Is Islamic finance the answer? – By Robin Brant
By Robin Brant
Experts in Islamic finance believe their way of doing business has shielded them from the global credit crisis.
But how does it differ from conventional Western finance?
A former executive director of the International Monetary Fund, Dr Abbas Mirakhor, says wider Islamic economics relies on God’s guidance, handed down almost 1,400 years ago.
There is a “consciousness of a supreme creator and a system that he has provided”, he says.
What we know as the conventional Western way does not have that, which is “really the major difference between the two”, he adds.
In practical terms, the most significant difference is that charging interest is not allowed in Islamic finance.
Neither are most forms of speculative investment permitted, such as hedging or derivatives trading.
“We don’t recognise the concept of interest… to look for some profit from trading money,” explains Dr Bambang Brodjonegoro from the Islamic Development Bank.
“In the Islamic concept, money is strictly for the purpose of exchange or storing value, but not for the transaction of looking for excessive profit,” he says.
How then, does an Islamic bank, and a customer who puts money in that bank, make a profit?
The system is asset-based, with tangible assets or commodities at the heart of it. There are buyers and sellers, not borrowers and lenders.
Here is a comparison.
In Los Angeles a customer who wants to borrow money to buy a car would go to a conventional bank and agree a loan. The bank would hand over the money.
There would be regular repayments, which include interest accrued on the loan.
In Lahore a customer could go to an Islamic bank and sign a contract with the bank to buy a car from them.
The bank would not loan the money but buy the car itself. Then it would sell it to the customer at a mark up.
The customer would agree to pay back the cost in instalments over a regular period.
One of the core principles at the heart of Islamic economics is risk sharing. The bank and the people who put their money in it share any profit, or loss, from investments.
“In Islam we appreciate merit, so if someone works harder in a business…they (the bank) will get the sharing benefit,” explains Dr Brodjonegoro.
“The more important thing is that there will be no bank that rules everything. It will be bank and borrowers at the same level and they share the risk and benefit.”
Short URL: http://tinyurl.com/yabbdoe