A younger man makes his profession alternative and decides to grow to be a profitable banker, identical to his father. He desires to arrange for the function and asks his father “What must I do to become a successful banker, just like you?” “Son,” says the daddy, “You must follow these three simple rules: first, don’t lend money to those who don’t have any; second, don’t lend money to those who need it badly; and third, the most important, don’t lend your own money.” Sound recommendation in these troubled instances. It is a disgrace that a lot of at this time’s bankers both by no means obtained this sound recommendation, or ignored it!
In a earlier article I offered the argument that Islamic banking establishments had been weathering the current monetary disaster comparatively effectively as they had been, or definitely must be, insulated from the disasters within the interbank market and the mess within the derivatives markets. Various readers raised the logical query of how Islamic banks handle to remain in enterprise with out charging curiosity.
To recap, one of many fundamental ideas of Islamic banking is the prohibition of riba (usury or curiosity). Up till the 1980s riba was usually interpreted to solely apply to usury however it’s now accepted observe to seek advice from all curiosity. Other ideas are primarily based on easy morality and customary sense, that are in no way distinctive to Islam. For instance, usury was additionally prohibited by the Old in addition to the New Testament. Even literary heavyweights equivalent to Shakespeare weighed in towards the observe.
Islamic banking can be in no way a latest phenomenon. The fundamental practices will be traced again to the early components of the seventh century. Some specialists even declare that lots of the ideas and strategies so acquainted to us at this time had been later adopted by European bankers. Its pretty latest reemergence coincided with rising oil costs within the mid 1970s thus offering components of the Muslim world with important monetary assets. The different essential aspect was the accompanying seek for moral values in managing their monetary affairs, one thing lots of the historically western monetary organisations couldn’t present. As it is a development not solely relevant to the Muslim world, the rising Islamic banks are more and more being accepted by non-Muslims who don’t want to put money into, and even deposit their financial savings with firms engaged in unethical and socially dangerous actions, equivalent to dealing in alcohol, playing, pornography and tobacco.
The Islamic financial system is anxious with social justice to make sure that not one of the events concerned in a transaction is being exploited with out on the identical time inhibiting particular person enterprise. Extended to the Islamic monetary system, which means that the funds people and/or firms put in danger share the income or losses ensuing from the enterprise. This idea of sharing the delights or ache of the result of enterprise is a progressive one. To paraphrase Charles Darwin “It is not the strongest financial system that survives, nor the most intelligent. It is the one that is most adaptable to change.” Islamic banking encourages higher assets administration, particularly as outright hypothesis will not be permitted by Shariah, ie Islamic regulation. The individuals are holding tempo with subtle strategies and have developed merchandise that aren’t solely ethically motivated but additionally worthwhile.
Islamic monetary options usually have Arabic names thus intimidating many potential patrons into saying it’s all too sophisticated. At their core, most of those merchandise are primarily the identical as their typical equivalents. The most important variations are the absence of curiosity and sometimes sophisticated procedures to make sure compliance with Shariah regulation.
For instance, in Islamic housing finance the dangers concerned are shared between the financial institution and the borrower, reasonably than transferring all the chance to the latter. The mostly used contract is the diminishing musharaka (partnership) contract. In this case the financial institution and the borrower type a partnership, with the financial institution offering as much as 95 p.c of the acquisition value, and the borrower 5 p.c.
The borrower buys out the possession share of the financial institution which makes its revenue from the hire paid by the consumer for the share the financial institution owns. This occurs over a interval of, often, 15 to 30 years.
Should the borrower default on a rental or principal compensation, the financial institution could advance the borrower an interest-free mortgage to allow him to proceed their funds in anticipation that he can pay in full when he is ready to. The excellent news is that in this era of misery, the borrower retains his residence reasonably than face eviction.
Having stated this, Islamic banks nonetheless appraise credit score threat, and certainly are extra cautious about who they finance than typical banks.
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