Islamic finance acceptability increasing

Dr Umer Chapra, a renowned international scholar on Islamic economics and finance, has said that there is a greater acceptability of Islamic finance in the world after the recent global financial crisis. Delivering a lecture on ‘Current Islamic Banking Paradigm and the Way Forward’ on Wednesday, he said that Islamic Finance is now more respected all over the world because of several economic crises created by the global financial system in the last four decades.

He said the recent financial turmoil was the most severe of all involving approximately $3 trillion to $4 trillion in bailout funds. He said that primary cause of the recent crisis was excessive and imprudent lending by banks, which happened because of inadequate market discipline and lack of regulation and supervision.

He gave a complete run down on how the international financial crisis evolved and highlighted salient features of the Islamic financial system, which could prevent occurrence of such a crisis in future. Dr Chapra said that risk-sharing and equitable allocation of credit are the hallmark of Islamic financial system based on Islamic principle of justice.

He said the Islamic financial system lays great emphasis on equity and profit and loss sharing which make banks more cautious in lending and added that in Islamic system debt is not created through direct lending and borrowing but rather through the sale and purchase of real goods and services.

He said the Islamic financial system puts several conditions on debt financing which, inter alia, include that the asset being sold or leased must be real and not notional or imaginary. Similarly, debt cannot be sold and the risk of default associated with it must be borne by the lender himself, which will motivate creditor to be more careful in lending, he added. He said the market discipline that Islam imposes puts a check on excessive expansion of debt.

Dr Chapra said that Islamic finance was still in its infancy stage but it had a lot of potential to grow. “Islamic financial system has showed the world why conventional system failed … and this system can save the international financial system,” he added. Earlier, State Bank of Pakistan Governor Salim Raza in his welcome address acknowledged the valuable contributions made by Dr Chapra in the field of Islamic economics and finance. staff report

source : dailytimes

Islamic banks can mitigate the economic crisis

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.

Better advice

 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.

 Ethical investments

 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)

 

Court directive to State on Islamic banking firm

A Division Bench of the Kerala High Court on Thursday directed the State government and its instrumentalities to desist from participating in any way, financially or otherwise, in the business of a newly formed non-banking financial company, said to be based on Islamic laws, pending adjudication of the writ petitions challenging its formation.

The Bench of Chief Justice J. Chelameswar and Justice C.N. Ramachandran Nair passed the directive after hearing arguments on petitions filed by Al Barakh Financial Services Limited and the State government seeking to vacate an interim order.

The Bench had earlier directed the government and the Kerala State Industrial Development Corporation (KSIDC) to ensure that the newly formed company did not commence its operations until further orders from the court.

The interim order was passed on a writ petition filed by Janata Party president Subramanian Swamy against the government sanction given to the KSIDC to form such a company.

The Bench clarified that the interim order did not prohibit the company from carrying on its activities, provided such things were done in conformity with the law and after obtaining all clearances.

Dr. Swamy, opposing the pleas to vacate the interim order, submitted that there was no new development that warranted the lifting of the stay. He pointed out that the Union Finance Minister stated in the Lok Sabha on December 18, 2009 and March 5, 2010 that Islamic banking activities were not feasible in the current statutory and regulatory provisions.

RBI Deputy Governor Shyamala Gopinath had gone on record that the Islamic banking proposal had not come to the RBI because it was an issue between the Centre and the State. In fact, the RBI rejected such a proposal in 2007. The government and the KSIDC stated in their counter-affidavits that the company was RBI-compliant. He contended that the government order in this regard disclosed that it was an Islamic investment company. If the company was to function as per the Shariah laws, an amendment to the Banking Regulation Act would have to be made. The setting up of such a company with co-ownership of the state was ‘antithetical’ to equal treatment of all religions.

Equity

Dr. Swamy said that as per the government order, 11 per cent of the equity would be held by the KSIDC.

Counsel for the KSIDC submitted that the corporation had not yet made any investment in the company.

The government, in a counter-affidavit, refuted the allegation that the company would function in terms of the Shariah law.

The allegations were baseless and misleading. The company would function only in accordance with the RBI Act, rules and guidelines, it said.

source : hindu

Sharia depositors’ funds may be haram in Indonasia

 
A discussion at Nahdlatul Ulama’s (NU) 32nd national congress in Makassar, South Sulawesi, ended on 25, March, 2010 with a conclusion that Sharia banks in Indonesia had yet to provide fully ‘halal’ fund management.

A young scholar who was also the deputy head of the contemporary religious issues deliberation division at NU headquarters, Cholil Nafisia, said Islamic institutions in Indonesia still lacked ability to verify funds managed by Sharia banks.
“It’s still possible that the funds of Sharia banks’ depositors are managed or invested in ‘haram’ ways,” Cholil said during a meeting at Makassar’s Sudiang haj dormitory.

Depositors usually did not realize this, he said, as the initial process of the investment generally appeared halal.
“When a depositor first makes the [transaction deal] to invest funds at a Sharia bank, everything will look fine and ‘halal’.
“The mess will happen after that, when the bank invests the funds into various investment schemes,” he said.
A sharia investment will not benefit its customer with interest. Sharia banks invest the funds in the stock market and share only a certain percentage of the profits with customers.

Each Sharia bank implements unique methods of sharing and profit calculation, making it harder for Muslims to determine whether the funds are really managed accordingly.

Once a single rupiah of a fund is invested in a haram business, the entire investment of a particular depositor would be haram, Cholil said.

“That’s why it’s hard to supervise all of the investing processes.”
Cholil suggested that the NU play a significant role in tackling such issues.
 
