Cristian Guajardo Garcia

Business Strategy

where data and creativity collide

Islamic Finances and Greece

The last couple of weeks, I have been reading 2 really good books. Shantaram and Heaven's Bankers: Inside the Hidden World of Islamic Finance. The last one has been such a huge learning to me. Basically, islamic finances transforms the relationship between lender and borrower into a investor - manager one, in which the risk is shared and making money out o thin air is haram (not permitted).

Now you know, the media has targeted islam as something negative, yet banks from the west have dive straight into islamic finances in order to penetrate the muslim world: The Emirates, Dubai, South Asia or Turkey are the home to millions of people and literally, billions of dollars. The interest of the west grew bigger and now they are playing by halal (permitted) finances.

Why am I mentioning this? Because of Argentina, because of southern Europe, because of the poster crisis boy: Greece. I spent 10 solid days in Athens few months ago. I loved the city but I saw its flaws and pains everywhere, every single day. I met the locals and I saw the reality that is hidden to the tourists going to the posh areas and the akropolis. They are in deep trouble indeed.

We could say that from 2010 Greece started to go down. This translated into 3 bailouts within 5 years. The lenders are known as “the troika”: the European Commission, the International Monetary Fund and the European Central Bank (ECB). This entities lent $274 billion to keep the country afloat. However, there is one more bailout left. This one amounts to $8.1 billions BUT, The European Commission requires Greece to make major cuts to its budget before approving this money.

The major cuts could be translated into affecting retirees and weaken the social services. People will not tolerate that, so the country could have another massive riot.

Yet the plot thickens.

On june 30 (2 days from now) Greece has to pay back $1.8 billion to the IMF from its previous bailout. That same day, an agreement should be reached regarding the immediate future of the country (the other negotiation as of now, aims to extend the bailout payment for another 4 months, not a big deal actually) The bad thing is Greece is truly broke (the third bailout is actually not “that” big) so its citizens started to withdraw all of their savings from the atm’s.

The EU thinks Greece is “taking advantage” of the situation, not taxing as they should and only depending on the bailouts.On the other hand, Greek politicians are upset with EU for getting on their business, so they rebel. Greek politicians are willing to increase taxes, but they do not want to sacrifice the wellbeing of its people (by cutting pensions and social services) given its low cash reserves. So, Greece could pay part of the money it owns to the IFM with this third bailout (yes, they would be paying the IFM with IFM’s money) or they will face a very difficult choice:

Social unrest or bankruptcy.

As of tomorrow (Monday) Greece will close its Athens Stock Exchange and also the banks. The whole financial system will go into hiatus.

==Today the word “default” appeared.== Greece will not receive more money. What now?

Unfortunately, Greece is not the only country that could face this. The consequences could be astronomical, and all of it happens basically when you trade with things you do not own or worse yet, you do not have.

Islamic finance is based in trading with the things you own and the is not such thing as an interest rate. Utopia? Perhaps, yet there is always another way to pull the trick.

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Cristian Guajardo Garcia (cc) by-nc-sa | Made in London, UK |  2005 - 2017