Islamic Finance - What is your opinion?

[Khayr]

Maybe I can put this in laymen's terms:

 

If I lend money to Northerner to buy a car and the conditions are:

 

-Northerner come up with 25-%50% of the downpayment.

-Repayment plan over 5yrs.

-Khayr owns the car incase of default in the repayment plan.

-Khayr gets a profit of $1000 at the end of the 5yr term for providing the loan services.

-Loan amount is $5000 to Northerner.

 

Would this be Halal?

 

How does the lender 'benefit financially' from lending the loan?

 

In the case of a home, I can say that the parties can agree to sell the home after a number of yrs. or at a fixed prices and split the equaty in the homes.

 

i.e.

 

Djib-Somali gets a loan from Northerner to purchase a home.

 

Terms:

-Djib has to put down 5% of the purchasing home price.

-A 5yr term (Vendor take back i.e. Northerner buys the home and enters into a home equity sharing agreement with Djib.) Home is to be sold in 5yrs at a particular bottom line price.

-Equity shares after the sale of house are split percentage wise. i.e. 75% for Northerner (Majority Shareholder) and 25% for Djib (Minority Shareholder).

 

Now, how is the risk 'reduced' for Northener in this case?

[Abu-Salman]

Khayr, to sum it up simply and without financial jargon, here is what I've understood so far:

 

When I ask Northerner or the bank to lend me money for buying my house, in fact the bank or Northerner buy the house and lease it to me.

 

However, besides the rent, I'm supposed to pay a regular "supplement" each month

 

Finally, at the end of the contract, the house is mine and I stop paying rent.

 

This is somehow similar to what we call location-vente or renting-selling (through litteral translation).

 

Now the problem arise when I decide to accelerate things if my income augment during the contract's period, ie I pay the rent plus 2 "supplements" instead of one each month.

 

Obviously, I want the house to be mine as early as possible and I have no incentive to continue paying rent .

 

In this case, this is clearly not in Northerner or the bank's financial interest since they stop receiving rents earlier than expected.

 

So the bank may ask for penalties for breaking the agreement, hence the misgivings in a Islamic point of view.

 

The car's loan follow the same pattern, and I highly doubt wether it is allowed to ask for a fixed fee in return of the loan.

 

 

PS: my point was that trying to copy Western financial system, or more broadly Western economic paradigm based on the assumption of individual immediate satisfaction optimization, was besides the point so to speak.

 

Not only are we copying unhealthy consumerism for both the individual as well as the environment but we are also showing some inferiority complex since economic is a matter of basic assumptions about Human nature and priorities.

 

So how could we copy them if we have very different assumptions on both Human nature and our priorities?

 

Likewise, the current mushrooming of "Islamic" Financial institutions which reveals at best an exagerated admiration for the Western World despite their blatant failures to alleviate human suffering and unjustices, even within their own societies...

[Khayr]

So how could we copy them if we have very different assumptions on both Human nature and our priorities?

This is at the heart of it all...

 

The Muslim comes from a different worldview i.e. That Man is a temporal being created to worship his Lord and is a creature for the Hereafter. This world is a temporary state.

(IDEAL MUSLIM b/c most of us are confused and are accidentaly muslim, not consciously.)

 

 

For the avg. capitalistic consumerism "ACC" (which is what most of the population aspires to be), their worldview is that this world is all they got. Therefor, do ALL YOU CAN or 'BE ALL YOU CAN BE'. Consquences come into play when it is a financial matter i.e. threat of jobless, loss of home etc.

 

Therefor, interest and any other means to attain financial gain is acceptable to the Avg. capitalistic consumerism "ACC", albeit it has to be legal. Whether the action is moral or not is a relative and subjective matter for the ACC.

 

From what I have understood, Islamic financing is not about attaining 'Jannah' on earth i.e. a comfortable life. Rather it is about building a healthier and stronger muslim community. The aim of this is for muslims to interact and help one another and give 'goodly loans/qarda hasna' and 'sadqats' and pay our'Zakats', so that we might attain TAQWA/Consciousness of Allah

 

It is to intergate the secular with the sacred. Hence, why when Salat is mention in the quran, the word zakat follows it:

 

• And be steadfast in Salat; practise Zakat; and bow down your heads with those who bow down (in worship). (2:43)

• But those among them who are well-grounded in knowledge, and the believers, believe in what hath been revealed to thee and what was revealed before thee: And (especially) those who establish regular prayer and pay Zakat and believe in Allah and in the Last Day: To them shall We soon give a great reward.

• And certainly Allah made a covenant with the children of Israel, and We raised up among them twelve chieftains; and Allah said: Surely I am with you; if you keep up prayer and pay the ZAKAT and believe in My messengers and assist them and offer to Allah a goodly gift, I will most certainly cover your evil deeds....

These are just a few ayats as there are many more linking Salat with Zakat.

 

Fi Amanillah

[Naden]

Originally posted by Djib-Somali:

Now the problem arise when I decide to accelerate things if my income augment during the contract's period, ie I pay the rent plus 2 "supplements" instead of one each month.

So the bank may ask for penalties for breaking the agreement, hence the misgivings in a Islamic point of view.

If the agreement stipulated initially does penalize for early payments, despite your scenario being very much fair to the financial institution by payment of installment + supplement (a very interesting euphemism for interest), then the person in debt should pay the penalty.

 

This is akin to an open and closed mortgage whereby the latter has such penalty while the former charges principal + interest but with little or no penalties.

