Archive for the ‘Islamic Finance’ Category

imran-1

 

I remember some years ago, a British commentator remarked in an off the cuff, ignorant manner, that Islam (and therefore Muslims in general) had not contributed any thing of substance in the last 100 years or so.

Which Islam or Muslims was he referring to? A number of respected intellectuals have made valid contributions to the most profound topics of discourse in contemporary matters, be they governance, enterprise or spirituality. Perhaps this person never made an effort to look beyond his own sphere of understanding in order to identify these contributions

One such example of what the Muslim world has delivered for contemplation of all nations states, is the funding model based on Zakat – financial or non-financial investment for the sake of others, not to gain personally, but to establish a method to fulfill a need which private profiteering cannot.

In the UK, we struggle to foot the cost of basic welfare through taxation. The number of taxes in existence are far too much to understand how far the web stretches and how much they impact our everyday lives, destroying incentives to save or to give.

In a part of the world riddled with abject poverty, injustice and failing state apparatus, a beacon of light is being provided by world class medical institutions such as the Shaukat Khanum Memorial Hospital (SKMH), entirely funded by donations and providing free cancer treatment to the most disadvantaged patients. Across the third world, similar initiatives  do exist, whether they are based on Zakat or not, I highlight this project due to it being based on principles found at the core of the Islamic faith; giving up of ones own property to provide for others, in a way which establishes justice.

At the end of 2015, SKMH opened its second site in Peshawar. The factors which make this institution thrive, are not confined to Islam, however it certainly demonstrates the way in which incentives, resources and an interest to gain from intangible, distant means, not necessarily financial in nature (based on a belief in a power other than that of Man), can be made to work perfectly well for a wider section of the population, independent of state disintegration.

https://www.shaukatkhanum.org.pk/

 

 

 

A few of my previous posts have covered attempts by various parties to introduce their own versions of a financing method closer to what is perceived as genuinely riba-free.

To name a couple, Ansar Finance in the UK, Grameen Bank from Mohammed Younus have made an effort to shed light on alternative models which are closer to interest-free financing, in that an interest derived rate is not charged to the customer.

Ofcourse, the wider context of this should not be forgotten – the money itself, the paper (or digits) we use as a means of transaction – is of interest and IS interest itself. Given this fundamental fact, one cannot escape true defined RIBA in any such method outlined in these endeavors.

However, designing alternative models can expose the wider audience to the weaknesses of the mainstream Islamic Banking practices, which are all in name not in spirit, and I find it refreshing and worthwhile to introduce different forms which may be used as a stepping stone to something widely accessible and equitable in future, Insha Allah.

Contributing to this intiative, are LARIBA, a US based institution who have introduced their own version of what they feel is a RIBA-free mechanism. Judge for yourselves weather you feel their method is actually viable, however this company has been established since the late 1980’s and I favour their understanding of the monetary system, even though they still resolve to make use of it. They too understand and are upfront with their clients about the debt enslavement aspects of interest based loans, and also draw attention to the wider Islamic Banking industry which still uses interest rates in their products.

Their website has a number of worthy materials on related topics which I would also like to recommend.

https://www.lariba.com/sitephp/index.php

Allah (SWT) knows best about their intentions and actions.

 

 

 

Adding this Imam to the prominent few scholars that truly understand money and the nature of Riba, this lecture demonstrates the misunderstandings of other Muslim commentators when faced with this holistic issue.

The content is not new, much of it has been covered extensively in other posts.

More toxic offerings in the guise of islamically compatible products. I always like to draw readers attention to the reasons given for such launches – read between the lines, not so much to do with trying to offer people something which will meet their needs, but more a case of chasing the petro dollars, while they last that is.

With all the QE money being funneled into global asset prices, can Muslim investors not appreciate the superficial nature of these funds – they are destined to end in tears

Another text exploring how an alternative system could, in theory function, although this is simply one interpretation. By G.A.Parvez

http://islamicdawn.com/wp-content/uploads/2015/01/The-Quranic-System-of-Sustenance-by-G-A-Parwez-Tolue-Islam-Trust.pdf

 

I find it remarkable how many non-familiar observers can quite easily spot the obvious spade in Islamic Finance practices, and call it a spade. However, for them to then completely ignore the issue that the source guidance (the final proclaimation and criterion; The Qur’an) never accepted any favourable position on RIBA (not interest, in any form, simple or compound), and that the deceit or falacy here should be put only at the doorstep of the commercial banking industry and its proponents who invented this fraud.

