Ep 95. Halal Investing in the AI Age | Mujtaba Khalid

Speaker A: A lot of banks or financial institutions do not touch the real economy. And the simple answer is Hasan, unfortunately they come from the conventional side and then they try to copy paste that into the Islamic side. So a lot of the Islam. It's unfortunate. I have met CEOs of Islamic banks who have unfortunately told me they don't believe in a lot of things which are, which are done and I'm sure you have as well or very senior people. It's a struggle, it's an uphill battle. And the reason is they come from a conventional bank. So you'll have a CEO who has been, uh, who has 25 years experience in a conventional bank and all of a sudden he is a vice president or a senior vice president or a deputy CEO of an Islamic bank, right? Because he is good at his job. But for an Islamic banker, you don't only need to be good at your job. Your mindset has to be slightly different. Right? You don't have to see everything, uh, from a financial perspective we are at an inflection point as well. Uh, because Islamic finance, uh, everywhere you look hits a threshold which is about 20% of the financial, ah, economy of a country. By the time it hits 20%, it's very hard to expand from 20 to let's say 30, if not impossible. I think now is the inflection point of Islamic banking at this moment, current moment is how to make it more appealing to non traditional customer consumer. Right. But also non Muslim consumers.

Speaker B: Khalid, welcome to Majlis and markets.

Speaker A: Pleasure to be part of it. Assalamu alaikum to you and everyone else.

Speaker B: It's been a really long time since you and I have caught up in person. Last time we may be caught up was in 2023 when you were at the BIBF in Bahrain and then you obviously went off to do your higher studies at Harvard. But Mustaba, uh, I really want you here today, uh, to talk about something that I found very interesting. Writing a few articles over the past couple of years. I wrote an article, I think I'll link in the show notes about screening and uh, some of the challenges of screening. And when we say screening we mean like looking at things like equities for halal and these kind of things that Islamic investors are looking for. And maybe you can break down a little bit. But just to kick off the podcast, could you tell us like what you're up to nowadays since you left the bibf?

Speaker A: So when I left the BIBFLF for Harvard and there at the Harvard Innovation Labs, I set up bag E which is working with small scale farmers, a complete pivot from what my experience has been. But it's working on financial inclusion, uh, especially at small, uh, scale farmers. And the reason I started it, to be honest, was so I've worked. When I was leaving for Harvard, I'd worked about 16 years in Islamic finance. I worked in the UK, a, uh, bit of Malaysia, Pakistan and then in the gcc. And all across. One of the things that kept coming up was what Islamic, uh, finance doing for financial inclusion. And across the project. And I've had projects in Africa, Central Asia, Southeast Asia. Originally I'm from Pakistan, as you know. So even in Pakistan. And I saw. And where I am from in Pakistan is Punjab, right? Punjab is the agriculture hub of Pakistan and across not only Muslim countries, but across the global south, which is developing countries. I heard a lot of talk from regulators, bankers, financial institutions about financial inclusion, that we want to do this UN SDGs and everything. But one of the things they were missing, like everyone was talking about digital payments, right? And all of that. And this includes, uh, Latin America, by the way. So I'm not just talking about Muslim countries, but the most ignored, let's say segment were rural populations, but even within them, smallholder farmers. And it's not, uh, unique to Pakistan. About 25% of Pakistan's GDP, which, I mean, depending on who, who you trust, the numbers are the GDP is about 400 billion to half, uh, a trillion dollars. Right. About 25% of that is attributed attributable to agriculture. Right. And In Pakistan alone, 90% of the farmers are smallholder farmers, which means they work on less than 10 acres of land. And this is across Bangladesh, India, Kenya, you go to Kenya, you go to Africa, you go to Central Asia and you know, when you've been working again, I can't be as controversial as I can be about the Islamic finance industry, but I don't want to. But like when you're working in the industry, you're seeing, you're visiting all these conferences and events, right? And it's great, right? Mashallah. A lot of great people working in the industry. But then you see, uh. Okay, right, that's great. You know, you've got good banks, you've got bankers, uh, making good bonuses across the board, right? But like who's working on inclusion? Who's working on uplifting community? Who's working on. And I'm sure we'll discuss this, the Maqassid of Sharia, Islamic law, Islamic finance, right? And you know, after a while, when I was at Harvard. I was exploring uh, new things. That's where I set up something called Baghee, where we give digital credit to smallholder farmers. We link it to, um, the geolocation of their land, the soil type, water type, and then we give the credit based on what our AI model tells them. Okay? So at, ah, uh, this week you need to put in these inputs, a QR code is generated. We have partnerships with a Swiss company called Syngenta. We have a partnership with an American company called Cargill. Right. Um, you know, so they grow their farm, their produce. At the end we, uh, you know, aggregate all the produce from the smallholder farmers, sell it to the market and do a profit share. Right? So it's a musharka, uh, based model. And that was very simple because agriculture is cyclical, right? And that's where uh, bankers get it wrong. So bankers also now and inshallah, uh, when we speak about the future, what I think the future of Islamic banking is, bankers need to think about their core customers, right? Islamic bankers. I'm specifically talking because for these periodic payments, agriculture is cyclical, right? So they, sometimes they have money, sometimes they don't. So you can't expect when they're dry, to ask them to pay interest or uh, profit or whatever, right? So yeah, that's one of the things I'm doing. The other thing is, as we discussed the other day, I, uh, about saying 14 years ago, uh, when I was very young, you know, started getting into Islamic finance, I wrote an article about uh, screening. Screening methodologies are very two dimensional where it's halal and haram, right? So these equities are halal. These equities are haram, right? And they're based on very basic financial ratios and obviously the business activity. So for example, an alcohol beverage producer is obviously haram. So you know, you've got your business screening and your financial screening. And I always had this thing that, I mean, I'm um, like that's fine, but you know, there should be a higher, um, methodology or objective of investing a Muslim's money to generate halal wealth rather than us saying, okay, take care, this is halal, this is ram. Right? Within the halal universe, right? You can have two companies doing in the same industry, let's say, but completely different the way they approach customers, the market, the product they're selling.

Speaker B: Right?

Speaker A: So that's another thing I've been working on, uh, you know, developing this uh, platform, uh, which if your users are interested, I can give a link to, they can have free access to it. So yeah, short answer, mashallah, you've done a lot.

