Open
up the pages of any newspaper or Financial Magazine and you are guaranteed to
find advertisements from banks announcing their latest Islamic finance
products. Once perceived as a niche market, Islamic finance today is big
business with both local and international banks keen to get in on the act. An
increasing number of non-Muslims are adopting Islamic compliant products as
awareness of the principles behind Shari'ah finance has grown. In 2008, at
least $500 billion in assets around the world were managed in accordance with
Shari'ah and the sector is growing at more than 10% per year.
Asif
Mumtaz, regional head of HSBC Amanah, HSBC's Islamic banking arm, says: "Within this region the Islamic
finance industry is evolving from a niche segment to a mainstream one." It
is our informed opinion that within the next eight to 10 years, the industry
will capture half of the savings of l.6 billion Muslims worldwide."
To
gain a foothold in the market many conventional banks, including HSBC have
launched Islamic versions of their traditional products - including Islamic
loans and credit cards. In recent weeks Standard Chartered announced the launch
of its global Islamic banking brand in the Middle East, Saadiq and its first
Islamic credit card, the Saadiq Gold Credit Card. It followed hot on the heels
of First Gulf Bank's first Islamic credit card the Meccah Credit Card, which
rewards customers with the opportunity to earn steps to travel to the Holy City
of Mecca.
Islamic
Finance and the West
In
the West London is turning into a hub for Islamic financial activity, Gordan
Brown announced changes to the tax status of Islamic finance in his 2006
budget. Then on the 23rd April The British government
announced it will issue Islamic bonds, seeking to meet what it believes
is a significant demand for this financial product both inside and outside the
UK. The evolution of Islamic finance has resulted in Ford Motor Inc selling
Aston Martin - maker of James Bond's favourite sports car for £479 million
($1.2 billion) to a leveraged buy-out (LBO) consortium organized through
Islamic Finance.
Britain
currently has five Islamic banks, whilst at the same time Britain's high street
Banks offer a range of products which they claim are Shari'ah compliant. The
Islamic Bank of Britain offers a Shari'ah compliant current account, mortgage
and personal loan. HSBC offers an Islamic current account and mortgage. A
handful of other banks - including some of the biggest international names and
the Middle East's biggest traditional banks - also offer financial products in
the UK.
Whilst
Islamic finance and Economics has been welcomed with open arms by some, there
are some who are skeptical. Islamic finance is sparking a heated debate in
France, a strictly secular European heavyweight, though economists contend it
would be in the country's interest to tap into the booming global industry. The
French parliament in September approved a number of adjustments to its banking
laws to allow sukuk (Islamic bonds) to be issued for the first time. This was
at the same time as the Qatar Islamic Bank applied for license to operate in
France as the first Islamic bank.
However
Socialist MP Henri Emmanuelli told Agence France Presse (AFP) that "We must not allow principles of
Shari`ah law, or the ethics of the Qur`an to be introduced into French
law." This has led to France's highest constitutional
authority on October 14th to strike down some of the provisions the
French Parliament passed.
Islamic
banking: The basics
The
main difference according to the industry between banks' conventional and
Islamic products is the absence of interest. Under Shari'ah law interest,
whether nominal or excessive, simple or compound, fixed or variable is
forbidden. Shari'ah based products also favour asset-based transactions.
Explaining
the principles behind it Dr Taha El Tayeb, head of products development and
Sharia structuring at Mashreqbank's Islamic banking division Badr Al-Islami
says: "Islamic finance and Sharia law
would always recommend people to go for asset-based transactions. If you need
to buy a car for instance, instead of borrowing money from a bank - that bank
should take the risk, buy the car and sell it to you at a profit rate." he also adds: "The intent of Islamic banking is
very much that you are in a socially responsible banking community. Islamic
banking moves away from pure speculation and more into activities that will
help to grow the industry and the infrastructure-based economy. Every
transaction is tied to an asset, which is a real world economy asset."
