Articles on Islamic Finance

[Uthman]

BBC News, Jakarta

Indonesian President Susilo Bambang Yudhoyono has called on Islamic banks to take a leadership role in the global economy, amid the financial crisis.

He was speaking at the opening of the World Islamic Economic Forum in the Indonesian capital, Jakarta.

The forum has brought together political and business leaders from 38 countries to discuss the global economic slowdown.

They will also discuss ways to achieve energy and food security.
Mr Yudhoyono said it was time for Islamic banks to do some missionary work in the West.

Islamic financial institutions, he said, had not been hit as hard as their western counterparts because they did not invest in toxic assets.

Banks run in accordance with Muslims laws on interest payments and the sharing of credit risks are seen by many as fairer than traditional banks, less focused on profit and kinder to the communities they work in.

Demand for Islamic financial products has been growing in the Muslim world for years but Mr Yudhoyono said that many in the West were now ready to learn from them.

Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling.

Transactions must be backed by real assets, and because risk is shared between the bank and the depositor, there is added incentive for the institutions to ensure deals are sound.

Source

[Uthman]

PM Calls On Muslim Countries To Invest In Agriculture

JAKARTA, March 2 (Bernama) -- Datuk Seri Abdullah Ahmad Badawi, noting that the largest number among the 15 per cent of the world's undernourished population are Muslims, has urged Muslim countries to invest in the development of agriculture and food industry.

The Malaysian prime minister told public and private sector leaders at the World Islamic Economic Forum (WIEF) here on Monday that the growing number of undernourished people could no longer be ignored.

Quoting statistics, he said, the number of undernourished people had increased from 842 million in 1990 to 963 million in 2008, with 160 million were living on an income of less than 50 cents a day.

"The financial crisis has further eroded the purchasing power of the poor who spend 50 per cent to 70 per cent of their income on food," he said.

He noted that growth in agricultural productivity had been stagnating due to under investment in agricultural technology and rural development, and that global cereal production had plummeted since 2000, jeopardised further by the increasing volatility in climate.

He warned that if the trend continued, the Muslim world would not be able to feed its growing population in the near future.

Source (Malaysian National News Agency)

[Uthman]

The West’s bankers may learn from their Islamic brothers

Frank Kane

If the former chief executive of the Royal Bank of Scotland had been a Muslim and had run his bank on Sharia-compliant principles, would it have prevented the disaster that has befallen RBS?

It sounds hypothetical in the extreme. Sir Fred is a Scots Presbyterian, and RBS was the epitome of gung-ho western capitalism before it came crashing down.

But the question came to me as I sat at a dinner in Dubai’s Grand Hyatt hotel this week, where 300 or so bankers and financiers had gathered to slap each other on the back at the Islamic Finance News Awards ceremony. If the financial world was run on Sharia lines, the backslappers concurred, we would not be in the middle of economic meltdown.

That opinion came not just from Dubai. In Jakarta, president Susilo Bambang Yudhoyono of Indonesia told the World Islamic Economic Forum much the same thing, adding that Islamic financiers should “do some missionary work in the West” to teach the former masters of the universe how to run a proper banking system.

Incongruously, the sentiment was echoed in Rome, where the Vatican newspaper L’Osservatore Romano said: “The ethical principles on which Islam is based may bring banks closer to their clients and to the true spirit which should mark every financial service ... Western banks should use tools such as the Islamic bonds known as sukuk as collateral.”

From the Far East, to the Gulf, and on to the heart of Christendom, the belief has been gaining ground as quickly as the financial crisis has accelerated: if western bankers had applied the cautious, prudent methods of Islam, instead of the bonus-fuelled jiggery-pokery of the US and Europe, we would not be on the brink of financial disaster.

Islamic financial principles can show us a way out of the mess.

They have a point. Apart from banning investment in industries such as alcohol and gambling, Islam also bans financial interest and the so-called “products” that derive from them.

Collateralised debt obligations, the class of products largely responsible for our current disaster, are as un-Islamic as it gets.

Sharia-compliant personal and consumer finance, such as mortgages, leasing agreements and loans, are matched much more closely than their western counterparts to true asset value and are generally more conservatively rated. That does not mean Islamic finance has been unaffected by the crisis caused by the West. There are credit crunches and liquidity shortages aplenty in the Gulf, and the rest of the Muslim world – the direct result of western contagion.

My host at the Dubai dinner, Dr Humayon Dar, the chief executive officer of the BMB Islamic group controlled by the Sultan of Brunei and several Middle East royal families, put it neatly: “Western institutions are sick and hospitalised; Islamic financials are hospitalised alongside them, but not that sick. We can be back on our feet more quickly.”

But if so, will they pull the West out of its predicament? And will the western financials pay any more attention to Islamic banking once they get out of the current predicament?

Within the global economy, Islamic finance is still minuscule. According to London Business School, the total value of Islamic financial business in 2007 was something like US$729 billion (Dh2.6 trillion).

That sounds big, roughly the same magnitude as the US government’s current bailout programme of its toxic assets, but it is still a mere 1 per cent of the total value of the world economy.

With 1.6 billion Muslims out of the world population of 6.6 billion, you could argue that Muslims are hugely underserved by their financial providers. So there is plenty of potential.

Some western bankers saw that several years ago, and there was a rush to hire Muslim staff and initiate Sharia-compliant operations. These focused on the big Muslim communities in the Middle East, Indonesia and Malaysia, but also began to fish in the big pools of Islamic communities in Europe and North America.

Whether this represents “conversion” to Islamic financial methods on the part of westerners is another matter. They were after business, of course, and particularly the big pools of liquidity held by governments and wealthy individuals in the Gulf, and the mass markets of the Far East. Their motive was profit, not a more secure global financial system, and they were ready to bolt on Sharia-compliant procedures to the most hair-raising and risk-taking aspects of casino capitalism.

They also did it grudgingly and with many reservations. There was much complaint in western banking circles about lack of regulation in Islamic finance, the high fees needed to lure the comparatively small number of Sharia-qualified financiers in the world, and the cost of “fatwa-shopping”, the process by which western-originated financial products were issued with Sharia-compliant authorisation.

“It’s a con. They know it and we know it. But it’s the price we have to pay for access to the Islamic markets,” said one western banker at the Hyatt last week.

There is no real conversion to Islamic principles there; merely a typical western business imperative to get a slice of some action when conventional markets are locked in financial paralysis.

HSBC, one of the better-run global banks that has so far stayed out of the spiral of government bailout, has decided Islamic finance is a top priority.

“It will be one of the few areas of world finance where there is any growth this year. We think the market for sukuks will revive and there is huge potential in consumer retail banking products. The demographics are all-important: Islam is young and growing, Christendom is old and dying,” said a Dubai HSBC executive.

But what about Sir Fred, and his bonus – would a multimillion-dollar compensation package for wrecking RBS have been acceptable under Sharia principles?

Dr Dar said: “It would not have been ‘haram’ (forbidden) – that is a very strong phrase in Islamic finance. But it would have been objectionable.”

That is roughly the predicament of the British politicians are trying to get him to pay it back. It seems the two systems have plenty in common already.

business@thenational.ae

Source

[Uthman]

A Muslim Davos

The World Islamic Economic Forum provides a vital opportunity for innovative thinking to get us out of the global recession.

This week saw the meeting of the World Islamic Economic Forum (WIEF), the equivalent of the Muslim world's Davos, held this year in Jakarta. In attendance were heads of states and senior government figures from across the Muslim world, including Indonesia, Malaysia, Morocco, UAE and Qatar, with delegates from 38 countries.

The purpose of the WIEF is to increase trade and business activity among Muslim countries and beyond. I had the privilege of chairing one of the sessions. Fazil Irwan, director at the WIEF Foundation explained to me that WIEF's central pillar is to develop itself as a networking conduit between the Muslim and non-Muslim world, as they believe business collaboration can generate greater prosperity and mutual understanding. Established in 2004, WIEF gives particular focus on investing in women and the young; understandable given the high levels of unemployment among these two categories in Muslim countries.

The Muslim world's economic performance is generally dire. Despite making up one-fifth of the world's population, it produces a measly 7% of its output. Much of the discussion at the WIEF revolved around the global economic meltdown and its impact on Muslim countries that are now facing economic contraction, job losses and greater poverty due to the reckless model of unfettered market liberalism. With the interconnectivity that comes with globalisation, no state is immune. The systemic failure of the current banking model has generated much more official interest in Islamic finance. Shariah-compliant finance is based on financing secured against underlying tangible assets and involves risk-sharing between the parties in the pursuit of genuine commercial activities, rather than profiteering from paper instruments whose trail often led back to highly leveraged low-quality debt (better known now as toxic debt). There was a widespread view among those attending (including non-Muslims) that Islamic finance could provide one possible way out of the current malaise and become an important foundation in a new, more stable world economic order.

One official pointed out that it is not the labeling of products as "Islamic" that is the solution, as it is perfectly possible for a shariah-compliant bank to create sophisticated financial products that end up mirroring the conventional system. What is needed is ethical standards for the financial system based on transparent risk assessments and controlled debt levels. Whether such a model of greater fairness and integrity should be necessarily labelled with the exclusive term "Islamic" is a separate debate. Gordon Brown yesterday, in his speech to Congress, spoke in similar terms when he said that "markets should be free but never values-free, that the risks people take should never be separated from the responsibilities they meet".

The conference showed the efforts the Muslim world is making to help pull the world out of recession. Indonesia itself is home to the world's largest Muslim population, the third largest democracy and the fourth largest population, at 230 million. It is also a member of the G20. Its stable democracy and impressive economic growth over the last decade has marked Indonesia out as a front-line state in the west's greater desire for a more respectful engagement with the Muslim world after the Bush years.

Indonesia is seen as a possible template of how to deal with Muslim democracies and markets, new and old. In her recent visit to Jakarta in February, Hillary Clinton asked colleagues whether Indonesia held lessons for Pakistan, a state with the sixth largest population but far less stable. Given the different role Islam plays in Pakistani and Javanese culture and public life it is not immediately clear what those lessons might be. Indonesia is also strategically important given its commanding presence over the narrow Strait of Malacca, through which supertankers transport Middle Eastern oil to the Pacific Rim. There is great excitement here that President Obama may choose Jakarta to deliver his promised address to the Muslim world from a Muslim capital, the home of his childhood school.

The way out of the current economic crisis will require innovative thinking and a meeting of minds. The WIEF provides one such forum.

Source

Asim Siddiqui is a founding trustee of the City Circle, a grassroots network of professionals established in 1999 which runs, in addition to educational and welfare projects, weekly public events providing an outlet for debate on issues of concern for British Muslim communities and wider society.

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[Whatsthepoint]

I'm sure they are, but I guess they're not making the same profits in good times.

[Uthman]

I'm sure they are, but I guess they're not making the same profits in good times.

I'm guessing you're right. Of course, with Islamic banking, the emphasis is more on ethics than on profits.

[Whatsthepoint]

I'm guessing you're right. Of course, with Islamic banking, the emphasis is more on ethics than on profits.

Yep, but it goes too far.
WEe need a mix of both. A profitable yet not greedy, cautious yet not overly conservative. Several such banks exist, but they don't make it to grand corporations.

[syilla]

:salamext:

and it is still not competitive for the businessman to use islamic banking compared to other banks.

And in Malaysia we called them ah long (loan shark), as they give a higher interest than others (i don't want to say is riba coz i'm not knowledgeable in this area) and when time to ask payment they'll chase u everywhere.

I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.

I really hope they do more research in this and give it a competitive edge and a better option for others to choose from.

[Uthman]

Yep, but it goes too far.
WEe need a mix of both. A profitable yet not greedy, cautious yet not overly conservative. Several such banks exist, but they don't make it to grand corporations.

Islamic banks are still profitable though, aren't they?

I understand how they could seem excessive to Non-Muslims, and that is why I think they are probably more suited to Muslims themselves. In a Muslim society, banks would probably be more concerned with serving the needs of the people than with making lots of money. It's prosperity in the hereafter that's the goal, not in this world...

[Uthman]

I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.

I think it's true that many Islamic banks are managing to trick Muslim customers into thinking that they are banking with Islamic guidelines, when really there is still riba going on under a different disguise.