Speaker B: You know, just when you were speaking just now, it got me thinking of when you were based at the BIBF in their old building before they moved to their new premises or the current premises that they're at. And uh, I met you and I remember you were building a um, tech platform for the back end for Islamic banks. I remember, I don't know if you remember that. I think it was in 2017 or 18. And this was your own project. I remember you telling me at the time. And you were experimenting. So have you always been like a builder of these kind of products? Uh, you've been trying to solve so

Speaker A: in the bibf, which is by the way the training and capacity building and advisory arm of the Central bank of Bahrain for the people who don't know. So we did projects which are capacity building, even working with Islamic Development Bank, World bank, and then also did governance frameworks for regulators who were introducing uh, Islamic banking and so on and so forth. Worked very closely with iOfi. For example, the question of have I always been a builder know? But what I do know is that you know the world's first E simulation, Islamic banking, E simulation was developed when I was at BIBF. Uh, we uh, so IofI has an eLearning platform, the uh, fir. You know, we developed it when I was there. We launched a few, we launched the world's first. The world's first education linked NFT. This was an NFTs world thing. Right? You remember that time? Um, so, so I wouldn't say like a builder. I don't know what the right word is, but I always wanted to do, explore something more than what was the status quo. Right. And Islamic finance by the way is a great space to do it because you can take inspiration from the cutting edge of what's going on in conventional finance and then figure out, okay, this is helping people in a conventional sense. Let's try to bring this in. Islamic finance. So yeah, I've always tried to do something which is different. Alhamdulillah. So far it's worked out, you know, um, inshallah Khair for the future as well.

Speaker B: Mushtaba. When I first got into Islamic Finance in 2013, a big thing was put to me about how Islamic finance supposedly took the big emphasis on the real economy. And it's supposed to be about justice, equity, inclusion, risk sharing, profit and loss sharing, all these as well as avoiding interest and other non compliant or haram sectors. But in reality you uh, Know the majority of Islamic finance transactions. Why do you think they don't really touch the real economy? No.

Speaker A: So let me step back. So just like there's something what Islam says and Muslims do, I think it's kind of unfair to judge Islamic finance and what certain banks do. You know, there's some great banks out there as well. Like uh, I don't. But there's some great banks even in Pakistan, by the way. Um, you know, Pakistan or Malaysia, I've seen some great work even in the GCC who have done very great work, who are doing great products. Right. To help students, for example, to help people buy their first homes in an affordable, easy to understand manner. Not overcomplicating things. But unfortunately you're right. I mean I wouldn't say majority, but a lot of banks or financial institutions do not touch the real economy. And the simple answer is, uh, hasan, unfortunately they come from the conventional side and then they try to copy paste that into the Islamic side. So a lot of the Islam. It's unfortunate. I have met CEOs of Islamic banks who have unfortunately told me they don't believe in a lot of things which are uh, doing which are done. And I'm sure you have as well or very senior people.

Speaker B: Right?

Speaker A: So that's what we, people like you and I who actually believe in Islamic finance or that there's something that can good that can come off it. It's a struggle, it's an uphill battle. Because in spheres which are decision making spheres, a lot of them don't believe, a lot of them do as well, but a lot of them don't sometimes are fully convinced. And the reason is they come from a conventional bank. So you'll have a CEO, uh, who has 25 years experience in a conventional bank and all of a sudden he is a vice president or a senior vice president or a deputy CEO of an Islamic bank because he is good at his job. But for an Islamic banker, you don't only need to be good at your job. Your mindset has to be slightly different. Right. You don't have to see everything, uh, from a financial perspective. And ah, that's my thinking. I could be wrong. Right. I don't want to say I have all the answers, but that's how I approach things like. Right, so there's the financial bit which is important. Everyone should also know that Islamic banks are not charitable organizations. Right. Which is fine. And Islam does not forbid you to, to make money in a halal way. Right. And make lots of it. If you're doing well and all of that, but only thinking with that metric or the bottom line is something unfortunately a lot of these banks do look at. So what they see is okay, this is being done in conventional self finance. This product is making conventional banks a lot of money. How can we replicate it exactly in the Islamic side, just where we can change some documentations to achieve our objectives. Right. Sometimes Sharia scholars do push back and that's great. But there's so much they can do when there's so much pressure from all sides. So yeah, that's unfortunate reality of the industry.

Speaker B: Not to get too historical esoteric, but um, you know I've talked to academic and across the world. Uh, but one stands out to me was Ryan Calder, who I'll link in the show notes. We've done two episodes with him and he's written a book about Islamic finance which I'll also link. And he made a really good point that um, you know, when Islamic finance began, let's say in the 1950s in its modern sense, that's modern iteration, right with the mid Ramah in 1950 in Egypt. And then you can talk about Bangladesh and Pakistan and other countries, it really probably took off in the 1980s or 1990s with HSBC Amana, and you can talk about Dubai Islamic bank and the development of the establishment of Islamic Development bank in the 1970s. But it really took off in the Western countries, let's say, or really took notice with HSBC Amana. And the reason why I bring this up Mujtaba, is that um, before HSBC Amana and all these other banks, a lot of the Islamic financial transactions were more like, say a cooperative and smaller scale and more community based, let's say for a local community rather than big transactions. So like when you had the oil windfall in the GCC countries in Malaysia and Southeast asia in the 1970s, uh, you know, a lot of these countries had not a big windfall from the natural resources and naturally they wanted to put their money into places like London, London property market. So that led to them going to their bankers and lawyers and saying like, hey, we want something that feels synthetic similar to the conventional, but it's Sharia compliance. Obviously the bankers and lawyers are kind of like, oh, what is this like Islamic finance? Do you think that because of the growth of the industry it's kind of had to like, you know, be similar to the conventional.

Speaker A: So that's a great point and uh, that's something I have to bring up. Right. And that's why I wanted to link in Makasset, eventually in inflection point. So Islamic finance has had three, according to me, right? And everyone has their theory. And I've spoken to Dr. Chopra, for example, or all of these. These people who are the godfathers of Islamic finance, right? Muftita Kiswani and the likes, right? So the first iteration of Islamic banking was, can there be an Islamic bank?

Speaker B: Right?

