… Sharia Finance : a gift from Islam to the world
- Do any of the following statements apply to you? I’ve been affected by the credit crunch. » « I’m fed up with excessive bank charges. » « I think my bank makes unethical investment choices. » If so, Islamic banking may appeal to you. As international debt markets enter a new era, Islamic finance is set to make the world a better place.
“Now is a golden opportunity for Islamic finance to provide an alternative model which, by its very nature, binds both the real and financial economies – just what the world needs right now,” said Swati Taneja, conference director of the Islamic finance industry’s leading global event, the twice-yearly International Islamic Finance Forum.
“There has never been a more interesting time for cautious investors burned in the conventional credit crunch to begin looking at what the Islamic markets have to offer,” Taneja added. “For Islamic financial products to be compliant they avoid excessive gearing and speculation – precisely what regulators are looking for the world over in the new era we are entering.”
“In today’s globalised markets financial products of all types – Islamic or conventional – are affected,” said Taneja. “But what is clear is that Islamic finance practitioners are identifying new markets as a result and are likely to have renewed confidence in the inherent sustainability of the Islamic finance model. Some are even suggesting Islamic products could provide safe havens in these challenging times.”
Islamic banking differs from ‘mainstream’ banking in several fundamental ways. Islamic finance is governed by the principles of Sharia’a (Islamic law). Key Sharia’a tenets include the following:
• The collection and payment of interest (usury – commonly known as riba in Islamic discourse) is prohibited. Earning money – without having to do any work for it – is against Sharia’a principles.
• Instead, one of the mainstays of Islamic banking is the sharing of profit, and loss (for example, between the financial institution and the entrepreneur). Profits made are shared between the bank and the entrepreneur according to predetermined ratio.
• Investing in businesses that are considered unlawful, or haraam, is also prohibited. This includes companies that sell alcohol and pork, as well as those that deal in gambling, pornography, and other commodities contrary to Islamic values. Ethical investing is the only acceptable form of investment.
If you choose to buy a house using Islamic financial services, you won’t have to pay any interest on a mortgage. Sharia’a compliant home finance is based on the principles of ijara (leasing) and musharaka (partnership). So how does it work ? Here’s an example : Say the bank contributes 90% and the customer 10% of the purchase price. Over an agreed period (up to 25 years), the customer then pays monthly purchase instalments, through which the bank sells its share of the home to him or her. However, during this time the bank will make a profit on the transaction. Often, this is through the customer paying the bank rent to live in the property. So, although Islamic home financing aims to be market competitive, you’re unlikely to save much money buying a property this way.
So if I’m not Muslim, why would I choose Islamic banking? These banks have largely been protected from the credit crunch and sub-prime mortgage trouble. Overdraft facilities are not offered, and if an account does go overdrawn, no penalty interest is charged. Administrative fees are charged – for items like returned cheques and letters of notification – but in keeping with Sharia’a principles, the charges should only reflect expenses incurred. Many Islamic banks even choose not to keep the money from bank charges. For example, a lot of Islamic banks donate their charges to charity.
No Speculation : Shariah is against short-selling
The practice of short selling is prohibited by Islamic Sharia. Short selling occurs when stock market participants sell stocks or commodities they do not own in order to profit later from an anticipated fall in prices. It is a strategy widely used by hedge funds, which often are blamed for contributing to the fall of market instruments.Because of the latter phenomenon, short selling is prohibited under Shariah.
Islamic Finance denies the conventional way of thinking, which aims of creating a new dollar out of every dollar. By selling a stock short, the ‘investor’ may gain while the underlying company loses value – a clear violation of the ban of unjust deeds, stated in the Qur’an : ‘Deal not unjustly, and ye shall not be dealt unjustly’. 2:278-279
Islamic Finance is about serving society. By selling a stock short, an avalanche of more short-sellers might be triggered, leading the firm to expensive stock buy-back initiatives or in the worst case to bankruptcy. As well as short selling, day trading is labelled as speculation and therefore is counted as haram as well. Market participants are certainly allowed to profit, but this should add value to the entire economic system.
Transactions in Islamic Sharia are based on the real exchange of goods and utilities. Islamic law forbids usury and outlaws the selling of what you do not own except under strict conditions such as the selling of commodities where the full price is paid in advance whilst that which is valuated [the product] is postponed, which reduces the risks in the transaction. Islamic Sharia also forbids the postponement of buying and selling [forward contracts], which is the case with derivative contracts, and debt trading, except under certain conditions that prevent usury, manipulation and deceit. For these reasons, Sharia scholars have condoned trading in securities and derivatives of all kinds, which also explains why Islamic financial institutions have not been affected by the mortgage crisis.
See also :
- The math behind the growth of Islamic banking
- Can Islam Save The Economy ?
- Ethical Islamic Finance vs God’s wrath against Riba (Usury)
- Islamic finance can give early warning of debt woes
- Non-Muslims flock to ’safe haven’ Sharia bank protected from the crunch
- Islamic Finance In Changing World
- What can Sharia banking offer ?
- This is not a credit crisis
- The Proliferation of Interest-free Finance
- Islamic finance and the global economic crisis
- If we do not defeat usury, usury will defeat us too
- Repositioning Islamic finance for global market
- Virtual Economy – Root Cause: Analysis of The Current Financial Crisis
- Islamic Finance System ‘Can Replace Capitalism’
- Could It happen here ?
- A Muslim Davos
- Europe takes closer look at Islamic financing
- Islamic finance yet to shape banking sector
O you who believe! Be careful of your duty to Allah and relinquish what remains from usury, if you are believers. But if you do not, then be apprised of war from Allah and His Messenger; and if you repent, then you shall have your capital ; neither shall you make the debtor suffer loss, nor shall you be made to suffer loss. Qur’an 2:278-279