Wednesday, January 30, 2008

"Islamic Financing Is A Con Job"

So I had decided to leave the blogosphere, only for Tarek Fatah (of all people) to bring me back!

I was listening to John Moore of the CFRB yesterday evening and he had Tarek Fatah on for a few minutes. Fatah was criticizing "Islamic Banking", calling it a "con job and scam" by the Imams. John Moore agreed with him, terming it as "religious foofery at it's finest".

Now John is a great talk show host, but I wish he had spent a little more time on this topic than he did (after all he had just spent 20 minutes on the ethics of an office pool). Fatah was on for about 5 minutes, and then John just had 3 callers before he moved on to another topic. The first caller was sounded obviously angry, foaming-at-the-mouth-mullah kind of guy, the second caller seemed to be the apologist Irshad Manji kind of person, while the third caller was the best. He actually, for the very first time ever that I can remember, gave a reasonable answer as to how his house was Islamically financed. However time was short, and John, usually such an open minded fellow, seemed to have made up his mind, Islamic banking was just an accounting trick, and that was that.

Now I don't know much about the details of "Islamic financing" (and yes there is a reason why I put it in quotes), but whenever I have asked someone about this they have launched into such a complex explanation, full of terms like mudarabah, muajjal, Ijarah and Sukuk - that soon I got lost. Excuse me, but shouldn't there be a SIMPLE explanation?

Last year at RIS, I actually asked a couple of the merchants in the bazaar section, who were hawking "Islamic Finance Bonds" (now there's an oxymoron if there was one) as to how it exactly worked. They started to speak, and soon I was left thinking, "Boy, this is just one big scam! They are not dealing with interest, but they just take it and call it something else!"

Obviously, there is legitimate Islamic Banking and there are the con artists. Shariah-compliant banking is the fastest growing segment of the financial services industry and millions of Muslims can't be wrong, but what exactly is Islamic financing and how does it work? Please, someone tell me in simple words.

I am not going to go into this whole debate of usury vs interest. Rather, I need simple answers to these THREE questions.

1) I want to lend Mira $5,000 (in 2008), and Mira has promised to pay me back $5,000 in five years (in 2013). Now we know inflation is a fact, value of money decreases every year. So $5,000 in 2008 is actually worth more than $5,000 in 2008 than 2013. So why should Mira not pay me more than $5,000?

2 a) I have $100,000 to lend to Mira. What is my incentive for doing so, if I cannot earn anything back in interest (and, given the example in (1), actually lose money)?

2 b) I want to borrow $100,000 to start a business. I don't want to make anyone partners in my business, I just want to borrow the money and return it after so many years when my business is up and running. What incentives can I offer the lender if I am not paying them interest?

3) If I am lending someone money, I am losing the opportunity cost of that money. If I lend Mira $100 for 1 week, I can't use that $100 for 1 week. How will Mira compensate me for that 1 week?


mystic said...

It all depends - is Mira a girl or boy?

(lol - I don't know. I am not a 'scholar')

Anonymous said...

Ah the time value of money. Now you see, if for some reason you didn't invest that money, it would still be the same at time of repayment right :) The time value of money only works if you have an expected ROI. But lets not get all technical. The simple answer here should be....what you get out of the transaction is that you were able to help a friend in need to acheive the goal which they set out to acheive. So the real question should be is Mira going to use the money in an honourable way, so that you feel all warm and fuzzy inside when Mira is able to buy her first house/car/textbook :)

Anonymous said...

Wihtout getting into too much detail a tangable asset has to be in place for the lender to make money on these transaction. For example instead of lending Mira money straight islamically you must purchase the item mira wants to purchase for him and resell it to mira at a higher price. For example if you want to buy a business for $10,000 and mira is going to loan you the money, mira can buy the business for you and then resell it to at a higher price giving mira the desired return.

Some will argue that this is just interest, but in acutally it isn't. There is a physical tangable item that is being exchanged, not just money going from one person to another and that makes all the difference.

Islam and most other religions for tha matter place great importance on the form of a transaction over the substance of the transaction. For example two people may live together, have children together, support each other in every way, but islam will not qualify this as a marriage. If another couple is living in the exact same manner but under the context of a marriage then under sharia this is a valid relationship. Even though the only difference between the two relationships is one couple had a nikka done and the other one didn't. Thus great emphisis is placed on the form (nikka) over the substance (common law).

As such, by incorporating this physical item in the transaction and turning it into a buy and sell transcation rather then a straight loan of money it makes all the difference.

