drawing room

Islamic Finance and Venture Capital

It’s not difficult to see how Islamic banks turn Islamic finance into a charade. Since Koran prohibits interest, all financing must be done on a profit and loss sharing basis. In practice, no more than 5% of Islamic financing is done this way.

Instead, Islamc banks use a structure called murabaha, or cost plus predetermined profit. Remarkably, the “profit” in a murabaha transaction and the interest a conventional bank would have charged on the same transaction happen to be exactly the same (imagine that!). Indeed, Islamic banks often quote their “profit” as a margin over Libor. Sounds dubious? It is.

What Islamic banks should do is to move away from the deceptive modes of financing they currently use and step towards venture capital. The venture capital groups who favor profit and loss sharing over interest are real islamic finance, the genuine thing. Moreover, by providing funds to entrepreneurs with bright ideas, the banks can assist in promoting innovation, invention and creation of new jobs and industries the Middle East desperately needs.

At one time - from AD750 to about AD1100 - it was the Muslim world that was making advances in science and technology, because of the availability of risk capital. But nothing of consequence has been invented in the Islamic world for thousand years. By becoming more like venture capitalists, Islamic banks can practice authentic and genuine sheria compliant financing while helping the Islamic community to rediscover its tradition of invention and innovation.

The next Forum on Islamic Finance should be in Silicon Valley, not Dubai.

Office Life

Quinn Goldstein, one of my closest friends, sent me a brilliant note on office conduct this week. It’s so good that I had to share with you in its entirety:

….I always teach my team to be helpful to everyone in the company regardless of what’s being asked. I hear too many people say they can’t help because that’s not their job. And there’s a fine line between helping everyone and being the office bitch. Helping others does a few things:

1. It feels good to help others.
2. You learn how to better deal with people.
3. You learn. Teaching is the best way to learn.
4. You meet more people in the company because once you become known as a helpful/knowledgeable person you get more requests and other people refer questions to you.
5. You get a good pulse on some of the the subtle issues that drive the mood/culture of the business. If people are frustrated by the new coffee maker that’s important to know and if you’re the one that knows how to operate it you’ll know how many people are troubled by it.
6. You make your department look good.
7. You become more valuable and harder to replace.

So no matter how high of an executive I become if I’m walking by the copy machine and I see someone struggling I’ll help them. The irony is that the higher up you get the more you should help the people on the bottom because (1) at the top you’re out of touch with the people and (2) it’s good for them to see you with the “people”.

The way you stay away from being the office bitch is by staying very busy and looking proffesional. You walk down the halls with purpose, you’re never strolling. You dress well and you don’t look like the coffee machine repair man. That’s the difference.

Q

Nothing new for those who get it, but good to always keep in mind.

Iran and Palestinian-Israeli Peace

The rise of Iran has made the timing ripe for a new strategy for an Israeli-Palestinian peace. Here’s why: The primary divide in the Middle East is between the forces of moderation and those of extremism. Iran and the radicalism it supports has created a potential alliance among moderate Palestinians, Israelis and the leaders of Saudi Arabia, Egypt, Jordan and the gulf states. And, it’s in all of their interest to work now for a comprehensive solution.

The good news is that Condoleezza Rice and Israeli Foreign Minister Tzipi Livni are spearheading an ambitious new diplomatic initiative for achieving such a peace. Their strategy is to put aside the step-by-step road map, which requires that the Palestinians dismantle their terrorist infrastructure before any new phase of negotiations begins, and instead leap right to final-status talks with moderate Palestinians about what a two-state solution would look like. If a suitable framework for a Palestinian state is reached, Abbas would then go to his people with a referendum: Do you want it or not? He is convinced that more than 70% would vote yes, thus marginalizing the Hamas resisters. Olmert would do the same, and probably get close to the same support.

The region needs this breakthrough. Hope they succeed.

private equity

A $100bn LBO no longer seems unthinkable. Home Depot, which is rumored to be a target, has an enterprise value of about $90 billion. Add a premium, and you are close to that number. If a deal goes through, it is feasible that private equity groups could find, say $25 bn equity, and raise a further $75 bn in today’s extraordinarily generous markets.

But what about the exit?? A trade sale is virtually impossible for any $100 bn+ company (there are only 60 non-financial public companies worldwide with that size). Financial engineering has its limits (given the risk of tougher market conditions). And, an initial public offering for a 15-20 per cent float will be extremely difficult (Bank of China aside, the biggest IPOs ever - Enel, Deutsche Telekom, AT&T Wireless - raised between $10bn and $15bn). Even with a successful IPO, a complete, staged exit from the remaining stake could take very long.

With ever-increasing amount of capital chasing bigger and bigger deals that seems to reach a plateau, expect returns on private equity investments to go down.

Google Options

Stop me if you heard this before. Google is trying his hand again at financial innovation with their attempt to create a market for employee share options. The theory is sound. Many employees do not recognise the real value of their options, so allowing them to be sold in a transparent market, once vested, would demonstrate their value. It should also help Google recruit those who are worried that the company’s amazing share price run has left little upside. But it also sends a worrying signal, as Financial Times points out today:

Options are meant to give employees an incentive to work hard and remain with a company in the long term. Under this scenario, employees would be able to crystallise part of the value of the future years of an option right now.

That is hardly the best way to keep people when things get less rosy. And they will.

Drawing Room

Good ideas are the best distributed thing in the world, for everyone thinks themselves to be so well endowed with it (especially, here in Silicon Valley) that those who are the most difficult to please in everything else are not at all wont to desire more of it than they have. It is not likely that everyone is mistaken in this. Rather, it provides evidence that the power of judging well and of distinguishing good ideas from bad ones is naturally equal in all of us, and that the diversity of our opinions does not arise from the fact that some people are more intelligent or educated than others , but solely from the fact that we lead our thoughts along different paths (through experience) and do not take the same things into consideration. For it is not enough to have a good idea; the main thing is to apply it well.

For myself, I have never presumed that my ideas were in any respect more perfect than others. In fact, I have often desired to have as keen and distinct an imagination as some other people. But I desire to blog in this site my thoughts and to represent my life in them as if in a picture, so that all my friends may judge them for themselves; and thus, that, learning from the common response the opinions one will have of it, this may be a new means of teaching myself, which I shall add to those that I am accustomed to using. Good idea?