Speaker A: And that's where they were faced with. Because imagine right now, we think we take it for granted, oh, it's an Islamic bank. A, uh, banking was seen as, uh, something haram. Completely haram, right? It was riba based. So imagine trying to figure out, can there actually be an Islamic bank? And they had two, uh, options, right? One was, um, Madarba, Community based organization.

Speaker B: Right.

Speaker A: And the other was, um, trying to mimic if that's the right word, or trying to, uh, look like a bank but be Islamic. Right? And scholars were very clear that this is for the short term. And the reason was very simple. So you could attract two. So you had two customers you could attract. One was, were the type who were like, this is riba. I, uh, don't want to do any banking, right? Put. And believe it or not, this was the case till the 80s. People would keep money under their beds, under, like Mizan Bank. I would speak to the original people of Mizan bank, and they would say, we would get money, right? Which had dirt on it, because people dug up, used to dig up their backyards, put their money there, right? And when Mizan bank came along in Pakistan, for those who don't know, Mizan is the premier or pioneer Islamic bank in Pakistan. So people brought in bags which were full of dirt, like covered in dirt, right? So there are two type of types of people. One was those types, and probably Mudaraba or, uh, something could have been appealing to them as well. But then there were people who were used Muslims who understood banking. Their thought process, the godfather of Islamic finances, the people, the pioneers, Their hypothesis was it's easier to convince the people who are already doing banking to use Islamic banking and then be seeing, uh, the people who've never done banking. They'll see that people are going towards Islamic banking, and then they'll go towards it, right? So that was the whole hypothesis, right? Um, so you could attract like, a Muslim who's already doing conventional banking, but he realizes, okay, I understand what a credit card is. I understand what a savings account is. So because I, I am a customer of a bank, but they say that this is Islamic, I'm a Muslim. Riba is haram. So it makes sense for me to migrate to an Islamic bank now. They thought that was an easier challenge, an easier opportunity to scale and then move from there and expand from there. Right. So that was the first inflection point. The second was, okay, you've had a branch now within, within that province or country. Can we have multiple branches? Then it was moved to multiple jurisdictions. Go to London. You know, a lot of them had rep offices in London. Right. From Malaysia, Pakistan, the gcc. And I think now we are at an inflection point as well. Uh, because Islamic finance, everywhere you look, hits a threshold, which is about 20% of the financial economy of a country. By the time it hits 20%, it's very hard to expand from 20 to, let's say, 30, if not impossible. I know Malaysia has done great, and that's because the customers who are interested in Islamic banking are kind of exhausted. Like you've, you've reached out to almost all of them, Right. Who are really willing to come, even if the services are not as good as, let's say, your HSBCs or JPMorgan Chase. But they're still willing to come because they believe that. Yeah, uh, we do not want Riba, I think now is the inflection point of Islamic banking at this moment, current moment, is how to make it more appealing to your non traditional customer consumer. Right. But also non Muslim consumers. Right. And this is where one of the things. So the business aspect of the maqasid al Sharia comes from exactly this. I think to do that, it's harder to attract non Muslims into Islamic banking. But you have a lot of Muslim investors, especially young professionals like yourself, people in America or Canada, Australia or Western Europe. Right. Muslims who are invested in, you know, ethical financial products or companies who are actively not investing in, let's say, companies which promote genocide, for example.

Speaker B: Right.

Speaker A: So they're not investing in that, but they're investing in ethical companies.

Speaker B: Right.

Speaker A: So you target those, those consumers, and that's where maqasid comes in. So maqasid is not religious per se. Yes. It's based on what Islam says or what the scholars, historic scholars like Imam Ghazali gave us, five maqah al sharia. Right. But it's not like it's only for Muslims. Right. For example, the five muqasat al sharias, the protection of, you know, uh, which Imam al Ghazali and which I follow the framework of muqasid al Sharia. And it's a beautiful framework. The Way you look at muqasad al sharia, right, Is so for example, this is the tenant, right? Alcohol is banned. So you take it at face value, but for a higher objective of understanding Sharia or Islam, you try to go into why it's banned, right? It's not like there was no reason for the ban, it's just like, oh, I don't like it, ban it. Right? It wasn't that. At least alcohol consumption leads to negative impacts on society. And I think no one, even a non Muslim, won't disagree when he says that he or she, uh, when someone tells him or her that if you reduce your consumption of alcohol or if you completely finish it, that will have positive impacts on your health, on the way, on your social interactions. I think even non Muslims can agree on this impact of smoking for example, right? No one, even a smoker, smoker, won't ever say I smoke because it's healthy. Right? Um, but they have other reasons, right? Uh, but why is this? So for example, the alcohol part, right? Um, and ah, that's a great lens to look at. Uh, because even if you're in 14th century Islam, uh, medieval Islam or in the 21st century, if you understand the Maqasid, the reason of these, then it makes a lot of sense and then you can apply that reasoning to modern issues and stuff. So there were five, for example, from Imam Ghazali, it was protection of religion and morals in society, right? And protection can also mean promoting. So either you can protect it or you can promote it, right? So protection of or promotion of religion, life, or promoting or protection of life, you know, even health. So health companies, modern day health companies for example, would come into the framework when I come to explain protection of uh, health, protection of intellect. Right. Uh, protection of the family and lineage. And lastly protection of wealth, halal wealth. Right. And promoting it as well. Believe it or not, it's a maqasat al Sharia where if some, if you help someone or a company facilitates halal income generation, that's good, right? It helps people. Islam is a very practical religion, as you and I both know. So um, uh, that's using that framework. We need to bring in people who are already within the Muslims, who are already in the ethical financial space, socially responsible investments and so on. And from there we can attract other non Muslims who will see. Yeah, this makes sense. It's not about religion, it just makes sense. It's for the social good of society, for the health, uh, a healthy society for a um, wealthy society. You know, if it's halal, why not a prosperous society? So that's where I think we are at an inflection point where we need to bring in your non traditional consumers and your non Muslim consumers. Otherwise it's. It's the way it's going. Islamic finance is very close to conventional finance, the way it's evolving, right. And it needs to figure out, right, that does it want to continue towards that path, right. Or does it actually want to evolve into something which actually the forefathers had envisioned it would eventually evolve into?