Anonymous said...

This is a good link.

-- Farah

Anonymous said...

I am also waiting to hear more *solutions* to your question. My friend's husband had saved money with a certain *islamic mosque/organzition* for a number of yrs. When they wanted to have their money for personal reasons, they were given a cheque to take it to some major canadian bank(where this organization keeps its money) to be given their money, my friend simply told me, they were *thieves*,hehehehe,they pocketed the interest and gave her husband the same amount of money he put in. They were surprised to see that the *organization* was just *banking* like the rest of the world. LOL. sf

BD said...

check this out

Anonymous said...

Assalamu Alaikum.

For small loans (like in 1), I would simply deal in gold (for example, any other commodity will work). Rather than loaning them 5000 dollars, you can loan them 5.5 ounces of gold (in dollars, which is roughly the same). 5 years later, you are paid back "in gold" (meaning, whatever the spot price of gold is then). That seems quite fair.

It gets complicated for larger loans. If your friend is investing in a company, why not agree to some percentage of the profit (based on some mutual agreement)? If there is no profit (ie they are not investing in some business, or going to school), then of course, this becomes like a "charity" (relieving your brother's grief). You're right though, just like in giving charity, there is no material benefit in loaning somebody money. But there are numerous hadiths about loaning money as a charitable deed (in fact, I think one hadith even says that it is superior to charity, perhaps because the lender can give more money as a "loan" than as "charity" so the benefit is more).

Somebody also explained how Islam does place great emphasis on the form as well as the spirit of an action. For instance, giving a loan on interest is reprehensible (letter of the law), but so is giving a halal non-interest loan with the intent of showing off one's generosity (spirit of the law).

But bottom-line, yes, there are not many material advantages to giving a loan nor in charity, but we are taught, for some mysterious reason, that "charity never diminishes wealth" (hadith), and that riba is indeed a spiritual diminishing.


tani said...

Islamic banking and finance at first does sound a bit odd...specially when you hear it from certian practitioners who try to market their services....but I think if your really interested in the topic, ask an academic, and practitioners of islamic finance in its different forms (not just the ones trying to sell you a mortgage)

there are quite a few reputed academics (more in the UK and Asia, then in Canada and the US) developing its theory and applied aspects with regards to the current international monetary system.

Also, it might be a an idea to talk to its practitioners in places where there is already a signifianct market share for its servcies...malaysia, indonesia readily comes to mind..

there have also been a few good conferences on the topic here in Canada...the first one at mcgill university in 2005 - organized my muslim students with backing from the university's Economics and Management department..there were around 120 attendees....95% of them young muslim men and women who wanted to know more about it

there was another one in 2007 may in Ottawa...a much more high profile one...

its hard for this sector to take off here...given the competition...but it definitely has potential i think...

Lloyd's, HSBS, Citibank all have islamic banking services already...royal bank used to have it, but then put it on hold because they didn't know how to market it...Investors Group also has a division on islamic finance

..."islamic bonds" do sound weird...but you need to consider the underlying structure of how these bonds are developed...its mathematical obviously, but based on principles of doing "fair-trade" as those espoused by our prophet and other islamic scholars...and i'm not fully versant on the techinical jargon...but i think you can do a google search and come up with some good answers

also, many of the islamic financing traditionally focus's on mortagages....but it can take many different forms...

here are the links to those conferences, the names of the speakers are there...they may be more helpful in giving you a clearer idea of how it works!

isheeta said...

I have to agree with Mira here... if Mira is a girl, she will take all your money and spend it on Islamic finance.. like shoes. A good cause, I always say. lol

Kidding!!!! dont be hatin! Im not much of a scholar myself.

mezba said...

Thank you all for your comments.

I was looking for answers to these questions as to what would be my reward as a business to lending the money.

Mystic: Mira is deliberately chosen as an androgenous name!

Mousehunter: Say Mira is not a friend but some borrower of the street and I am a business (like a bank). That's what I was looking for, and while fuzzy feelings are nice, as a business I need to make money, right?

Anon (9:36): thank you. It does make sense what you say,especially about the married couple vs the live-in relationship and how Islam looks at the semantics of a relation.

Farah: thanx.

Sf: wow.. that is some big scam! What a bunch of crooks!

BD: thanx for the links.

Saif: What if the gold prices fell? then I as a lender would lose the money, right?

