Islamic Finance - What is your opinion?

[N.O.R.F]

Islamic Finance has evolved over the last couple of years. From the initial inceptions by banks such as HSBC and The Woolwich for homebuyers to many more financial services.

 

Today you have customized services for a host of purchases, you have ‘profit’ rates in-lieu of interest rates, ‘sheria compliant’ has become a by-word for many players and advertisers, the debts amassed by young people has rocketed as they feel they are doing no wrong, businesses are thriving as a result of ‘Islamic financing’, the guilt factor is being ebbed away at by banks and financial institutions.

 

Islamic banking and financing differs from region to region as the interpretations are different in terms what services can and should be provided, how these services should be provided and to whom.

 

I have never looked into Islamic banking in much detail but I have to do just that of late. Living in a place brimming with ‘Islamic financial services’ it is difficult to avoid. Being tempted to walk into a bank just for a chat during my lunch hour is becoming the norm (a different bank each day). I have friends and relatives who have/are using these services for a number of investments and ventures. Sitting on the fence for a while does no good, hearing numerous opinions on the subject has not helped in making a decision. Deep down you can say one does not have confidence in the legality of such services (Islamically) as these are usually contracts within contracts and to trust a bank clerk/manager on such issues is never a good idea.

 

So nomads, we have been exposed to this for a while now and I’m sure we even discussed it before, but has anything changed? Do you still have the same doubts as before? What are the opinions of the ullama? Etc

 

A discussion would be beneficial for all.

[Abu-Salman]

It may help in clarifying the issue of Islamic banking by looking separately at the theoric and practical level.

 

At the theorical level, I'm still pondering on few interesting books, namely "Islamic Banking and Finance: Current Developments in Theory and Practice" or "Issues in islamic papers:selected papers" available at the central Regent's Park mosque (Baker Street), which are published by the UK Islamic foundation in Leicester or online www.islamic-foundation.com

 

Still persevering in my own modest "research", my conviction that shariah compliant banking is not only a divine requirement but a powerful tool in "moralizing" economic activity was greatly enhanced given the many obvious advantages corroborated by the specialists.

 

Nonetheless, it is obvious that economic exploitation consitute the bedrock of neo-colonialism and that vested interests held us in hostage through corrupt autocrats and international institutions like the IMF or World Bank, which ruined entire generations and destroyed many countries through criminal policies such as the unfamous "structural adjustment" motto.

 

Consequently, one of the urgent priority facing the Ummah is countering the unethical and mercenary Western banks, though formal banking doesn't necessarily constitute a prerequisite for economic activity and even growth (for exemple, somalis are famous for their "Hagbad" assimilable to the "tontines" in west Africa).

 

On a individual basis, it is obvious that borrowing for consumption in whatever form should certainely be avoided unless absolutely necessary.

 

Readily available credit can also lead, for the society, to the American' economy inherent fragility as consumption financed through credit drive their "growth" while they ironically reproach the much less affluent Chinese for financing their deficit.

 

For instance, the housing bubble lead housing prices upward, hence accentuating deprivation and obscene inequalities alongside the concomitant taken-for-granted regular inflation.

 

Of course, we need more investigation in this field, and we should be cautious, especially regarding the offshoots of HSBC and consorts.

 

Recently, the monopoly enjoyed in Djibouti by two subsidiary comapnies of French majors Banks has come to an end with the inauguration of a Malaysian's firm's local branch(the local treasury, which is the main lifeline, use it for paying State's employees).

 

Yet, although it is still hoped that the latest won't plunder us through 17% interest rate loans and generalized overpriced fees requested even for simply accessing our own savings, it was announced that they will, too, charge interest rates, albeit "competitive" ones...

[Nur]

Great topic Northerner, and timely too.

 

Aslamah ( islamization ) is the new buzz word these days, as Islamic awareness sweeps the Muslim world, everything from marriages ( eNuri Halaal girl/boyfriend idea, taylored for troubled teens in the west ), to drinks ( alcohol-free beer ) to financial transactions, are being redefined to match islamic Sharia, islamization is on full swing, and it makes money too.

 

As the world gets closer and closer, globalization of business, down sizing and out-sourcing is driving business to cross traditional barriers and into new trans-cultural/faith dimensions, not only does the global village convert currencies and languages to conduct instantaneous business transactions, but also entire banking instruments are being converted at will to suit any need ( albeit with some changes ) after scholars of the secular church and the Islamic sharia specialists ( short supply, a job guarnateed for any professional with an MBA in islamic finance, from Malaysia of course ) cross check their respective deffinitions and rules of what is acceptable to each vision.