 

It's clear from reading many of the fine prints in 'Islamic' institutions that the risk factor taken by an individual/institution, known as interest, is simply replaced with other more acceptable words such as supplement, charge, sharing cost and so on.

 

In 3:130,

يَا أَيّÙهَا الَّذÙينَ آمَنÙواْ لاَ تَأْكÙÙ„Ùواْ الرّÙبَا أَضْعَاÙًا مّÙضَاعَÙَةًوَاتَّقÙواْ اللَّهَ

 

Riba in the Quran refers to excess or add as read in 22:5 and 16:92. We would wonder about the ‘double’ of riba. Is there an acceptable percentage of ‘riba’ lower than the principal that can be charged (assuming the double in the verse refers to the principal and not the agreed upon excess/interest)? One wonders if the profit of lender is always haram when termed ‘interest’ and acceptable if called by another Islamic name. A rose by any other name is still a rose.

 

The muslim psyche has it seared that interest = riba (of all kinds) = haram.

 

I wonder if what used to be termed رباالنسية before the advent of Islam is what is made haram. People who couldn’t pay off a debt at the agreed upon time where given an extension but only if they would pay double or more of the principal amount. Modern versions of this exploitation are practiced by some financial institutions (and loansharks), whereby your monthly payments are only interest and your principal remains the same and due at any time.

 

This may be different than الربا الÙضل which is the money/interest paid in trade or purchase of goods and is a fixed and agreed upon amount BEFORE a transaction.

 

I think that until terminology dealing with riba as a whole as outlined in the Quran is made clear and reexamined, people will continue to be ambivalent about anything with a greater return than the principal including investments and so on. They'll also continue to be suckered into ‘halal’ financing of business and goods that doesn’t seem much different than its haram counterpart.

[ElPunto]

^Sometimes you have a particularly sarcastic way of addressing religious issues But what you said in your last paragraph is fundamentally correct. There really needs to be a better explanation and discussion of riba and the reasons why Islamic institutions are not charging riba when they ask for a 'supplement' on a loan.

 

However, the Islamic system with regard to profit earning entreprises like a business is clearly and fundamentally different than its western counterpart. This system is more akin to a profit partnership or equity partner. The issue with riba regards consumer goods.

[Naden]

^ Not at all. More skepticism than anything.

This system is more akin to a profit partnership or equity partner.

If you look hard enough, you'll probably find a credit union or a cooperative with similar values and practices. I've dealt with a credit union for the better part of 10 years. The charges and risk taking fees are always there, though, no matter where you go. It's the psychological appeasement that I don't necessarily seek in an Islamic term vs. a so called western one. The value and intent behind a policy/practice has to jibe with the meaning behind the Quran's words.

[ElPunto]

^Yes about the credit union. But with the Islamic system - it is de rigeur whereas with a credit union you have to explore and negotiate.

 

I think the point behind Islam's directives lie with a more equitable distribution of risk and gain/loss. Islamic finance for a commercial entreprise becomes straight forward but with consumer goods it is much more murky if not similar to secular institutions.

[Abu-Salman]

Of course, modern Islamic finance as a reaction to Western banking seems a bit blurred when it comes to consumer goods.

 

However, my point was that, in this particular perspective, it has a somewhat artificial flavour and focused too much on offering an alternative to Western institutions.

 

More broadly, the need of such financial services to support consumption is debatable...

[Abu-Salman]

Of course, modern Islamic finance as a reaction to Western banking seems a bit blurred when it comes to consumer goods.

 

However, my point was that, in this particular perspective, it has a somewhat artificial flavour and focused too much on offering an alternative to Western institutions.

 

More broadly, the need of such financial services to support consumption is debatable...

[Abu-Salman]

As for economic development, it is largely recognized that Foreign Direct Investments as well as equities are the most efficient financial tools comparing to interest-based bonds or commercial loans through the benefits of risk-and-profit sharing compounded by Ideas' circulation.

 

Therefore, it is clear that Shariah promotes economic well-being by chanelling most efficiently available savings towards productive investments.

 

Previously, we have seen that Western economic paradigm is nothing but a catastrophic delusion failing to take into account environmental as well as ethical concerns at the fundamental level, which is the brainwashed consumer, unable to resist an unhealthy consumerism (both in terms of physcal as well as psychological health).

 

Likewise, investors, pressed by interest-based commercial banks for short-term profitability, unvarably fail to behave ethically, even according to the qute laxist Western norms which are necessarily dictated by compromises with ruthless capitalits unaware of their broader social role.

 

All these observations are corroborated by never-ending hard evidences througout history; evidence for which humankind's overwhelming majority or entire nations paid the awful price and will continue to endure undefinitely the consequences through the planet destructon.

 

Nevertheless, denouncing is not enough and implementing Islamic economic and Finance in a generalized, holistic and systematic way is long overdue specially when we can benefit of the unprecedented Petrodollars manna and Muslims pioneered modern banking by introducing cheques and others innovations.

 

In practice, this means promoting economic integration and solidarity within Islamic nations, attracting Arab excessive capital by setting up local Islamic equity portfolio markets, liberalizing and encouraging people and capitals movements which have spread Islam across continents (and which gave birth incidentally to Somalis) ect.

 

Accelerating and enhancing the coherence of existing initiatives is the sine qua non condition of strenghtening the Ummah, hence protecting our independance...

[N.O.R.F]

Bump!