Thread: Islamic Banking: The Banking of the Future

Originally Posted by Ray

This is indeed great news.

Islamic banking, as one understand, has no interest levied.

Yet, banking cannot be vibrant without interest to be economically viable.

Therefore, this is indeed a miracle.

How does this really work out and if this article is correct, it is indeed something worth emulating!

One could get flush with loans and not pay the interest!

Credit cards is thus passé !

The article states that there is no speculatinn. If that be the case, then how does the bank sustain itself?

It is so confusing.

Hi Ray,

There was an article on Islamic banking in a CFA magazine I read a few months back. Let me see if I can dig it up and try to find some answers.

I am no finance expert, but it does seem that a reasonable interest rate is essential for the banking system.

Also, where is the increase of Islamic banking business coming from? Is it coming from Muslim clients mainly, or non-Muslims? It is all the more interesting if the latter is true.

An interesting article, but I do not know the implications of a worldwide Islamic banking dynamic or system.

I hope we see the comments of some finance experts.

I read that Islamic banking gets around interest by purchasing whatever it is that the person getting the loan wants, and then selling it at a higher price, therefore being able to provide an interest free loan. So for instance, if someone wants to buy a house, the bank will buy the house for him, and sell it to him at a higher price while giving him an interest free loan to buy the house from the bank. Seems to me like there is no real moral difference between that and interest....but, whatever.

Islamic banking is exactly the same as a fixed interest rate.

At the end of the day all banks must make profits to exist.

Islam urges you not to get money or loan money at extortionate rates of interest as well as altering rates of interest. For example as a muslim, for me to take a loan with a 20% fixed interest rate is probably wrong, unless i am sure that i can pay that extortianate amount back.

Also variable intrest rates are forbidden, as today the intrest rate may be 2% and tommorow 50%, which is a gamble with my money and assets, which is consequently forbidden. Some however argue that as long as you have agreed a fixed term witht he bank for that increase/decrease to be notified, even this is allowed, however that is grey territory.

A fixed intrest rate loan means you borrow $xxx, for y years and repay it with an intrest rate of z, giving a grand total of $xxx...which will be the same as the day you borrow to the end of period y, assuming all payments are made on time.

Islamic banking is the same thing, just re-worded....rather than agreeing to pay a certain amount of intrest, you agre to the bank buying the house for you and you paying x amount over y years to the bank, leaving a total higher than that at which the bank purcahsed the property.

However investment is slighty different, as you chare both proft and loss, the idea being you buy the banks share back from them (the amount they loaned you plus thier fee) as your business makes money (a fixed term), however i can't understand how a loss works, because i ehar they are supposed to be equally shared too....don't take this part as gospel from me though.

Originally Posted by Ray

This is indeed great news.

Islamic banking, as one understand, has no interest levied.

Yet, banking cannot be vibrant without interest to be economically viable.

Therefore, this is indeed a miracle.

How does this really work out and if this article is correct, it is indeed something worth emulating!

One could get flush with loans and not pay the interest!

Credit cards is thus passé !

The article states that there is no speculatinn. If that be the case, then how does the bank sustain itself?

It is so confusing.

Similar products are avaiable in India too,its more like a deep discount bond.

There are two types of bonds basically.

1.Interetst bearing Bonds.

If you buy a Interest bearing Bonds with a tenure of 1 year having a interest rate of 8% per annum and face value of $ 100.

After 1 year it will work out as to = 100*1.08= $ 108

2.Deep discount Bonds:

In the same market, a deep discounted bond will be available for $92.59 and on maturity it will be $100.Giving you the same returns of 8%

But islamic banking is a much wider topic and one of the hottest topics.

Its mainly due to evilness of interests that the arabs tend to trade morein currency futures than in currency spots.

read that Islamic banking gets around interest by purchasing whatever it is that the person getting the loan wants, and then selling it at a higher price, therefore being able to provide an interest free loan.

Leader,

Even that is usury and not permitted in Islam.

As soon as anything resembles usury, it is not permitted in Islam.

One may argue that usury is high interest. But then what is low interest? Who decides what is low interest.

To many, a miss is as good as a mile.

Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury.... Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner.... O you who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time tin it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew. [Surah al Baqarah, verse 275-280.

[2:275] Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, GOD permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with GOD. As for those who persist in usury, they incur Hell, wherein they abide forever


Plat,

If Islamic banking is what is normal banking, then why is it so hot as you claim?

Appears to me with your explanation above that it is merely a gimmick and an old wine in a new bottle or a case of "buri ghori lal lagam" (old mare with a red rein!)

maybe in the 6th centurey this concecpt was hot....

today it's just banking....well marketted banking...

Originally Posted by platinum786

maybe in the 6th centurey this concecpt was hot....

today it's just banking....well marketted banking...