[aadil77]

I think it's true that many Islamic banks are managing to trick Muslim customers into thinking that they are banking with Islamic guidelines, when really they is still riba going on under a different disguise.

Don't know about all the banks but the Islamic Bank of Britain gives you profit from halal investment in savers accounts, that way you're not getting haraam interest.
I don't think they disguise riba, because they say you can get up 3% profit when in actual fact you hardly get like 0.4% this shows that they are investing and aren't getting very good returns. Also you don't get any 'profit' in normal accounts. So nothings really hidden

[north_malaysian]

:salamext:

and it is still not competitive for the businessman to use islamic banking compared to other banks.

And in Malaysia we called them ah long (loan shark), as they give a higher interest than others (i don't want to say is riba coz i'm not knowledgeable in this area) and when time to ask payment they'll chase u everywhere.

I used islamic banking to buy a house...and it is expensive! and some even said that...they have hidden riba.

I really hope they do more research in this and give it a competitive edge and a better option for others to choose from.

many people criticising BIMB for their BBA loans... some religious peeps calling those loans as hidden riba

Al Rajhi is the best Islamic bank in Malaysia... try that bank...

[Whatsthepoint]

Islamic banks are still profitable though, aren't they?

I understand how they could seem excessive to Non-Muslims, and that is why I think they are probably more suited to Muslims themselves. In a Muslim society, banks would probably be more concerned with serving the needs of the people than with making lots of money. It's prosperity in the hereafter that's the goal, not in this world...

I understand you completely, it's just that all these articles are saying our banks should learn from theirs, without really seeing the bigger picture.

[KAding]

Banks can certainly learn something from Islamic banking.

But in the end I wouldn't trust a bank that would be so dogmatic and driven by ideology rather than what makes business sense. I mean, it makes sense for Muslims, since it avoids sin, but thats not a valid argument for non-Muslims. There are too many other strings attached that would make them unattractive for people who don't believe interest is a sin.

[Uthman]

RENEWED INTEREST IN MUSLIM FINANCE

Could Sharia-compliant banking be the answer to UK money woes?

Among the ruined reputations of the financial world, there is one banking system that has emerged claiming the moral high ground.

Islamic finance - which rules out the payment of interest - largely avoided the risky investments and trading of debt that prompted the credit crunch.

Banks offering Sharia-compliant accounts and selling Islamic mortgages say they are reaping the benefits.

Institutions such as the Islamic Bank of Britain say they were attracting more customers and business - by no means all of them Muslim - even before the credit crunch.

Encouraged by their new reputation, a group of such institutions are taking their show on the road this week - first stop Leicester - offering a range of services.

They include, for the first time, Sharia-compliant car insurance - which works by insurers paying their "premiums" into a shared pot, out of which claims are taken.

Whatever is left at the end of the year is shared out among the contributors.

It's Islamic, says the company, because it avoids the element of gambling inherent in ordinary insurance.

Its advocates insist that Sharia-compliant funds could go some way to rescuing UK plc from its own credit crunch.

The argument goes like this. There are hundreds of billions of dollars - much of it income from oil - dammed up in the Middle East. Much of it is available to borrowers, but only in Sharia-compliant loans. We have a dearth of credit, so should issue Sharia-compliant bonds.

No interest can be paid on the loan, but rent can be paid. The government could, for example, back the bonds with assets such as civil service buildings.

Fly in the ointment

It would pay rent on the buildings and then "buy" them back at the end of the agreement.

There is a fly in this soothing ointment however - there's disagreement about the means of deciding what is and is not truly Sharia among the array of Islamic financial products on offer.

Normally, the definition is set by committees of Muslim scholars, some of whom train and specialise in this lucrative work.

The trouble is that they are often paid by the very financial institutions seeking approval for their products.

Source

[Civilsed]

:sl:

An excellent talk on Interest and Islamic banking by Bilal Philips

Very Informative

http://theislamicummah.ning.com/vide...slamic-banking

[abumalik]

Salam,

My feeling is that Islamic banks are Islamic only in name and form. Riba is making profit on money, yet supposedly riba-free mortgages cost more than riba mortgages. How does that make sense? Only if Islamic banks are charging us more than what a non-Islamic bank is willing to charge us. I remember listening to a radio interview with one of the heads of an Islamic bank (I can't remember which bank) and when he was asked why Muslim banks charge so much more than non-Muslim banks, his response was "It's difficult to be a good Muslim." In other words, they're abusing our wish to live in a halal way to make more money out of us than if we were willing to do something haram. But the reason why riba was prohibited was precisely to make it easier for non-rich Muslims to be able to borrow money without being exploited. Now we are told that being a good Muslim means to be exploited more than other people. How does that make sense?

But there is one sense in which Islamic finance can teach non-Muslims economists it's this: if you can convince people that getting exploited by banks is a righteous act then you're far less likely to suffer during a recession.

And as for it being halal, I'll just mention two experiences: the first when I phoned up about halal mortgages and was told that the rent I would pay on the property would vary depending on interest rates. The second is a friend who has been working in Islamic banking for years now, and he says it's as capitalist all other forms of banking. Which isn't exactly ethical.

May Allah protect us from thinking that an Islamic label makes something Islamic halal.

[KAding]

But realistically, how would anyone ever be able to buy a home if even Islamic banking is haram? Basically this would mean that only non-profit banking would be allowed? But who is ever going to set that up?

[Eric H]

Greetings and peace be with you Osman my friend,

I remember taking out a loan about forty years ago the interest rate was low, but they charged a very high arrangement fee. When I worked it out later it amounted to about 40% interest overall, even though they called it an arrangement fee.

Charging interest is the most transparent way for a consumer to compare costs for borrowing money from various institutions, in Britain all the lending companies have to calculate interest using the same formula.

Islamic banks might charge fees, or rent or call it something else to borrow money, but the bottom line is you can still compare the cost of borrowing money Islamicaly, and say it is equivalent to X percent interest.

So how does all this change in names make it ok, is there something else I am missing?

Take care.

Eric

[abumalik]

We pay taxes. I wouldn't mind paying a few more taxes if it meant that I could get an interest free loan from the government. Rather than give it to a bank. And to make sure the government doesn't lose money by the value of money going down in relation to the house, they could lend me gold which I would have to pay back. There are solutions. The world shouldn't revolve around profit (i.e. greed). Greed was seen as a sin in all societies until capitalism, when all of a sudden it became good.

The problem lies with the economic system we live under. We had a brief heyday under capitalism in the 60s and 70s when capitalist governments had to treat us well because they were scared we'd kick them out and become communists. Now that there's no alternative, capitalism's real colours are starting to show, and it ain't pretty. Expect things to get worse as we slowly become more like 3rd world countries in terms of distribution of wealth.

[Uthman]

But realistically, how would anyone ever be able to buy a home if even Islamic banking is haram?

I don't think anyone is saying that Islamic banking itself is haraam, but that some supposed 'Islamic banks' aren't really doing Islamic banking.

[Uthman]

Greetings Eric H,

Greetings and peace be with you Osman my friend,

I remember taking out a loan about forty years ago the interest rate was low, but they charged a very high arrangement fee. When I worked it out later it amounted to about 40% interest overall, even though they called it an arrangement fee.

Charging interest is the most transparent way for a consumer to compare costs for borrowing money from various institutions, in Britain all the lending companies have to calculate interest using the same formula.

Islamic banks might charge fees, or rent or call it something else to borrow money, but the bottom line is you can still compare the cost of borrowing money Islamicaly, and say it is equivalent to X percent interest.

So how does all this change in names make it ok, is there something else I am missing?

The following article might help:

http://www.islamicboard.com/world-af...ng-sharia.html

:)

Peace

[Uthman]

Islamic tenets help funds flourish

When it comes to Wall Street, the Islamic faith seems to have hit on a pretty good idea: Debt is bad. Aversion to indebtedness is one of the tenets of Islam that two mutual funds have followed to notable success amid the lingering credit crisis.

The Amana Growth Fund and Amana Income Fund carry five-star ratings from Morningstar Inc. But they won’t carry debt or buy stocks in companies that rely on debt.

So as the financial system has flirted with melting down, the Amana funds have owned no bank stocks.

That’s a victory in itself.

And it is no accident. The funds formed specifically to allow those who follow Islam to invest and keep the faith.

In addition to avoiding companies with debt, the funds avoid companies that rely on alcohol, gambling or other practices forbidden by sharia, or Islamic law.

Fund manager Nick Kaiser said a group of Islamic businessmen approached his company in the mid-1980s about starting just such a fund.

The two funds have attracted a decent-sized following, with a combined $1.3 billion in assets under management.

But how can a mutual fund operate without debt?

Kaiser said he has to filter out companies that rely on debt before seeking the best buys. That eliminates about half the field.

Kaiser has been able to put larger technology names in the growth fund’s portfolios — Apple Inc., IBM Corp. and Qualcomm Inc., for example.

The income fund — which relies on dividend income, not interest income — holds energy stocks, including Exxon Mobil Corp., health care names such as Wyeth and consumer staples such as PepsiCo Inc.

Big, established companies pop up a lot because they become self-funding, needing no significant debt financing.

It also means the funds stay fully invested and earn nothing on their cash holdings, which sit in a checking account.

Each has shown relatively strong results, routinely beating the Standard & Poor’s 500 and their own Morningstar peers over the last four years and so far in 2009.

And that performance means the funds aren’t just for Islamic investors. A majority of the fund shareholders are not Muslims, said Abid Malik, a Kansas City businessman who serves on the funds’ boards.

Kaiser allowed that some of the growth in recent years has included “hot money” that will chase some other leading performer once Wall Street’s breeze shifts.

Investors should know that just as the funds benefited from avoiding debt amid the credit crisis, they may well lag others as the crisis ends and the global economy rebounds.

Funds exposed to the leverage of debt likely will be able to post more stellar returns.

It doesn’t necessarily mean the Amana funds will shed their non-Muslim investors. After all, the devastation wrought by overleveraged bets may have made believers of a lot of folks, regardless of their religions.

Source

[Uthman]

Islamic laws of finance a cushion in hard times

The recession gripping the nation has taken less of a toll on American Muslims who follow age-old Islamic laws against paying – or charging – interest.

They've also been shielded by socially responsible retirement plans because Shariah– Islamic law – forbids investments in banks and mortgages as well as tobacco, alcohol, gambling, pornography or weapons.

"If everybody was Shariah-compliant, there would be no recession," said Farouk Fakira, a Yemeni immigrant who moderated a discussion on Islamic finance at Sacramento's Masjid Annur last week.

Fakira, 57, rents a home – like hundreds of other local Muslims – because "interest is pretty much forbidden. If you're making money off of money, the only person who benefits is you."

Shariah – 1,400 years of Islamic legal knowledge based on the words of the Prophet Muhammad – guides Muslims in daily life, said Imam Muhammed Abdul Azeez of Sacramento Area League of Associated Muslims, or SALAM.

Shariah prohibits usury, which often took advantage of a desperate person who needed to feed or protect his family, Azeez said. "There's an element of exploitation here."

The bottom line for many Muslims is, "if I don't have the money to buy something, that means I can't afford it," said Deya Dean Elghassein, who's Palestinian American.

His family helped him buy his home in Folsom with cash. "I do use credit cards, but they have to be paid off in full at the end of the month," he said. He wouldn't invest in Costco because it sells pork and alcohol, but he and others shop there "out of necessity."

About 20 percent of the Sacramento area's 50,000 American Muslims closely follow Islamic rules of finance – especially the prohibition against interest – said Irfan Haq, an economist who's president of the Council of Sacramento Valley Islamic Organizations , an umbrella organization representing 10 mosques.

"Muslims in general have been much less affected by the recession because they're very cautious and conservative in matters of finance and take a longer-term view of life," Haq said. "They want to invest their funds in a way that pleases God so they can sleep peacefully – they care about the afterlife."

Along with avoiding interest, another tenet of Islamic finance is not to invest in enterprises that violate Shariah: alcohol, gambling, banking and weapons. Azeez counsels his Muslim flock not to buy businesses that sell alcohol because "you cannot be in the business of spreading sin: Drunk driving kills."

Mohammed Memon, a Pakistani American project manager for Oracle in Rocklin, has a 401(k) through Amana Mutual Funds – a Shariah-compliant fund based in Bellingham, Wash.

