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 …

Read More

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.

Read More

The most important step for preventing future mortgage meltdowns

I have been asked several times ‘what would you change’ in the mortgage market in order to prevent serious financial melt-down in the future, the truth is there is no single thing that will ever do it, our issues are a perplexing intertwining of regulation failure, greed, banking errors, mismanaged risk, fundamental misunderstanding of money markets and national failure. There are key players within this, first and foremost is our government, after that is our central bank/ regulator, and finally financial institutions.

Anyway, the one thing I would change if I could would be the security on asset lending, in a nutshell I would just change one rule, therefore removing the need to revamp the entire system, the rule would mean that asset lending is non-recourse beyond the asset upon which the loan was secured.

In plain English, if you got a mortgage then the only recourse a bank would have wouldn’t be to you (currently you are on the hook for 12yrs and more) it would be to …

Read More

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 …

Read More