Islamic Finance ( Islamic Banking ) | My First Million Podcast

Manzil. So this is cool. This is one of my favorite reasons to do the podcast is that interesting people just reach out and tell me about their business. So, uh, Manzil is, uh, this— so this guy Sam reached out. He listens to the podcast.

What's his last name?

Sam Malako?

Malako?

Something like that.

Tweeting at me too.

And, um, so he was like, hey, I got this business, you know, would love some help with it, um, or just would love to chat. I And so I said, okay, let's chat. So I get on the phone and I end up blown away by what these guys are doing. So they teach me about something I've never heard of and is now very finance, very, very fascinating to me. So what they do is, Mansell does Islamic financing.

Oh, we've talked about that.

What's that mean? We talked about it, not on the podcast, but we talked about it offline 'cause I was pretty interested in it. So, Henry, do you know what Islamic financing is? If you didn't know Legion, I don't think you'll know this one.

—Are you Muslim?

—I'm not, I'm Hindu. Well, I'm neither, but like my family is Hindu. So I didn't know about this, but basically in the Muslim faith, there's actually sort of, the advice is against traditional loans. So interest, which is known as like riba, I think, in their faith, is frowned upon. So a traditional mortgage where you go to the bank, you have your down payment, you take out a loan and you're paying interest, is actually not compliant with, um, with their, with their faith and their law.

And which is actually common in a lot of other different religions.

Is that true?

Yeah, so I'm, I'm Catholic Christian, and, uh, I was raised that way, and there's definitely rules regarding handling money and interest and things like that.

Yeah, and I think the, the fundamental basis— I'm going to kind of butcher this, so I apologize, but I'll, I'll— I'm just trying to explain as best as I understand it, uh, so So apparently, you know, money, sort of fiat currency, which is just not pegged to anything, it's just a made-up concept. The belief system is that money has no value, inherent value in itself, and so you should not be charged interest for borrowing money, which is this sort of abstract concept. So they have loans, or they have sort of agreements, which can work as long as both sides are taking shared risk and getting sort of shared upside, shared return in some way.

So there's— Is Sam Islamic?

I believe so, yeah. And his partner Mohammed is also. So they were explaining to me that, hey, there's this big thing called Islamic financing and there's these Islamic challenger banks. And so if you ever heard the word challenger bank, check this out, it's pretty cool. We know that banking's been around forever, these big bank brands that are, you know, in every country there's big banks that are worth billions of dollars. And recently, over the last, let's say, 5 to 7 years, there's these things called challenger banks, or neo banks they're called. And so in Brazil, there's a bank called Nubank, N-U bank. And Nubank is worth $10 billion. It's one of the most valuable startups in Brazil. In the UK, there's challenger banks. Oh my God, I'm gonna forget their name. But does challenger just mean a new one? It's a startup bank. Yeah. And they offer different things. So what these guys did was better digital access, so mobile apps, quicker ability to get sort of credit cards and debit cards spun up. and so there's, you know, there's a couple of them that are huge now. Um, few different multi-billion dollar startups done this. What these guys have done is, uh, they've done this for a faith-based, uh, bank, which is basically saying there's a set of customers out there, in this case Muslims, who are not being served well by the generic banks, and we can make a bank that serves them better. And the way we're gonna do it is you wanna take a mortgage out, you can either take a sort of a mortgage out, a traditional mortgage, which is not compliant client, or you can take one out that's compliant with your faith. We've come up with a mechanism that is blessed by sort of the village elders, you know, the sort of leaders in the community, that says, yes, this is, you know, I think Sharia law is what it's called, it's compliant with Sharia law, and then on the other side, this works as a mortgage, you can actually buy your home. And so these guys have this concept, and in other countries, this is apparently really big, so in Africa, Indonesia, places where the Muslim population is the dominant population, they've already solved this problem. But in places like US, Canada, where it's just a minority of the population is Muslim, they don't have these banks yet. So I love this startup idea because— How are they doing? So how they're doing, so they've spent a lot of time making sure that they can actually get it to be compliant and actually get the financial mechanism to work. That took them a while, over a year, maybe 2 years. Now they've gotten that to work and they have Basically, they have two sides of a marketplace. On one side, they have people who are investors, 'cause, you know, if you're gonna issue mortgages, their average mortgage is like $500,000, so it takes a lot of capital to start this business. They don't wanna be the one, they don't wanna go raise a billion dollars and then start issuing these loans. They want on one side to have investors who will put in the capital to fund these loans, and on the other side, they wanna have the borrowers who are trying to buy a home, who can pull from this pool of, you know, sort of halal financing, you know, this, uh, this financing that's compliant. And so they have $10 million committed on the, on the investor side, $1.2 million in their bank, $10 million total. And then, um, and they're just every week they're trying to close more of those checks, I think, which is a small amount, but this is like just inbound interest. This is not like they haven't really done anything yet, but $10 million will let you, let you do if you just do half a million dollar loans. That means they can do whatever, 20 mortgages right now, and every mortgage has a certain value. So it's about worth about, I don't know, $20K a year to them is that mortgage just in their fee that they get on top of it. And so, and on the other side, they have all these applicants, I think, you know, about 1,000 applicants. And these are what they call super prime applicants because these are people who are doctors, lawyers. They have good jobs. They, they have the money. They have the means to afford their homes. They're just looking for a solution that doesn't force them to compromise their faith. So I really like this business. There's a working model in the UK, there's a working model in, um, in Africa, there's working model in Indonesia. There's nothing in Canada where these guys are, and there's nothing really in the US, uh, where—

