Areté Club Blog

One Comment

1. Aaron Weaver
   Posted July 6, 2009 at 5:03 am | Permalink

   Firstly, I would like to introduce myself before I launch into this blog. I have been a member of the Arete club since Sara founded the club early last year. I feel very privileged to belong to such a knowledgeable network of individuals who like to engage in thoughtful discussion and offer to share their experience and thoughts for resolution towards various issues.

   I am finance lawyer with a city law firm who has been engaged in various capital market raisings in the Middle East. I am also currently seconded to a government agency assisting with financial stability matters. So I attended the event in June with interest.

   It appeared as though the crux of Tuesday’s night discussion was the difference between financial systems that promote efficiency and those that promote concepts of social justice. There is an astounding amount of petrochemical dollars floating from the Middle East and the role of Islamic finance in today’s financial system. Perhaps this suggests that sovereign wealth funds and Shari’a financing do not have pure investment incentives such as other forms of investment vehicles, but may have underlying political objectives? This has yet proved or denied until we see something that is a radical movement on accepted norms of market behaviour, but I could stand corrected if any one has examples of this.

   The legal founding of Shari’a financing systems demonstrated the western world’s ignorance for the understanding of Islamic finance concepts. Perhaps this is true, but being a finance lawyer myself I am astounded by the lack of understanding shown by professionals and individuals within banks and other financial institutions as to the legal structuring and terms of conventional western finance. This was obviously evident in the criticisms of the banking industry in light of the use of CDOs and securitisation structures, but arguably in my view even extends to plain vanilla forms of debt and equity instruments.

   Moving back to the dichotomy of the efficiency vs social justice concepts, Islamic finance promotes the basic tenets of Sharia law and ensures the compliance with one’s moral obligations even in the commercial realm. My question, even thought I did not get an opportunity to discuss this, was whether any soft revolution in Islamic culture (if it is in fact true that there is a change in thought for the modern Islamic generation) would still allow such a system to persist or that leanings towards the western model of efficient trade would promulgate.

   The paradigm of western finance is efficiency and the minimisation of transaction costs. Theoretically, this should allow markets to transact efficiently and with maximum knowledge. It would seem that the concepts of corporate social responsibility extend the principles of western finance to reach the desired social outcomes of Islamic finance. There was some focus around the origins of the banking trade and the fundamental principles of the Abrahamic religions. Furthermore, it was suggested that Islamic finance was a showpiece to demonstrate superiority to rival cultures, which if indeed true probably does not differentiate itself largely to any push of other ideals by western society.

   The fundamental question on everyone’s minds though is the actual intention of those sovereign wealth funds investing in western corporations. The obvious example discussed was the US objection to the ownership of some US ports by the Ports of Dubai Authority. Some parallels were drawn with what has been termed as “China’s other nuclear option” referring to massive Chinese investment in US treasuries. Maybe a contributing factor to the global financial meltdown seen recently could be the money poured into the US Treasuries from foreign funds.

   So, if there are lingering doubts over the motives of sovereign wealth funds, how do countries or multinational bodies act to moderate any behaviours or concerns in regards to sovereign wealth funds? Can we regulate sovereign wealth funds and how? And if that is the desired intention, how do we align any such regulation with free market capitalism?