supporters to face off on religious issues to define and implement first what is a perfect Islamic society seems a very wasteful (and very self-serving for some)detour from the road to progress.

Dear Zeemax,

First, and foremost, I am writing this to ask your forgiveness for my message # 86, which I have just re-read and realized that it was rude, un-called for and off the wall.

I noticed that you did not respond to me, so I realized that you must be upset. You are wise and have a big heart. If I have offended you, please forgive me. `Bhari bazm meiN raaz key baat keh dee, baraHa bay-adab houN saza chaHta houN...

If, on the other hand, you did not mind my nonsensical mutterings, and just ignored them, then I thank you and still apologize any way.

Second, I want to thank you for engendering a lively discussion which has, except for my `bud-tameez` message, produced many `high grade` responses from the various participants that have made a positive contribution to the readers` knowledge about things like the BCCI matter, etc.

Now, let me try to explain the mitigating circumstances of my response #86, which was in bad taste.

It was late at night and I had been sitting with Imran sahib (he is visiting the US) having a detailed visit with the Jack of Danniels. Need I say more?

Having read your piece again, without the haze of intoxicants, I see that you have written a dialogue where the protagonists are engaged in expressing their opinions and exchanging views. Obviously, everyone will have a different slant on those same subjects. Others have brought out all the points that I could have thought of so I will let it rest.

Your new-found `Islamophilia` comes as somewhat of a surprize to me, and frankly, I am none too happy to lose yet another long time liberal ally to the conservative camp.

As for your admiration of various characters whom I do not hold in as high an esteem as you do (Idi Amin Dada, Agha Hassan Abedi, Zulfi Bhutto etc.) let`s just say that reasonable people can agree to disagree.

Once again, I hope my personal assault on you which referred to your recreational preferences from the days of yore will be forgiven as the ramblings of a drunk fool.

respectfully,

...SR

Re: Zeemax #98

No, I don`t think that the GoP as an institution, knew or approved of this little scheme as, otherwise, my bank would have been doing it as well, I`m sure. (Well, maybe not; our GM--a gora--was pretty much a stickler for the rules and he was the only one to vote ``No`` regularly on funding requests that came up at PICIC since it was pretty clear that all these sugar and textile mills were just a vehicle to transfer funds from PICIC to defaulters.) I am sure that BCCI bribed lots of people in the SBP and the MoF but this does not mean that the GoP sanctioned this little scheme.

No banks were allowed to lend as much as they could have theoretically done so since the SBP kept a tight lid on how much ``ceiling`` they would sanction each bank (don`t know what the current set-up is; been out of banking for too long). As you know, a certain proportion of each bank`s deposits are kept as ``required reserves`` and the bank can theoretically lend out all of its ``excess reserves,`` unless the SBP sets another limit on its total loans outstanding; which the SBP did.

The rest of the bank`s ``unused`` funds were supposed to be used to purchase govt bonds (as you are well aware; these bonds usually yielded only about

Reply #: 100 sadna

``what do you mean by going 100% Islamic, esp where the economy is concerned?``

Ok. Let me try to explain the `Islamic Financial System` in the simplest terms.

In the traditional financial systems, the banks` essential and indeed the core role is financial intermediation, which is acting as an intermediary between the savers and users for a fixed fee which is the interest `spread`; and creation of `money` through credit, thereby creating a `multiplier` effect which spurs economic growth. Take the example of a credit card. If you only have $ 100, you can still spend $ 500 on a card and pay back the difference by using the purchased commodity to earn additional money. Essential principle is the same. Though that is also the chief cause for inflation but let`s not go into that for the moment. Thus, banks are the financial intermediaries who take their profit as middlemen.