Speaker B: Masha, um, Allah. You made some really great points there. I think with the Islamic finance, how it's developed over the last, say, 30, 40 years, is that it's kind of been more mirrored to the conventional because from a risk perspective and also regulations as well, in certain jurisdictions, even countries like Turkey, Morocco, there weren't like specific laws for Islamic finance to really operate in, especially on a fair level. Uh, you know, you didn't have to pay a premium if you wanted to do some kind of Shariah compliant transaction. But Mujtaba, you know, you're from Pakistan, right? And you can point to this probably from your generation and from your father's generation and people within your circle is that, you know, in the 80s, Pakistan decided to go down this road of like, really, uh, making everything where everyone takes on equity risk. And I bring this point up because, you know, a lot of people will say, including Ryan Calder will say, well, you know, the early experiment of Islamic finance was based on private equity, like venture capital, risk sharing, profit loss sharing. And a lot of people got wiped out. And then there was this decision that was made by people in the industry that, hey, let's be more like simulating the conventional. Do you think there's kind of like a lot of people don't understand that? Yes, you have to make, you can make. It's not, it's not about Zakat or Sadaqah, it's about making profit, but it's about also sharing risk as well.

Speaker A: I mean, the people being wiped out and stuff like that, right, That's a specific business decision. You can't like, for example, blame Christians if someone gets wiped out in The S&P 500. Invested in the S&P 500. So that was, uh. I, uh, mean, I know it sounds because people invested in. Because it's Islamic finance, but that was just a shortcoming in the fact that the way they did business, right. That was operational slash business. Um, otherwise, you know, you have in the. And it's so glad because if we were in the 80s, I probably wouldn't have an easy way to convince you. But Silicon Valley is completely risk based, right? So people do get a lot of people to get wiped out, but then you have trillion dollar organizations coming out of Silicon Valley, garages, Apple, the likes of Google's, you know, Amazon, all of these started out in uh, garages where people understood the risk they were getting into, but they believed in the product or the service, right? And they were willing to put in money. And that's one of the things I always have had an issue with bankers, right? Especially a lot of them who come from the conventional space. They treat it as, you know, I'll get, this is money going in, right? This is my interest rate and uh, this is money coming out to me. This is the payment, right? They don't understand how business is done in Islamic finance, if it needs to evolve, it needs to either understand private equity, slash vc. All the negatives and the risks as well, not just the positive, not just saying, everybody, let's have a good time, let's make money, the risks as well. Because Pride B, by the way, you and I both know, have a lot of people have been burnt over the past two years. Remember three years ago when everyone was making money and they were writing checks of millions of dollars and now everyone got burned again, understanding risk, trying to mitigate the greed which is inherent in all humans. And you know, the Quran says that essentially so greed, keeping greed in check and understanding business, right? So it comes down to that, that is just an operational business thing if done well. I mean, look, so we work with farmers again, I've been working with farmers. It's risky sometimes, especially in our part of the world. So I started in Pakistan and because of global warming last year just before harvest, you know, it was about to rain. So our model predicted that the rain is coming. So you harvest a week or two weeks earlier, uh, people who didn't have access to that did get wiped out. So you figure out, you mitigate the, you understand the risk, you try to mitigate them. And if it's unmitigatable, if that's a word, right, you don't take that risk. Right. Um, so if you have a portfolio, yeah, 10%, 15% is extremely risky. But if you're putting everything in one basket of risk, highly, ah, risky basket, yeah. Um, on some days you might make money, but you will get lighter. So again, business decisions, bankers, Islamic bankers, need to understand how business is done. Not conventional finance is done, right? Not how to fill in Paperwork, but actually understanding business and then moving from there. And I think there is an opportunity because like I mentioned when I started, when we started the podcast is across the global South. Majority of the farmers are smallholders. A lot of them are Muslims.

Speaker B: Right.

Speaker A: Do you understand that, like, as Islamic bankers, there's an opportunity to be had because 25% of 400 billion isn't a small amount. So there is an opportunity. And still, like in. I'll give, uh, the example of Pakistan, because I work mostly here in agriculture, not that it's specific to Pakistan, but because we wanted to run a piloted Pakistan. But the per acre yield, right, in Pakistan is lower than not only the global average, but lower than a lot of developing countries, which are much worse off than Pakistan.

Speaker B: Right.

Speaker A: And still. And still Pakistan as a whole is the 9th largest producer of food in the world. If you aggregate all the produce that comes out of Pakistan, it's lower than per acre yield is lower than. I don't want to name countries, but trust me, they're much worse off than Pakistan. So even if you increase the efficiency of smallholders farmers by 30%, that could have a multiplier effect not only on, um, the farmer, the village, but also the gdp and whoever's taking that risk, Right. Be it a banker or whoever can make money and do good as well. So bankers need to. And that's just agriculture. There's so much more opportunity in the global south that is untapped. You know, just access to roads and stuff like that. Infrastructure, if you give them infrastructure, the opportunity is huge. Um, and I strongly believe that a lot of business, not business, but a lot of flow of money is moving from the Western countries towards the east. And China and India are a big part of it. But you have other countries. Pakistan, Bangladesh, you have Africa. Huge opportunity in commodities. So bankers need to understand that.

Speaker B: Yeah. And I think, um, like you said, right, it's different cases because, like a bank's risk profile and risk mitigation is different to say, like a PE or vc. Right. But, um, I just wish a lot of more Islamic banks and lenders would, uh, put their money where their mouth is, like to talk about risk sharing. But if you look in the contracts of most Islamic banks, they're very similar in terms of risk. But, uh, Mustafa, I wanted to ask you one thing. The acceleration and the democratization of investing for consumers has now been accelerated a lot since COVID So about six years, last five, six years, we saw the, the craze of Gamestop. We've seen meme Stocks rising and things like that. If we just take it to Shariah compliant investing. There's been a big proliferation of people taking interest, excuse the pardon of um, Shariah compliant stocks and assets. I worked briefly for a brokerage platform and I learned about how um, investors or consumers, especially retail consumers who have very little financial education would have to understand and learn about Shariah compliant investing. For our listeners and viewers, what are the main things that retailers, retail investors have to look at when they're looking from a Sharia compliant perspective on a vast basis level.