"They're relatively better than other funds; I'm down 15 to 20 percent while many of my friends are down over 50 percent," said Memon, 38.
Amana's income and growth funds avoid bonds and interest-paying securities.

"We screen about 5,500 stocks a month for our 75,000 shareholders, and 2,200 to 2,400 pass," said portfolio manager Nick Kaiser. "The growth fund's biggest holding is Apple Computer. We buy technology, health care stocks and stocks with low debt. The income fund focuses on drug companies, energy stocks, mining."

Shariah also prohibits gharar – the Arabic word for uncertainty or risk – and maysir – gambling – which includes real estate speculation.

Metwalli Amer, founder of SALAM, said he knows Muslims who speculated in real estate and lost their shirts.

Amer, 75, said Islamic finance is about living within your means and helping the needy. "If Muslims had followed that, we'd be much better off," said Amer, an Egyptian immigrant.

But he said the majority of Muslims he knows "became greedy."

Islam doesn't prohibit wealth as long as you give back, he said. "The Quran promotes going into business and trading ventures that share the profits and loss."

Amer said one Sacramento Muslim who was able to become a millionaire while adhering to Islamic financial principles is Kais Menoufy.

Source

[Uthman]

Shariah also prohibits gharar – the Arabic word for uncertainty or risk

I thought it was all about sharing the risk equally, as opposed to completely prohibiting it. Is this true? Aamirsaab?

[Uthman]

How Islamic banking operates within sharia law

Saving and investing in line with religious principles is important for many Muslims and an increasing range of financial products is now available to meet Sharia rules.

There are 1.8 million Muslims in Britain and surveys show that about three-quarters are interested in the idea of running their savings and investments in keeping with principles laid out in the Koran. While Sharia products are in their infancy in the United Kingdom, the uptake is very rapid.

While trade and investment are encouraged, Sharia rules prohibit involvement in companies whose activities touch on a wide range of industries including alcohol, gambling, pornography, human cloning, arms and many forms of entertainment. Industries associated with pork are also out.

However, the biggest difficulty for devout Muslims and those financial groups which aim to serve them is the principle of riba. Riba means that you cannot receive or pay interest, because Islam defines interest as a form of usury.

This makes it very difficult to invest in large Western companies, many of which are funded to a greater or lesser extent by debt. It also rules out investment in conventional banks, which may not be a bad thing at the moment.

Interest is hard to remove from any financial transaction. Interest is the price of money measured over time and one of the cornerstones of economics. The entire conventional banking industry, with products from mortgages through to credit-cards and deposit accounts, depends on calculating interest. How on earth do you remove it?

The answer that Sharia-compliant accounts offer is to convert the interest normally paid into a form of profit or loss. Accounts or mortgages will often be marketed as offering competitive rates measured against non-Sharia, interest-based products, but the structure of the financial proposition is different.

Current accounts are not too much of a problem to devise on a Shariah-compliant basis as interest does not play a big role. You get all the facilities you would expect, such as a cheque book, debit card, ATM usage, monthly statements and so on. You do not get any interest, nor are you charged any if you accidentally go overdrawn.

Most Sharia-compliant current accounts merely seek a credit balance and only penalise you, though not with interest, if you go overdrawn.

Most banks are explicit that the money deposited in Sharia-compliant accounts will not be used for non-Sharia purposes, which means it cannot be loaned out and must remain segregated.

The bank have the freedom to invest the deposited money rather than loan it, but the customer still has the right of immediate withdrawal. However, a basic Sharia savings account presents more of a problem. The banning of interest means some other kind of return needs to be offered, but it must be sure and certain, as interest would be.

Banks such as Islamic Bank of Britain typically specify a rate which sounds like interest and is intended to be competitive with banks which do offer interest. However, the return is generated not through loans to individuals or businesses, but by sale and purchase contracts under the Murabaha principle.

This means, for example, that someone wanting to buy machinery for a factory would have it bought by the bank, who would then charge a premium on top of the cost in exchange for receiving repayment over a number of years.

Most Sharia-based mortgages work on the principle of Ijara, a form of leasing, together with Musharaka which means a risk-reward partnership and covers the transfer of ownership.

This means the bank buys the property and your payments to it over, say, 25 years cover the value of the home as living space in the form of Ijara, ie rental.

A diminishing Musharaka means that your payments held reduce the bank’s equity in the home. In effect, the principles of loan and repayment have been turned into a type of co-operative trade, which is expressly allowed under Islam.

Again, though charging interest is strictly forbidden, products are generally marketed in competition with conventional mortgages and charges tend to fluctuate in line with mortgage rates.

The Sharia mortgage market is expanding rapidly and could be worth £1.4 billion by the end of this year.

Investing in property, either directly or through Islamic Trusts, is certainly possible and, when done by the financial institutions themselves, creates a financial engine which is capable of funding either Sharia savings accounts or Sharia mortgages.

Property investment funds run by firms such as Legal and General and Aviva’s Norwich Union would be considered suitable for Sharia investment.

Sharia-compliant investment in equities is much like any form of ethical investing, but the details are trickier. The excluded categories are easy to follow and there is an ancillary clause which allows investment in any of the prohibited activities, providing it constitutes less than five per cent of the company’s activities subject to scholarly oversight.

One additional restriction is gearing. Islamic principle forbids investment in any company where the debt-to-equity ratio is over 30 per cent. That alone will remove thousands of potential companies from Muslim investors’ universe.

However, to make up for these difficulties, a plethora of Islamic funds have sprung up offering ready-made Sharia-compliant investments.

The best known is probably the HSBC Amanah fund, which is available through a wide range of pensions and investment plans. It has performed relatively well, compared to traditional funds. All Sharia funds and institutions need a reputable board of Islamic scholars to ensure compliance is accurate.

The final piece of the jigsaw was put in place in 2008 when a Sharia credit card became available. This basically works in the same way as a Sharia mortgage but with a much shorter term.

It all goes to show the ever-changing nature of financial products and the way that institutions adapt to meet new demands. You can be sure that the established financial institutions are constantly seeking ways to boost their income from not only Muslims but a whole range of non-conventional investments.

Source

[aamirsaab]

I thought it was all about sharing the risk equally, as opposed to completely prohibiting it. Is this true? Aamirsaab?

I'll have to look into it. Risk is innevitable with economics/business so I don't see why it would need to be prohibited.

Unless what they mean by no risk is traders being more honest, thus preventing asymetric information (where one party [usually the seller] has more knowledge on the product [i.e the quality of it/what its real value actually is etc] than the other party [usually the buyer]) and thus negating risk all together as BOTH parties know exactly what the product is and what it is worth.

[Uthman]

Is Islamic finance the answer?

By Robin Brant
Malaysia correspondent, BBC News, Kuala Lumpur

Investments worth £800bn are made through Islamic finance products.

Experts in Islamic finance believe their way of doing business has shielded them from the global credit crisis.

But how does it differ from conventional Western finance?

A former executive director of the International Monetary Fund, Dr Abbas Mirakhor, says wider Islamic economics relies on God's guidance, handed down almost 1,400 years ago.

There is a "consciousness of a supreme creator and a system that he has provided", he says.

What we know as the conventional Western way does not have that, which is "really the major difference between the two", he adds.

In practical terms, the most significant difference is that charging interest is not allowed in Islamic finance.

Neither are most forms of speculative investment permitted, such as hedging or derivatives trading.

"We don't recognise the concept of interest... to look for some profit from trading money," explains Dr Bambang Brodjonegoro from the Islamic Development Bank.

"In the Islamic concept, money is strictly for the purpose of exchange or storing value, but not for the transaction of looking for excessive profit," he says.

Sharing risks

How then, does an Islamic bank, and a customer who puts money in that bank, make a profit?

The Qur'an contains principles Muslims must follow when they do business

The system is asset-based, with tangible assets or commodities at the heart of it. There are buyers and sellers, not borrowers and lenders.

Here is a comparison.

In Los Angeles a customer who wants to borrow money to buy a car would go to a conventional bank and agree a loan. The bank would hand over the money.

There would be regular repayments, which include interest accrued on the loan.

In Lahore a customer could go to an Islamic bank and sign a contract with the bank to buy a car from them.

The bank would not loan the money but buy the car itself. Then it would sell it to the customer at a mark up.

The customer would agree to pay back the cost in instalments over a regular period.

One of the core principles at the heart of Islamic economics is risk sharing. The bank and the people who put their money in it share any profit, or loss, from investments.

"In Islam we appreciate merit, so if someone works harder in a business...they (the bank) will get the sharing benefit," explains Dr Brodjonegoro.

"The more important thing is that there will be no bank that rules everything. It will be bank and borrowers at the same level and they share the risk and benefit."

Alternative way

This sense of equality is important. It is one of the defining characteristics which proponents of Islamic economics say make it different from the conventional western way.

It is time for Islamic finance to pause and think of the direction it is taking

Prof. Habib Ahmed, Islamic finance expert

Islamic economics also highlights a belief in benefitting the wider Muslim community.

The former IMF Executive Director Dr Mirakhor says that it chimes with "a movement toward becoming more 'other conscious'...having consciousness about the other fellow, about the general public interest."

This contrasts with what he described as the "simple narrow basis of self interest which motivates, supposedly, the economic agents in the liberal economic system."

Some see the Islamic model as an alternative. Others see it as complementary to the system which has dominated the western world.

"I don't think that this Islamic banking system is the alternative, that we have one or the other. I think this is a complimentary service, a way of doing service," says Prof Ekmeleddin Ihsanoglu, Secretary General of the Organization of Islamic Countries.

"It needs to be an option there where people can find different ways of doing the same thing."

Compromising principles

Islamic economics is not the exclusive preserve of Muslims.

UK has 8th largest Islamic finance sector according to the DTI

London is emerging as a major financial centre for Islamic finance. Islamic banking products are also widely used by non Muslims in Malaysia.

"This is an alternative system that can be applied to everybody. Everybody can use it regardless of their religion," says Dr Brodjonegoro from the Islamic Development Bank.

Major banks like Britain's HSBC and Citi of the US have set up Islamic banking subsidiaries that are flourishing. Some of the champions of the Islamic way want to see business expand beyond the natural market of Muslim countries.

They believe that now, more than ever, there is a market for non Muslims who share in the values espoused in Islamic economics.

But there are some who fear that by expanding the Islamic way is becoming less Islamic.

Time to reflect

"Unfortunately what is happening is that Islamic finance in some ways is moving more and more closely to the conventional finance," says Prof Habib Ahmed, a world authority on Islamic finance.

"If you look at the development in the past few years, Islamic finance appears to be mimicking most of the products of conventional finance."

There has never been a better time to champion an economic model which is different to the one laying in shreds on Wall Street, says Prof Ahmed. But he believes that the Islamic concept is being diluted.

"As people after this crisis are looking for solutions...the Islamic finance industry is moving towards that very system," he says.

"I think it is time for Islamic finance to pause and think of the direction it is taking".

FEATURES OF ISLAMIC ECONOMY

• Dealing in interest, liquor, pork, gambling or pornography are prohibited under Sharia law

• Islam forbids all forms of economic activity which it deems morally or socially harmful

• Individuals must spend their wealth judiciously and not hoard it, keep it idle or squander it

• Muslims have a duty to contribute a percentage of their wealth to deprived and poor sections of Muslim society

Source

[Uthman]

Life lessons from Islamic banking

By He Zongying

As the world's best-known banking systems from Europe to the United States desperately try to drag themselves out of quicksand, it makes sense for business schools to expose students to alternative forms of financial practices.

A course in Islamic law, banking and commerce, which debuted at the Singapore Management University earlier this year, was heavily over-subscribed.

The course, spanning a period of 15 weeks and covering topics ranging from the syariah (Islamic law) to the development of Islamic finance products, also invited authorities on the subject from establishments such as the Islamic Bank of Asia and the Monetary Authority of Singapore to give their take.

These highly charged sessions involved extensive discussions and sometimes, even ferociously candid debates on touchy issues such as the practicality of imposing religious practices in today's profit-driven financial environment.

Some questioned why many Islamic banks offer products that are on the surface free of riba (interest), which is haram (forbidden) in Islam, yet charge an equivalent of it in the form of mark-ups and extra fees.

