Islamic Finance Week 2009

[Nirvana]

I got this in my email inbox today. What do you guys think?
Should we all be supporting this "Halal" banking system?

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Assalamu Alaikum

I pray that you are well. The first-ever Islamic Finance Week begins on the 1st of June 2009. IFW is a national celebration of Islamic banking and finance, and you can find out more by visiting www.islamicfinanceweek.com.

You can also vote for the best Islamic Finance products by clicking on the link below:

http://ifw.questionpro.com

Your vote is very important. This is your opportunity to tell the Islamic finance companies exactly how you feel about their products and services. The most prestigious award is for "Customer Service Excellence" - which recognises the Islamic finance providers who offer the best level of service to their UK customers.

If you have any questions about the Islamic Finance Week project then please contact us by email: [email protected]. Feel free to forward this message to any of your friends who you think may be interested in helping to choose the best Islamic finance products in the UK.

Yours faithfully,

Junaid Bhatti
Chair of Judges
Islamic Finance Week

 

[rpwelton]

While there is nothing wrong with investing, as long as it is done according to Islamic rulings, one cannot make money by lending money to someone else in accordance with Islam.

The whole concept of "Halal" mortgages is largely deceptive; I've examined several of the systems that exist here in the US, and they are simply using alternative terms for "principal and interest". I'm not sure about the UK, but I'd imagine it's much the same across the globe.

What we need is true Islamic financing; a model that does not seek to imitate the riba-based model of banking, but one that is completely different.

 

[aadil77]

In the UK halal mortgages work like this:

How does it work?

The Home Purchase Plan is based on the accepted and widely used Islamic financing principles of Ijara (leasing) and Diminishing Musharaka (reducing partnership).

For example, the bank may contribute 80% and you 20% of the purchase price. Over a period of up to 30 years, you will make monthly purchase instalments through which the Bank will sell its share (80%) of the home to you. With each instalment paid, the Bank’s share in the property diminishes while your share correspondingly increases.

The customer is a tenant of the Bank
and will pay rent on the occupied share of
the property

The income for the bank is from the rent
charged to the customer for using the
property

The bank will be the holder of the legal
title but the customer will have the
beneficial interest of the property and the
title of the leasehold

The bank as a partner in the property will
be subject to the risks associated with
ownership of the property

http://www.islamic-bank.com/imagesupload/HomePurchasePlanLeaflet_v1_0608.pdf

 

[Nirvana]

In the UK the banks are offering Islamic Mortgages that are based on shared ownership. So the bank owns part of the house and you own the rest. And you have to buy from the bank the part that they own bit by bit until you own the whole thing.

The only problem for the customer is that if the property prices fall - just like they have done! - then the customer is the one that loses out. The bank does not have to take the hit, even though they are supposed to be part-owner. This is not Islamic I think.

Having said that, the Ansar Finance Group in the UK offer an Islamic Mortgage where they are truly Islamic, because if there is a negative equity problem then both the owners (the bank and the customer) have to share the hit in value. This is the truly Halal way of doing things. Or so I have been advised. Allah hu Alim.

 

[rpwelton]

The problem is this: the "ownership share" portion that you pay to the bank each month is the same as "principle" in a riba-based loan. The "rent" or "utility" charge you pay in order to live in the home is the same as interest in a riba-based loan.

To make matters worse, the payments often come out to be exactly the same AND they base the "rent" payments off of current interest rates!

Now, the average person is not aware of this, and it's only because I have a finance background that I have taken to studying these issues. Therefore, the average person engaging in an Islamic loan is doing so believing he or she is participating in a truly alternative halal way of financing.

The only real ways to buy a house Islamically are:

1) Pay all cash (unrealistic for most people)
2) Get a truly 0% loan. This is possible if you took 0% loans from hundreds of different people (which might work as part of a community micro-financing program). Again, it's more realistic than the first option, but without a solid system and network in place, it's not likely to work repeatedly.
3) Find several other people who wish to own their own home, then get together, buy a large plot of land, and each of you builds his or her own house. You still will probably need to borrow some money at 0% to do this, but it will be FAR cheaper than buying an already made home on a stand-alone lot.

Another problem with these banks is that legally they have to operate like traditional banks, and thus state and local housing laws apply to them, some of which go against Shari'ah.

In the end, most people will have to rent. Housing prices are simply too high in most areas, and the options described above cannot be extrapolated to every individual that wants to own a home (like riba-based loans can).

 

[Forced_In]

Salaam

I suppose one important thing to consider is that the bank should invest in
production and should not be a big dealer. Otherwise I find it difficult to adopt
shariah rules.

 

[aadil77]

The problem is this: the "ownership share" portion that you pay to the bank each month is the same as "principle" in a riba-based loan. The "rent" or "utility" charge you pay in order to live in the home is the same as interest in a riba-based loan.

To make matters worse, the payments often come out to be exactly the same AND they base the "rent" payments off of current interest rates!