Speaker A: Uh, so specifically I think and I saw this specifically in Western Europe and North America and even Australia. So a lot of my Muslim friends in America especially they're invested in Sharia compliant ETFs. I think Wahid does it, Mustafa does it. There, uh, there's Sharia capital I believe I'm forgetting. So there are a lot of, for those who don't know exchange traded funds. Right. So, and that's the best way to go for now rather than active investment. I, I personally believe if you don't know the space. Right. Um, and, and you know you, you rightly said the gamestops, the Robinhoods that made it accessible. Right. So there is an opportunity. But again a lot of these people, if you don't, if they don't understand the risk ETFs or index funds sharing compliant index funds are a good way to, to go. But again it's, it's so easy now to get like I can just ask ChatGPT or Claude, whatever you use this month. AI, right. They can ask for the risk, you know back in the day and that's, I don't mean like 30 years ago, I mean like six years ago you could, you didn't have these, you could Google stuff. But Google did not present information in a way where uh, AI platform does now. Uh, it can hallucinate so you need to figure that out. But if you're asking basic questions it's just Claude and chatgpt, they're really good. Right. So you can manage your risk effectively I suppose as uh, someone who doesn't understand. But essentially there are opportunities like investing in ETFs, exchange rated funds where the work is mostly done by the company, whoever is listing the etf. You can check their historic uh performance of that ETF and just use I think even Wahed or Mosafi. You have these apps in the us I'm not too sure if of the UK for the ftse but you know you have these accessible things and ask your agent, AI agent, do your, do your due diligence.

Speaker B: Now even when I was working at the brokerage, you know, I learned about uh, the S, UM and P Islamic Index. And you know, it actually outperformed the conventional. Obviously it filtered out a lot of companies that were considered non compliant. And uh, I think one of the problems, one of the challenges in Sharia compliance investing on the retail side is that there were just so many different kinds of standards. So you have Aofi standard, I think it's standard 21 on uh, shares talked about things like um, Haram income, uh, um, cash, uh, deposits, whether this is cash on the company's books. So you have to actually go into the company finances and then provide uh, an analysis of what's happening and how compliant it was. Do you think that because there are so many different standards M. It can be quite difficult for investors to understand what is actually Halal and what is not.

Speaker A: So I'll tell you, I'll tell you how, and this is not like a sales pitch, but how I approached this and in the Mikasa platform, just because exactly why I, uh, looked at this and said, you know, it might be confusing. So the Makasset Australia platform, right, first looks at four rating methodologies, Sharia screening methodologies, the Dow Jones, the FTSE, the Mizan Bank 1 and the Bank Negara Malaysia. So it looks at these four out of that there's a halal universe that is populated, right? So of those four, right, Even if one of them says it's halal, right? So let's say three says and usually the reason is ratios, financial ratios. I'm not a Sharia scholar, so I won't say which is right and which is wrong. So there have, there has been a lot of thought that went behind all of this and usually there's mostly overlap between them. So a lot of them are overlapping, some have some slightly different. They would use market capitalization, some would use actual assets as a denominator and that changes slightly the ratios. So there's a halal universe that's populated and then within that halal universe, right? So you know, you'd say like this is lal, let's invest in it. But what if, you know, it's a healthcare company? So there are two healthcare companies which have made it through that filter, right? But one of the healthcare companies is testing on animals or has done unethical testing without the people knowing. So on people, without people knowing, right? Still made the financial screening, still healthcare, which isn't selling alcohol, which isn't gambling which isn't selling pork or whatever. So m me as a consumer I would rather know these both companies and want to invest in the one which is more ethical. The way I did this platform is so it populates a halal universe. Then it goes to the Macasa screening. The way it does it is right now it's just the S&P 500 companies because honestly the most information I can get and scrape and freely get or of S&P 500 companies, right, which is SEC, uh, uh, filings, financial, um, reports, quarterly reports, all of that, it literally goes through all of them. And firstly it does a business training says okay, so what is the business model? Um, is it healthcare, is it this, this? And I've hard coded something in it where if it's the likes of Palantir which says it's a information company, it then checks what are the clients of this company and if it's like the US or Israeli or any army or defense or something, it just automatically says we're not moving forward with this company.

Speaker B: Right.

Speaker A: So first it does the business reading. The business screening is done based on Maqassad al Sharia, the five principles. I told you. So is it promoting or protecting religion or morals in society for example or within its disclosures has it said something about yeah, uh, we allow religious freedom to our employees or facilitate something where they've done CSR for religious communities, even Christians by the way, Christians community or whatever, Jewish whatever. So that's first, right? Then the second one it goes through is you know, life. Is it a healthcare company? You know life, Is it protecting life? Then then it's intellect. So is it doing educational stuff? For example Texas Instruments, it ranks really highly in the Bukasid uh ratings because it's worked on um, some cutting edge stuff which is facilitating schools, public schools in the US and stuff. Now I would love to expand this in Pakistan, Malaysia but I don't have the information for the other countries. So we're just specifically right now talking about S&P 500 companies and so on. So that's how it first goes, that's the highest weighted ticket. Uh, it measures. Then what it does is it says one is their revenue model.

Speaker B: Right.

Speaker A: So for example, and what does that mean? So Amazon, whenever I talk about Amazon, the drop shipping and all of that comes to mind, right, that you're parcel. But you'd be surprised, majority of its revenue comes from aws. If anything the warehousing and all of that is probably loss making. I need to check exactly as of today. But like till 5 years ago Amazon was at a loss. But AWS and all of that was where it's making money. So it checks where actually is the revenue being generated from. Right. So the likes of Palantir, right. It says we are a company which does um, you know, data analytics. But then you say the most of its revenue is coming from the Department of Defense or Department of War, whatever you know you want to call it or XYZ countries and stuff. So then that's a red flag, right? Then it goes into a uh, few like so the product is it harmful but not just the business. Right, but the product is it harmful. Have they done testing? So for like I mentioned healthcare, right? Two companies making the same product to let's say eight diabetes, right. But one company says we're going to out price so poor people can't afford it and we're going to really uh, raise the price of our product. But uh, the other companies think we want to make it accessible. Make the product accessible, right? So then it goes through that and at the end it gives you a um, Makassid rating out of 100 that these companies may were 80, 70, 60 and then up till 50 after below that is low because it's rating.