Islamic banking practices and standards among different regions also differ, and what is accepted as a syariah-compliant product in Singapore or Malaysia might not pass muster in stricter jurisdictions such as Saudi Arabia. There are also other aspects of Islamic finance - such as the avoidance of gharar (uncertainty) and maisir (speculation) - which prohibit Islamic banks from engaging in high-risk transactions or investments.

More than that, I was thoroughly impressed by the fundamental principles (though hardly ever practised) that govern Islamic banking. The idea of having the bank as an entity that serves to advance social welfare, and to promote development and entrepreneurship, is brilliant.

Philosophical discussions and banter aside, snagging a job in the growing Islamic banking sector was high on the minds of the students, and each session would inevitably end with sheepish questions about the availability of jobs or internships, or if non-Muslims were welcomed.

With the rapid expansion of the industry, there is a chronic shortage of personnel who are adept at both Islamic principles and financial know-how to bridge the gap between the Islamic scholars and conventionally trained bankers.

A classmate even suggested that there should be a separate track in our university for Islamic banking and finance to allow for more specialised study in this area. The need to understand this topic has become more relevant than ever in today's economic climate, and I am sure this knowledge will serve me well.

Yet the most important elements I got out of this has to do with the simple principles, such as how money was once meant as just a means of exchange, and not something you amass and worship.

And this would serve as a timely reminder for me, as I leave school and enter the fascinating world of unemployment.

The writer, 24, is a final-year business management student at Singapore Management University. (Islamic law, banking and commerce is taught by Associate Professor Andrew White, a trained lawyer who specialises in Islamic law and arbitration.)

This article was first published in The Straits Times.

Source

[Uthman]

Islamic Financial System now a Viable Component

Higher Education Minister Datuk Seri Mohamed Khaled Nordin says the Islamic financial system has now emerged as a viable and strong component, complementing the conventional financial system.

He said that the robust progress achieved by the Islamic financial system in Malaysia had shown the way for its integration in the global market.

He also said that efforts undertaken at the international level to place the Islamic financial system as a credible component, would further help strengthen the development of Malaysia's financial system.

"As an example, the establishment of the Islamic Financial Services Board and the International Islamic Financial Market in Kuala Lumpur to draft international regulatory standards based on the unique features and risks of Islamic banking institutions, will contribute towards ensuring the strength and stability of the Islamic financial system," he said his speech at the International Conference on Islamic Economy at the Kolej Universiti Islam Antarabangsa Selangor (KUIS) here today.

The text of his speech was read by the Deputy Director-General of the Higher Education Department, Prof. Dr Reyhan Mustafa.

Khaled said Malaysia's efforts towards creating the Global Halal Hub was also a step towards highlighting Islamic values in line with the current development of the global economy, which is witnessing an encouraging demand for halal products.

He said the halal products industry is a branch of global business that is growing at a fast pace, with a consumer market of 6,000 million globally and Malaysia in this regard, has been recognised by the United Nations as the best example worldwide.

Meanwhile, at the same function, KUIS signed a memorandum of understanding (MoU) with a number of educational institutions from Indonesia, Turkey and Kazakhstan.

The educational institutions are the Academy of Banking (Kazakhstan), the Islamic University of Europe (Turkey) and the Institut Studi Islam Darussalam Gontor, Universitas Andalas, Universitas Yarsi, UIN Syarif Hidayatullah, Jakarta, (Indonesia).

KUIS Rector Datuk Mohd Adanan Isman in his speech said the MoU created a network of smart cooperation in the educational field, the exchange of students and lecturers as well as knowledge growth.

Source

[Uthman]

Islamic finance training course launched in London

The growing influence and practice of Islamic finance has been recognised through the creation of a London-based training programme for industry professionals.

The programme, which was launched by the Lord Mayor of the City of London, Ian Luder, on Wednesday (May 27th), is being run the Islamic Banking Finance Centre UK (IBFC-UK).

The aim of the course is to enable financial services centres such as London to better cater for the requirements of Islamic finance, which is guided by Shariah, or Islamic law, principles.

The Lord Mayor of the City of London said: “Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure.”

IBFC-UK has been established in partnership with the Islamic Banking & Finance Institute in Malaysia (IBFIM) and Cardiff University’s Business School and Centre of Islam. Its role is to provide research and training for private and public organisations and clients include insurance companies, banks, non-financial businesses and academic institutions.

Akmal Hanuk, chief executive of IBFC-UK, said: “The Islamic finance sector is expanding at an exponential rate and is now estimated to be worth $1.2 trillion globally and growing faster than any of the conventional banks, between 15-20%. This is due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties.”

The UK Programme has been launched in conjunction with International Business Wales (IBW), the Welsh Assembly Government’s trade and investment arm and will be rolled out in Wales initially before other areas of the UK and the rest of the world are targeted.

There are three main components of the course, covering training for finance industry professionals, finance regulators and those in educational roles who want to become accredited in Islamic finance training.

Source

[Uthman]

Birmingham hosts conference on tapping into Islamic finance market

Birmingham will today play host to a conference looking at how the West Midlands can tap into the potential offered by the emerging multi-billion-pound Islamic finance market.

The half-day event, entitled Islamic Business: The Way Forward, brings together a range of speakers from the sector and will look at the potential for positioning Birmingham as an Islamic finance hub.

Aston Business School lecturer Dr Omneya Abdelsalam, who has organised and will chair the event, said one of the key themes was to look at ways to rebrand Birmingham as a centre for international Islamic businesses.

She said: “The West Midlands has real experience in managing investment funds, so there is great potential for areas like the West Midlands to attract Sharia-compliant funds to invest here or provide project finance for projects.”

About 70 delegates are attending, at least half from the legal and financial sector in the West Midlands, to hear speakers including Keith Leach, head of alburaq (Arab Banking Corporation); Omar Shaikh, private equity and Islamic finance, Ernst & Young; and Professor Habib Ahmed, Sharjah Chair in Islamic Law & Finance at Durham University.

Dr Abdelsalam said there was a shortage of skills in Islamic finance, particularly in the development of innovative new Sharia-compliant products, a gap which Aston University hopes to fill with the planned launch of a new Masters degree in Islamic Finance next year.

“There are opportunities not only for Birmingham but for Aston University. We are developing a Masters degree in Islamic finance where we will be able to produce the next generation of qualified professionals who will not only be qualified in Sharia finance but also in conventional accounting and finance.”

The university is also gearing up to offer a series of short courses in Islamic finance in July ahead of the launch of the Masters next October.

Dr Abdelsalam said the panel discussion would reflect not only on the opportunities offered by Islamic finance but the challenges emerging in the sector.

“For example, we need high quality financial reporting and enhanced disclosure of financial information. We also need an improved supervisory and corporate governance framework.

“There is also a need for a centralised Sharia supervisory board which is independent and consistent.”

Dr Abdelsalam said the conference would look at how Islamic finance could help in a recession and pointed to the factors that meant Islamic banks had not been caught up in the subprime financial crisis.

“Islamic finance is more conservative,” she said. “In Sharia-compliant finance the sale of debts is not allowed. Also, to be able to sell a product, you must hold this product. Usury (riba in Islam) is not allowed. Instead sharing risks and rewards is encouraged. Interest is not allowed, instead the bank and the depositors all share the risks and rewards so there is more scrutiny in the banks.

“Ignorance (gharar) must be avoided. Contracts should be completely clear to the contracting parties. With the subprime problems, they were packaged as securities and repackaged again and again. The banks shared in this subprime crisis but it took some time to realise this because there was some ignorance of the product. This is not allowed in Islamic finance.”

Dr Abdelsalam said the difficulties experienced by conventional banks spelled opportunities for Sharia-compliant finance.

“There is a continued liquidity restraint in conventional banks. Everyone is paying more attention to risk assessment, which is something Islamic finance encourages.”

She believes Islamic financial products could be targeted to the wider market, not just the Muslim community.

Source

[Joe98]

I was provided with an example of how Islamic finance works: A person wants to borrow to buy a $20,000.00 car

The Muslim bank, buys the car for $20,000.00 and then sells the car to the customer for (say) $24,000.00

It is then agreed that the customer makes pays the bank (for example) $500 per month for 48 months.

Where does the Islamic bank get the $20,000 from ? Western banks know from experience they will do (say) 1,000 car loans per year and from the money market borrow 1,000 x $20,000 = $20,000,000.00.

There is a hidden cost. Legally, the bank buys the car, pays the taxes, registration and so on and then sells the car and the buyer then pays the taxes registration and so on. That is double the paperwork. That cost is borne either by the customer or the bank – and most likely by the customer. This makes a car loan from an Islamic bank more expensive than from a Western bank.

What if the customer loses their job and stops paying? The Western bank charges interest on interest till the loan is repaid and the Islamic Bank does not. The Islamic bank makes higher losses. The danger is that the shareholders / depositors desert the bank and the bank goes out of business.

-

[Uthman]

Banking: Looking to Islam

Can Islamic banking and insurance provide guidance to western regulators?

The UK media is awash with news on the changing face of financial regulation in the UK and in the US as policy makers seek to ensure the financial failures witnesses in 2008 never happen again.

With this a background the University of Leicester has announced a conference that will ask whether Islamic banking systems could provide guidance to western bank governance.

If Western banks had been operating on a similar system to Islamic Banks, would the global recession have been avoided?

Would an Islamic Insurance system have been more robust and less prone to the issues that led to the collapse of the world major insurance companies? In short, are there lessons for western banks from Islamic Banks?

From its beginnings as a collapse in the sub-prime housing market to a major global crisis, the impact of the current calamity is clear, but developing new practices which can address the issues that led the world to the brink of collapse are a vital part of recovery.

In order to address this fundamental question “how do we stop it from happening again?, The University of Leicester’s School of Management is hosting a conference to consider potential lessons from the Islamic Banking and Finance sector.

Professor Martin Parker, Director of Research for the Management School commented, “It is important for everyone’s future that we study the current crisis in order that more sustainable financial practices can be developed. This conference is a contribution to that project.”

The conference, will consider topics such as:

• Is the current form of Islamic banks, which has been developing its own practices over recent decades, more resilient than current Western practices?

• With the underlying principle in Islamic banking that the transaction be free from the interest of element and backed up by a tangible asset make it more robust?

• Would globalisation make the Islamic system vulnerable?

• Does the obligation of Islamic Financial Institutions on transparency make it less vulnerable ?

Conference coordinator, Dr Ibrahim Umar, said “This is an opportunity for economists, business practitioners, Islamic scholars, and private industries such as banking and insurance to come together to consider whether we can learn lessons from the Islamic system and, if so, what benefits might be achieved. It also gives us the opportunity to consider what potential situations or factors may have a detrimental effect in the future. The conference is open to both academics and practitioners. I hope that anyone who has something to add to the debate will attend.”

Source

[جوري]

Excellent thread.. Jazaka Allah khyran..

:w:

[Uthman]

:wa:

Wa Iyyakum.

[Uthman]

Islamic finance still in search of global credibility

[Uthman]

Sharia derivative standard out by year-end-IIFM

* First master Islamic derivative possible by end year
* Islamic scholars still divided on derivative use

By Cecilia Valente

LONDON, Sept 10 (Reuters) - The first template for over-the-counter derivatives compliant with Islamic law could be in place by year-end, allowing quicker and cheaper Islamic risk management, one of the institutions involved in its creation said.

Ijlal Alvi, CEO of the International Islamic Financial Market (IIFM), told Reuters he hoped the master-contract, originally expected earlier this year [ID:nLB438463], would be approved by its scholars panel within the next three months.

"It is happening. We are working internally and with some banks as well," Alvi said in an interview on Wednesday.

The contract -- to be known as Ta'Hawwut or hedging -- would create a standard legal framework for OTC derivatives in the Islamic market, whereas currently contracts are arranged on an ad hoc basis.

OTC derivatives, or swaps, are privately negotiated deals between investors and counterparties and are commonly used to hedge against interest rate risk and default risk. The total notional amount of OTC deals outstanding was nearly $592 trillion at end-2008, according to the Bank for International Settlements.

Islamic institutions have limited access to derivative products mainly because Islamic law requires the underlying assets in any transaction to be tangible, virtually excluding most of the mainstream derivatives instruments.
Islamic scholars are split on the legitimacy of derivatives; some see them as permissible instruments to hedge risks but others as speculative transactions, which Islam forbids.

Some Islamic operators have used a contract known as Arbun to replicate
call options.