 

Before we embark on discussing this interesting fiqh -ul-mucaamalaat topic as applied to financial transactions, a treatment of the mother-of-all-fiqh is in order, the spirit and moral of the law, or as known in the academic spheres of Ummul Qura and Madina Universities and others in the Muslim world as Cilmul Maqaasid Al Shariica, and the other Branch Ussulul Fiqh ( the two are different yet share a lot ).

 

Till, then, let us hear from other Nomads.

 

 

Nur

[Khayr]

Some questions that maybe Northener and D.S. and Nur and others can help with:

 

• How does a muslim obtain an interest free loan to buy into a business or even startup a business?

• Are there interest free loans for purchasing vehicles? How does Equit sharing work in such a suitation?

• How about interest free student loands?

Please don't provide a 'link only' response.

 

Jazaka Allah khayrun

[N.O.R.F]

Please don't provide a 'link only' response.

 

Dubai Islamic Bank

 

You asked if these services are available and the answer is yes (with a link)

 

Not an expert on the issue but that is why i'm trying 'stimulate' our nomads into some form of discourse on the issue. We have all read/heard differing opinions.

[Khayr]

Diminishing Musharaka

Diminishing Musharaka is a form of partnership, which ends with the complete ownership of a partner who purchases the share of another partner in that project by a redeeming mechanism agreed between both of them.

 

Applying this mechanism on property financing, we will enter into a partnership with you for the purchase of a property, thereby having common ownership in it. Thereafter, we will lease our share in the property to you and will receive agreed rentals. Periodically, you will purchase a pre-agreed percentage of our share in the property, thereby increasing your ownership in the property and reducing our share by a similar amount. The ownership of the entire property will pass to you upon successful completion of the agreed lease term.

Terms of Financing:

 

Bank Participation :

Maximum 50% of the property value

 

Financing Period : Up to 10 years

 

Mode of Payment : Quarterly, Semi-annual or Annual terms are available

 

Source of Payment : Rentals of the property

 

Bank’s Rental :

EIBOR rate plus margin applied on the outstanding value of the Bank’s share in the Musharaka Property for each rental period

 

Security : First class mortgage on the land & building, post dated cheques covering installments

 

Insurance : The Musharaka property to be fully insured in Bank’s favour

 

Qualified Assets : Residential, Office Buildings & Villa Complexes

 

What is an EIBOR rate ?

 

It sounds like that it is a 50/50 parternship. How does an the average consumer come up with 50%

[ElPunto]

^EIBOR = Emirates Interbank Offer Rate; the rate at which banks lend to each other; obviously the average consumer will have to pay more than that.

 

It's not just Musharaka on offer; Mubaraha asks for 25% of price.

[ElPunto]

I want to ask my learned brothers and sisters something that I've found rather odd. With all Islamic financing of consumer goods like houses or cars - a profit amount is added to the cost of the item. How is this fundamentally different from interest - where a profit based on a percentage rate is charged to the consumer/buyer?

[Abu-Salman]

With all Islamic financing of consumer goods like houses or cars - a profit amount is added to the cost of the item. How is this fundamentally different from interest - where a profit based on a percentage rate is charged to the consumer/buyer?

 

The fundamental difference is that usury based on interest rates eludes the risk factor to the consumer's detriment, a fact corroborated by the overwhelming human suffering througout history not least by farmers'suicide endemic in India for instance.

 

Hence usury doesn't make sense, even in a purely economical perspective, in a world where risk is omnipresent and increasingly so, thanks to speculation and others destructive forms of economic gambling.

 

Nor does it allocate efficiently resources or prserve our biggest asset, our environment; in fact, usury does contributes tremendously to its destruction by promoting ruthlessly short-term

profits.

 

Moreover, debt based on usury is a most pernicious way of subjugating the majority of humankind as illustrated by the IMF "structural adjustment program" whereby entire nations were devastated with all sorts of consequences through the shrinkage of already symbolic health or education expenditures, civil wars, genocides.

 

The irony or suprem immorality here is that we are constricted, through our Western-friendly despots, to reimburse indefinitely and many time the very loans used to oppress and genocide us(the confessions of a former "economic hit man" were eloquent in this regard)...

[ElPunto]

Originally posted by Djib-Somali:

 

The fundamental difference is that usury based on interest rates eludes the risk factor to the consumer's detriment, a fact corroborated by the overwhelming human suffering througout history not least by farmers'suicide endemic in India for instance.

 

According to Islamic rules for financing your house or car - the provider does not take risk either - he/she simply reposses your house or car in case of non payment just like the secular finance provider. And the Islamic finance provider also adds an amount for profit over and above that of the debt. Again this is similar to secular loan providers except they call their profit interest. So what is the difference again?

 

Djib - you've simply failed to answer my question unless my paragraph above is mistaken is some fashion or other.

[Abu-Salman]

More explicitely, the founding principle of Islamic Finance is risk and profit sharing in-lieu of arbitrary usury regardless of the actual results of the business or borrower's solvability.

