Prohibition of interest in Islamic banking can alleviate economic crises and financial crash – assesses financial expert. Interest Prohibition makes Islamic banks to become shareholders of the client’s business and it makes them more accountable when they lend money.
If we had several banks operating according to Sharia in the Muslim faith, the financial crisis would not be nearly as grim as it is today. It assesses the British consultancy firm Jasper Capital, which specializes in Islamic finance.
“Obviously we would have had the financial crisis in any case, but if there had been a more prudent lending policies, which are within the Sharia financing, so the crisis had been lower,” said Jack Stewart, who is chief consultant for the Jasper Capital and stationed in Abu Dhabi.
According to Sharia, it is forbidden for Muslims to participate in financial transactions involving interest, but it does not prevent Muslims from doing business. Over the past five years Sharia finance has grown wild in Europe, according to Financial Times, and it may have some benefits for both consumers and the economy as a whole.
Sharing risk with the customer
Although Islam prohibits interest, it is still allowed to earn money to lend money. Before buying a home for the bank will buy the house for a client and let it over to a fixed price equivalent to the purchase price and profit. When the house is paid off, transferred ownership to the customer. Niels Mølgaard head of Amanah, the first financial institution in Scandinavia, operating only in accordance with Shari’a principles. And according to Niels Mølgaard a sharia bank would never have invested in the uncertain mortgage receiving the housing bubble to burst in the U.S. and thus created the basis for the financial crisis.
“Crash in the housing market in America came because they borrowed too much money to people who could not pay back, and it would not have happened in the same degree in sharia financing,” says Niels Mølgaard and explains:
“In the pure system serves the banks money by shifting investments to where there is the greatest return. When the bank lends money for a house purchase, founder customer promissory letter that the bank can sell more, and hence no longer liable for, but it can not in Shari’a, which the Bank is co-owner of the house until it is paid off. Bank binds its manpower and money in that time period, a financing is set to, for example. 30 years. And thus bears the risk of bank financing in conjunction with the customer, “says Niels Mølgaard. And when the bank is bound to a solid agreement, it will also keep away from unsustainable investments that U.S. banks went on board in the housing bubble in the U.S..
Housing Bubble and Financial Crisis
Housing Crisis in the U.S. is a classic lesson in how wrong it can go when the banks too uncritically lend money to ordinary people that can not be transparent market mechanisms. After repeated interest rate cuts, which made home buying relatively cheap, the banks issued a lot of high-risk for house buyers, which in reality could not afford, but which entered the market with the expectation that further interest rate reductions and increases in property value would enable them to pay the loans back.
Value Increases came and cheered for additional borrowings in equity release to fund a growing family. But eventually, the market was saturated, the value decreased in the housing market, the loans were more costly and coercive actions began to roll. Part of the debt from the rotten housing deals were in the meantime been sold to European banks, which now sat in housing investment was no longer worth anything.
Islamic banks are joint owners of the loans they give out and therefore can not run away from bad investments:
“Islamic banks creates a more stable economic environment because they look very carefully for what the customer can pay back,” said Jack Stewart, who points out that small businesses can benefit from switching from the big banks to sharia banks.
Within the traditional banking among banks was not in the company’s business, but it makes the Islamic banks, because they bear a greater share of risk when they become joint owners of the company. In return, they also share in company profits.
“Islamic banks are tied to an investment, and therefore participate more in their clients’ business, because they both share the risk and profits, and it can be of great benefit to small businesses that do not have the same expertise that large companies with experienced trustees and investment managers hired, “says Jack Steward, who criticize the big banks to let small businesses in the lurch.
“Small to medium-sized companies have always been at the mercy of large banks, both in the West and in developing countries, and are particularly vulnerable to bad investment advice,” says Stewart, Jack.
London is the western mecca for Islamic finance and the English authorities could be the first in the West authorize the first Islamic bank, Islamic Bank of Britain, in 2004.
The English authorities have amended legislation for banking regulation, since Islamic banks should be regulated in a different way. Partly to serve the 1.8 million Muslims in Britain, but also to enable the UK-based banks to access the new surplus, rising oil prices have created in the big sharia banks in the Middle East. The cash surplus in the Middle East has become very attractive to Western banks, which suffer from the financial crisis, but the Islamic banks are also attracting a different customer group.
Non-Muslim customers with ethical requirements for investment banking also opens accounts in the Islamic Bank of Britain. Besides the prohibition of interest is not permitted to invest in pig production, alcohol, porn, gambling and weapons, and has, according to Jack Stewart also been an engine for growth.
“It is rather to the requirement that companies must demonstrate social responsibility like Corporate Social Responsibility, which has grown up as corporate ethics seal of approval in the West,” says Stewart, Jack and the Islamic Bank of Britain also aware of:
“A lot of our customers are attracted by the ethical dimension, but also because we serve our customers in different languages. Hindu, Urdu and Arabic is a fundamental service, “says Shah Abbas.
Source : informationdk(google trstld)