The Islamic financial System on the other hand does not envisage a middleman (banks) between savers and users. It seeks to bring together, directly, the savers and users in groups of mutual fund type institutions on a profit/loss sharing basis which can be managed by a professional manager for a fixed remuneration. These institutions are of many forms like Musharika, Modaraba, Morabaha, Ijara and so forth which cover Overdrafts, Industrial Loans, Project Finance, Leasing, Trade Finance, Forward trade and so forth. There fore it`s all there and at a lower cost to the borrower as there`s no middleman.

However, there are problems in the Islamic system for the small saver as fixed income on investment is not permitted. Then, for this system to operate, there must be complete transparency in the whole society so that the investor can directly inspect the borrower`s books of account or visit his premises. Full & quick justice must be available to protect the investor`s interest and prevent wilful default. There can`t be any keeping of duplicate accounts for tax evasion etc. These are all ingredients of Islamic Society which is based on principles of honesty and justice.

Above is why I said in my mail to you that an Islamic Financial System can operate only in an Islamic Society, and not in isolation of it.

On a lighter note, the runner for my article, instead of being the `feudal` line, should have been `Everything you always wanted to know about Islam but were too afraid to ask !`

Rgds

Zeemax

re Sameer #101:

Your post has a number of points that may need to be explained in greater detail. Maybe Zeemax or Fuzair or even I could write an article explaining those.

Briefly:

1)According to accounting 101 the assets and liabilities of any publicly traded company are equal except for that pesky little thing called shareholder equity. Whenever the liabilities take a huge hit(due to depositor withdrawals for instance in case of a bank) the shortfall is madeup for by shareholder equity. Companies try to keep liabilities off their balance sheets in a number of ways. Enron is a good example of what happens when you get too creative in that area. Theoratically a company should be able to meet all its obligations by getting rid of its assets. Reality however is a different thing. Except for a few cash rich companies like Microsoft or Intel, I doubt if more than 20% of the companies in the S&P 500 can meet that theoratical criterion. One cannot fault BCCI for going under at least in the USA on that criterion.

2)Money laundering is more of an art form in these days of increased government vigilance. Governments, sadly are always one step behind in the latest ways of combating it. The example you mentioned about smugglers buying properties in Lahore and then Islamabad doesn`t work anymore because of the change in tax laws. You are right in your observation that the hundi guys in Jackson Heights are little more than unglorified western union outlets. The `bad` money is still cleaned in off-shore havens with the active connivance of major banks all over the world. tAhmed321 seems a little too enamoured with `law-enforcement` in the USA. Crime pays(at least initially and many cases in perpetuity) and invariably somebody is always around to handle the cash.

later

-sac

SameerJB #101 There is no doubt that BCCI was at one time the fastest growing European-based Bank. And many people (rival European bankers for example) would I am sure have been quite pleased to see a major rival out of the way. And, knowing the different types of people we share the planet with, a measure of glee driven by racist or cultural prejudices was almost certainly present among some observers. All this should not however deter us from acknowledging the fact that the BCCI was systematically on the wrong side of the law in virtually every country it operated in.

Zeemax #102 You quote some instances and end by quoting my earlier post ``Where even angels fear to tread`` and commenting ``Indeed ...you`ve got to be kidding.``. Here is my response to this: Abdi and Naqvi also believed what you are saying, and extended their empire into the US, with the same tactics based on contempt for the law in this country as they had undertaken elsewhere. They were ensnared by the US law enforcement agencies. Abdi is now dead, his global empire gone, and having spent I understand his last years as a fugitive from justice in some Karachi flat. Naqvi is I believe still doing time in a US jail, having been extradited from his refuge in the middle east. Your instances, my friend, are exceptions that prove the rule. If you really think what you claim in your post, then you have to be a ... (I dont know what to say here: I hate to use the word ``fool``, but honestly know of no better word to describe this view that one can build a banking business in the US while playing games with the law).

Reply #: 99 tahmed321

``The US had a savings and loans...we have Enron ...but not the Banking sector (touchwood) where only fools (and the geniuses of BCCI) rush and where even angels fear to tread.``

Your invective amazes me, as does your ignorance.