No platinum, its basically a hot topic in ME,atleast in dubai.there are lot of seminars been held to discuss this topic.

infact these arabs so ****ing freaks that they even are scared to touch, spot-currency markets and are happy at the same time to trade in currency futures.

Originally Posted by Bulgaroctonus

An interesting article, but I do not know the implications of a worldwide Islamic banking dynamic or system.

I hope we see the comments of some finance experts.

Bulgaroctonus,

I am not one of the financial experts you are hoping for, but I do have small grasp of the subject knowledge gleaned from a few readings, anecdotes, etc.

The gist of it, as I am sure you are aware, is the goal of making finance Shariah compliant. But, as with all things Shariah, there are many interpretations and schools of thought on the matter.

A few posters have touched on the issues of usury and interest and this is a good example. It is popular to sum up the issue neatly under the prohibitions regarding "riba". However, like most things Muslim, commentators on the Koran have differing views and intepretations of "riba" run the gammut from outright usury to simple bank interest.

Outside of "riba", there are the so called "Twin Pillars of Islamic Banking": "mudarabah" and "musharakah".

Mudarabah is essentially a proift sharing scheme. The bank becomes the "mudarib", a borrower, and at the same time the "rabbulmal", the owner of the capital. The bank uses the money on deposit to fund various undertakings and takes its profits from those investments. Playing both sides of the fence is a riskier proposition than "conventional" banking but it is profitable enough to keep the practitioners coming back and is Shariah compliant as long as none of the profits are derived from underwriting activities that are clearly "haram".

Musharakah is the prinicple already mentioned about essentially leasing to own your property from the bank. There are a couple of different structures and it can be that musharakah is similar in general to the conventioal ideas of partnership and joint stock holding.

Regarding securities, there are several that are Shariah compliant such as the Islamic bond, or "sukuk". For example, consider the "ijara sukuk", a leasing bond. The nature of this vehicle is simply investors or groups of investors buying bonds from an issuer and then selling them back to the issuer at a future date at a profit under a predetermined agreement. The growth of the profit can be floating or pegged just like a conventional interest bearing security.

Modern Islamic banking is a post World War II phenomenon and is generally considered to be in its third generation.

There is a lot of activity in Isalmic finance and you may wish to peruse the Shariah Equity Opportunity Fund Ltd., of New Cannan, Connetticut at www.shariahfunds.com

Islamic banking and financing is indeed hot and beyond the Middle East at that as it is generally thought to be a 250 billion dollar or greater opportunity. UBS, Citigroup and HSBC all are playing the game: Noriba Bank, Citi Islamic Investment Bank and Amanah Finance.

It is interesting to note as well that the United States' own FHLMC and FNMA (Freddie Mac and Fannie Mae) our purchasing Islamic housing contracts.

Many people in Islamic finance are seeking to better integrate their activities with the global economy at large by adopting widely accepted accouting standards and seeking to comply with international banking standards ala Basel II.

In the scheme things, I would consider the rise of Islamic finance and banking a good thing. It shows that Islam is indeed capable of adapting to a changing, modern world. The fact that Islam can most likely integrate with the rest of the world on the economic and financial level seems to be another inconvenient fact that those who pimp the "Clash of Civilizations" thesis will likely ignore.

Well, that is probably a reasonable thumbnail sketch of the situation and there is no doubt much, much more. Hopefully some of those experts you mentioned earlier will be able to tell us something substantial and correct any misconceptions I may be circulating.

An interesting subject. Does anybody know about the credit markets and whether debit cards are making inroads into Islamic finance, or are those non-sharia compliant?

Originally Posted by shek

An interesting subject. Does anybody know about the credit markets and whether debit cards are making inroads into Islamic finance, or are those non-sharia compliant?

Shek,

Yes, but I do not know exactly how it works.

Apparently, the first step in getting an Islamic financial vehicle to market is the empanel a Sharia Board of several or more clerics and/or Koranic scholars to determine compliance. This adds a lot of expense and lead time to product development, however.

Here is an old article on the "al Buraq" card; claimed to be the first Islamic credit card:

ABC Islamic Bank (E.C.) launches Islamic credit card

ABC Islamic Bank E.C, a wholly-owned subsidiary of Arab Banking Corporation, has issued the first Islamic credit card.

Bahrain: Tuesday, September 24 - 2002 at 09:41 GMT+4

The card, considered the first Islamic credit card that conforms to Sharia principles, is expected to be well accepted by all customers who prefer to utilise a credit card based on Glorious Sharia principles.

Prior to launching the card, ABC Islamic Bank (E.C.) established an Islamic credit card company with a variable capital. The company has issued two classes of capital. The authorised capital of Management Shares (Class A) is US$5,000,000 with a paid up of US$3,000,000, and Participation Shares (Class B).

The card has been issued to its employees and some corporate clients and while distribution to corporates continues, the card is available to individuals through participating banks. ABC Islamic Bank (E.C.) is now concluding the participating agreements with these banks.

