Japan Joins Booming Islamic Banking

[sonz]

TOKYO — Japan is planning to introduce Shari`ah-compliant dealings into its beefy banking system in a bid to attract lucrative Middle Eastern oil money, a Japanese newspaper said on Sunday, June 18.

The government-backed Japan Bank for International Cooperation (JBIC) has formed a four-man advisory board of Islamic legal scholars from Saudi Arabia, Malaysia and Pakistan, the Nihon Keizai Shimbun said.

JBIC will also study Islamic-style finance in a tie-up with Sumitomo Mitsui Banking Corp., Mizuho Corporate Bank and Bank of Tokyo-Mitsubishi UFJ, the business daily said, quoting sources close to the plan.

Japan Asia Investment Co has separately set up an advisory panel of Muslim scholars to confirm that the Shari`ah Asian Investment Fund it manages jointly with a US firm for Middle Eastern investors conforms to religious teachings.

Islamic banking operates by sharing profit or loss between the bank and its clients, instead of interest, which is forbidden.

Islam forbids Muslims from receiving or paying interest on loans.

Observer

The government also intends to take part as an observer in the Islamic Financial Services Board, a Malaysia-based organization set up by Muslim countries.

The aim is to help Japanese private financial institutions enter the Islamic financial market, according to the paper.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

There are an estimated 300 Islamic banks and financial institutions worldwide holding $300 billion in assets predicted to grow to $1 trillion by 2013.

Deposits grew by 13.7 percent per year from 1998-2003, while in the Gulf region deposit growth reached almost double that in the last few years.

The fastest growing region has been the Gulf Cooperation Council, a region seeing windfall oil revenue, with 60-70 percent of new deposits there going into Islamic banks.

Europe's giants like Britain and Germany expanded over the past three years in producing banking services and products aimed at the Muslim clients.

Britain's fifth-biggest bank, Lloyds TSB, on Wednesday, June 14, began to roll-out its Islamic financial services across the country.

British Muslims, estimated at 1.8 million, will now be able to open a Shari`ah -compliant current account in any of Lloyds' 2000 branches in England, Scotland and Wales.

Deutsche Bank, Germany's biggest bank, set up a committee in 2004 to examine to what extent its products conformed to Islamic law and hoped to create products that did so without diminishing the financial performance clients would expect.

http://www.islam-online.net/English/...06/18/04.shtml

[Joe98]

TOKYO — Japan is planning to introduce Shari`ah-compliant dealings into its beefy banking system in a bid to attract lucrative Middle Eastern oil money,

Well done Japan!

Just do everything as you are doinng now. No new systems required. Change the word "interest" to "fee" and the profits will roll in!

[Chuck]

Change the word "interest" to "fee"

There is a big difference between interest and fee. Charge in an interest is continuous while in fee it is periodic, and most importantly it is not compounded.

[Joe98]

There is a big difference between interest and fee. Charge in an interest is continuous while in fee it is periodic, and most importantly it is not compounded.

Only in theory.

The bank lends $1,000,000 to a business.

Over 3 years it needs to be repaid $1,200,000

All the figures are put on a spread sheet and calculations done.

In some places its called "interest" and in other places it is not.

However the figure is still $200,000.

The amount is the same. The calculation is the same. The method of calculation is the same.

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[Islamicboy]

If you take a loan of 100 and end up paying 125 because of the fee is that not interest. I looked up the defination of Riba..

[Chuck]

"The bank lends $1,000,000 to a business."
Ok

"Over 3 years it needs to be repaid $1,200,000"
Ok (the banks requires are return of 200,000 over 3 years, which is approx 6.267% p.a.). Keep this in mind it means a return of approx 6.67% (i.e. return of $66666.67 p.a. on the investment of $1,000,000).


"However the figure is still $200,000"
Only if the company pays on time, but normally companies don't and ask their banks to carry forward. Let's say company pays the full amount in year 5 then the cost of the loan will be $355,164.77. Without interest it will be $333333.33 ($66666.67 * 5) which is $21,831.44 less.

[Chuck]

The real problem of interest for poor is not visible at all. I know a pakistani guy who has been trying to repay his loan for generations. His grandfather took a loan of 10,000 from a landlord... he couldn't pay full loan in his life time... neither his son... and now he (the grandson) is try to repay it which stands at 30,000 rupees. Overall, they have paid up to now over 200,000 rupees... which is quite sad.

[Joe98]

The bank lends $1,000,000 to a business over 3 years.......

..fees...of $66,666.67 p.a

Let's say company pays the full amount in year 5.....

Any sensible Islamic bank would charge more fees of $66,666.67 for each of the 2 years in return for extending the loan from 3 years to 5 years.

[Chuck]

Any sensible Islamic bank would charge more fees of $66,666.67 for each of the 2 years in return for extending the loan from 3 years to 5 years.