As for agreeing to a share of the business for bigger amounts, that is precisely my point. As a lender I don't want to be part of a business I don't know anything about (and then have to suffer losses if any). I want to lend my money and get it back, plus be paid for lending the money, as the borrower is using my services (of the money). As a business I cannot give charity. This is where I have the whole issue with the non-interest aspect of the loans.

Tani: thanx for the links and I do plan on asking more people about this.

Isheeta: haha! Islamically though her shoes may have to cover her ankles.

Anonymous said...

Assalamu Alaikum.

Yes, you would lose money. I think one of the reasons Islam sees riba as oppressive, is because there is a "guaranteed" return, regardless of how well or how poorly one's business does. You must pay your "pound of flesh"... This serves to accumulate wealth in the hands of the rich.

In that specific example, you may want to "hedge" it by using a basket of commodities, and not only gold... Perhaps silver, platinum, the Euro, other currencies, oil come readily to mind. Even the US dollar (if gold goes down, does the dollar come back up?)

Even in a conventional loan, as we are all learning from the subprime mess, there is no actual guarantee that you will be paid back, of course. "Loan sharks" routinely hurt desperate people, I think Islam is just trying to mitigate that.

Even banks in real life never simply hand out money to people they "don't know anything about", they do some investigation (at least a credit check)... If you're a business, they're going to listen closely to how you propose to make any money, etc.

I do agree with you though, without interest, there is no incentive to make a business purely out of loaning people money; even to those who can ill afford to buy a house/car. Maybe that isn't such a bad thing after all...


Anisa said...

i really think the whole point of all this was for PEOPLE not to charge interest to other PEOPLE...a.k.a. family/friends, etc. if my mom loans me $100, she can't ask me to pay HER interest. as a me, that's a whole different thing. can't deny that businesses are designed to make money and therefore pay employees to they can make a living. totally different IMHO.

MM said...

Aaah, Islamic Finance.

As a fresh graduate in Abu Dhabi 3 years back, Islamic Finance was one of the sectors I thought I would like to join.

I still remember the too good to be true response from one of the Banks, which was to quote them, "As these job vacancies are all related to Islamic Finance, only nationals of Arab countries will be considered for the positions"......

isheeta said...

in that case...... all hail the mighty (sexy) winter boots.

and if mira is an androgenous name... I feel for the boy whose name is Mira.

MM said...

Btw, Mezba Bhaiya,

are we allowed to venture guesses as to why you have almost stopped blogging ? :)

Anonymous said...

well i am as lost as you, but think of it in another manner ....i am not perfectly sure if the the currency that was used during the time of the prophet was gold .....but if it was .....then is a scenario ....dollars or currency is essencially a reciept of gold if i give someone $100 dollars ..(worth of gold)( then essecially i am giving that person that value in gold ....then that gold has a different value in lets say 5 years whats so wrong with getting more money back in line with the rate of inflation??....specially if the value of gold has risen ..


Molly said...

Uff, I'm not a scholar but I going to put my (interest free) two cents in.

1- the Prophet pbuh always said to lend money like you don't expect it back. This is of course not something a business is going to do, but as a person yes.

2- making a profit off of business dealings is perfectly legal (how else would wealth ever be amassed?) however I feel that a company could do that without necessarily needing to charge interest. I'm not sure because a- I'm not a business major, and b- I'm not an islamic scholar.
But if you're in the business of money, it hard to not get shady about it. Which is why I would never be in the business of money (banking) anyways.

Islamic financing I don't believe CAN be a scam if it IS actually Islamic.

If its a scam, then its just financing. Don't be dragging the word Islamic through the muck.

Hasan said...

Why not loan her a pot of gold. She is to return the exact amount of gold at the end of the period. This offsets the inflation.

You can also buy a boat for her (if she wants to earn a living catching fishes) and charge her rent.

I know it is not the same as interest which is fine as it should not be the same...

Molly said...

and why did you want to stop blogging???

AKA said...

I'm really interested in this topic too and although I know there are some legit organizations out there, many of the ones in Canada are unfortunately not what they say. Like you said, they're just simply calling 'interest' something else like 'fees'.

Won't mention specific names, but the company that was the major sponsor at RIS in 2006 is no longer in operation...supposedly they went bankrupt? My dad launches into a scathing attack on them because they some how 'cheated' (his word, not mine) his close friends out of money when they tried to sell their house and caused trouble.

Raising the issue of Islamic banking leads into so many other avenues that it's a debate with no end I think.