"We are waiting for approval from the sharia board -- this work is now reaching finalisation. We are very hopeful it will be by the end of the year," Alvi said.

The IIFM, which was founded by the central banks and monetary agencies of some countries in the Middle and Far East as well as the Islamic Development Bank, has been working with the International Swaps and Derivatives Association (ISDA).

ISDA was not immediately available for comment. (Reporting by Cecilia Valente, Editing by )

Source

[Uthman]

The steady rise of Islamic finance

London has become one of the biggest centres for Islamic finance in the world, with five Islamic banks, and many others in the high street offering Islamic financial products, or "windows" as they are known.

The growth of Islamic finance has been an unexpected outcome of the attacks on the World Trade Center of 11 September 2001.

Islamic finance is based on rules from Islam's holy texts - the Koran. Scholars claim the fundamental difference to conventional banking is that Islamic finance is more ethical.

First it bans any form of "riba" or interest, preventing consumers being exploited by high rates of borrowing.

'Sinful'

Secondly, it regards speculative trading as sinful. One of the world's leading experts on Islamic finance, Sheikh Hussain Hassan, argues the whole crisis in Western banking could have been avoided if these basic sharia principles had been followed.

He said: "$600 trillion were wasted on options, futures and derivatives, all gambling. Sharia prohibited these kind of risks 14 centuries back."

We have a policy of no obstacles, no special favours, towards Islamic banking or indeed any new financial company

Financial Services Authority

Some Muslims regard ordinary mortgages as sinful. The idea is for the lender and the borrower to share the risk. There are now more products on the market which help Muslims buy a house without paying interest.

The most common form of Islamic home purchase loan works like this: When a couple wants to buy a house, instead of borrowing the money, the Islamic bank buys 80% of the house for them.

The couple puts down a deposit for the other 20% and then pays the bank rent, plus regular portions of the capital. During the fixed period, ownership gradually passes from the bank to the buyer. The rent charged by the bank is how it makes its money.

If the borrower loses his job and defaults on the payments, under sharia law it is very difficult for the family to be thrown out of their home, as that would be seen as a creditor exploiting a debtor.

These interest-avoiding transactions can work on a bigger scale as well.

The old Chelsea Barracks in London was bought by the Qatari government for nearly £1bn - the biggest residential property deal in the UK.

The entire transaction was done under sharia pinciples, with contracts drawn up by lawyers at Norton Rose.

Farmida Bi, one of the law firm's partners, explained that London has attracted this kind of investment because the British government wooed Islamic money in the wake of 9/11, at the expense of the US.

"It was really September 11th that made being a Muslim a political statement and not just a matter of personal faith," she said.

"And with the Patriot Act, which made investments in the US difficult for many Islamic investors, there was a significant increase in Islamic investors choosing to invest in Islamic institutions and Islamic products."

So while groups in the US were investigating terrorist connections with Islamic banks, Muslim investors pulled their money out of America.

Some of the money got diverted to London, which had traditionally been a banking centre. The British government then helped further by changing regulations to give sharia-compliant funds a level playing field with conventional ones.

A spokesperson for the Financial Services Authority, the body which regulates UK financial services, said: "We have a policy of no obstacles and no special favours towards Islamic banking, or indeed any new financial company."

The desire of British Muslim consumers to affirm their identity is also leading to a growth in new consumer services.

Salaam Insurance has launched Europe's first sharia-compliant car insurance aimed at Britain's 700,000 Muslim drivers.

Bradley Brandon-Cross, its non-Muslim chief executive, finds most Muslims do not yet understand the profit and loss sharing principles of "takaful" that it is based on.

"There's clearly an education campaign we are undertaking for British Muslims, to help them understand what Islamic finance is and what it means for them," he said.

Critics say the Islamic character of the products is merely window dressing to lure in Muslim customers.

And others argue the scholars who authorise them are a narrow group whom financial institutions choose to support their new services.

But this scepticism is unlikely to halt the inexorable growth of Islamic finance - as big investors and growing numbers of Muslim consumers demand it.

Source

[kawaiigardiner]

I'm guessing you're right. Of course, with Islamic banking, the emphasis is more on ethics than on profits.

The way Islamic banks operate has less to do with Islamic 'principles' and more to do with common sense.

As PJ O'Rouke pointed out; when something becomes so complex one has to face the fact that it is a fraud. What we saw being marketed as 'new financial products' were so complex that even the creators couldn't explain how they worked - in other words, it was a giant ponzi scheme equal to that of Bernard Madoff.

If the American economy stuck to the 3-6-3 (3% on deposits, 6% on loans and on the golf course by 3) rule - the whole financial collapse would never have happened.

Oh, and then there was greed - a human 'quality' that exists everywhere. Muslim leaders and their opulent palaces, subsidising Wahhabist ideological propaganda whilst the ummah lives in poverty.

[Uthman]

France seeks to woo Islamic finance

PARIS — As France debates whether to ban the burqa, the government is leading a drive to attract billions in investment from Muslim countries by turning Paris into the European capital of Islamic finance.

The French parliament this month has approved changes to legislation to allow Islamic "sukuk" bonds to be issued and the Qatar Islamic Bank has applied to be the first such bank to open in France.

Home to Europe's biggest Muslim minority, France is hoping to unseat London as the European hub for Islamic banking, offering products that comply with Sharia law and meet the needs of big investors mostly from Gulf countries.

But the drive is raising hackles, with some opposition politicians accusing the government of undermining France's much prized secularism to accommodate wealthy interests.

"When rich Muslims are concerned, we welcome them. But when they are poor, we put them on planes and deport them. This is all very upsetting," said Socialist deputy Henri Emmanuelli.

After failing to garner enough votes to derail the bill, the Socialist opposition is challenging the legality of the new legislation on Islamic finance before the Constitutional Council.

"We must not allow principles of Sharia law, or the ethics of the Koran to be introduced into French law," said Emmanuelli.

Under Sharia law, making money from money such as charging interest is not permitted and investment in companies involved in alcohol, gambling and tobacco is strictly off limits.

Much of the debate has focussed on opening up the French market to "sukuk" bonds, which are asset-based and do not pay interest. Investors receive coupons corresponding to part of the profits earned by the asset underpinning the bond.

Economists argue that money raised through Islamic finance could help spur France's nascent recovery with tools that are seen as financially sounder than the high-risk derivatives that led to the 2008 global meltdown.

Elyes Jouini, an author of a report presented to the government last year, estimates that France could tap into 120 billion euros in capital from Islamic finance by making adjustments to its tax and banking laws.

Only seven billion euros of those would be raised domestically among France's five million Muslims.

"There are extremely important financial reserves in Gulf countries and southeast Asia and these countries are ready to invest anywhere but they have specific rules in terms of ethics and in terms of the choice of investment," said Jouini.

"If France wants to attract this capital to its economy, it must offer the possibility for these investors to do so according to the rules of Islamic finance," he said.

Finance Minister Christine Lagarde and Central Bank governor Christian Noyer are to address a major conference in Paris this week that could yield some announcements on promoting Islamic finance in the French economy.

France's far-right National Front has denounced Islamic finance as a "community-based peril" resulting from immigration.

Jouini said opposition to the changes stems from "fear of the unknown."

"The term Islamic is confused with Islamist, the term Sharia raises fears because some think of women forced to cover themselves, the word fatwa raises fears because some think of Salman Rushdie, but a fatwa is nothing more than a decree," said Jouini.

"Islamic finance draws from the ethical principles of Muslim law but it obviously obeys Republican laws. It is not outside the boundaries of legality or civil society," he said.

The drive to open up to Islamic finance came as a parliament task force was looking at measures to ban the wearing of the full Islamic veil in France, reviving controversy over Islam's place there.

Source

[Uthman]

Islamic finance could help student debt

Drawing on Sharia Law principles, a new business project could offer students attractive loans according to experts.

Islamic banking could help reduce student debt drastically according to Liaquat Ali, founder an organisation aiming to reduce consumer debt.

Mr Ali, who heads the of Truly Interest Free project, will be speaking on the opportunities and benefits of interest free student loans at the UK's first Islamic Finance Conference later this month.

According to Mr Ali “it is simply a matter of rearranging how money flows through our lives”.

Using Islamic banking rules Mr Ali hopes to help point students in the direction of interest free loans, as banks are not allowed to charge interest under Shariah Law.

His organisation, Truly Interest Free, specifically aims to reduce consumer debt for families faced with charges related to college education.

Despite the Islamic finance has seen unprecedented growth over the past three decades, Dr. Mehmet Asutay, lecturer in political economy at Durham University believes that appealing to a non-Muslim market will be difficult.

He said: “Misconceptions about Islam in general prevent Islamic finance penetrating into larger non-Muslim communities. Therefore, a real effort has to be made by the Islamic finance industry to demonstrate that this is nothing more than ethical finance, as the ethical finance industry in the UK is growing.”

Dr. Asutay also stressed that inaccurate pre-assumptions about Shariah law need to be addressed in order for Islamic finance to appeal to a wider audience.

“A number of newspaper attempt to link Islamic finance with fundamentalism or radicalism and such attitudes do not help...linking Shariah law only to brutal criminal codes is a huge mistake.

“Despite such negativities, at least in the wholesale and fund management areas, British institutions including leading law companies are moving into Islamic finance. Thus, there is a huge potential for Islamic finance to develop in Britain and beyond.”

Earlier this year Lloyds TSB announced they would be offering suitable banking alternatives compliant with Islamic faith:

“Lloyds TSB offers an Islamic student account which is designed to meet the requirements of Islamic law. The account neither charges nor receives interest. The Islamic Student account has the approval of the Board of Islamic Scholars to ensure that it is Shariah compliant.”

Earlier this summer the National Union of Students compiled a report which showed over half of Scotland's students were taking on costly commercial debt in addition to student loans and bursaries.

Source

[Uthman]

“Lloyds TSB offers an Islamic student account which is designed to meet the requirements of Islamic law. The account neither charges nor receives interest. The Islamic Student account has the approval of the Board of Islamic Scholars to ensure that it is Shariah compliant.”

I've got one of these. :D

[GuestFellow]

I've got one of these. :D

I gotta get one of those... o_o

I hate interest.

[Uthman]

I gotta get one of those... o_o

You can check out the details here. :)

[Uthman]

Islamic asset management needs products, distribution to thrive

[Uthman]

Islamic derivative contract seen by early 2010

Al Salam Europe mulls new deals by year-end

[aamirsaab]

:sl:
This thread is actually going to very interesting for me, since I'm at present taking a Masters in Islamic finance and banking.

Keep this thread alive, Uthman. My life is depending on it! :p

[Uthman]

Islamic banking system provides unique opportunity in tough times

[aamirsaab]

I was provided with an example of how Islamic finance works: A person wants to borrow to buy a $20,000.00 car

The Muslim bank, buys the car for $20,000.00 and then sells the car to the customer for (say) $24,000.00

It is then agreed that the customer makes pays the bank (for example) $500 per month for 48 months.

Where does the Islamic bank get the $20,000 from ? Western banks know from experience they will do (say) 1,000 car loans per year and from the money market borrow 1,000 x $20,000 = $20,000,000.00.

There is a hidden cost. Legally, the bank buys the car, pays the taxes, registration and so on and then sells the car and the buyer then pays the taxes registration and so on. That is double the paperwork. That cost is borne either by the customer or the bank – and most likely by the customer. This makes a car loan from an Islamic bank more expensive than from a Western bank.

What if the customer loses their job and stops paying? The Western bank charges interest on interest till the loan is repaid and the Islamic Bank does not. The Islamic bank makes higher losses. The danger is that the shareholders / depositors desert the bank and the bank goes out of business.

-

There are a couple of ways of financing this in Islamic banks:
1) Murabaha (selling at cost plus): I deposit say 20 K into the bank. The bank can (and does) use this money to buy the car for 20 K and sell at 25k (5k mark up)

2) 2 tier Mudarabah (a form of partnership; one party invests money, the other invests know-how): I depost money into the bank. The bank can loan this money to another person to buy the car (who will then repay the bank in installments or w/e). In this case, the bank has acted both as a lender and a borrower.

3) A lot of the Islamic banks charge high prices for their financial products (in some cases, MORE than conventional making the ruling about no interest seemingly pointless - this is sometimes refered to as back-door interest) so this money can be/is used to finance most of their transactions.

