Chapter 55 - Islamic Banking

Islamic banking is a system of banking that complies with the principles of Islamic law and is also called 'Sharia compliant finance'. A major principle involves the sharing of profit and loss. Another principle involves the prohibition of the collection of interest as the collection of interest is not allowed under Islamic law. Islamic banking is effectively banking without interest.

Unethical investments are not permitted. So investments involving alcohol, gambling, pork, and a few other items are not allowed.

In Islamic economics, it is accepted that money has no intrinsic value.

To Islamic economists, money is a medium of exchange, a store of value or a unit of measurement. The return on money invested needs to be linked to the profits. Lending becomes a profit sharing arrangement.

Islamic banks make a profit through investments in their clients' goods and businesses. Islamic Finance does not support debt financing. It only endorses equity financing. Transactions must have a connection to the "Real Economy". An Islamic loan is structured in a different way so that no interest is charged, but the transaction ends up being similar to a debt based loan.

One of the problems faced by the Islamists is that they are often purchasing items such as houses in regions where usury dominates. So the bank loans need to compete against loans given on usury. The question then arises as to whether Islamic financing has been arranged to compete against usury.

Avoidance of Speculation

Islamic banking does not permit investments that rely on chance or speculation. Normal commercial risk-taking and related speculation are permitted. This is a very good principle. The borrowing of money for speculative gain, which includes rental housing, is a blight on Western society.

Ethical and Morally Acceptable Lending.

Islamic investment does not accept socially detrimental activities. This includes gambling, tobacco, adult materials, alcohol, weapons and more. For the most part, Islamic investing is consistent with conventional value-based investing, which mandates social values and good governance. This again is a tremendous principle and, irrespective of our religious beliefs, we need to applaud this stand.

Islamic Finance challenges the fundamental principles of Western banking procedures. Western banking procedures involve money making money through interest on loans. Islamic banking appears to avoid the issue of the creation of unpayable debts. With Islamic banking, the debt is not magnified with interest.

Islamic finance does not accept investments in structured products that are not backed by assets. This includes non-asset backed items such as futures, options and collateralized debt obligations. There are new arguments that finance should not be available for derivatives and these thoughts include the fact that derivatives played a major role in the 2008 financial crisis.

The principles of Islamic banking are excellent.

The concept that money has no value is close to my statement that money has no value to the creator. The insistence that no interest be charged ensures that debt cannot exceed the money supply. The passing of profit from the business to the bank appears to avoid the problems associated with usury. The banning of investment in speculative activities is wonderful and the avoidance of futures, options and CD owes and derivatives is an anti-usury dream come true. When an investor has a stake in the business then the lender is prone to help and nurture the business.

With Islamic Finance, you identify a real project and share in the returns whether that be a profit or a loss. With modern conventional finance, you lend money and receive interest irrespective of the success or failure of the project.

Under Islamic Banking there is:

A ban on interest.

A ban on speculation.

A ban on the financing certain activities.

A profit and loss sharing principle.

An asset-backing principle.

Mike Seccombe 2012

Around the world, regulators are fighting an uphill battle to put ethics back into the Judeo-Christian financial system. The Islamic system has them built in. Jesus Saves, Moses Lends, Muhammad Invests by Mike Seccombe. 9 July 2012

Hayat Khan

It is projected by 2020, the Muslim world will be doing 50 per cent of its banking with Islamic institutions.

Hayat Khan, Latrobe University


Say you want to borrow to buy some inventory for your business. The bank says 'I'll buy the inventory for you and then as you go to sell it you can buy it back from me.' And the difference between the profit and the resale is the bank's profit. Or, in the case of housing finance, the customer selects a property, the bank buys it, and the customer then buys it back over time from the bank.

So the real estate is actually on the balance sheet of the bank,

The big difference is that in the Islamic system, these institutions actually own the assets. If you look at an Islamic bank's balance sheet, you will find it has a lot of fixed assets on it. A bank in Australia, for example, would own some computers and ATM machines and other bits and pieces, but not much in the way of other assets...

Mike Seccombe 2012

Indeed the whole world of Islamic banking is looking pretty lucrative these days, so it's not surprising that conventional financial institutions and markets are looking for a piece of the action. Britain in particular has gone a long way towards making its system welcoming to Islamic banking. "Jesus Saves, Moses Lends, Muhammad Invests" by Mike Seccombe. 9 July 2012

Anthony Migchels 2012

Islamic banking still takes a lot of money with shares of profits. Interest-free money is much cheaper still for producers and consumers. retrieved 29/06/2015

In Quran, the following verses are about usury:

That which ye give in usury in order that it may increase (other) people's property hath no increase with Allah; but that which ye give in charity, seeking Allah's countenance, hath increased manifold 40

And of their taking usury when they were forbidden it, and of their devouring people's wealth by false pretenses. We have prepared for those of them who disbelieve a painful doom 41

O ye who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to Allah, that ye may be successful. 42

Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affairs (henceforth) is with Allah. As for him who returneth (to usury) - such are rightful owners of the fire. They will abide therein. 43

Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty. 44

O ye who believe! Observe your duty to Allah, and give up what remainth (due to you) from usury, if ye are (in truth) believers. And if ye do not, then be warned of war (against you) from Allah and his messenger. And if you repent, then ye have your principal (without interest). Wrong not and ye shall not be wronged. And if the debtor is in straitened circumstances, then (left there be) post-ponement to (the time of) ease; and that ye remit the debt as almsgiving would be better for you if ye did but know 45

In Islam, usury is receiving excess in a transaction involving two commodities of the same kind, which are weighable or measurable, or receiving of excess in loan. The Muslim definition of usury can, thus, be applied to "barter usury" as well as "usury of money". In the former, the loaned commodity is returned back to the lender with some excess of the same commodity. In debt usury, any conditioned excess in loan is usury, even if the excess is in any kind of commodity, service or gain of using the loan. In debt usury, there is no difference between weighable, measurable, numerable and observable. The practical example I give in conversation is:

"Imagine all the gold in the World.

Imagine all the gold of the world was lent out.

The interest rate is 10%.

At the end of the year, there is gold owing than there is gold."

You can apply this to any commodity.

Usury was a problem.

Usury is a problem.

Usury will always be a problem.

The concept that 'usury centralizes wealth' and 'usury causes the poor to get poorer and the rich to get richer' is a theme common to quite a few religions. Islam is extremely well documented on these items. Islamic documentation and tradition very noticeably enshrines the concept of equality of distribution. And does its best to avoid a situation where usury creates an asset-less section of the population who suffer from the transfer of wealth to the affluent.

Islam certainly has got a lot of good points. They are way ahead of the Christians on this topic.

Maybe you have noticed that the usury-promoting countries, such as Britain and the United States, have leaders who often proclaim Christian values. They seem to forget that Jesus was nailed to a wooden scaffold very soon after his provocative incident in the temple. He didn't tip the money tables over to save souls, he tipped the tables over as a very clear demonstration to the ruling Pharisees of the time, that he, his followers and the working poor were no longer going to tolerate the manipulation of money that impoverished the poor to the benefit of the affluent.

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