Speaker B: Right.

Speaker A: So that's how the platform does it. So yeah, it is confusing to your original question. It is confusing but having said that there are ways to understand it and with AI, right. Like I told you that I wrote this article in 2014 but at that time it was very hard to get all of this done like because it requires tons of data to be analyzed.

Speaker B: Right.

Speaker A: But with AI and stuff it's pretty easy. It's pretty easy. And retail Islamic banks should take note as well because they can do a lot of stuff which you're doing currently which can be more efficient and even better, better serve the customer, better serve the Sharia boards, Right? So yeah, um, not as easy as it was is but like still much easier than it used to be.

Speaker B: Sorry, you know. Yeah, no, I was just going to say I have an anecdotal example when I met a portfolio manager who worked for a very well known asset manager and he wanted to set up a Sharia portfolio based on Maqasid. And one of the things he said to me is that if you take a sports apparel company which on the screens of AOFI would appear compliant but they don't mention the fact that they use sweatshops in China using kids to make the garments, right. And um, even if you take it to more rudimentary level. If you go in the uk, if you go to a Halal restaurant, it's got Halal written on the door sign. You don't know how that animal was treated before slaughter, right. Like how was it fed, how was it kept and all these kind of things. People only just look at the end result, so they don't look at farm to fork. So you can look at it like that. The thing is, I think now as a point you just mentioned was about AI, I think that really does also drop the cost because, you know, back in the day you'd have to either do it yourself, which was very time consuming and you'd need a bit of expertise to know what you're doing, or you'd have to pay, uh, a specialist or a research firm specializing in screening. Right. So it's much more democratized now and a lot more, um, empowering to the investors. But then do you not think also that there's also maybe some bias from the, from the AI? So there also needs also human intervention, right? Or human guardrails to stop, stop any of this, like hallucination or any kind of thing like that, 100%.

Speaker A: And that's where it's going to be very tough if you're getting AI to decipher if something's halal or haram, right. Or come up with a decision.

Speaker B: Right.

Speaker A: What, what this Makasid platform does is it already uses a benchmark, four benchmarks to tell you that these are, this is the halal universe, right. And out of this then it's just simply measuring, using, uh, analytics, right. Ethical companies, which can be done for a conventional company or a Sharia compliant company. Right. It's interesting you bring this up because I remember when AI was very new, a lot of people were saying that, you know, you won't need Sharia scholars because AI would help, would, uh, essentially replace Sharia scholars. I think it's the opposite. I think with AI you can have a much better governance, Sharia scholars can have a much better governance approach. Um, because right now, how is Sharia done, for example, by the Sharia board, right. So you are the Sharia department, Sharia audit department. But how the Sharia board does it, how do they do it? So they at best meet every quarter, right. And they're presented, um, you know, files which contain all the non compliance, potential non compliance or all the transactions, right. And then they do a audit which is like randomized check.

Speaker B: Right.

Speaker A: So if I have files in front of me, they'll take Two from this pile, one from that pile, one from. Then check if everything's in position. Everything's according to, um, m. The Sharia, uh, you know, principles laid down earlier by the Sharia board according to the governance framework. Sharia governance framework. Right. Um, with, with, with AI, they don't need to do that, uh, randomized audit. Right. If the data is being captured in a way which is AI readable, which eventually banks should move to Word, they would have a dashboard in front of them, possibly even live, which could flag a potential issue. Right? Live. They could have it on their phone or they can check it at the end of the day or even quarterly. Right. These were the potential red flags. We went through all the transactions, we found these red flags. Now let's talk about these red flags. Right? So I think, um, you know, it'll work great for banks as well because right now, if a Sharia board says this is a haram transaction, the profits written off, right. Goes to charity, which is great, you know, but I'm, uh, saying from a bottom line perspective, if bankers are going to think like that, like, okay, let's talk about the bottom line, right? They save more money which goes to their profits rather than being written off. Right. So it helps both the Sharia scholar, but also helps the banks. So I think Islamic banks to figure out how they capture data which is AI readable and then from there feed it to an AI. The Sharia board should have dashboards. They can see in real time where the red flags are occurring. And even quarterly, if they meet, they should just talk about the red flags. I think it's a great opportunity.

Speaker B: Despite all these advances, why hasn't this been fed into the fees then? Because if you look at some of the fees for Islamic ETFs, they're uh, still quite high. And if you try and get into some Islamic funds, I'm not going to name the names, but if you look at it and compare it to the conventional, it's still quite expensive despite the AI advancements you're talking about. Why hasn't this Fed in, do you think?

Speaker A: Because unfortunately, I mean, no one is doing it. But B, Islamic finance has always lagged conventional finance, right? Which should change when young people come into the industry. It should change, right? You should start thinking on cutting edge, not like, okay, so someone did this in Standard Chartered or JP Morgan Chase. How can we make this to Islamic banking? Rather than that, why don't we just start figuring out what the problems of the industry are and try to solve them ourselves? So the simple reason is just because the wave I've seen startup finance over my 15, 16 or plus years is it just lacks the conventional financial system. As, uh, simple as that.

Speaker B: Yeah, no, it just, it just seems a bit counterintuitive that you have to pay a bit more when you can with the tools of AI. Now it seems like they still haven't really fed this in. I know there's tax and other kind of regulatory costs involved as well, and maybe also other indirect costs as well, but still it hasn't really fed into a lot of the funds. But one of the things that's interesting, if you look at, I think liquidity and the size of some of these assets are still quite, quite thin. So the more liquidity you have, the more activity and trading you have, that should hopefully be feeding into the cost and making more parry pursuit. But, uh, one thing I wanted to ask you on this point, Mujtaba, is there was a big craze about ESG over the last five or six years. Still is to a certain extent, mostly in Europe and Asia. US is a bit less now with, uh, Donald Trump in power. But do you see very big similarities between things like ESG and SRI investing in the use of your tool?

Speaker A: Yeah, a hundred percent. Like I said, Maqasid Al Sharia is not just for Muslims, like even in ESG frameworks or even the SRI before that. So ESG was later, SRI was earlier. Everyone talks about social benefit, everyone talks about promoting good health, access, inclusion, all of that, which essentially we were had as Muslims about a, uh, thousand years, if not more ago, uh, when I think Ahmad Ghazali did it in the 1100s, I believe, or something.