There seems to be too much of an impression that underlying islamic principles are in someway contradictory; with one hand they oppose ‘interest’ and with the other hand, it is condoned in another form, under another name.

This post will not go into the essential issue of what RIBA is (a more fuller all encompassing term) and not interest, however suffice to say, those who are of the above opinion have only a crass, superficial understanding of what they reject whilst at the same time, plenty of effort is put into unearthing great myths from other elements they wish to debunk – that is what I find odd.

One such guilty party would be the Adam Smith Institute. Their article found here, which references Islamic Finance practices makes this obvious mistake. In a partial response to the issue of time value if money and the innate nature of things, I would also like to refer readers to this piece by Tarek El Diwany

But I want to instead highlight an aspect which once again exposes the current industry for its flaws in constructing alternatives which are not too different from the products they are based upon;

For they all (things like Sukuk bonds and so on) depend upon the absolute rejection of interest, that very thing that we insist is part of the fabric of our reality. The reason we so like Islamic finance is because all of he (sic) successful forms of it are actually constructs that, in the face of the religious insistence that there should be no interest, actually operate in a manner to ensure that there is a time value to money and that there is an interest rate, interest which has to be paid 

Another cat let out of the bag, but wait there is more. The article referenced in the above quoted piece, by Jon Fasman reading a book by Harris Irfan, also provides us with more of the truth;

Yet by the end of the book, Irfan seems genuinely conflicted about his industry. Most of these instruments were reverse-engineered from their secular counterparts, and so devised to comply more with Shariah’s letter than its spirit. His protests against such moves echo those of American politicians who condemn “tax inversions”

….Many of the instruments Irfan discusses were sold by major banks that saw them as just another opportunity. This is not surprising: Governments and wealthy individuals wanted financing that complied with their religious requirements, and banks gave it to them….

Riba is not merely interest. Interest itself can take a numbers of forms, remove or change the English term, and the entire issue cannot simply be dismissed. For, whatever term is used, the actual application of this phenomena exposes the real use of Riba itself – a percentage number, applied to a principle amount, which continues to generate more and more of this result over time, a self feeding and ever-increasing to infinity.

Albert Einstein once commented…

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it 

An earlier blog entry showing the ticking debt clocks for many nations public debt shows a profound example of this constantly increasing compound effect, it is a wonder how much more debt will be added to the total by the time you stop reading this piece?

From the above link one can see clearly the overriding effect of compounding interest. Un-payable amounts, totals which need to be serviced regularly just to keep your head slightly above water. Whether it’s a third-world nation spending large proportions of its tiny revenue to make monthly repayments, to some of the strongest economic power houses of today, the debt burden will never disappear, that is not even the intention. The true purpose of debt is to show you can afford the repayments, and that the proportion of it is ‘reasonable’ as compared to the size of your economy. Why would a government choose to waste precious funds on clearing the principle debt? They can easily just generate higher inflation, and erode the value of the loan over time…..there are many tricks of this trade.

Turning our attention to the Islamic Banking industry, their trick is to call interest ‘Rent’ or ‘Profit’. But see that both of these terms appear as percentage rates, applied to principle amounts….giving us clear instances of compounding, ie RIBA by any other name.

Now consider this verse from the Qur’an, and others like it;

(3:130);

O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.

And contrast the language with ayahs such as this

(2:245);

Who is it that would loan Allah a goodly loan so He may multiply it for him many times over? And it is Allah who withholds and grants abundance, and to Him you will be returned.

The concept of compounding is evidently shown in such signs in the Qur’an, proving that Riba must be linked and concerned with avoiding this particular form which exacerbates the problems it causes.

Expanding upon this, the natural order that has been created gives an element of entropy in everything. All things must decay at some rate and reach the end of their useful life. However the effect of compounding is directly opposite to this fact, it continues to grow and grow, never-ending. It goes well beyond the bounds set by our Maker.

Notice too, how the Qur’an contrasts the negative effects of Riba with the positive attributes of giving for the sake of Allah/charity, not expecting a material reward, but deferring your compensation to a point in time not necessarily of your choosing

For further analysis of the Arabic terms in use in these verses, please refer to the RRMCR journals here. Note the links given to works by El-Diwany, Vadillo and others.