This is what the IBB say about this:

Q. You state that the rent is calculated on the outstanding amount of the Bank’s share of the
property under the Diminishing Musharaka Agreement. The example is calculated at the rent
rate of 6.95%. This seems like an interest rate. Is it permissible under Sharia’a to determine rent
in this way?
A. It is important to remember that we do not charge interest. We are the landlord and part
owner of the property and have a lease contract where we charge rent and as such all of our legal
documentation and our activities reflect this arrangement. However, to ensure that we give you a
competitive price and to ensure that we are in line with the rest of the market, we use the Bank of
England base rate as a bench mark to ensure that our product is priced competitively with other
products in the market. This has been approved by our Sharia’a Supervisory Committee.

Q. I understand the Bank will review the Rent. I have two questions concerning this
a) Why is there a review of rent?

A. (a) Providing a product that has variable rent is important to both you and the Bank. It is important
that the rent payable remains competitive and provides a rate of return that is comparable with the
profit that is made by other providers when advancing conventional non-Islamic loans. At the same
time, our customers want the flexibility of knowing that if the rates that are used for benchmarking
purposes go up or down, their rent will accordingly be adjusted. There is a further reason why the
Bank adjusts the rent. Some of you may wish to make additional Acquisition Payments, which can be
made at any time, but it is most beneficial to you immediately prior to the rent review. By periodically
adjusting the rent, the additional Acquisition Payments are taken into consideration when assessing
what the new rent figure should be on each rent review date.

Some people also do not agree with 0% loans as the value of your currency can change with inflation

 

[rpwelton]

This is what the IBB say about this:





Some people also do not agree with 0% loans as the value of your currency can change with inflation

Yes, it's true that if you loan someone money at 0%, in the modern economy you are actually losing money. However, if you repay a loan with anything extra, even if it's to compensate for inflation, then it's riba.

I find Islamic finance very interesting, because I see a lot of potential if it's done right. However, the trouble nowadays is that it's just trying to imitate the riba-model instead of becoming something new.

It does have promise, but people have to be committed to it in order for it to work.

EDIT: I recommend the lecture "Let's Buy a House Islamically" by Ghassan Barqawi. I'll dig around to see if I can find a link.

 

[aadil77]

Yes, it's true that if you loan someone money at 0%, in the modern economy you are actually losing money. However, if you repay a loan with anything extra, even if it's to compensate for inflation, then it's riba.

I find Islamic finance very interesting, because I see a lot of potential if it's done right. However, the trouble nowadays is that it's just trying to imitate the riba-model instead of becoming something new.

It does have promise, but people have to be committed to it in order for it to work.

EDIT: I recommend the lecture "Let's Buy a House Islamically" by Ghassan Barqawi. I'll dig around to see if I can find a link.

So what I heard at an islamic finance conferene was that dealing in Gold is the best as its value stays constant

 

[rpwelton]

So what I heard at an islamic finance conferene was that dealing in Gold is the best as its value stays constant

Actually, gold does not stay constant, but rather it increases in value steadily over time. This is because we do not use gold as a currency, rather we use it as a commodity.

I do not know the rulings on dealing in gold apart from simply buying to invest in (which is halal). Finance is an area in which there is limited scholarship, and something that we need more 'Ulema to specialize in. If you can find a fatwa dealing with transactions in gold, please share it.

 

[Nirvana]

According to Shari'ah, you are perfectly entitled to use Gold or Silver as a currency, because that was the currency used by the Islamic civilisation throughout history. In fact, most of Europe also used Gold and Silver as currency.

The British currency "Pound Sterling" is called that because £1 = 1 pound of silver (or at least it used to be).

However, there are certain restrictions about trading in Gold and Silver, and incorrect trading with Gold and Silver can be "Riba". There are many forms of Riba. Interest-bearing loans are known as "Riba Al-Qur'an" which is what most people think of when they hear "Riba". However, there are many other forms of Riba, including "Riba Al-Hadeeth". It's a big subject, and there are quite a few decent books about the topic.

"Introduction to Islamic Finance" by Mufti Taqi Usmani is a brilliant introduction to the topic for laymen, as it outlines the different opinions on Tijarah (business) according to the four main schools of thought. The book itself doesn't include any Fatawa, it just re-iterates the teachings of the great scholars of Islam. (e.g. it will tell you the minor differences of opinion between Imam Shafi'i and Imam Ahmad bin Hambal on certain types of business partnerships.)
However, when i read the book what really stood out was how very very similar the different interpretations of the Four great Imams were when it came to conducting your business transactions according to Shari'ah.

Mufti Taqi is Hanafi/Deobandi himself i believe. I was lucky enough to study under him for a very short period of time.

It's worth noting that Mufti Taqi Usmani used to sit on the "Shari'ah Board" of Islamic Bank of Britain but resigned just before they launched. So he has not given his approval to their products. Although they did feature his name quite prominently in their literature for a long time. So I would beware of their products.

He has approved the products and services of HSBC Amanah, BankIslami and Abu Dhabi Islamic Bank according to my research. He's a very strict Jurist, so I have a lot of faith that he would not approve something that he wasn't sure about.

He is also Chairman of the Shari'ah Scholars Board of AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions) which is the leading standards board for Islamic Finance.

 

[aadil77]

Actually, gold does not stay constant, but rather it increases in value steadily over time. This is because we do not use gold as a currency, rather we use it as a commodity.

.

I'm not sure but I think with exchange rates and inflation the value overall still remains constant.