ABC Islamic Bank (E.C.) chose the name 'Al Buraq' for the new card. Al Buraq is the name of the creature that Prophet Mohammed is said to have rode on when he made his miraculous night journey. This name has been chosen for its religious connotation and because it represents speed and trust. The card will provide benefits similar to normal credit cards in terms of settlement and international recognition. It will be distributed through various retail banks and is intended to be promoted by both Islamic and conventional banks.

Mr. Mohamed BuQais, General Manager of ABC Islamic Bank (E.C.), Bahrain, has clarified that ABC Islamic Bank (E.C.) invited major Islamic banks and financial institutions to participate in Class B shares, allowing these banks to issue credit cards to their customers in their home countries. Arab Financial Services Company, an affiliate of Arab Banking Corporation, is responsible for producing the card and is also the technical manager and processing agent.

---End---

Link to Source: http://www.ameinfo.com/10422.html

Ok, here is something more recent and a little more explanatory on Islamic credit cards:

Credit Cards: It Is A Long Way For Most Local Islamic Banks
November 6, 2005

Making Islamic credit cards a near substitute to conventional credit cards seems a bridge too far for local Islamic banks, despite the fact that all of these institutions offer some sort of card based credit options to customers.

“Islamic banks offer asset backed finance where cash transactions and interest are avoided. In most 'credit' situations the bank buys the 'asset', that could be a product or service on behalf of its customer, and the customer buys back the asset from the bank in installments. In the case of personal loans and credit cards too such asset backed transactions are possible,” said Hussain Ahmad Al Qemazi, Chief Executive Officer of Sharjah Islamic Bank.

In the case of available Islamic credit cards in the UAE market today, most are payment cards (debit cards) or at best cards with credit option that comes with an yearly service charge that compensates for interest payments. Going by Islamic principles, the concept of the conventional credit card is forbidden on religious grounds.

Interest payments made when the outstanding balance is not repaid are Riba payments, and therefore not acceptable in Islam. Thus most banks offer cards, which requires the customers to pay off the entire card-spend at the end of each month.

“If one commits to paying off the balance every month and therefore never utilises the credit option of the card, then the Riba avoided,” said the General Manager, Personal Finance of an Islamic Bank. “The question of interest does not come into picture if the whole product is structured on regular repayment in full or part along with a pre-agreed profit rate (service charge),” he added.

The problem is when a customer defaults on repayment. If the default results in penalty it will be in violation of Shari'ah principles. In addition, regular repayment of balance in full would mean that the issuing bank will make little money from such a product.

Complexities apart, all four Islamic Banks in the UAE are offering credit cards. Dubai Islamic Bank offers Visa charge card, which offers up to maximum of 40 days free credit, and its operations are approved by Shari'ah. The Visa card usage is debited automatically once a month, to the customers' current or saving account maintained with DIB.

The major criticism against these products are that these are not credit cards at all. “For all practical purposes these are debit cards. The customer is getting a short-term loan, which is guaranteed against his account, and it is debited fully at the end of the credit period. At best it could be considered as a value added service,” an said an industry source.

Emirates Islamic Bank (EIB) a new entrant into Islamic Banking has made a bold attempt to offer a fully Shari'a compliant credit card. The card is based on 'Ujra' or service charge. In this case, a yearly service charge is levied depending on the credit size. The card works similar to conventional credit cards, however with not interest charged. It only charges an annual fee which is payable in quarterly installments.

As far as the credit amount is concerned, customers should pay 10 per cent of the outstanding every month. Although free of interest, the card comes with a hefty annual fee of Dh800 for annual credit up to Dh6000. “Though the annual fee might look a bit higher compared to other conventional banks, the card is totally free from any element of interest. There is no hidden cost associated with the usage of the card,” said an EIB official.

With the growing demand for Islamic 'credit' products many local banks are looking at possibility of designing innovative products. Malaysian banks offer Islamic credit products including credit cards on the basis of 'Bai' Al Inah' contracts that covers installment repayments over a fixed period. Customers are charged a fixed rate profit per month on the outstanding balance, with nothing to pay if the minimum payment is made on time.

The Bai' Al Inah contract works on the basis of two 'akad' agreements. The first is the bank's agreement to sell an item to the customer at a pre- agreed price, with the second agreement covering the customer selling back to the bank at a lower price.

The difference is the bank's profit on the transaction. Such products do not pass the test of strict Islamic compliance as practiced in the UAE and is often criticised for camouflaging interest payments. Thus, many in the Islamic banking community say it will be a while before any Islamic equivalent of a conventional credit card will be available in the market.

Link to Source: http://creditcardsmagazine.com/manag...sp?C=90&A=9893

Originally Posted by Ray

Leader,

Even that is usury and not permitted in Islam.

I think Ira is going to be grievously insulted by that.