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Islamic banking - the way to go? - 9/30/2008 5:12:05 AM   
LadyEllen


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From: Stourport-England
Status: offline 		Anyone know whether the Islamic banks are suffering/ could suffer from the present turmoil?

If not, could their way (heaven forfend) offer us any insight into how to reorganise "financial services"?

E

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RE: Islamic banking - the way to go? - 9/30/2008 5:23:18 AM   
Paulnz


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Status: offline 		At the end of the day the quality of the lending and the underlying security is what matters, not whether the institution charges interest or fees. Recent turmoil in the financial markets reinforces the notion that lenders have to make good decisions and if they don't they suffer losses, along with their investors. It is the way prudence is learned. If a lender thinks they'll never suffer a loss they're likely to become imprudent. We've seen this over the last few years with governments trying to avoid recessions at all costs. In doing so, lenders became imprudent ( they thought the government would always bail them out ). In the Islamic world they are underpinned by the oil for the most part ( good security for now ). Whether their construction boom and the funding that is going into it is quality or not is yet to be seen. If the oil dries up, or an alternative is found, that bubble could burst just as quickly.

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RE: Islamic banking - the way to go? - 9/30/2008 6:43:23 AM   
LadyEllen


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From: Stourport-England
Status: offline 		But, does the Islamic financial system get itself involved in all the stuff that ours does is what I'm wondering?

Could it be, under their rules, that pieces of paper could be shuffled and abstracted so far from the underlying asset, as has happened with our system?

Not asking for value comparisons here, but interested in what their system might have to offer in terms of counsel for our system's future in terms of speculation etc, if anyone knows?

R

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RE: Islamic banking - the way to go? - 9/30/2008 5:07:55 PM   
Paulnz


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quote:

ORIGINAL: LadyEllen


Could it be, under their rules, that pieces of paper could be shuffled and abstracted so far from the underlying asset, as has happened with our system?



Financial centres such as Dubai have adopted the western model for the most part, so they're just as exposed to paper shuffling. The shuffling itself is not a bad thing, it is the underlying security which matters.


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RE: Islamic banking - the way to go? - 9/30/2008 5:27:27 PM   
Musicmystery


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Status: offline 		Lending for money is not permitted in Islam. They do have some creative workarounds, though.

Been a long time since I looked at that. Here's some quick reseach:

Two basic principles behind Islamic banking are the sharing of profit and loss and, significantly, the prohibition of the collection and payment of interest. Collecting interest is not permitted under Islamic law. --Investment Dictionary

Investopedia Says:
Here's an example of how the Islamic banking system uses methods of profit/loss sharing to facilitate financial transactions: for some types of loans, the borrower only needs to pay back the amount owed to the lender, but the borrower can choose to pay the lender a small amount of money to serve as a gratuity.

Since this system of banking is grounded in Islamic principles, all the undertakings of the banks follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally-distinct form of ethical investing (for example, investments involving alcohol, gambling, pork, etc. are prohibited). The Dubai Islamic Bank has the distinction of being the world's first full-fledged Islamic bank, formed in 1975.

Banking Dictionary: Islamic Banking
System of banking consistent with principles of Islamic law and Islamic economics. Islamic law prohibits the collection of interest, commonly called riba, although revenue-sharing arrangements are generally permitted. With increased trade between western nations and Islamic nations in the Middle East, Citibank, Deutsche Bank, and other western banks have been opening Islamic banking units since 1996. Because modern Islamic banking is relatively new, rules for financial accounting, bank governance, and lending standards are continually evolving as business practices become more refined. The Institute of Islamic Banking and Insurance, a London organization, says Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits to ensure correct profit sharing according to Islamic law.

Wikipedia:
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 Ijara wa Iqtina, 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).

