The moral financial lesson from Islamic Finance.

In the field of Islamic Finance there are two unlawful or ‘haram’ activities, both are in the area of ‘Riba‘ – which is often translated as ‘interest’ but is better thought of as ‘excess’.

These two are Riba al fadl, and Riba al naseeyah.

Riba al fadl is the easy one to remember, it is the charging of interest, in Christendom we call it ‘usury’, something that was once forbidden under Christian doctrine (hence the pushing of Jews into becoming the earliest bankers – they could engage in this forbidden activity for Christians who wanted to borrow – borrowing was OK, but lending was not).

Riba al naseeyah is the second tenet, and perhaps the most important, because it is an early adaptation of understanding that economic rent is a problem. This isn’t an argument for socialism or anything else, but it is an acknowledgement that Riba al naseeyah [which means ‘excess compensation] can be both a financial, societal and economic problem.

Price gouging is one aspect of riba al naseeyah, another would be deriving income …

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‘Riba’ or Interest

Often we hear that under Islamic finance ‘interest’ is illegal (it is technically ‘Haram’ or unlawful), the term in Arabic is ‘Riba’ and it doesn’t just cover interest. The basis of the anti-interest ruling is from the Surat Al Baqara Verse 275 ‘God has permitted trade & prohibited riba’ and it restricts wealth building by making money from money, rather it can only be done via investment and commerce.

However, riba is not confined to interest on loans (although that is the primary type), the full name of interest riba is ‘riba al naseeya’ (also known as riba al-Quran or riba al-jahiliyyah). There is a secondary type called riba al-fadl and this is best described as ‘excess compensation’, this can occur where one party makes too much from an exchange. A foundation in Sharia’a compliant finance is that transactions should be fixed in nature (to avoid ‘Gharar’ or uncertainty) and associated with a specific risk, so any compensation beyond what is considered the fair value is also a brand of riba. For instance, if two people exchanged 1kg of metal …

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Mudaraba Deposits – Sharia’a compliant finance

The Mudaraba contract is essentially a contract partnership in Islamic Finance, the Prophet (PBUH) forbid riba or interest, and for that reason the provision of capital for borrowers is generally not performed as a function of debt, but rather as a function of an equity investment.

In this way a Mudaraba relationship can exist with a depositor, but instead of getting interest the Islamic finance institution will invest it on their behalf. However, unlike western banking accounts, a Mudaraba account does not have capital protection as it would be in breach of the profit and loss sharing rule of sharia’a compliant finance. That is a big downside when you compare it to conventional banking.

This brand of deposit account is interesting because it has no guarantee, and yet people willingly sign up to it because it is handled in a responsible manner, shareholder funds are combined with depositor funds to make investments, and these are not securitized or sold on which encourage the probity and diligent underwriting of the investment. Conventional banking could learn a great deal from this.

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Everything old is new again, buying on layaway

I remember getting a new coat when I was about eleven, we went to a shop in Swords village, next to a place that was called ‘Savages’ (in fact I think the clothes shop was owned by them too) and I tried on a coat and my mother paid part of the money for it on ‘layaway‘ and then we went back the following fortnight and paid for the rest and picked it up, in the mean time they made an adjustment to it too.

Will we see a return to some of the ideas from the past as the credit market contracts? Perhaps we will, layaway does have several advantages for both sides of the transaction.

Seller side advantage: The seller sells a product and gets cashflow into their business, if the buyer pulls out later there is normally a charge and the item can be re-sold. So if the person doesn’t go ahead then the …

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Islamic Finance, Ireland is turning truly cosmopolitan

Islamic finance in Ireland? What is it all about? Well before I go into it today’s post will start with condolences, you see I was meant to be at a seminar at the end of March about Islamic Finance and it had to be put off because several children parishioners of the Dublin Mosque were killed and others extremely injured in a car crash while on a field trip down to the country. My hopes and thoughts are with the children who survived and for the families surviving the ones who were lost. Due to this tragedy the seminar has been postponed but we’ll cover some of the basics of what Islamic Finance is all about and how it may change certain aspects of the Irish Market.

According to the Koran (Qur’an) there are many laws surrounding contract and general dealings. The extent of Shar’ia law is actually quite complex and in many ways you could compare it to British Common Law which was developed using the …

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