Definition
Sharia (in Arabic) or Shariat (in Turkish and Farsi) Finance seeks to achieve an "interest-free' economic system so that there is no conflict between business activity and the Quar-an. “Those who devour usury [lending money in return for interest] will not stand... Trade is like usury, but God hath permitted trade and forbidden usury”. (Quar-an 2:275) “O ye who believe! Fear God and give up what remains of your demand for usury if ye are indeed believers." (Quar-an 2:278-279) This goal is achieved by specialized banks and leasing companies.
For example, under conventional western banking capitalism, a financial institution lends someone $20,000 over two years for a car 8% interest payable annually. So at the end of the first year, the borrower owes $21,600. At the end of the second year, the borrower owes $23,328. This amount would be payable monthly over two years.
Under Sharia finance, the car might be leased for a fee of $23,328, payable monthly over two years, at the end of which the person leasing the car may keep it.
The car is the same, the ownership is the same, monthly payments are the same but in one case the buyer pays interest whereas in the second case no interest is mentioned.
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News 3/7/08 Muslim Mortgage, Marketplace. A California family describes how they arranged a mortgage to comply with the Shariah ban on paying interest. 11/21/07 Conference on Islamic Finance, May 19-22, 200811/19/07 Muslims Prod PM for Interest-Free Banking,Telegraph, Calcutta, India. The Centre is being urged to introduce “interest-free” banking so that Muslims can organise savings and investments without falling foul of Shariat laws. The Shariat forbids earning and paying interest. The demand has come from Muslim MPs cutting across party lines. One group, led by K. Rahman Khan, deputy chairman of the Rajya Sabha and a chartered accountant, recently wrote to Prime Minister Manmohan Singh seeking a Shariat-compliant savings and investment system. They cited Malaysia’s Tabung Haji scheme and some forms of Islamic banking in the West as examples. 10/10/07 Islamic Finance, Carnegie Council for Ethics in International Affairs. The Islamic banking market is estimated at $1 trillion with an expected growth rate of 15 percent per year (Forbes.com). Started in the 1970s in the Muslim world, non-Muslims also use these services. Hong Kong is creating a market for Islamic bonds, or sukuk. Western companies are targeting Muslim consumers with halal products - HSBC offers Islamic financial services.
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1/15/07 Islamic Banking and CSR. As we see large parts of our banking system being acquired by sovereign wealth funds in the Middle East and East Asia, we should pay more attention to Islamic banking, whether or not the acquiring institution has any intention of engaging in Islamic banking. Harvard has recognized the growing importance of the topic by creating an Islamic Finance Center. The 260 Islamic banks in the world are mostly in the Middle East and are worth about $200-$300 billion. Trillions of dollars more exist as potential deposits from Islamic customers who do not at the moment use an Islamic bank. Two big established Islamic banks outside the Middle East are Bank Islam Malaysia and Islamic Bank of Britain; new ones are Amanah (HSBC), Citibank and Noriba (UBS). Noriba makes clear that it sees a connection between Islamic banking and CSR.
The three basic principles of Islamic banking are:
1. Do not do business in sinful industries, haram, such as alcohol and gambling.
2. No riba, usury - no accepting or paying interest.
3. Avoid gharar, i.e., risk.
The first principle does sound like CSR. The second turns out to have a workaround in the form of lease-purchase arrangements. The third sounds like good advice based on what has been happening in the U.S. financial arena!
1/15/07 Blogspot, John Tepper Marlin, Islamic Banking.
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