There are several other approaches used in business deals. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company's individual rate of return. Thus the bank's profit on the loan is equal to a certain percentage of the company's profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

***for a long, multisource quick education, go to http://www.answers.com and typing in Islamic Banking


< Message edited by Musicmystery -- 9/30/2008 5:29:23 PM >

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RE: Islamic banking - the way to go? - 9/30/2008 6:05:26 PM   
Paulnz


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quote:

ORIGINAL: Musicmystery

Lending for money is not permitted in Islam. They do have some creative workarounds, though.




All of the instruments outlined are not somehow Islamic apart from being given a nice new name.

For instance, Mortgage free house funding - otherwise called ' Sale-by-agreement '

Or lending on an asset the buyer wants to purchase - ' Hire-Purchase ' where the buyer does not receive title until the final payment is made and the lender owns the item for the duration of the loan.

These have been around since donkey's yonks.




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RE: Islamic banking - the way to go? - 9/30/2008 6:14:06 PM   
Musicmystery


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Status: offline 		Dude, I'm just sharing how it works

Take it up with them.

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RE: Islamic banking - the way to go? - 9/30/2008 6:45:29 PM   
Marc2b


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quote:

Lending for money is not permitted in Islam. They do have some creative workarounds, though.


Sounds like the same attitude Europe had during the middle ages. It was considered morally wrong to lend money for interest but it went on all the time anyway (including, unfortunately, letting the Jews do it, because the were un-Christian heathens who were going to hell anyway, leading to an unsavory stereotype that endures to this day). Europe eventually got wise and loosened up.

The current situation demonstrates the need for laws (enforced) against fraud and the need for lenders not to stupidly loan to people who can’t pay it back.  With these conditions present, the loaning of money for interest has demonstrated itself as a great means for people of the middle and lower classes to live better lifestyles (no having to spend fifty years saving up for a house) and to even move up the economic ladder (e.g. starting your own business).

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RE: Islamic banking - the way to go? - 9/30/2008 7:19:43 PM   
Musicmystery


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quote:

The current situation demonstrates the need for laws (enforced) against fraud and the need for lenders not to stupidly loan to people who can’t pay it back. 


Yup.

Just look at the interest rates and fees all too often charged. Only a few decades ago, we called that "usury." Now we call it banking.

"But the banks need to do that to keep up these days!" Then something's fundamentally flawed with the banking business model as it is practiced in recent years, and it needs to be changed, not propped up.

AND some banks are doing just fine sticking to the "old" methods.

Along with that, though----

People ARE buying homes/vehicles/etc. that they can't really afford. Common sense at the consumer end would help too.



< Message edited by Musicmystery -- 9/30/2008 7:21:11 PM >

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RE: Islamic banking - the way to go? - 9/30/2008 7:32:14 PM   
pahunkboy


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Status: offline 		we fixed the laws in the 1930s.



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RE: Islamic banking - the way to go? - 9/30/2008 7:48:23 PM   
Musicmystery


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Status: offline 		Obviously not.



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RE: Islamic banking - the way to go? - 9/30/2008 8:13:43 PM   
Marc2b


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quote:

Yup.

Just look at the interest rates and fees all too often charged. Only a few decades ago, we called that "usury." Now we call it banking.

"But the banks need to do that to keep up these days!" Then something's fundamentally flawed with the banking business model as it is practiced in recent years, and it needs to be changed, not propped up.

AND some banks are doing just fine sticking to the "old" methods.

Along with that, though----

People ARE buying homes/vehicles/etc. that they can't really afford. Common sense at the consumer end would help too.


No arguments here. The banking business model today seems to be, "go for the quick buck," rather than the slow and steady accumulation of wealth which, while not sexy, works. There are indeed some banks which still hold to this my own included (actually, a credit union but a rose by any other name...), which is why I bank there. Nor will I argue that there are a lot of borrowers who lack common sense. As far as I’m concerned, one of the U.S. education system’s major failings is the lack of an education in fiscal responsibility.

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RE: Islamic banking - the way to go? - 9/30/2008 8:22:58 PM   
Marc2b


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quote:

we fixed the laws in the 1930s.


We can fix all the laws we want, the question is: do we enforce them?