In any case, it won't be compounded. Normally it will be adjusted for inflation rate and keep it mind banks don't normally give loan on fixed interest rates, which means interest rate will be adjusted for inflation + the interest will be compounded on this adjusted rate... so interest free rate will be the cheapest option (all other things equal).

[Joe98]

Thank you!

I will borrow from Islamic banks and lend to non-Islamics!

Whoooo! I will soon be rich!

[Chuck]

"I will borrow from Islamic banks and lend to non-Islamics!"
You're welcome.

"Whoooo! I will soon be rich!"
Actually it is not about being rich, but credit with interest cost the poor most. And rich should pass extra savings to poor too, imo.

Here is something interesting:

At the end of the year 2000, U.S. households were accruing interest on $574 billion of revolving credit card debt, or debt carried over to the next month rather than paid off entirely. The average household with a credit card balance carried revolving debt of nearly $10,000. A household making the minimum payments—commonly only two percent of the unpaid balance or $20, whichever is greater—on this debt would pay nearly $1,500 in interest just in the first year. Nationally, consumers pay interest of more than $87 billion annually on this revolving debt. Cardholders paying only the minimum balance accumulate interest on top of interest, paying far more than their share to credit card companies.

http://truthaboutcredit.org/truth.as...3=credittruth&

[Joe98]

You are trying to say that an Islamic bank does not charge interest and then conclude that the customers are better off.

This means the Islamic bank must be making losses.

The reason is, that if the people cannot afford to repay under one system then they cannot repay under the other system either.

[Chuck]

"This means the Islamic bank must be making losses."
If a bank stop charging accumulated interest on top of interest, how come that means they'd make loses? This is just an extra income for the bank that affects poor the most, since they are the ones who normally can't make payments on schedule, but a bank would still earn return on principal amount.

[lolwatever]

You are trying to say that an Islamic bank does not charge interest and then conclude that the customers are better off.

This means the Islamic bank must be making losses.

The reason is, that if the people cannot afford to repay under one system then they cannot repay under the other system either.

People are better off Islamically, they can be better off materialistically too depending on how good the bank is at it's quantitative methods and forecasting skills.... you can endup making muchh more money out of an Islamic bank compared to an interest bank, but there's a much higher risk involved too.

But that's normal... entrepeneurial profit is proportional to the risk you take, as they say...

[Joe98]

I am now starting to “get it”. Islam is not against interest as such, it is only against compounding interest.

However compounding interest is important for banks to work properly. It works like this:

An Islamic bank borrows $100 from the market. It pays a $4 fee for doing so

The bank lends $100 to a customer. The bank charges a $10 fee for doing so.

However, during year 1, the customer does not pay any amount.

The bank agrees with the customer, to extend the loan for another year in return for another fee ( to be calculated below).

At the end of year 1, the bank has paid $4. In terms of it’s cashflows the bank is short by $4.

So at the start of year 2, the bank, instead of borrowing $100 from the market, it needs to borrow $104 from the market. This is required to correct it’s cash position.

So, at the start of year 2, the customer now owes the bank, $100 principal, and the original $10 fee. But the bank needs to recoup it’s $4. So the fee for the extension of the loan is $14.

At the end of year 2, the amount owing is $124 which is made up of $100 principal and $24 in fees. In reality it is compounding interest.

Ultimately the bank’s cash flows must balance. It doesn’t matter what name you give it. The alternative is to issue more capital of $4 which is not practical.

Under the Western banking system, if you compound $100 at 10% then at the end of year 2 the amount owing is $121

[lolwatever]

No that's not right,

When you lend money you can only take back the exact amount, and if a bank is going to charge a different fee for borrowing compared to lending then that's interest because it obviously mean's their not revealing their true opportunity cost (or in layman speak, cost of service).

Secondly the way these islamic banks works is more of an investment fund, a sharemarket sorta thing rather than what you're describing.. So you have a pool of money which gets invested into businesses and stuff, and the return that's derived is shared between the shareholders at the end of the financial term, and the bank that way is able to lend people without interest.... Because people have an incentive to put their money with a bank because of the profit they can recieve, and that money can be split between loans and investment projects.

ther'es a risk there, because of the bank invests in a cactus deal, people lose money just like sharemarket, that's the difference, so its not a win win as you make it sound.

Also, I think you're mixing up between riba and interest, not all forms of interest are Riba. And there's alot of Riba that's not labelled interest as such but it's equally forbidden.

[i_m_tipu]

Islamic Law over business, loan and others do have several times more beneficial for the people of all kind (except those who have bad intention) than current system of banking

Poor knowledge over Islam force people to follow current system

We should know Islam better
Qur’an should be our constitution

Otherwise we can not susceed

003.146
How many of the prophets fought (in Allah's way), and with them (fought) Large bands of godly men? but they never lost heart if they met with disaster in Allah's way, nor did they weaken (in will) nor give in. And Allah Loves those who are firm and steadfast.