There were billions of dollars discovered in four Russian Individual`s personal accounts at Bank of New York in New York in 1999. Noone seemed to know where these balances came from, or how such large amounts went unnoticed. It was though casually reported in passing that a senior official of the bank had originally started her career with Bank of Moscow in London. There was a bit of sensational reporting in the media for a few days and then the whole thing hushed up.

The Founding Chairman of Republic National Bank (RNB) was brutally murdered alongwith his maid a few years ago in Monaco and his villa set to fire. RNB`s main business, rather specialty service, was moving/transporting of cash (notes & coins) for banks across the world and provided that service for a fee. He obviously stepped on someone`s tail rather badly. It is also interesting that Republic National Bank was soon after the event taken-over by HSBC and is now HSBC Bank USA.

The Head of the Holiest of them all, The Vatican Bank, was found hanging from the Tower Bridge in London. No further ado about it though there was some talk of Mafia style revenge.

There was a Manager of Bank of Boston in Hawaii who used to personally accompany a drug dealer across the world with suitcases full of cash, a million Dollars per suitcase. I had turned him away but other banks took him out to lunch. He must have progressed pretty high up the ladder by now.

Where even angels fear to tread ? Indeed ...you`ve got to be kidding.

Zeemax

sac, Zeemax and tahmed321: Thanks very much for explaining concisely about my query. These posts have, in fact, increased understanding of someone not very familiar with the banking system and the BCCI episode in particular.

I seriously doubt that hawala type transactions are so big to account for even the 10 percent of money laundering. At least what I have seen around NY/ Jackson Heights, these are usually few hundred to few thousand dollars transactions and mostly used by lower and middle class income people. Again, I may be ignorant here!

In my poor understanding, I guess if illegally acquired wealth by smugglers or else, once successfully converted into solid assets and back to liquid and done repeatedly, basically erases the trail of its origin unless the authorities have really vendetta against the individual or institution. For instance, a smuggler with money buys properties in Karachi, sells them after a while and buys properties in Islamabad, sells them and invests in financial markets and so on. Additionally the huge undocumented black economy of Pakistan and other third world countries provide fertile ground for laundering.

The really debatable question, however, remains if BCCI was singled out and for what reason? Sac has answered this question, the best it could have been answered objectively. A similar example would be a parking violation ticket where one could never pay or pay with penalties. My understanding is that once BCCI was investigated and charged with many foul practices, it was really the insolvency that sealed its fate. Now I do not have the slightest idea if it was really as insolvent and unable to meet the demands of its depositors. I vaguely remember reading somewhere that its assets were close to 5 billion dollars only whereas its liabilities (based on deposits) were close to 20 bilion dollars.

In banking or other servicing industries, the institution builds up much more slowly than technology industries. The BCCI was rather a new kid on the block and nowhere close to top 100 or 200 banks in the world banking industry. They were targeting special accounts by influential people where major banks already had been working in innovative ways to bypass the local banking laws and protect the special clients. Perhaps, BCCI was ding it aggressively without enough protections, organization and assets to back up their practices. Like I said before, I could be totally wrong here too.

Agha Hassan Abdi was not a lone ranger. Most of his life, he has been part of the world banking system. I remeber reading reports about him being go-between CIA activities in central America and financial system. Actually in one story, he was tied to ZAB either supplying him cash during 1977 elections or supplying cash to movement (PNA) to overthrow him. He certainly was close to Sheikh Zaid of UAE and possibly a go between Zaid and ZAB. My wildest guess would be that both ZAB and Agha Hassan Abdi, being smart asses, tried to double cross their patrons and all those who helped them to reach to the top. ZAB double crossed almost everybody along the way from the days he was helped to move up from the position of a Law professor in Karachi. Well USA, CIA and the world banking system were too big and too smart to be double crossed.

Thanks again and please do not think much about this post. If material presented here does not make sense to you, then it is nonsense to me also.

