Thursday, October 9, 2008

Islamic Finance: Part 1

What is Islamic Finance? Or more so what should Islamic finance be? At the moment I think I am ever so slightly disillusioned with the little I know of Islamic Finance. I see it today in its current form as a mere equivalent to mainstream finance. That instead of having the Islamic goals and values, the industry is going down the path of market capitalisation. Creating equivalents of western banking products.

Now I do see the argument for this, that the industry must start somewhere, and establish it's self. Once it is fully established it can create more Islamically sound products, but then the industry isn't as new as people think it is. Its been around in some shape or form for the last 2-3 decades, but only in the west for the last 5-10 years in a growing fashion.

I think most (if not all) of the products are pretty much Halal if done with the right intention, in the way the contracts are structured. however I don't believe that the Islamic spirit is there at all. Instead we now have lots and lots of equivalent products, equivalents to loans, bonds (sukuks), and even appearing in a few places credit cards (that one shocked me).

Allahamdullilah no one has managed to create an equivalent to Derivatives yet, if they did I would be surprised as I see it as glorified gambling, albeit generally very educated gambling, but none the less still gambling.

Its interesting when i think of muslims perceptions esp in the west (time for huge generalisations here), have the perception that Gambling, Alcohol, pre-marital sex are big big no's. Interest does not have that same stigma,I wonder why?

Allah(SWT) has clearly forbidden riba. As shown by the following verses(I never realised how explicitly it was forbidden till recently):


“Those who devour riba will not stand except as he stands who has been driven to
madness by the touch of Satan … Allah has permitted trade and forbidden riba … Allah
will deprive riba of all blessing” (2:275-6)

“O ye who believe! Fear Allah, and give up what remains of your demand for riba, if
you are indeed believers. If you do not, take notice of war from Allah” (2: 278-90)

But yet many muslims see it as a lesser evil. Maybe it's because the loans are used to help further business's or careers, and unfortunatley we(me included) are far too attached to this dunya and thus are willing to sacrifice are scrupels when we shouldn't.

I know if when I actually could afford to get a house (far in the future at this rate, i'm still a student), I would probably get an Islamic Mortgage, as while I don't think it's perfect, I do think it's better then a conventional loan. I dislike how the rent part of most Islamic mortgages are conviently linked to the LIBOR (inter bank interest rate).

Islamicially from my understanding(and I know I am speaking from a postion of little knowledge), money cannot be made from money, but instead value must be added through a service or product.

So I wonder did my random ramblings make any sense? I know I don't even attempt to give a solution nor do I fully get to the bottom of the problem. Further work for another post me thinks.

When I next get around to posting I will continue my musings on Islamic Finance :

Part 2: Islamic Microfinance: reclaiming the islamic spirit?

Ma' Salaama

Mushowish

10 comments:

amad said...

interesting.

This is a tough subject. I am taking an islamic finance class this MBA semester at school (haven't started the course yet). Unfortunately, its tough to figure out where riba starts and lariba ends. Research carefully!

good luck, and good luck with the blog. If you have something really solid and well-researched, you could always try sending it to us inshallah...

wasalam

The Muslim Kid said...

Very intresting I comlpletly agree with the No-no thing.
Alcohol, premarital sex, all those things are OMG THATS A HUGE SIN,

but interest, people say, we live in a non-muslim country its permissable.

I disagree. there is a hadith that states, those who lend or receieve interest will be given a spear by the Angels and told to go FIght ALLAh.

can u imagine?

seriously

Nice blog!
Check out my blog sometime.
http://themuslimkid.blogspot.com/

-The Muslim Kid

Jasmine said...

My (admittedly very basic) understanding of Riba is an unreasonable amount of interest, with very high risk that is used to capture the person's assets and offered at a time of desperation.

Example: House market failing, people cant pay mortgages. Companies offer quick fix loans to these desperates @ 100% interest, with weekly payments. Part of the contract is is you don't pay the interest doubles. Eventuallly, the company gets the house.

I thought this was Riba.

Wrong?

Jas

Mushowish said...

Amad,

Please accept my apologies for being rather slack on the replying front. I have as you can see been neglecting my fledgling blog :(

I will inshallah get back into it soon!!

As you so rightly said it is so confusing, and a point of contention for many. Inshallah in the future i will look into it more, if not just to get a better understanding for myself

Mushowish

Mushowish said...

Salam Muslim Kid,

Again like I just said to Amad, please forgive me for not replying sooner. I have checked out your blog, and will soon start coming out form the woodwork and commenting.

Its not even non-muslim countries where interest is less frowned upon (not really sure that the correct sentence strucutre, but hey). My friend was telling me in Bangladesh, a v high population of muslims, that again similar culture of interest not being as 'that' bad. Which kinda explains in my eyes how Grameen bank was able to work successfully in the poor villages, that and the people were deseperate to improve their lives. As I will Inshallah go on to write at some stage, I ahve a deep respect for the Grameen Bank and Prof Yunus, but still think interest in that form is Haram.

Mushowish

Mushowish said...

Salam Jasmine,

I first of all profess to be no expert on Riba. Disclamer finished for now.

I think Riba is far more then just the english term Interest.

the following two hadith came to mind

" Bilal visited the Messenger of Allah (pbuh) with some high quality dates, and the Prophet (pbuh) inquired about their source. Bilal explained that he traded two volumes of lower quality dates for one volume of higher quality. The Messenger of Allah (pbuh) said: "this is precisely the forbidden Riba! Do not do this. Instead, sell the first type of dates, and use the proceeds to buy the other."

For instance, Anas Ibn Malik reports that the prophet, peace be upon him, said: “When one of you grants a loan and the borrower offers him a dish, he should not accept it; and if the borrower often a ride on an animal, he should not ride, unless the two of them have been previously accustomed to exchanging such favours mutually”

The point i'm trying to make from my very very limited knowledge, is that riba is far reaching, and is pretty much any excess on the capital.

and thats where trade kinda comes into it, that is clearly halal (within limits).

Not really sure if I answered you point or just rambled

Mushowish

Jasmine said...

I think you rambled, but it's ok...I think we all rambled!
I think what is bad and what is good is obvious - all of these rulings, stories etc etc - they just fog the vision, and we start looking at things through a cluttered perspective. Using interest is a neccessary means to survive in this world - whereas alcohol and pork aren't neccessary for survival.
So...upon that basis, what's a healthy, constructive level and what is harmful is clear.

Yes or no do you think?

Mushowish said...

Well i did call my blog random ramblings of a confused soul for a reason:)

For once I have a clear answer for that (in my head at least). We have been ingrained to think that we cannot function without interest, and while it may not be easy it is perfectly plausible.

What made me realise is a rather odd example. Been reading Prof Yunus book, Creating a World Without Poverty: Social Business and the Future of Capitalism and in it he argues that you can have profit making firms that aim is social and not profit maximizing. The point of the example is that if people do believe in something enough they can create an alternative that works for them, and reinforces the importance of intention.

Mushowish

Anonymous said...

Well its not just riba which people no longer realize the seriousness of. What about missing prayers? Backbiting? Slandering? Lying? Arrogance? Mixing with the opposite sex?

Ultimately we cant look at people to determine whats right and whats wrong, the condition of the ummah is not so good.

Mushowish said...

Annoymous,

You are quite right, this ummah is in a weak place in terms of iman. I am a prime example of that. We need to strenghten out basic core, of salah and our values (e.g not lieing, not backbiting, not slandering,caring for our neighbours e.t.c). May Allah give us the strength and guidance to improve ourselves.

Mushowish