how many Muslims do you think there are in America? I think there's—

look this up— I think there's like a couple million, only 2 million, I want to say, roughly.

Um, that's pretty interesting. I like that. I think that there's a bunch of weird rules around banking. I mean, they're not weird. They should be there. But, and so starting a, starting a bank, I think, is it's almost like nearly impossible.

It's very difficult. So what all the neobanks do, all the charter banks do—

not real banks.

They're not real banks. They sit on top of BBVA or they sit on top of these other banks and they're just the— they're the consumer-facing layer. But the banking happens with their underlying partner. And it's sort of like the lead gen model that you're talking about. They go to these banks and say, hey, I can get you a whole bunch more customers. I'm going to spend all the money doing the marketing. They'll be banking with you, but we own this sort of relationship.

Yeah. And that's actually pretty common. I use this thing. My debit card is Simple. Have you heard of Simple? I've heard of it. Yeah. This is my debit card. It's pretty cool. I like it because the customer service, I can just text and they're like easy. These like young guys in Portland and they, they're easy to chat with and they answer 24 hours a day. They were acquired for $100 million and I was like, It's like a freaking bank. That's it. Yeah. And I did not— a bank. Yeah. And it was— what's it called? BBVA. Yeah, that's who they use. BBVA Compass, I think.

Exactly. They're under— they're under— there's a few that are underneath all these. Now, the very first— there's now one of the Challenger Banks got their very first banking charter, banking license, which is very rare. I forget their name, but they just announced a couple weeks ago, last 2 weeks, that— so the— so now it's very interesting. Now, once that seal broke, because it was so hard to apply for this.

Yeah, I think.

And They all want it. Robinhood wants their license. Brex wants their license. It's just very hard for them to get this. I think you need 5%—

or what is the number? I think you need 10% in reserve. Yeah, you need a certain amount of reserve.

That's not even the problem. It's just that there's no incentive for the government to give these out. They're like, ah, you, you kind of highfalutin, you know, tech startups. Do I really want to give this to you? You've only been around for so long. I don't know if I have the trust in you. So now the seal is broken. The first one got it. We'll see what, what that means. But what I like about these guys is they're not a bank. They're not taking your deposits. They're just doing loan issuance. So on one side they have the reserve capital, the investment fund, but they're using other people's money.

OPM on one side.

