Islamic Finance Rides The Storm?

Yesterday, @deenworks sent me an interesting link on Twitter about how Islamic finance has been doing a lot better in these hard financial times.

I personally can’t claim that I have a full understanding of how Islamic finance works in detail, or how much difference there is between it and other financial systems; neither do I know if the difference is significant or not when it comes to the problems the financial world is facing these days; so I prefer not to analyze things from my side and just stick to sharing the article with you.

…Sharemarkets in London and New York are a third off their peaks. Dow Jones’s Islamic financials index, in contrast, rose 4.75 per cent in the most recent September quarter and lost a modest 7 per cent in the previous year.

Not only has the industry been resilient; it’s also on the cusp of serious expansion. It is growing faster than any other subset of world banking, at 15 to 20 per cent a year. The Economist estimates Islamic assets under management are worth $US700 billion ($1000 billion). This figure could hit $US1 trillion – about the Australian sharemarket’s current value – by 2010.

What’s more, all this growth has come from a model of lending that rejects interest payments and shuns speculation and heavy borrowing.

In short, Islamic finance bans some of the excess that has brought the West’s financial system to its knees, and is looking wise indeed, or at least lucky.

Islamic finance takes its guidance from sharia.

The biggest markets are in the Middle East and Muslim countries, but global banks have opened sharia-compliant branches. Locally, the Muslim Community Co-operative is one of a few lenders offering the service.

Justice, partnership and opposition to excessive risk are the main principles guiding Islamic banks. Outright speculation and dealing with any party that has a balance sheet more than a third of which is debt are forbidden, as are investments deemed unethical by Islamic scholars, such as casinos.

But if these rules sound tough, the biggest difference is a ban on interest.

Charging interest is immoral because it does not take into account how changes in the value of the loan’s security can affect the borrower, sharia says. Home owners who bought near the peak are now experiencing this harsh reality: interest gives banks a steady payment from the borrower, regardless of the property market’s state.

However, profit is fine, and Islamic banks have devised ways to make money from lending. Instead of demanding interest, they buy the asset outright on behalf of the borrower. The borrower pays off the loan (the principle) and a fee for using the asset (rent, for example) until the amount is repaid and ownership transfers to the borrower.

[Full Article: Business Day]

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MMM

Mohamed Marwen Meddah is a web development director, amateur photographer and web enthusiast from Tunisia, currently living in Canada.

6 thoughts on “Islamic Finance Rides The Storm?”

  1. Salam,
    I think that this article, and most discussion on islamic finance on the net, is over-simplified and fueled by zeal and not logic.

    I just want to point to Dr. Mohammad ElGamal’s post on the topic – he’s a professor of Islamic Finance at Rice University:
    http://elgamal.blogspot.com/2008/10/islamic-economics-and-financial-crisis.html

    why I disagree with the assessment above:
    1- Most of current implementation of Islamic Finance today is just a matter of renaming of the regular transactions. Instead of Interest we call it “buy over time”, etc.

    2- Islamic Countries had several financial crises – e.g. Jordan’s latest Stock market bubble. Did Islamic Finance save us there?

    3- Islamic Institutions who follow strict rules (e.g. Amana Funds) are simply just conservative investors. Other conservative investors, e.g. Wells Fargo bank, has also escaped the financial crisis. They are actually buying other banks now. Does this mean the religion of Wells Fargo bank is as good as Islam?

    I think Financial Issues must be discussed in depth and not with triumphalist zeal which borders on arrogance.

    my 2 cents..

  2. AA,

    “is over-simplified and fueled by zeal and not logic.”

    I think reporting of the financial crisis is over-complicated I think it is a simple case of theft and over-inflation of prices that was allowed because of interest; which everyone is saying is complicated to cover it up.

    WHo was talking about ‘Islamic countries’ ?
    Just because you have a majority of Muslims doesn’t mean you are an Islamic country and even if you are an Islamic country doesn’t mean your financial system is Islamic. If we take your example ( Jordan ) as an example; because of it’s reliance on US support it ain’t Islamic and its financial system isn’t either, so it can’t be used as an example of Islamic banking !

    “Islamic Institutions who follow strict rules (e.g. Amana Funds) are simply just conservative investors.”

    And whats wrong with being cautious with other peoples money ?

    “Other conservative investors, e.g. Wells Fargo bank,”

    How many of them are there ? and how many of them would have survived if the US government hadn’t bailed out the economy in time ? When we have a general trend of success then we will discuss it . And when did Wells Fargo’s religion dictate their financial dealings, only Islam and to a lesser extent Judaism do that .

    “I think Financial Issues must be discussed in depth and not with triumphalist zeal which borders on arrogance.”

    In depth ? Well Islamic banking doesn’t have interest ( or shouldn’t ) on the other hand western banking has only interest what is there to discuss in depth if both aren’t related in any way. Plus even before this crisis western banks where a sham in which only the rich got richer and the poor got stuck with high interest and larger debts, this crisis only made this sham undeniable. As for bordering on arrogance that’s how I would describe your comment …. maybe you profited and benefited from capitalism; but only a minority in the world did and you are being selfish and arrogant to trump such an ideology !

    salaam 😉

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