4) There's also capital invested by shareholders; which works the same as in conventional banks.


If the customer is unable to pay, and collateral has been agreed in the legally binding contract, then the bank takes the collateral. If there is no collateral, the bank will thus bare the loss - but that risk is factored into the deal in the first place; the bank knows that going into the agreement, the customer might not be able to pay (hence they are allowed to take collateral!) and hence they are allowed to make a profit on the sale of commodity (this is called iwad - justification of profit on commodity, because you have put in all the effort/risk)

Islamic banking is still in its infancy, and as such it doesn't have all the makings of the conventional system. For example: there is no bank of england equivalent yet (this is incredibly vital in terms of financial institutions). It's very difficult to get liqudity because not all of the neccessary systems are in place - we don't have a lender of last resort or discount houses to finance short term liquidity, which a BoE equivalent would be able to give. That's one of the reasons why you see some Islamic banks charge high prices (or backdoor interest) for their products.

The good news is there is so much room for growth and Islamic banking does seem to be taking off.

[rpwelton]

OK, let's take that car loan example.

So the bank buys the car from the dealership for $20K. They then turn around and sell it for $25K, but they split that payment over, let's say 5 years. So now the customer is able to pay in installments and "in theory" avoid interest.

However, where did that $5K markup come from? That premium in the price is simply for the allowance to pay over time. This is because the customer can go get the car straight from the dealer and pay $20K in cash. But instead they pay an extra $5K to the bank so that they can pay over time.

Isn't this just interest in disguise?

In theory it could work if the bank buys directly from the manufacturer and becomes a dealer in and of themselves, therefore they could buy it at $17K for instance and still sell at $20K while still being able to offer the option of paying over time. However, this is highly unlikely given the fact that banks are not in the car business and it probably wouldn't prudent for them to do so.

Don't get me wrong, I would love for the current models of Islamic finance to work, but I just can't see how they are justified as truly being interest-free. Being a finance guy myself, I thought about going into the Islamic side of things, but I just can't seem to figure out how a lot of it is justified.

[aamirsaab]

OK, let's take that car loan example.

So the bank buys the car from the dealership for $20K. They then turn around and sell it for $25K, but they split that payment over, let's say 5 years. So now the customer is able to pay in installments and "in theory" avoid interest.

However, where did that $5K markup come from? That premium in the price is simply for the allowance to pay over time. This is because the customer can go get the car straight from the dealer and pay $20K in cash. But instead they pay an extra $5K to the bank so that they can pay over time.

Isn't this just interest in disguise?

There's a difference between profit and interest. The main difference is ''profit'' made on a loan is classified as interest. However, a mark up or selling a comodity at cost-plus is regarded as profit. I can't charge you extra for money, but if I sell you an actual comodity or product (i.e a car), I'm well within my islamic right to charge you more than what I bought it for.

...
Don't get me wrong, I would love for the current models of Islamic finance to work, but I just can't see how they are justified as truly being interest-free. Being a finance guy myself, I thought about going into the Islamic side of things, but I just can't seem to figure out how a lot of it is justified.

The inherint problem islamic banks face is that the world economy is built around interest. So even if they don't charge their customers it, they still will hit that wall of interest somewhere down the line.

That's what rubs me the wrong way with all of these so-called "Islamic Mortgages". First of all, they're just riba in disguise, and second of all, is taking out a $400,000 loan which will take you 30 years to repay something that is considered commendable in Islam?

/rant

Lol, that's a very good point indeed. It might not be considered commendable, but the option is available for those who wish to take it, at least in terms of Islamic finance.

[rpwelton]

There's a difference between profit and interest. The main difference is ''profit'' made on a loan is classified as interest. However, a mark up or selling a comodity at cost-plus is regarded as profit. I can't charge you extra for money, but if I sell you an actual comodity or product (i.e a car), I'm well within my islamic right to charge you more than what I bought it for.

:sl:,

I do understand the different between profit and interest. Profit is good and halal, but unfortunately Islamic finance makes this line very blurry. You are essentially introducing a second middleman (the first being the dealer) when you buy a car from an Islamic bank, thereby driving up the price above and beyond what the market is asking for the product.

Let's say you have two people each selling 10 pound bags of rice that are identical in every way. Person A is selling his bag for $10, but person B is selling his for $12. Now with Person A's bag you have to pay cash all at once, but if you buy from Person B you can pay over a period of 2 weeks.

What do you think is the difference between these two bags of rice? Clearly the premium person B is charging is to account for the delay in payment, and that delay is added "value". That's exactly what interest is: a compensation for money lost now, to be repaid later, plus an added premium for risk. Essentially the value of the money in 2 weeks plus the risk premium (i + r).

Let's extrapolate this to the car example. Unless the Islamic bank is getting some kind of discount, they are always going to be selling their product for more right out of the gate than the dealership. Now the difference is that with the Islamic bank you see the full price up front and the price is fixed, meaning a delay in payment beyond the specified contract will not charge you more interest. However, in the reversal, paying the car off faster will not save you any money either.

The premium the dealership charges is basically to account for the delay in payment and for the service of "loaning" money (in Islam a loan is supposed to be charity; you're not supposed to make money off of it, so hence the bank probably wouldn't call it a loan). One could see this premium as just profit, but the thing is that the person is coming to the bank specifically because he wants to pay over time, and that is exactly the service the bank offers. He doesn't come to the bank because that's the best place to buy a car. On the contrary, if you were paying cash upfront, you would never choose the bank over the dealership, because the dealership would be cheaper.

So taking all this into consideration, is there really proof that this type of transaction is allowed in the shari'ah? I'm not a scholar, but a lot of scholars seem to think so. There are some detractors, but for the most part, this is allowed in Islamic finance. I am not going to say it's haraam, because that isn't my job; only Allah can decide that. However, it seems to be one of those issues where your conscience factors greatly into the decision. If you're like me, and honestly believe this to be interest in a hidden form, then it is probably best to stay away from it. However, other people may not see it that way, so for them it might be OK.

And Allah knows best.

[aamirsaab]

....

The premium the dealership charges is basically to account for the delay in payment and for the service of "loaning" money (in Islam a loan is supposed to be charity; you're not supposed to make money off of it, so hence the bank probably wouldn't call it a loan). One could see this premium as just profit, but the thing is that the person is coming to the bank specifically because he wants to pay over time, and that is exactly the service the bank offers. He doesn't come to the bank because that's the best place to buy a car. On the contrary, if you were paying cash upfront, you would never choose the bank over the dealership, because the dealership would be cheaper.

Another good point. But, people do use banks instead of dealership because they allow for deferred/installment style payments, whereas not all dealerships would (the latter may indeed by cheaper upfront, but you might not have that money at the time; as such we have this system in Islamic finance to pay for that commodity).

So taking all this into consideration, is there really proof that this type of transaction is allowed in the shari'ah? I'm not a scholar, but a lot of scholars seem to think so. There are some detractors, but for the most part, this is allowed in Islamic finance. I am not going to say it's haraam, because that isn't my job; only Allah can decide that. However, it seems to be one of those issues where your conscience factors greatly into the decision. If you're like me, and honestly believe this to be interest in a hidden form, then it is probably best to stay away from it. However, other people may not see it that way, so for them it might be OK.

And Allah knows best.

Well, it is considered a form of halal trade amongst the jurists and is allowed in Islam (it's counted as a murabaha contract). But, the point you raise about it being hidden interest is well received and noted. It's a major problem in islamic banking right now and there still isn't much of a solution to it, because interest can so easily be (and most likely IS) hidden in the prices.

The only real way of determining if banks are/are not using hidden interest is through regulation - which opens a whole other can of worms. For one thing: an independant regulator, who is well versed in sharia economics is needed. The problem is we don't have many of them available right now [plenty of demand, no supply]; we can't use non-independant because they're on the bank's payroll [conflict of interest] and we can't use conventional regulators because they don't know sharia [and it takes a lot of time and money to train them].

Inshallah, as the market grows and expands, we will be able to set up a BoE equivalent that can help sort these problems out. Until then, however, the element of hidden interest will continue to exist in Islamic banks.

[rpwelton]

No doubt interest is unavoidable in some form or another. I mean, even the tax dollars we pay here in America goes to help loan money to banks (thank you government bailout :raging:)...so indirectly I am contributing to riba, but I can do nothing about it.

[noorseeker]

i stiil dont undestand islamic finance, it just seems a few words here and there are changed.

[aamirsaab]

No doubt interest is unavoidable in some form or another. I mean, even the tax dollars we pay here in America goes to help loan money to banks (thank you government bailout :raging:)...so indirectly I am contributing to riba, but I can do nothing about it.

Lol; that's what I meant earlier about the wall of interest. We as muslims can do everything to prevent both charging and accepting it, but because of how the system works, we're gonna hit that wall.

Thus, there is definately a need for revolutionary islamic economicists, and I hope to be one by this time next year.

p.s; jazakallah kheir for taking the time to discuss this issue with me. I recommend all members ask questions about these topics; it'll help me with my revision and it will increase your knowledge on the matter (this is especially important for all muslims)

Edit:

i stiil dont undestand islamic finance, it just seems a few words here and there are changed.

There are differences, but there are also quite a few similarities. To put in to perspective. 90% of conventional banking is allowed in Islamic banking - so most of it is very similar; that's why it just looks like a few words have changed. The real difference between the two is equity finance (which Islam favours) vs debt finance (which conventional banks favour)

[rpwelton]

Lol; that's what I meant earlier about the wall of interest. We as muslims can do everything to prevent both charging and accepting it, but because of how the system works, we're gonna hit that wall.

Thus, there is definately a need for revolutionary islamic economicists, and I hope to be one by this time next year.

Insha'Allah you will do well.

[Uthman]

UBS to widen Islamic derivative offering -unit head

[Uthman]

Russia: A Promising Market for Islamic Finance

[Uthman]

Very interesting article: How Islamic finance missed heavenly chance

[aamirsaab]

Very interesting article: How Islamic finance missed heavenly chance

Interesting read indeed.

The course I am currently doing is actually very critical about modern islamic finance (if you can call it islamic that is), so news like this isn't rare to come by.

Still, interesting nonetheless. And only highlights the importance of muslim economicists. I'm not feeling down by this, rather I enjoy it: there's so much room for growth and improvement - can't wait to get stuck in!

[Uthman]

Why Scotland is primed for Islamic finance

[Uthman]

Another very interesting article: How Sharia-compliant is Islamic banking?

[rpwelton]

Another very interesting article: How Sharia-compliant is Islamic banking?

The part about the "Fatwa Shopping", while not surprising, is truly sad. Great article.

[Raaina]

Interesting articles, I never really understood how Islamic banking worked because of the no interest thing.

[aamirsaab]

Interesting articles, I never really understood how Islamic banking worked because of the no interest thing.

Hehehe. Ideally, the islamic banks could work without interest (for the most part), The reality is most of them actually charge interest (but they will call it something else, like transaction fee or something. I referred to this earlier as back-door interest). There are Islamic banks that don't charge it (hidden or not) but because of how widespread interest is, globally, they will be affected by it in their day-to-day business.


There is actually a massive debate going on as to whether we can have an Islamic bank at all. Not neccessarily because of interest (or lack thereof) but also because a lot of the products are based on caravan-era trading. A bank is a lot of things but it's not really a caravan-era trader.

For instance, mudarabah (limited partnership) and murabaha (unlimited partnership) - they work very well in 1 to 1, face-to-face transactions (they'd probably be better suited to corporate banking now that I think about it). But (commercial) banks, like Natwest/HSBC etc don't operate on a 1 to 1 basis (certainly not face-to-face anyway), so they suffer from a lot of information problems (lemon or principle-agent problems).

And, as a member stated earlier in a conversation between him and myself a few pages back, we shouldn't put each other (especially fellow muslims) into the way of harm via loans/debts etc.

So it's difficult to fully say if Islamic banks should exist or not; on the one hand, there is a need for halaal banking (muslims need to put their money somewhere!) but on the other, can banks, as it is (a financial intermediary operating successfully in it's own industry) be even considered halaal in the first place?

It's mind-boggling stuff. And will make for an excellent dissertation!