Speaker B: Right.

Speaker A: So he came up with this. Right. So we had that much time to evolve it into something much greater where we just dropped the ball. Right. And ESG is, I think, yeah, it's essentially the same. If anything, I would say Islamic investing or doing business predates esg.

Speaker B: I agree. I just think that the mainstream esg, because if you look, for example, I haven't checked the latest figures, but if you look at the unp, you know, you worked for the UK IFC in your time, and, uh, the guys over there were doing really great work with the likes of the UNPRI and some of these other institutions which are pushing for a more sustainable agenda. But one of the things I noticed in my research when I was working with them on a project for, uh, COP23, which, uh, took place in the UAE, was that the number of Islamic financial institutions Signed up as the PRI signatories were very, very low. I haven't checked the figures lately, but I don't suppose it's increased significantly as that much. Why do you think Islamic or fiis have challenges in terms of implementing these kind of ESG and sustainable agendas?

Speaker A: So you mentioned the uk. I have seen, I mean, the year of training and all of that. So brother Umar Sheikh, that's where I started. Like, I learned a lot from him. M. So, yeah, that's my original mentor. But coming to the slumming banks and why. Again, two things. One is they lag the conventional financial space. But to be fair, like after Covid or during COVID I saw the gcc. I was based out of the gcc, right? And I was doing a lot of work in the GCC with regulators. There was a lot of interest in the UN SDGs. And then the cop happened in Dubai, I believe. And then after that, they dropped the ball. I think they've moved on because the US has moved on. I think, um, a lot of them wanted to do good, but a lot of them might have been to attract, um, investors from the west, which was the UN STGs was the flavor of M the week during that time. So it was two things. One, Islamic banks, as we know, or the industry as a whole does lag the conventional industry. And the second was that a lot of them were doing it and even not just Islamic banks. So I don't want to put Islamic banks down. A lot of conventional banks were doing it just as optics rather than just believing in it. So greenwashing was a lot of. A lot of it was greenwashing. Right, which. The bubble burst like two years ago when everyone realized that, yeah, they're asking for premiums from investors on the, on the precedent that they're doing good for the environment. But when you actually did the audits, you realized a lot of that was just, you know, made up or, or they multiple. Like, so if they'd taken a patch of land, they'd sold it to multiple banks or whatever financial institutions and stuff like that to show in their reports. So a bit of both. One was the lag, I believe they were. They, don't get me wrong, there was a lot of interest. But again, it just takes time for the Islamic banking industry to move towards one direction. And I think when they seriously tried to move, the bubble had burst or was in the process of bursting. So they then just did it. Right. You know, they were like, okay, I think this is more towards the end. Let's try to figure out what else we can do.

Speaker B: Now to be fair to the UAE and other countries in the gcc, they have been trying to put out their uh, net zero agenda. I know the UAE's been doing a lot of Saudi Arabia and Qatar as well has been doing as well. But I think also part of the issue here is that still these economies, predominantly the GCC and if you look at Indonesia, Malaysia, they're still very oil based or resource based economies, right? So to change that and to diverse away from that does take time. So to be fair to them, it does take time. Uh, Muchaba, you know, to close the podcast, I want to talk about one thing that I talked about with Bar Faro Kharaza a few months ago. Uh, you know, it's very well known that Pakistan is going to be transitioning to, well, hopes to transition to a fully Islamic economy where you uh, know there's no river in the economy by 2028. I want to say I think the deadline is January 1, 2028. Um, how do you think things are going so far?

Speaker A: So I've spoken to people in the, let's um, say the regulators as well and a lot of people in the industry. Look, uh, it's a good thing, like it's a step towards the good, but it's almost impossible. And I'll give you an example, right? So Pakistan has, um, operationally it's impossible, right? But it's a good start and a lot of work has been done on the ground. I'll give you an example. So Pakistan has about 18,500 bank branches right now. Let's assume even if 10,000 of them have people who are trained Islamic bank, we're not talking about legacy, changing the legacy framework, how things are done. Let's just assume 10,000 of them know Islamic Bank, 10,000 of those people in those branches know out of the 8,500, let's assume even if there's 10 people per branch, right? So some branches will be bigger. So we'll have more than 10.

Speaker B: Some might have.

Speaker A: Um, but let's say on average, right, you have 10 per branch. So out of 8,500 into 10, so that's 85,000 people in a year trying to train them without them trying to make a mistake. So that's one opportunity like thing of the training, the capacity building is just a tough ask. The other thing is just from an operational perspective, for example, I was giving a lecture uh, on Islamic banking in lums. So LUMS is one of the best universities in uh, Pakistan, the highest rated in Pakistan. Right. Uh, the Lahore University of Management Sciences. Right. And this was about 50 bankers. And one of them asked, so he said, you know, what will happen to the likes of Murray Brewery? So Pakistan has a brewery, right? Because Pakistan has uh, 5% or 6% non Muslims.

Speaker B: Right.

Speaker A: So as Muslims we can't buy alcohol, but it caters to, let's say those non Muslims and it does export, import, uh, a lot of those and even makes alcohol, uh, for, you know, um, medicines and stuff. Right. So there is a company, right, which is making alcohol.

Speaker B: Right.

Speaker A: It has a bank because it's not a small company.

Speaker B: Right.

Speaker A: If everyone is, ah, if the entire banking system is Sharia, what do you do about these companies? Right. What do you do about insurance companies? What do you do about uh, XYZ companies, arm armed defense companies. Right, right. So I think it needs to be. Would you. And then there was an answer. Someone else answered that back, um, in the day we used to have uh, Islamic windows. Now we'll have non Islamic windows in Islamic banks catering to those. Right. And I did ask that to one of the uh, deputy governors of the State bank, not one of the deputy governor, and he laughed because there are things which are not 100% thought through. Right. But the intention is great and inshallah, I hope it happens. But I mean from where I'm sitting, it's a very tough ask. Just the training part. So not just changing the legacy systems, the way things happen, the operational side, not just training people in, ah, the uh, even in a basic sense, right. You know, if they take 10 days off, 85,000 people taking 10 days off over a year, who will do the, you know, and m. I'm giving them grace that, okay, 10,000 of those branches know Islamic banks, thinking, you know, let's, let's assume they do. So it's a tough ass. Just the, just the training and capacity building in itself is a, is a challenge. Uh, but having said that, I have seen that a lot of people are taking it seriously, right? A lot of banks are taking it seriously. The State bank, the State bank, the Central bank, which is the State bank of Pakistan, is taking it seriously. So they will reach a point which will be very impressive. But I'll be well surprised if it's a hundred percent. I'll be honestly well surprised in a positive way. And I hope I, I hope I have proven wrong. But insha', Allah, let's see, how do

