News & Bulletins
Introducing Walid Salib - Islamic Finance
I am going to discuss Islamic finance and will argue that
in this area of Shariah law there is a moral equivalence to ethical
banking.
I am conversant with Islamic Finance Law and its regulations. I
was born in Jerusalem and my mother tongue is Arabic.
I have a Masters degree in International Finance Law from King’s
College London dealing with international bonds, syndicated loans,
derivatives and international project finance.
I joined Vizards Tweedie LLP in June of this year as a qualified
solicitor in their corporate department.
WHAT ARE THE MAIN RULES FOR ISLAMIC FINANCE
The rules lie in the principles of Islam's Shariah law, taken
from the Qur'an and the Sunnah, (the way) referring to the way in
which the prophet Muhammad lived his life.
Central to Islamic finance is the fact that money itself has no
intrinsic value,
it is simply a medium of exchange. Each unit is 100% equal in value
to another unit of the same denomination and you are not allowed to
make a profit by exchanging cash with another person. A Muslim is
not allowed to benefit from lending money or receiving money from
someone.
This means that earning interest (riba) is not allowed. To comply
with these rules, interest is not paid on Islamic savings or
current accounts or applied to Islamic mortgages.
Wealth should be generated only through legitimate trade and
investment in assets.
But investment in companies involved with alcohol, gambling,
tobacco and pornography and such like prohibited activities is
strictly off limits.
HOW DOES ISLAMIC FINANCE WORK
The overarching principle of Islamic finance is that all forms
of interest are forbidden.
The Islamic financial model works on the basis of risk sharing.
The customer and the bank share the risk of any investment on
agreed terms, and divide any profits between them.
The main categories within Islamic finance are: Ijara,
Ijara-wa-iqtina, Mudaraba,
Murabaha and Musharaka.
1. · Ijara works as a leasing arrangement: the bank buys something
for a customer and then leases it back to them. Different forms of
leasing are permissible, including those where a portion of the
instalment payment goes toward the final purchase.
2. Ijara-wa-Iqtina is a similar arrangement, except that the
customer is able to buy the item at the end of the contract;
3. Mudaraba offers specialist investment by a financial expert in
which the bank
and the customer shares any profits; customers risks losing their
money if the investment is unsuccessful, although the bank will not
charge a handling fee unless it turns a profit;
4. Murabaha is a form of credit which enables customers to make a
purchase
without having to take out an interest bearing loan. The bank buys
an item and then sells it on to the customer on a deferred basis;
this method incorporates a mutually agreed contract and a mutually
negotiated margin
5. Musharaka is a joint venture in which the customer and bank
contribute to the capital of the operation and agree to share the
returns (as well as the risks) in proportions agreed to in
advance.
WHAT TYPES OF ISLAMIC FINANCIAL PRODUCTS ARE CURRENTLY
AVAILABLE
Nearly all the traditional retail banking services expected from
established High Street banks are available in a Shariah compliant
format.
The Islamic Bank of Britain offers a Shariah compliant current
account, mortgage and even personal loan.
HSBC offers a Islamic current account and mortgage.
A handful of other banks - including some of the biggest
international names and the
Middle East's biggest traditional banks - also offer financial
products in the UK tailored for Muslims.
Also now Children's Mutual is offering a Shariah compliant Child
Trust Fund.
HOW STRONG IS THE DEMAND FOR ISLAMIC FINANCE
There is a very strong demand from Britain's two million
Muslims, many of whom do not use established banking services
because they are in conflict with Shariah. A lot of muslims cannot
obtain normal mortgages as they are interest bearing loans and
therefore these financial services will be able to assist them
greatly in obtaining the same level of financial support that
Non-Muslims enjoy in Britain. In a survey last year, Datamonitor
said that demand for Shariah compliant mortgages was strong, and
could yield up to £4.5bn in advances by 2006.
Children's Mutual is targeting the parents of 120,000 Muslim babies
with it's Shariah compliant Child Trust Fund as well which is again
of great importance to the children of Muslim families who
otherwise won't be able to enjoy the benefit of trust funds without
this new services.
HOW DO THE BANKS MAKE MONEY
Banks can profit from the buying and selling of approved
goods and services. The principal means of Islamic finance are
based on trading, and it is essential that risk be involved in any
trading activity, so banks and financial institutions will trade in
Shariah compliant investments with the money deposited by
customers, sharing the risks, and the profits between them.
Islamic banks are structured so that they retain a clearly
differentiated status between shareholders' capital and clients'
deposits in order to make sure profits are shared correctly.
Although they cannot charge interest, the banks can profit from
helping customers to purchase a property using a ijara or murabaha
scheme. With an ijara scheme the bank makes money by charging the
customer rent; with a murabaha scheme, a price is agreed at the
outset which is more than the market value. This profit is deemed
to be a reward for the risk that is assumed by the bank.
There are firm laws governing the types of business the banks can
trade with. As indicated above, there should be absolutely no
investment in unsuitable businesses, including those involved with
armaments, pork, tobacco, drugs, alcohol or pornography.
SIMILAR TO ETHICAL BANKING, THEN?
There is some common ground. Some of the tenets of Islamic
banking will appeal to anyone, Muslim or otherwise, who agrees with
the underlying principles of equitable distribution for everyone,
the ideals of fair trading, spending of wealth judiciously, and
well-being of the community as a whole. These principles result in
an exacting ethical stance relating to investment.
Walid J. Salib
Solicitor
Corporate Department
Date:
November 2007
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