Articles on Islamic Finance

[Uthman]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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-affairs/134279330-banking-sharia.html



Peace

 

[Uthman]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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.

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[Uthman]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

Excellent thread.. Jazaka Allah khyran..

 

[Uthman]

Re: Islamic banks 'better in crisis'

:wa:

Wa Iyyakum.

 

[Uthman]

Re: Islamic banks 'better in crisis'

Islamic finance still in search of global credibility

 

[Uthman]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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]

Re: Islamic banks 'better in crisis'

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.