003.147
All that they said was: "Our Lord! Forgive us our sins and anything We may have done that transgressed our duty: Establish our feet firmly, and help us against those that resist Faith."

003.148
And Allah gave them a reward in this world, and the excellent reward of the Hereafter. For Allah Loveth those who do good.

003.149
O ye who believe! If ye obey the Unbelievers, they will drive you back on your heels, and ye will turn back (from Faith) to your own loss.

003.150
Nay, Allah is your protector, and He is the best of helpers.

[Joe98]

All that they said was: "Our Lord! Forgive us our sins and anything We may have done that transgressed our duty: Establish our feet firmly, and help us against those that resist Faith."

How does this help us understand Islamic banking laws???

[lolwatever]

well maybe if you read my comment it might help you understand what is islamic banking and what isn't.

[Chuck]

"However compounding interest is important for banks to work properly."
Actually no, because it not the way market works. If all other things equal (inflation, demand, supply, etc)... if you invest 1,000,000 with the return 200,000 after 3 then after 6 years you will get 400,000. But if you do same thing with the bank you will end up paying more (approx. 440,336).

"So at the start of year 2, the bank, instead of borrowing $100 from the market, it needs to borrow $104 from the market. This is required to correct it’s cash position."
You are looking at this way because you are used to this concept, but it is not right, because if the customer had initially negotiated for a 2 year contract (all other things equal) the cost would have been $8 (1st yr expenses $4 + 2nd yr expenses $4) and not $21 for the loan.

"Islam is not against interest as such, it is only against compounding interest."
Depends on the definition of interest. Contracted term's interest (e.g. 200,000 in 3 years) in your example is not riba because the way you have set it up.

[Joe98]

But if you do same thing with the bank you will end up paying more (approx. 440,336).

Not at all. If the customer repays as per the contract there would be nothing for us to discuss here. If the customer does not repay only then does compound interest kick in - and we can discuss it.

Ultimately the question is-: How do Islamic banks handle customers who do not abide by the contract to repay?

[lolwatever]

1. you didnt reply to my comment
2. Ask yourself that question, hwo do your banks handle customers who don't abide to repay?

Assuming your answer is 'throw em in jail', Islam is more practical than that, if the person who default's has the money but isn't paying, then the matter is taken to court and the judge will make the appropriate decision, either the bank agrees to extend his contract, or he is forced to pay, i cant answer whether that's deemed to be theft but if it is then the punishment is applied.

But obviously the bank won't go out lending money to anyone and anyhow, similar to the way usury banks insure the person with the loan has a security.

If the person who needs the loan is poor, and the private bank can't come to any agreement with him/her, then the treasury is there to help, read into Umar's life as a khalifah to see examples of that. (Yes Muslims did have social welfare systems and a treasury while the europeans where trying to figure out whether the woman was a human or not)

[Joe98]

Assuming your answer is 'throw em in jail',

No! Of course not! Where are you from???

Therbank will enforce its rights under contract - which means if any assets were secured the bank will sell them and use the money to repay the loan. Any money left over goes back to the owner of the assets.

If there was no security the person is declared bankrupt. And a bankrupt cannot be a director of a company - which means he cannot lose more of the banks money.

In the mean time, I still have no idea how an Muslim bank works.

[lolwatever]

No! Of course not! Where are you from???

Therbank will enforce its rights under contract - which means if any assets were secured the bank will sell them and use the money to repay the loan. Any money left over goes back to the owner of the assets.

If there was no security the person is declared bankrupt. And a bankrupt cannot be a director of a company - which means he cannot lose more of the banks money.

In the mean time, I still have no idea how an Muslim bank works.

Well geez that's good news to the family of whoever went broke lol. A night out in the streets. I don't get your second paragraph.

There is no one way method for Muslim banks to work.. just like there's no one way to manage a business or economy... there's only the general rules that need to be established (in this case i guess, no usury and all other related business regulations).. and the rest is flexible

just like ther'es no one way to setup a Muslim leader, Abu bakr was voted by the people of Madinah, Umar was appointed by his predecessor, Uthman was selected from a set of six, and i cant remember about Ali (i think the disagreement blurred things)... So long as the major rules are intact, like the khalif can't be a mischievous person etc

[Chuck]

Not at all.
Not at all what?

If the customer repays as per the contract there would be nothing for us to discuss here. If the customer does not repay only then does compound interest kick in - and we can discuss it.
Hence, the two are not same, otherwise this difference wouldn't be present.

How do Islamic banks handle customers who do not abide by the contract to repay?
That depends on case by case basis. To make things simple, I'd say lended money is suppose to be treated like an actual investment (ref to post #16 & #20).