Edit: that BBC news article a few posts up is absolutely spot on. Our lecturers (one of them a Sheik who is on a sharia advisory board!) have been telling us all that information throughout this year. It also ties in with the debate surrounding Islamic banking. It's very interesting and unfortunate but at the same time to be expected: Islamic banking has only been around for a short time (30 odd years now....) so there are still teething problems, but through time should ease itself out. It's unfortunate and sad, however, that scholars are being bought....

[Insaanah]

Edit: that BBC news article a few posts up is absolutely spot on. Our lecturers (one of them a Sheik who is on a sharia advisory board!) have been telling us all that information throughout this year. It also ties in with the debate surrounding Islamic banking. It's very interesting and unfortunate but at the same time to be expected: Islamic banking has only been around for a short time (30 odd years now....) so there are still teething problems, but through time should ease itself out. It's unfortunate and sad, however, that scholars are being bought....

:sl:

This article really will make me think twice about Islamic finance. And I found the bit about the scholars highly disturbing....

In the Prophet sallallaahu alaihi wa sallams time, (if I'm right) if someone had a loan, they just paid it back. There was never any intention of that becoming an opportunity for someone to make money. I wander if their houses were paid in cash in full? And those who couldn't afford it rented? I wander if anyone has any information on that?

And murabaha and musharaka and the like..are they principles from the time of the Prophet sallallaahu alihi wa sallam, mentioned in the ahadeeth?

Jazaakallah khair.

:sl:

[aamirsaab]

:sl:

This article really will make me think twice about Islamic finance. And I found the bit about the scholars highly disturbing....

In the Prophet sallallaahu alaihi wa sallams time, (if I'm right) if someone had a loan, they just paid it back. There was never any intention of that becoming an opportunity for someone to make money. I wander if their houses were paid in cash in full? And those who couldn't afford it rented? I wander if anyone has any information on that?

I'll ask my lecturers next week about that. If memory serves correct, ijaraha and salam were used to facilitate those sorts of transactions. Though I'm not completely sure on that - I'll check next week.

And murabaha and musharaka and the like..are they principles from the time of the Prophet sallallaahu alihi wa sallam, mentioned in the ahadeeth?


Jazaakallah khair.

:sl:

I believe the Prophet himself did actually use mudarabah with his wife Khadijah (I can't remember 100% tho) in business matters - she would provide the money and he would provide the know-how. Murabaha is an evolution of mudarabah but I can't remember if it was used in Prophet's time.

Musharakah was probably used at that time tho, since it's selling at mark up (or cost-plus) - it's pretty basic concept of business, so I'm pretty sure it was done at that time.

I should add on to my last post: majority of conventional banking is regarded as halaal (and available in Islamic banks) - like 90%. The last 10% is to do with debt financing (which is haram). So in that regard, Islamic banking is better for muslims as you're only getting halaal products.

But, given the information we have (back-door interest, bribary of scholars etc), it's difficult to tell the real difference between sharia and non-sharia compliant banking - I wouldn't be able to say XYZ islamic bank is more halaal than Natwest or HSBC for instance because of the problems already highlighted.

Again tho, (and you'll hear this a lot) to be expected: islamic banking is still in growth stage.

p.s: If you guys/gals (muslim or not) have any questions regarding Islamic banking, please do ask them here. If I cannot answer them (yes, there is a limit to my awesomeness :p), my teachers can.

[Insaanah]

:sl:

I'll ask my lecturers next week about that. If memory serves correct, ijaraha and salam were used to facilitate those sorts of transactions. Though I'm not completely sure on that - I'll check next week.

Jazaakallah khair. I'd be really interested to know. If you find anything out, please do post it here.

I believe the Prophet himself did actually use mudarabah with his wife Khadijah (I can't remember 100% tho) in business matters - she would provide the money and he would provide the know-how. Murabaha is an evolution of mudarabah but I can't remember if it was used in Prophet's time.

Musharakah was probably used at that time tho, since it's selling at mark up (or cost-plus) - it's pretty basic concept of business, so I'm pretty sure it was done at that time.

I should add on to my last post: majority of conventional banking is regarded as halaal (and available in Islamic banks) - like 90%. The last 10% is to do with debt financing (which is haram). So in that regard, Islamic banking is better for muslims as you're only getting halaal products.

But, given the information we have (back-door interest, bribary of scholars etc), it's difficult to tell the real difference between sharia and non-sharia compliant banking - I wouldn't be able to say XYZ islamic bank is more halaal than Natwest or HSBC for instance because of the problems already highlighted.

Again tho, (and you'll hear this a lot) to be expected: islamic banking is still in growth stage.

p.s: If you guys/gals (muslim or not) have any questions regarding Islamic banking, please do ask them here. If I cannot answer them (yes, there is a limit to my awesomeness :p), my teachers can.

Jazaakallah khair.

:sl:

[Uthman]

Islamic Finance: Prospects for Development in Russia

[Chuck]

For instance, mudarabah (limited partnership) and murabaha (unlimited partnership) - they work very well in 1 to 1, face-to-face transactions (they'd probably be better suited to corporate banking now that I think about it). But (commercial) banks, like Natwest/HSBC etc don't operate on a 1 to 1 basis (certainly not face-to-face anyway), so they suffer from a lot of information problems (lemon or principle-agent problems).

I think it has a potential to improve standards. Here some have tried to come up with the solution by pooling of funds. A bank has funds/share in set of businesses that they know well, and then they give share to depositor in the savings account. It works similar to mutual fund, and fund manager in the bank tries to make a well balanced portfolio. But the concerns people have shown are that they don't know much about the business prospects, operations/practices, and management that their money is invested in. This is a valid concern, and trying resolving it would mean better sharing of knowledge and rating about revenue/risk models of the businesses, screening process, and transparency regarding the management and their operations/practices. This would be very beneficial for the industries across the board (but most importantly for banking and finance industry).

Another issue facing Islamic finance is the fiat inflation which was not there at the time of Prophet (pbuh) due to the use of gold and silver as currency. I'll try to find a chart, but in early 1900s when there was gold standard, I saw a chart that showed the value of money didn't dilute like it does today with fiat for 20 years. chart was about 20 years. So basically, it showed that money value moved up and down slightly, but on average even for 20 years it was almost same. So somebody lending 10 million would get back approx 10 million in real value even after 20 years. But with fiat lets say losing 2.5% each year on average for 20 years, means it would lose about 50% of the value.

Here is more accurate figure from http://www.westegg.com/inflation/

10 million initial money in 1988. Returned in 2008 which makes it 20 years. After 20 years, its purchasing power comes down to $5,547,348.18. That is about 45% loss in 20 years and these figures are real. So person lending $10million in fiat will get back only $5.5million in real value if borrower only gives back $10 million back in fiat after 20 years.

These two are very important issues in modern finance and how Islamic finance will impact these two issues rarely comes up in discussions.

[Uthman]

Are Islamic banks safe for home buyers and investors?

• No interest rates and derivatives under sharia
• London is a world centre of Islamic finance

Did you know that it is possible to take on an interest-free home loan? Do you believe that your investments should follow ethical principles? This is possible through the financial structures that follow the Islamic law.

Thousand of people, Muslim and not, have already turned away from their traditional banks to join the Islamic banking system. According to the University of Salford, that has just launched a new masters course in Islamic banking, the Islamic finance sector has an estimated growth rate of 10% to 15% a year, with about $500bn of assets under management.

Islamic finance is based on principles of the Islamic law, the shariah. Major principles of it are a ban on interest rates and contractual uncertainty, adherence to risk-sharing and profit- sharing, promotion of ethical investments that enhance society, and asset-backing. Following the Quranic verse: “Allah made legal commerce, and illegal interest,” Islamic law prohibits usury, known as riba. Making money by lending is considered immoral because the borrower bears the entire risk, while the lender has a guaranteed profit.

Leveraged investments are not allowed. Investments in business that deal in arms, alcohol, gambling, pornography and pork are excluded.

Islamic forms of real estate

Islamic banks therefore offer other forms of real estate that respect the sharia.

A possibility is, for example, that the bank buys the house and then resells it at fixed monthly rates to the customer. Another option is the so-called lease-to-own contract similar to the car purchase: the customer pays for the house “rent”, and at the end of the runtime, it belongs to him.

The third alternative is a kind of shared “take over” of the bank and the customer. The bank will resell gradually to the costumer its shares of the property.

Success of the Islamic finance

The boom in Islamic banking has several reasons. On the one hand the industry is young – so the growth is natural. On the other hand it depends on the credit crisis. Volatile interest rates, high bank fees and foreclosure in payment defaults make people unhappy of the traditional banking system.

Islamic banks are popular especially among young Muslims. Muslims in the UK are 3% of the population and Islam is the second largest religious group in the United Kingdom. In the pre-crisis scenario only a few of them could afford to buy a home. But since the beginning of the crisis house prices fell dramatically – by 18%, says Tony Key, professor at the Cass Business School and expert in housing market. This makes it easier to pay off a property. It seems to be the right moment to buy.

Internationally, Islamic banks appear to be more resilient to the global economic turndown and international financial crisis than conventional banks. Although the Islamic bankers invented tricks to defeat the religious rules getting closer to the western finance, they tend to avoid speculative investments, such as derivatives, that –according to many analysts- affected conventional banks in the financial crisis.

According to the Moscow Times, there are several ingredients that contribute to the success of Islamic finance in London. Essential ones are a regulatory framework that can accommodate financial principles and a clear willingness of the government to promote Islamic finance.

The UK government has fully supported the sector since the early 1990s. The situation is very different in France, where there is a debate on regulating the activities of Islamic finance. Some members of the French government are in opposition to it because they think that this would contravene the principle of secularity of the state.

Warning of “misleading advertising”

The boom in Islamic banking is in contrast to the global decline of the credit market. Thus, the number of loans in the UK has declined to the lowest level since 1975 and increases with fatigue, despite the policy of quantitative easing.

In this sense, Islamic banks go against the grain.

But critics complain that the financial models of institutes in the end turn up to the equivalent of a classic way of credit: the customer needs periodic payments, while the bank makes a profit. Moreover, other critics state that “the industry uses the religious insecurity of the people.” “Companies sell a product, which they claim that it was unlike other products, although it is not. This is misleading advertising,” said Mahmoud Amin el-Gamal, an economics professor at Rice University and Specialist in Islamic finance, in an interview with The Washington Post.

Islamic finance remains a drop in the ocean of finance. Most of its funds are situated in the Persian Gulf and 20% in South Asia but they are increasing in the Western world, where Muslims are a minority.

As the hyper-rich club of oil exporters in the Gulf region just announced that it will create a petro currency on their own to replace the US dollars, the influence of Islamic finance on the global market is set to increase.

Source: The City Herald - City University London

[Pomak]

http://www.youtube.com/watch?v=UHFaQDqVZk8

In the Q and A the woman actually explains the history of Islamic finance and does a bit of dawah lol.

[Uthman]

Dubai Crisis: Islamic Bonds the Problem?

[Muhammad Aseem]

One of the toughest lessons that we have had to learn in this decade has been the financial system collapse, and the collapse of many of the major banks of the world. The five major private and institutional banks have now become either commercial banks, including UBS and Goldman Sachs, or have become a victim to the current economic system, like Lehman Brothers and Bear Sterns. Smaller commercial banks have also been a casualty of the current economic system with banks like RBS and Northern Rock throwing in the towel and numerous banking institutions globally needing government funding to stay afloat.

Regulation around banking are becoming tighter and tighter and more banks have to implement government oversight. In the case of Islamic banking more and more banks are following the same example as has been set by traditional banks. Where the supply of money is based on fractional banking.

Lets take a look at what fractional banking exactly is. Fractional banking means using a multiplier of the deposits to give out loans. For example, in the real world a person would only be able give to other people as much money as he would have. If you had £100 you would be able to give someone £100. However in fractional banking you only have to keep 10% of the amount of loans you make. Thus, if you had £100 you would be able to lend out £1,000 based on the calculation that your total loans are £1,000 and 10% of these is £100 which you physically have.

Because of this fractional banking system you are always able to lend out more money than you actually have. Which allows more and more people credit. If the bank default’s as was the case for Lehman Bros, Bear Sterns and Northern Rock the depositors only get pennies on the dollar. Since the depositor is not entitled in the decision-making process of lending, effectively the bank has looted the wealth of the depositors.