Regards,

Sameer

Zeemax #98
Thanks. If you donot support Islamic banking, then what do you mean by going 100% Islamic, esp where the economy is concerned?

`` You see, Islam integrates not only cultural/social/moral/ethical values, but much of economy as well. There`s a concept of an `Islamic Society` in Islam which is not there in any other religion. Islam seeks to be a complete code of conduct in all spheres of life. This being so, Islam cannot be adopted in parts, it has to be adopted as a whole. Only then an Islamic Society as ordained by the Qura`an and the Sunnah can exist.``

SameerJB #74 It is fair to note, as you do, that illegal funds continue to flow after the demise of BCCI. It is also correct to note that:

a. Billions of dollars of funds flow across the world every month outside the regular banking sector - for Pakistan alone, I believe (from memory of reading this somewhere) about 2-3 billion dollars of remittances, and an unmeasured amount of outflows of currency, are done via the hawala. Drug smugglers and terrorists are known to favor this mechanism as well (talk about honor among thieves!).

b. Offshore Banks - Channel Islands, Bahamas (where laws are lax), Luxembourg (where interestingly BCCI also chose to headquarter), are also outside the control of many national authorities like the US.

c. Within the US, the Banking sector is heavily regulated, and only a few years ago were reforms brought in which loosened the tight strictures (e.g. no cross-state bank branches, limitations in the set of financial services they may provide) a bit. And government agencies watch Banks like hawks. The US had a savings and loans scandal many years ago, and of course we have Enron nowadays: but not the Banking sector (touchwood) where only fools (and the geniuses of BCCI) rush and where even angels fear to tread.

I`ll try to address as many issues as possible below. I apologise if I have missed any significant point. Though I have tried not to indulge in argument for the sake of argument and thus ignored some responses.

Reply #: 68 Zakkk

``my experience has been the closer you get to alleged `great people` the smaller they become.``

It depends upon what you look-for. Every person, who rises above his peers, has `some` quality/ies which the others lack. This applies across the board from the level of a top student in school, to heads of large conglomerates, to National/Global leaders and so forth. If we look for their flaws, certainly we find many and happily believe they`re actually smaller than us. What we miss to look-for are those qualities which they`re bound to have possessed to carry them so far ahead of their peers. This applies to all larger than life personsalities.

Reply #: 89 sadna

``Islamisation of banking (which Zeemax surely means by going 100% Islamic) ... all large defaulters namely large borrowers will be `ma`aafed` and all small depositers will lose the interests on their deposits.``

That is the common (allow me to say `uninformed`) view. Firstly, Islamic Banking does not exist, nor was intended to exist. Any banking system; i.e. an intermediation of money from the savers to the users, by definition; cannot exist without interest which is basically the reward for capital, alongwith rent for property, wages for labour, and profit for entrepeneurship. These are the four factors of production and entitled to their due rewards. If any one of them is removed, there would be no production. Example is the Communist system which removed the reward for entrepreneurship and collapsed.

There does however exist a concept of an Islamic Financial System within, and I repeat within, an Islamic society. It cannot exist outside that society and cannot even be initiated far from being sustained. So I do hope I have clarified that I am not a proponent of Islamic Banking as it is commonly known.

Reply #: 69 Fuzair

``GoP used to give a 1/2% commission to the bank that sold the old Khas Deposit Certificates ...`` and the rest.

The GOP knew exactly what it was doing. Certainly many people made easy money in that scheme by pyramiding as you described, however the GOP that way also picked up very short-term funds cheaply, at 1 % per month, for budgetary support. The KDC`s and other National Savings Schemes fall under non-bank borrowing and are unrestricted, while Govt direct borrowing from banks through T-Bills etc for budgetary support is subject to several constraints.

Reply #: 70 Bina

``I know what he said: ``Show me the money!``Hee hee hee ho ho ho!