Speaker B: you think, uh, consumers and companies are taking this transition? Uh, do you think a Lot of them are in favor of it. Because when I asked Farah Kharaza this, he said to me there's a lot of baggage, uh, of legacy with the older generation in Pakistan over Islamic finance. To the point I mentioned earlier in the show about the 1980s. And uh, I have my own anecdotal, um, experience of dealing with the State bank of Pakistan back in 2014. A lot of them, when I said I used to cover Islamic finance, a lot of them would just say, look man, we don't want to talk about this. But it seems things now have moved on a bit and changed. But how do you think Pakistani society is going to handle that?

Speaker A: I mean, so there is a legacy system issue, right? Or that 80s, uh, thing. But those are people who are much older, the uncles and the aunties. Right. I think in the younger generation there is more open mindedness for Islamic banking across the globe, by the way. So I've worked and lived in a lot of uh, multiple Muslim countries and usually the younger people are more open towards it. Right. And Pakistan, the majority of the population is under 35 or under 30, I think 60 or plus or 70% of Pakistanis are under the age of 30 or something. So there is hope. But again that doesn't mean that if you don't provide something which is of quality and uh, what is suitable for them, they'll just jump into it. But it's not as bad as convincing Uncle G's and Auntie G's.

Speaker B: Right?

Speaker A: That's the harder part. And I think if I was a banker or strategist, I would concentrate on the younger population than trying to convince the older population. Uh, so it can be done. Yeah, I mean it's not that hard.

Speaker B: The other big one is about Pakistan sovereign debt. How do you think that's going to go? Because Pakistan obviously every couple of years runs into a sovereign debt crisis and deals with entities like the imf and a lot of these, uh, they issue a lot of Euro bonds and they did a lot of loans and other kind of things. How are they going to do that in terms of, of managing sovereign finances?

Speaker A: Um, so our sovereign debt is interest based and I doubt the World bank does Sharia compliant financing. I don't know. I think Islamic Development bank does. But I doubt the World bank is interested or the IMF is interested in doing Islamic finance, um, financial financing. But having said that, so it's an interesting inflection point in Pakistan's history. It could go very well or it could be really badly.

Speaker B: How?

Speaker A: And it really depends on how things in the Middle east work out. If things don't prolong and Pakistan plays a positive part or is seen as playing a positive part, that could have a positive multiplier effect and Pakistan could manage things much better, you know. But if things don't go as planned or if things get prolonged in the Middle east with the crisis and the war and everything, it's going to be tough, is going to be tough for a lot of developing countries, including Pakistan to manage because there's so much debt you can issue right. With people wanting that debt, you know, because it is low, uh, low rated debt instrument. Pakistan national bonds I think leave accessed the Panda bond, Panda market as well. So China, so our financial minister, finance minister was in China just before Trump I'm guessing to issue yuan denominated bonds. I think that's the second time we've done it. So I think geopolitically things could either go really badly or really good. There is no in between. And ah, that is Pakistan's history in a nutshell. Or really badly. There is no in between. I think unfortunately that's a lot of developing countries but specifically Pakistan. So I'm hopeful that things go really well because no one wants a war, right? No one wants it. It's just taking uh, it's having a negative impact on a lot of people in the world, a lot of countries, you know. So let's hope inshallah for Khair. But yeah, again I wish I had an answer. I wish I could see in the future but I that what I do know is either it can go really well or it could be really badly.

Speaker B: Mujtaba, tell us any upcoming projects you may be working on.

Speaker A: So just the financing bit like so the farmers, I think uh, I might be doubling down on that. Um, we are developing one of the things which are learning. So we're on about 400 plus or 400 plus acres of land and one of the things we noticed was that um, consumers, and this was a learning I didn't have before I started Bagi, was that a lot of these consumers, they will not download the apps of your banks, banking apps or anything because they're not the most educated people so they have trouble with technology. Even though if they have a smartphone and they're watching TikToks every day.

Speaker B: Right.

Speaker A: So you have to meet them where they are, which is everyone uses WhatsApp. You'd be surprised how popular WhatsApp is in rural communities.

Speaker B: Right.

Speaker A: Ah, farmer communities. So we are working on a AI based LLM, which can speak in English, Urdu, Punjabi and all of that, and give you a number, you send it a voice note in Punjabi, Urdu, English, whatever, and then it is your interface to your banking. So you can ask him how much. Ask him or her. We haven't decided that, but you can ask it. How much is my balance? What step I'm at? So, depending specifically for us, what step I'm at. What is the weather like? Is there any flood warning I should know of weather patterns, all of the things our app does? So we are moving away from apps. I think the future is not apps. It's agentic workflows and you get to consume. You. You meet the consumers where they are rather than you expect consumers to download the app, which you've developed over five years as a legacy bank and you've spent millions of dollars where a fintech startup could have done it in three months at less than the budget of one person you hire. Right. But I think the future of finance is consumer finance is moving away from apps and meeting consumers where they are.

Speaker B: How can people find out about Baghi and uh, your other projects?

Speaker A: Um, I can share so Baghi's Bagh B A G H-E dot com or you can follow me on LinkedIn. And for the Makasid, uh, for your, um, viewers, I can share a link to the platform and they can access it for free. Play along with it. I'd love some feedback as well. And they can look at it, look at all the equities which are. So we give top 40 companies according in this S&P 500. They give you that as well. And you can look up any company in the S&P 500 yourselves and it'll give you a detailed breakdown of why it's rated the way it is.

Speaker B: I'll link it in the show notes. But, uh, Mujtaba, this has been a really great conversation. Really good to see you and, uh, let's catch up again in maybe six months time to see how things are going with the platform.

Speaker A: 100%. And I'll always love chatting to you, man. Take care, Samarika.