Yeah, other people's money to make the loans. And they're the broker and they take 1 to 2% of the transaction fee. And people are willing to pay a premium to have halal financing, just like people are willing to pay a premium for halal meat or for vegan or kosher meat, you know, whatever. Like, right. People are willing to pay a premium for things that are compliant with their faith. So I think this could be big. And you know what's interesting? I think that they've had a hard time raising money from traditional VCs because this is— They didn't understand it. Hard to understand, yeah. You have to like, you know, most VCs are old white guys, and you know, it's the sort of cliché, and you know, I know they do look into it, but I think that there's the natural challenges of any high aspiration startup, they have those. They have the problems that any startup that's really ambitious. But then they also have the problem of like, first they need to educate you about this problem. Like, you saw how I stumbled through this explanation, and I talked to these guys for an hour, you know, and that's where I am after an hour of really trying to understand it.

But you— and you ran this by Furqan, your, your best—

so I ran— yeah, I ran it by him. I introduced them yesterday. I said, hey, Furqan understands this. He's Muslim, he's an investor, he's a technologist, and he's an entrepreneur. If he doesn't like this, I don't like this. And what did he say? And so he— so he, he's like, I've looked into this. He's like, a lot of my friends I really wanted this. I tried to look at what options are available in the US. They suck. They're really super high premiums. Is he practicing? Yeah. Like, you know, to an extent.

Like, what I want to know is, do you really like—

like, he doesn't pray 5 times a day, but he doesn't eat pork, right?

So he's like culturally—

he drinks, but like his dad runs the mosque in San Jose. And, you know, like, it's— it's—

so even people who are like culture— who aren't incredibly devout are into this.

If he had the option, he would prefer halal financing over not if it was convenient. And he's like, the problem with all the existing options, they're not convenient, they're not easy to use, and they're very high premiums. He's like, if these guys did it conveniently, I think this could be baked. So he's gonna talk to 'em.

We'll see. Like, I'm, I'm not a practicing Catholic anymore. Are you, are any you guys Catholic? You're Catholic for sure, right? Do you eat meat on Friday on Lent? Yeah, I've been bad about it, honestly. I went to like all boys Catholic high school, so me too. I went to an all boys Catholic high school. I don't practice anymore, but that's another thing. I don't eat meat during Lent on Friday, so I try not to. So it's kind of like, it sounds like that's what it, it's kind of like where it's like, yeah, people, it's a spectrum.

It's a, You prefer it, but not— yeah, you prefer it, especially if it's convenient for you. You, you, you know, the way Henry just said that, a lot of guilt there of like, yeah, I should, but I don't. So there's, you know, if you can make it where people do what they want to do without lifting a finger, then they'll do it. You know, that's great.

That's pretty cool. I like that. I like that thing, or I like that angle of finding, because I don't know anything about Muslim culture. I don't know anything about Hindu culture, which is where you're from. I don't know, you probably don't know too much about Catholic. Yeah. It's kind of an interesting way to like look at how other religions do things. Right. Another thing that we should talk about, not today, 'cause I don't think we know what we're talking about. We definitely don't yet, is building things on top of banks. I think that's super interesting.

What do you mean by that?

So like what Simple did and like what the, what, what's the name of this company? Manzil.

Man, spell it. M-A-N-Z-I-L.

Manzil. Okay. Kind of like what Mansell did, a building, a building a front end on top of someone else's backend. Right. Which is the bank. I think that that's really interesting. Simple.com is my card. I didn't know they did this at first.

This is kind of what dropshipping is. So where you build the layer that says, I'm going to get the customer to a landing page and they buy. Yep. But it's just going to place an order with this other manufacturer and they'll ship it directly to them.

It's super effective. I like that with banks. Because, um, like, Simple, they did this all— I mean, it's, it's a little different. The card is all white and it's just slick looking. Yeah. Um, and their app is really good. And so it's kind of interesting. I, I think this is kind of what Brex is doing. It's a corporate credit card. They're layered on top of MasterCard. Um, I, I love these things. I, I really like that.