No, he actually used to repeatedly refer to four things. The Ultimate Purpose, Oneness with Nature, Total Submission to God, and Humility.

Reply #: 74 SameerJB Reply #: 95 sac

``I wonder if the collapse of BCCI has stopped smugglers from money laundering?``

The total drug money market in 1991 at the time of BCCI collapse was estimated at $ 100 billion per annum. Think what it could be now? and who`s laundering it? As the practise obviously continues.

It`s also well-known that the drug money charge was based on a sting operation by FBI operatives with Govt Funds, who had befriended the BCCI Florida staff for years and lured one into saying, on concealed tape, that `He didn`t want to know where that money was coming from...` That reply shut down the whole bank and that staff member was awarded 14 years R.I. In contrast, the Columbian drug smuggler who was also used in the sting, and was arrested with a physical consignment of Cocaine in his small private plane, was given 7 years by the same judge; and let off after a couple of years for good-behaviour.

Reply #: 76 Zafar Al-Talib

``What exactly is this identity problem?`` .. and other questions. Later .. my friend. Let`s see if this subject arouses any interest.

Reply #: 95 sac

``Maybe Zeemax can give us an objective inside view although methinks he was too close to the action to see the bigger picture.``

Well, actually I was `in` it. There was no small or bigger picture. There was only one picture from the inside.

That reminds me of the movie `Twister` and how you`re either in the tornado or out - period. You can`t be close to it.

However, there were certainly many more people at the periphery who were pulling it down than those who were strengthening it. But it`s a law of nature that 20% carries the rest of 80%, and the organisation would have survived despite that. What brought it down ? I think Sac and SameerJB have a fairly good idea.

I`ll only add in the end that when Agha Hasan Abedi was broken the news after many months by his wife that his bank had collapsed(as he was too ill to be told due to strokes and a heart transplant), his only comment was `Maybe God had willed it this way`.

Rgds

Zeemax

Friends,

I see my mention of some controversial names/events has opened up a whole Pandora`s box. The focus of my article was `Leadership` above all. However, since the controversies are, for the moment, seemingly more appealing in the progressing conversation , I`ll try to address as many as possible later today in the hope the conversation can enter a higher plane.

Rgds

re SameerJB #74:

Sameer Sahib:

You`ve brought out an excellent point. Almost every bank in the world can be convicted of the violations brought out in the charge sheet against BCCI. All of them launder money in one way or another. Private client services is the fastest growing sector in the banking industry which is the facade behind which these activities are carried out. All banks employ myriad corporate structures to lessen tax and regulatory burdens. BCCI was probably no more guilty of these lapses in corporate governance than any other major bank in the world. The difference lay in the attitude of its managers towards how they approached their everyday business. In their race to conquer the fianancial world they forgot their fiduciary responsibility to their clients. Any major corporation follows the creed and example set by its founder or CEO at the time. Abedi painted himself as a champion of the poor and the downtrodden taking on the goliaths of the Western capitalist system. He was trying to beat the white man at his own game using the same tricks-only he thought he had God on his side. He might have gotten away with it had he not bitten off more than he could chew. The Fed or other regulatory bodies would have let go of the indiscretions with the usual slap on the wrists but it they couldn`t let brazen breaking of the laws cloaked in nationalistic and moral bravado play havoc with the unwritten rules of the banking game. Had Abedi given his bank 10-20 more years to evolve, things may have turned out quite differently. Its a classic tragic example of the upstart forgetting his place and roots. You can buy an education but you can`t buy breeding.

Maybe Zeemax can give us an objective inside view although methinks he was too close to the action to see the bigger picture.

later

-sac

That last post was not for this topic.

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Re: Urstruly

You`re welcome. These were just what I knew about BCCI firsthand; actually, just what I remembered. I didn`t know the details of all of the other exciting loot-mar that BCCI was up to since I was too junior to know what was going on.

The other post on BCCI`s activities was much more detailed about their activities.

Regards.