There
are three main Islamic financial instruments which are used to structure
Islamic loans.
Ijara
works as a leasing agreement whereby the bank buys an item - such as a house or
a car - for a customer then leases it back to them until they have paid off the
full amount and take over ownership of the item. "When a customer is planning to buy something we at
Amlak buy that property then we give it to the customer on a lease period of 15
to 20 years then the ownership passes to the client. There is no interest
charged but there is profit based on the fact that when you own a property you
have the right to rent it out for however much you want." Says
Khalid Zainal, Director of Sales and Marketing of Amlak Finance
Murabaha
works by the bank supplying specific goods for resale to the customer at a
profit rate.
The
customer pays the bank back in monthly instalments - the rate of which are
fixed. Commodity Murabaha is designed for customers who want a fixed rate cash
loan and involves the purchase and sale of commodities on the London Metal
Exchange.
The
third Islamic banking instrument, Musharaka,
which is a joint venture whereby the customer and bank contribute to the
funding of a venture and agree to share the returns - as well as the risks - in
proportions agreed in advance.
Islamic
credit cards look set for major growth with increasing demand from customers
prompting banks such as Standard Chartered and First Gulf Bank to launch their
own Sharia compliant products. However Islamic credit cards are still to hit
the western high street. Islamic credit cards work in much the same way as
conventional cards but in place of interest banks will charge customers annual
or quarterly fees. Standard Chartered's latest offering, the Saadiq Visa Gold
Credit Card, for example operates on the Urjah concept, which is based on a
fixed fee structure.
Customers
are given a grace period to pay the monthly outstanding balance on the card to
avoid paying a fee, and a fixed monthly maintenance fee is charged for usage of
the card's service account.
Islamic
Economics
The
global financial crisis has highlighted some fundamental problems with free
market economies. The market as the ideal method to distribute wealth has been
discredited, economic growth in free market economies has proven to be
unsustainable and the financial markets, for long the showpiece of free market
success has proven to be no different to a casino.
In
order to stimulate many of the broken economies of the West and overcome many
of the structural flaws that cause economic crisis, many free market
governments have turned to Islamic finance due to the phenomenal growth it has
shown in the last decade. However this deflects attention from the real
problems the West faces.
Whilst
there is much the West can learn from the Islamic economy - such as the
stability Islam brings by being based upon the real economy, the rapid
distribution of wealth through a non-interest based economy and the stability
Islam's provided by Islam's trade rules and the removal of gambling and
speculation. Such economic concepts are in reality a few aspects of the Islamic
economy, which itself are built upon a fundamental alternative view towards
wealth, production, the macroeconomy and property. The mere adoption of some
aspects of Islam will not solve the economic problems of the West and even the
Muslim world.
Free
market economies need a complete overhaul as no amount of regulation will ever
curb the motive to make money at any cost. For this reason boom and bust has
been a feature of free market economies for over 200 years and will continue to
do so.
Conclusions
The
Islamic economic system is an integrated system with different aspects of
Islamic economics all feeding into each other. The rules of Riba are built upon
Islam's view of wealth, the Islamic rules of trade are built upon Islam's view
towards ownership, Islamic taxation is built upon Islam's views towards wealth
distribution and Islamic finance is built upon Islam's view towards investment
and currency. Taking a part of Islam without its framework will only create
contradictions in an economy. Attempts by the West to plug its problems through
aspects of Islam are attempts at giving the free market a leg up.
The
Ummah should not feel happy when a few elements of Islamic economics are made
available. This is an implicit acceptance that Islam cannot stand on its
own feet. There is a much bigger issue and that is why are the Gulf states and
the Far East who are the leaders in Islamic finance not comprehensively
implement Islam and make it available in the Muslim world. Such an approach
would completely revitalise the economies of the Muslim world and project a
positive image of an economic alternative. Islam is a complete system, all of
it should be applied.
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