If person A sells person B something they represent as having value yet know to be worthtless, then person A is guilty of fraud.

I'm not overly worried about a total economic collapse (not saying it can't happen, just being cautiously optimistic).  My main interest is in the FBI investigation.  Somewhere in the middle of this mess are some individuals in need of doing some serious jail time. 


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RE: Islamic banking - the way to go? - 9/30/2008 11:58:05 PM   
tweedydaddy


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Status: offline 		The islamic banking system is built on an avoidance of the sin of usury, where you do not charge interest in order to profit from the misfortune of another, Why would that be something for heaven to forbid?
Usury is a wrong. To take advantage of other people and to exploit their need cannot be morally justified. They make reasonable charges for the sevices they provide which is all right by me.
Our financial system is built from top to bottom on corruption and the urge to simply make money at any cost.The Western banks have been the driving force behind downsizing workforces over here and exporting jobs to the prison factory based industrial ecomony of China. Our banks are the ones who invented two principles I can't stand. One, is that no matter how the company has performed, it will be under pressure to fire workers and save money in time for the annual figures, only to re hire people when they realsie they are understaffed, and the second, to make rich people, ie bankers, work harder, you pay them more, to make poor workers work harder, you pay them less.
I am left in fits of laughter by the moral stance of all our governments about the current madness, they let house prices spiral out of control by limiting the numbers of houses being built, and providing little or no social housing, which pushed things up more than most factors, pressure from below will always cause m,adness.
We are looking at the madness of uncontrollable greed and it's inevitable result.
The Bankers made thier money and much good it will do them. It's everyone else who pays the price.
I am not a Muslim, have no axe to grind with anybody. I don't have a mortgage, or any loans and only keep a pre paid credit card for emergencies and internet purchases. I am a member of a local credit union where my savings there provide funds for local people. I watched my neighbours go insane for the last ten years borrowing money for things they didn't need and was stupid enough to warn them that the bubble, as bubbles will would burst.
I am now surrounded by a sea of for sale signs and kids who simply don't understand why the have it now philosophy has disappeared.
I honestly think people went mad. That a working person needed,or could possibly afford a two hundred thousand pound house, that's over $400,000 which for a deranged moment, almost became the norm was a fantasy.
Now we are all suffering from an overdose of reality.

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RE: Islamic banking - the way to go? - 10/1/2008 3:23:41 AM   
blacksword404


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Status: offline 		They did fix them back then. Certain business lobbies asked for them to be changed back. Pools brought down companies back  then. And they were illegal. Hedge funds are illegal but yet.... Same games different times.

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RE: Islamic banking - the way to go? - 10/1/2008 3:54:11 AM   
LadyEllen


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Joined: 6/30/2006
From: Stourport-England
Status: offline 		Thanks everyone - very interesting. I think there might well be some ideas that could be taken up here in a fundamental rethink of how things are done.

Also interesting would be what our "enemy" might think of us adopting some of his principles; might go some way towards reconciliation maybe if we were to say "we think you have some good ideas - come and advise us"

E

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RE: Islamic banking - the way to go? - 10/1/2008 4:07:17 AM   
blacksword404


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Status: offline 		We were on a good track until greed took over. Greed makes wise people make stupid decisions. Risking millions of dollars to make one extra more. Maybe now it will get back to making money the slow and steady way.

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RE: Islamic banking - the way to go? - 10/1/2008 5:14:37 AM   
pahunkboy


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Status: offline 		It would appear the "other side", follows gods will more then the prevailing side...

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RE: Islamic banking - the way to go? - 10/1/2008 5:52:45 AM   
Musicmystery


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quote:

ORIGINAL: blacksword404

They did fix them back then. Certain business lobbies asked for them to be changed back. Pools brought down companies back  then. And they were illegal. Hedge funds are illegal but yet.... Same games different times.


Agreed---and those laws work well.

The CURRENT financial crisis is for entirely different reasons----legal and underregulated.

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