 

To illustrate it simply, an Islamic bank may lend you the funds for starting Thepoint cattle export company but you become de facto associates, in the sense of benefices as well as losses are distributed in function of the participation.

 

Alternatively, the bank may purchase the trucks needed to transport the camels and lease it to you, though you may finally acquire the lorries by paying regularly an additional fee.

 

Likewise the controversial "Islamic mortagage" programs, which may imply that you'll be asked penalty fees even if you decide to repay earlier your loan (not mentioning the scenario whereby you fail to honor the initial agreement).

 

Consequently, such schemes seems to be highly controversial, especially when "Islamic Financial services" are offered by the mainstream interest-based Banks.

 

More fundamentally, Islamic Finance can not be dissociated of an Islamic economic environment, hence the urgency of a paradigm shift in this important field.

 

However, it is noteworthy that many non-Muslims plebiscited Islamic Banking in Malaysia (according to an article of The Economist), the reason being that it do guaranty nevertheless a much more ethical use of their money...

 

 

PS: sorry for the simile in my previous post

[ElPunto]

Originally posted by Djib-Somali:

More explicitely, the founding principle of Islamic Finance is risk and profit sharing in-lieu of arbitrary usury regardless of the actual results of the business or borrower's solvability.

 

To illustrate it simply, an Islamic bank may lend you the funds for starting Thepoint cattle export company but you become de facto associates, in the sense of benefices as well as losses are distributed in function of the participation.

 

Alternatively, the bank may purchase the trucks needed to transport the camels and lease it to you, though you may finally acquire the lorries by paying regularly an additional fee.

I fully understand this part - when it comes to a business with the potential to earn a profit - you and the Islamic finance house share the risk and the profits.

 

Here is the issue: Buying consumer goods on credit is not an activity that has the potential to earn a profit. So the collateral offered against the loan for the house or the car is the asset itself. And that asset will be repossessed on non-payment. This is exactly the same as western banks. In the above scenario, what is the risk that the Islamic finance house is taking? And how is different again?

 

[Nur]

Northener bro.

 

I am still out on the research of Riba from the Maqasidul Sharia perspective, I am also trying to prepare another write-up on Jihad, which is the hot issue these days, but so far the more I read about the Riba issue, and compare it to the current banking practices, its scary, the moral of the law has been adultered, the purpose beaten, and for that reason we find ourself in misery of wars, hunger and epidemics, all of them pointing the finger toward the verse:

 

"Fadhanuu bi xarbin minallahi wa rasuulihi"

 

 

Nur

[Abu-Salman]

Here is the issue: Buying consumer goods on credit is not an activity that has the potential to earn a profit. So the collateral offered against the loan for the house or the car is the asset itself. And that asset will be repossessed on non-payment. This is exactly the same as western banks. In the above scenario, what is the risk that the Islamic finance house is taking? And how is different again?

 

Little doubt that consumerism is a quintessential evil of our "modern times" Western economic paradigm's inherent fragility is revealed.

 

Moreover, readily available and aggressively marketed credit only add insult to injury.

 

Beyond the economic sphere as well as the obvious catastrophic consequences on our planet, experts are also worried about the psychological effects of consumerism, shopping addiction being assimilated to other forms of addiction in a recent article in The New Scientist.

 

Unfortunately, the constant stress assosiated with ever-increasing amounts of debt starting from the teenage years in many countries will do little to remedy the overall picture.

 

Therefore, one have to look transcendally at this issue by adopting a holistic approach, thus coming to somewhat similar conclusions as those of some Western prominent thinkers; the philosopher Peter Singer, for instance, vigorously denounced the essence of materialism/consumerism based societies while prescriving a frugal "economic diet" whereby human basic needs would be sustainably satisfied.

 

Nevertheless, given the lack of coordinated and coherent State and private sector schemes facilitating home ownership for the poor masses in most countries through creative and affordable projects, it may be postulated that credit towards consumption is part of the solution in this exceptional case, albeit a debatable one.

 

At any rate, this credit- based approach has every ingredient of an ad-hoc patch ignoring the root causes, namely an inconsistent and unsustainable economic paradigm diverting resources away from productive investment and the needy masses, while focusing on the symptoms.

 

So to answer your question, the difference is that in the case of islamic mortgage, the bank basically lease the home whereas you progressively augment your participatory share following a pre-agreed patterny, thus transfering progressively the house to the consumer...

[N.O.R.F]

Djib-Somali, thanks for explaining from the economist angle.

 

Nur

 

the more I read about the Riba issue, and compare it to the current banking practices, its scary, the moral of the law has been adultered, the purpose beaten

It has benefited those who pushed for it in the first place.

 

There is no rush on the write up saxib.