In the true Islamic monetary and economic system, the bank would function as a trust. Where the amount of money deposited in the bank would be a trust for the bank. An 'amanah' so to speak. The bank would only be able to lend out as much money as it owned or was deposited to the bank in terms of partnership money. Only the portion of the money deposited in the bank as partnership money would be used for partnership loans.

This would imply that people could deposit the money in the bank with the knowledge of getting the same amount of the money back. In the absence of a zero interest rate economy that seems extraordinary. It almost seems that depositing money to the bank would be a lost cause because of devaluation. However, because we are living in an economy which is stuck with interest, we are unable to understand how this would be beneficial.

Before going forward let us look at what interest really is. Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money, or, money earned by deposited funds. As this concept of money is considered we understand that all money should have a fee on it's usage, however Allah says that He will destroy riba. The explanation of which is given as follows;

“Ibn Jarir said that Allah's statement, (Allah will destroy Riba) is similar to the statement reported of `Abdullah bin Mas`ud, "Riba will end up with less, even if it was substantial.'' Imam Ahmad recorded a similar statement in Al-Musnad” . (Ibn Kathir)

Surprisingly most of us don't understand what it means, that interest even though it maybe substantial, will be less. The answer lies in the simple mathematical equation. On 5% annual interest £100 will be equal to £105 in a year. However, all things being equal, this implies that tomorrow's £100 will not be equal to today's £100. In fact tomorrow's £100 will be equally to only £95 of today. Since nothing else has changed there is no reason that the money should increase. It is infect decreasing. Because of the interest in tomorrow's money the £100 are only equal to £95 today. The intrinsic value of £100 pounds has actually decreased due to the element of interest which has been incorporated. Over time this value will keep decreasing and decreasing until the £100 become equal to almost nothing. This is what we see due to the current economic system. Goods that could be purchased for a few cents a decade ago cost hundreds, though the intrinsic value has not changed, e.g. a loaf of bread, or a can of coke.

The fractional banking system multiplies this problem by a factor of 10 increasing the problem of devaluation of the actual intrinsic value of money.

The solution then is two fold, first zero interest based banking and second the role of the bank as a trustee first and foremost and then a partner with the depositors to invest in beneficial enterprises.

In our next article we will discuss how these principles can be adopted easily on an individual basis without any changes to the current economic system.

[Uthman]

Luxembourg aims to become hub for Islamic finance

[Chuck]

Luxembourg aims to become hub for Islamic finance

Luxembourg should be the last hub of any finance, their debt is 2 trillion with the GDP only 54 billion. Luxembourg is one of the country with highest Debt to GDP ratio.

[syilla]

Emergency Status (Dharurah) and Islamic banks

By

Zaharuddin Abd Rahman

www.zaharuddin.net
( This article is an excerpt from my book "money, you and Islam" which can be purchased at this link )


emergency.gif



"If a person was lost for days in the thick forest without eating and may die, could he consume a pig due to desperation (dharurat)?" I asked the participants in an Islamic finance seminar.



"Yes, he could," answered the participants confidently.



"Wrong" I replied, creating confusion.



"This is because other options are still exist in the forest to ease his hunger such as snails, worms, plants, fruits and so on, which are far better than a pig. That should be prioritized rather than consuming the pig," I argued.



"Thus there is no dharurat at that time, and it is not permissible for the man to consume the pig just because it is tastier, more appetizing and fatter than worms" I said firmly, inviting laughter from participants.



The same situation applies to Islamic banking in Malaysia. Muslims should give priority to Islamic banking although it looks less ‘appetizing' and causes additional difficulties as compared to riba based institutions. Muslims cannot use dharurat as an excuse to use the facilities of conventional banks.



As mentioned:



"Verily what is allowed due to emergency (dharurat) requires a certainty that the emergency occurred after every effort of searching (for what is permitted)." (Syarhul Umdah, 1/426)



The example above is to indicate that the argument of emergency for using conventional banks and insurance in Malaysia these days is totally unacceptable since there are Islamic banks, Islamic banking windows and takaful. The excuse that the price in conventional banks is cheaper should not be used as it is similar to the lost and starving person who saw a chicken (that is permitted) but consumed a pig just because he desired it. The only exception is when all Islamic institutions have rejected your application. Remember the Islamic Legal Maxims that reads:



Meaning: "What is permissible due to dharurat is limited to a certain limit." (As-Ashbah Wa An-Nazair, As-Suyuti, 1/82; Hawashi Asy-Syarwani, 3/272)



Consider the following scenarios:



In a secluded village where clean drinking water is scarce, two sellers approach the villagers with the following offer:



Seller A: Offering 1 liter of cheap liquor at only RM0.50 a bottle.



Seller B: Offering 1 liter of cheap orange juice at only RM1.00 a bottle.



Who do you think, in the above scenario, is inconsiderate and malicious? If your answer is B ( because selling orange in higher price than liqour), YOU MIGHT NEED TO RETHINK AND RECHECK your level of belief and taqwa, it might be at a worrying stage. Why?

It shows that the person make the visible and material element i.e price as a more important than the spiritual element i.e the prohibition of liquor.



To me, there is nothing more malicious and cruel than offering liquor that is prohibited, and at a cheap price that attracts people to do the prohibited.



Do not reprimand seller B for selling at a higher price, as we do not know his capital and cost to obtain the oranges. He also wants to profit while offering a permitted drink.



You say, "True, but seller B should be more considerate and sacrifice to save a lot of people from being attracted to what is prohibited". I believe it depends on the ihsan and belief of seller B but what he did was permissible. It depends on the owner. Therefore, if the owner of an Islamic bank is unable to give discounts, other owners may not be able to do so as well.



Finally, we should be fair in evaluating Islamic banks and not hastily accusing them as malicious when they are actually saving the Muslim ummah from falling into the trap of riba-based conventional banks.



Best regards,



Zaharuddin Abd Rahman

www.zaharuddin.net

[Uthman]

Islamic Mortgages

[thetruth2009]

Assalam aleykoum sisters and brothers,


I will not suprised you if I tell you that France does't want to see any Islamic Bank in its land.


Because the policians say its a Muslim things and its a SHARIA and no SHARIA in France.


They have a very strange way of thinking.


Assalam aleykoum sisters and brothers.

[ardianto]

Assalam aleykoum sisters and brothers,


I will not suprised you if I tell you that France does't want to see any Islamic Bank in its land.


Because the policians say its a Muslim things and its a SHARIA and no SHARIA in France.


They have a very strange way of thinking.


Assalam aleykoum sisters and brothers.

Assalamualaikum, brother.

I am not surprised if those ignorant people assumed if sharia bank is sharia.

Sharia bank is banking system that based on sharia, but sharia bank itself is not sharia, and sharia bank is not for Muslim only.

There is no rule non-Muslim cannot save money, take loan or get any service from sharia bank. Even there is no rule non-Muslim cannot work in sharia bank because sharia bank is 'Mu'amalah' (relationship between human and human), not 'Ibadah' (relationship between human and Allah).

Also, non-Muslim can adopt sharia banking concept and system then establish their own bank that 100% similar with sharia bank. Concept and system of sharia banking is acceptable for everyone.

[sabr*]

سم الله الرحمن الرحيم

Bismillā hir Rahmā nir Rahīm
In the name of Allah, Most Gracious, Most Merciful

اشْهَدُ انْ لّآ اِلهَ اِلَّا اللّهُ وَ اَشْهَدُ اَنَّ مُحَمَّدً اعَبْدُه وَ رسوله

Ašh hadu al-lā ilāha illā-llāhu, wa ašh hadu anna Muhammadun ‘abduhu wa rasūluhu
I bear witness that none is worthy of worship but Allah, the One alone, without partner, and I bear witness that Muhammad is His servant and Messenger


As-Salāmu `Alaykum (السلام عليكم):

Akhi Muhammad Aseem:

Your article was well written and illuminating. Are you the source of that article?

Also besides the following Islamic Financial institutions are there others that are financial sound and trustworthy?

If anyone can banks you have personal experiences with it would be helpful.


Jazakillahu Khair

I hope this list is of some benefit.

Australia
Islamic Investment Company, Melbourne.

Bahamas
Dar al Mal al Islami, Nassau
Islamic Investment Company Ltd, Nassau.
Masraf Faisal Islamic Bank & Trust, Bahamas Ltd.

Bahrain
Albaraka Islamic Investment Bank, Manama.
Bahrain Islamic Bank, Manama.
Bahrain Islamic Investment Company, Manama.
Islamic Investment Company of the Gulf.
Masraf Faisal al Islami, Bahrain.

Bangladesh
Islamic Bank of Bangladesh Ltd, Dhaka.

Denmark
Islamic Bank International of Denmark, Copenhagen.

Egypt
Albaraka Nile Valley Company, Cairo.
Arab Investment Bank (Islamic Banking Operations), Cairo.
Bank Misr (Islamic Branches), Cairo.
Faisal Islamic Bank of Egypt, Cairo.
General Investment Company, Cairo.
Islamic International Bank for Investment and Development, Cairo.
Islamic Investment and Development Company, Cairo.
Nasir Social Bank, Cairo.

Guinea
Islamic Investment Company of Guinea, Conakry.
Masraf Faisal al Islami of Guinea, Conakry.

India
Baitun Nasr Urban Cooperative Society, Bombay.

Jordan
Islamic Investment House Company Ltd Amman.
Jordan Finance House, Amman.
Jordan Islamic Bank for Finance and Investment, Amman.

Kibris (Turkish Cyprus)
Faisal Islamic Bank of Kibris, Lefkosa.

Kuwait
Al Tukhaim International Exchange Company, Safat.
Kuwait Finance House, Safat.

Liberia
African Arabian Islamic Bank, Monrovia.

Liechtenstein
Arinco Arab Investment Company, Vaduz.
Islamic Banking System Finance S.A. Vaduz.

Luxembourg
Islamic Finance House Universal Holding S.A.

Malaysia
Bank Islam Malaysia Berhad, Kuala Lumpur.
Pilgrims Management and Fund Board, Kuala Lumpur.

Mauritania
Albaraka Islamic Bank, Mauritania.

Niger
Faisal Islamic Bank of Niger, Niamy.

Philippines
Philippine Amanah Bank, Zamboanga.

Qatar
Islamic Exchange and Investment Company, Doha.
Qatar Islamic Bank.

Saudi Arabia
Albaraka Investment and Development Company, Jeddah.
Islamic Development Bank, Jeddah.

Senegal
Faisal Islamic Bank of Senegal, Dakar.
Islamic Investment Company of Senegal, Dakar.

South Africa
JAAME Ltd, Durban.

Sudan
Bank al Baraka al Sudani, Khartoum.
Faisal Islamic Bank of Sudan, Khartoum.
Islamic Bank of Western Sudan, Khartoum.
Islamic Cooperative Development Bank, Khartoum.
Islamic Investment Company of Sudan, Khartoum.
Sudan Islamic Bank, Khartoum.
Tadamun Islamic Bank, Khartoum.

Jersey
The Islamic Investment Company, St Helier.
Masraf Faisal al Islami, St Helier.

Switzerland
Dar al Mal al Islami, Geneva.
Islamic Investment Company Ltd, Geneva.
Shariah Investment Services, PIG, Geneva.

Thailand
Arabian Thai Investment Company Ltd, Bangkok.

Tunisia
Bank al Tamwil al Saudi al Tunisi.

Turkey
Albarakah Turkish Finance House, Istanbul.
Faisal Finance Institution, Istanbul.

U.A.E.
Dubai Islamic Bank, Dubai.
Islamic Investment Company Ltd, Sharjah.

U.K.
Albarakah International Ltd, London.
Albaraka Investment Co. Ltd, London.
Al Rajhi Company for Islamic Investment Ltd, Lond

[Chuck]

UAE:
Emirates Islamic Bank
Abu Dhabi Islamic Bank

[Uthman]

Islamic derivatives standard to launch soon

StanChart to launch Islamic commodity derivative

[Chuck]

Islamic derivatives standard to launch soon

StanChart to launch Islamic commodity derivative

I don't think commodity derivatives can be Islamic. Anyhow, I'll read and keep an open mind.

[Uthman]

Islamic finance eyes new regions

Central Bank's reforms may aid Islamic Banking

[Uthman]

Islamic finance missing some opportunities