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Thread: Sharia Finance , Islamic banking

  1. #1
    Politics.ie Member mmrebel's Avatar
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    Question Sharia Finance , Islamic banking

    Was listening to Pat Kenny this morning and he had some guy on from the financial regulator saying they were looking to bring in Sharia financial system in Ireland for the Muslim population so was wondering what people will make of it "Islamic banking" is a euphemism for a practice better known as "Shariah-Compliant Finance (SFC).
    So here is what i have come across ..........

    Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

    In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach is EIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).
    read more Islamic banking - Wikipedia, the free encyclopedia

    From above id imagine no bank in Ireland would give any Muslim a mortgage based on those principles.

    Some more here on is Sharia finance and its downsides.

    [ame=http://www.youtube.com/watch?v=b_emH9gy7KI]YouTube - The DANGERS of sharia finance in USA[/ame]

    Anyone else any more thoughts or insight in to this form of banking ?
    Last edited by mmrebel; 25th May 2009 at 01:53 PM.

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    Politics.ie Member Silvio Dante's Avatar
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    How do I convert...?

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    Already a thread on this 3 weeks ago

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    they have failed to regulate their current responsibilities and now they wish to increase their oversight?

    amazing, they must have nothing better to do

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    Politics.ie Member zakalwe1's Avatar
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    its window-dressing bullshyte.

    fact: getting a "sharia" mortgage in UK or middle east is no cheaper nor expensive than a "regular" mortgage.

    all they do is rebrand "interest".

    do you not think that with arbitrage, any potential gain from sharia for the purchaser would be spotted by the big boys in the market and gobbled up?

    anyway, chances are you'll pay higher legal fees due to the complexity.

    ps. i have no problem with the introduction of sharia mortgages here. greater choice is better for competition. something our banking sector needs.
    I liberate minds with my music. That's more important than liberating a few people from apartheid or whatever. - Kanye West

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    More interesting are those arrangements said to be operating currently between banks and mortgage holders who are unable to keep up payments on their homes. I've heard that the banks are accepting rent in lieu. If so, I'd love to know how the amounts are worked out and if title reverts to the bank. Anyone know?

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    Politics.ie Member seabhcan's Avatar
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    Quote Originally Posted by zakalwe1 View Post
    all they do is rebrand "interest".
    More importantly, they share risk, and I think that aspect is something the west needs to look at.

    Part of the financial problems in the west at the moment is a failure to quantify risk because when a bank lends, it values the risk of default in a binary manner - either the loan is repaid or it isn't. And its very difficult to apply gradients to that risk before an actual default.

    In Islamic finance, the bank takes a share of the risk and the profit. If the business venture make a smaller than expected return, the bank shares that loss, if it is a bigger than expected gain, they share the profit. In this system, the return to the bank is some fraction of profits, rather than a fixed amount, taking pressure off businesses in tough times and making it a lot easier to quantify the expected return over the long term. Essentially, Banks are non-voting preferential shareholders, not lenders.

    This encourages banks to keep their eyes open and discourages some of the irrational lending we have in the west.

    I think that western finance would be improved if it took some of these ideas on board. Traditional lending for interest certainly still has a place, but this kind of risk sharing might be more efficient for some types in business lending.

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    Politics.ie Member zakalwe1's Avatar
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    Quote Originally Posted by seabhcan View Post
    More importantly, they share risk, and I think that aspect is something the west needs to look at.

    Part of the financial problems in the west at the moment is a failure to quantify risk because when a bank lends, it values the risk of default in a binary manner - either the loan is repaid or it isn't. And its very difficult to apply gradients to that risk before an actual default.

    In Islamic finance, the bank takes a share of the risk and the profit. If the business venture make a smaller than expected return, the bank shares that loss, if it is a bigger than expected gain, they share the profit. In this system, the return to the bank is some fraction of profits, rather than a fixed amount, taking pressure off businesses in tough times and making it a lot easier to quantify the expected return over the long term. Essentially, Banks are non-voting preferential shareholders, not lenders.

    This encourages banks to keep their eyes open and discourages some of the irrational lending we have in the west.

    I think that western finance would be improved if it took some of these ideas on board. Traditional lending for interest certainly still has a place, but this kind of risk sharing might be more efficient for some types in business lending.
    you're right. however, how do you calculate risk over 30 years or so?
    especially credit risk.

    2 years ago who'd have thought that AIG would be collapse and be nationalised? there are lots of people out there who got burnt, and there is no way you could have predicted that and priced accordingly.
    similarly, if you lend to someone over 10-20 years, how do you prevent them setting up a "derivatives finance division" that takes the company down without executive control. and if you are a participant in a syndicated loan, can you trust your lead investor to represent your interest when they might be dichotomically apposed to yours.

    its an interesting question, very subjective. very difficult, but may be an option for plain vanilla lending.
    I liberate minds with my music. That's more important than liberating a few people from apartheid or whatever. - Kanye West

  9. #9
    Geckko
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    Quote Originally Posted by seabhcan View Post
    More importantly, they share risk, and I think that aspect is something the west needs to look at.

    Part of the financial problems in the west at the moment is a failure to quantify risk because when a bank lends, it values the risk of default in a binary manner - either the loan is repaid or it isn't. And its very difficult to apply gradients to that risk before an actual default.

    In Islamic finance, the bank takes a share of the risk and the profit. If the business venture make a smaller than expected return, the bank shares that loss, if it is a bigger than expected gain, they share the profit. In this system, the return to the bank is some fraction of profits, rather than a fixed amount, taking pressure off businesses in tough times and making it a lot easier to quantify the expected return over the long term. Essentially, Banks are non-voting preferential shareholders, not lenders.

    This encourages banks to keep their eyes open and discourages some of the irrational lending we have in the west.

    I think that western finance would be improved if it took some of these ideas on board. Traditional lending for interest certainly still has a place, but this kind of risk sharing might be more efficient for some types in business lending.
    I don't think this is entirely accurate. I am almost certain that there are financing forms under Sharia that provide for a fixed income return to the lender (usually a lessor in Sharia finance).

    Also, the type of leaseback deals that would leave risk on the lessor under Sharia are not some sort of panacea. These are typically leaseback deals, which allow implicit borrowing to appear off balance sheet, sometimes making the level of gearing less apparent - you can end up exchanging operational gearing for financial gearing to the same end.

    For example, imagine Seanie Dunne under Sharia. His balance sheet would look all ticketiboo, with him leasing a shabby hotel or two plus some grazing land for exorbitant fixed rents. The debt would be just as real and deadly on the balance sheet of the lendor (lessor).

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    blogged on this in early 08 (link below)

    Irish Mortgage Brokers | Mortgage Brokers Dublin

    the idea of eradicating 'usury' doesn't interpret into 'value' its just another way of doing the same thing.

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