“Make more ulema into auditors and make more auditors become ulema,” he said.
“I have asked the auditors association and they confirmed that only a small number of auditors in Indonesia were skilled in auditing Sharia investments,” he said.

Cholil refused to comment if banks only used the label “Sharia” to attract customers.

source : jakatapost

Islamic finance gets the nod

THE Rudd government is pressing ahead with plans to develop Islamic finance in Australia to help position the nation as a leading global financial services hub.

Assistant Treasurer Nick Sherry told funds managers yesterday he would travel to the United Arab Emirates, Qatar and Bahrain at the end of next month for talks on the regulation, promotion and export of Islamic finance, banking and insurance.

Estimated at $US729 billion at the end of 2007, the Islamic financial services sector has been growing rapidly, and the government sees it as an alternative source of capital for Australian business and consumers.

“Australia sits as one of the closest neighbours to Indonesia, a rapidly growing developing economy and the largest Muslim nation in the world,” Mr Sherry said at a function hosted by the Investment and Financial Services Association and Deloitte.

“We have close and growing business ties to the Gulf region and beyond. We must do more.”

Charging interest is prohibited in Islamic financial services, as is speculation, and financial transactions must be underpinned by a tangible asset and require both parties to share the risk.

The government-appointed Australian Financial Centre Forum has recommended equal access for such products be introduce by removing regulatory and tax barriers.

Mr Sherry said the government was also considering ways to improve the tax treatment of managed investment trusts to attract foreign investment.

“In 2008, we asked the Board of Taxation to review these tax arrangements, and now we are considering the board’s final report,” he said.

He said the government strongly supported foreign investment in Australia.

source : the australian

Islamic Banking – A Myth of A Reality

The Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic laws (Sharia) and its practical application through the development of Islamic economics.

These are the views of a leading economist, Umer Chapra while addressing at a conference on the topic “Islamic Banking-A Myth of A Reality” at ICAP. Umer was of the view that Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden).

While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

He further elaborate that banking is a basic need of human since the beginning of the civilisation. Banking Concept existed before Islam and in early days it called ‘Saraaf’ who took deposits from investors and offer to trade people. When Islam arrived it gave guidance for trade, finance & banking and hence Islamic banking come in existence. Islamic financing is not myth it is a reality from hundreds of years.

Though Islamic banking launched on commercials basis very late, in modern world Dubai Islamic Bank was the first Islamic Banking bank, which was developed in the Islamic World. It is very unfortunate that total global assets of Islamic banks are just $1 billion as compared to conventional banks that have trillions of dollars. Despite this fact, we consider it a positive sign as Islamic banking are in growing stage and growing day-by-day and country-by-country. Islamic financing and banking are not only existing in the Islamic world but also practicing and teaching in the western countries.

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah. Hence the Islamic system caters to all the needs that a Modern banking does. The conventional products offered such as Working capital requirement, Leasing, Running Finance, Export Refinance Scheme and Auto finance have Islamic Finance Alternatives such as Murabeha, Ijarah and Diminishing Musharakah, Running Musharakah, Islamic Export Financing Scheme and Car Ijarah/ Medium term car Murabaha/ Car DM respectively.

Islamic Banking has the similar rate of return for consumers, the rates are based on the same benchmark and risks have been reduced comparatively to conventional banking. The facilities provided by the Islamic banks are similar to any modern banking such as ATMs, Debit Card and branch network.

source : dailytimes

Islamic Finance Offers Stability As a Financial System

As the world reels from the knock-on effects of the US subprime crisis, many are questioning the validity of the current financial regime and asking what should replace this flawed system. Leading Islamic Finance experts Iqbal, Mirakhor and Krichene make a strong case for adopting principles of Islamic Finance.

Sydney, Australia – infoZine – The validity of the current financial regime has been in question since the 2007 global financial crisis exposed its vulnerabilities that stem from high leveraging, a complex system of transactions and instruments, and a disconnect between the real and financial sector.

Published by John Wiley & Sons (Asia) Pte Ltd, The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future develops an analytical case for the inherent stability of an Islamic financial system, a system that is based on equity financing and risk sharing. The authors, who have written numerous books and articles on Islamic finance between them, bring a wealth of knowledge and experience to the discussion of the Islamic finance industry and its place in broader efforts to reduce the volatility of global financial markets.

Focusing on the historical, analytics and empirical discussion of the comparative stability of the two systems, this book first considers episodes of turbulence and instability in a historical context recalling the occurrence of such events from mid-19th century to the present. It then offers various theoretical explanations along with solutions and alternative financial systems that avoid instability provided by various scholars dating back to mid-19th century to present. Discussing the architecture of an Islamic financial system, it shows that the Islamic financial system shares at its core many characteristics of a stable financial system proposed by Western scholars throughout history to avoid the inherent instability of the present dominant system.

Scholarly, insightful, yet highly-readable, this book makes a convincing case for the world to shed its reliance on debt, interest and leveraging, and revamp the global financial system to rely more heavily on equity and risk sharing, the foundation of an Islamic financial system.

Prof. Hossein Askari received all his university education, including a Ph.D. in economics, at MIT. He has taught at MIT, Tufts University, the University of Texas at Austin and is now the Iran Professor of International Business and International Affairs at the George Washington University. He served for two and a half years on the Executive Board of the IMF and was Special Advisor to the Minister of Finance of Saudi Arabia. In the mid-1980s he was the director of a multinational team that developed the first energy plan and energy planning models for Saudi Arabia. He has written extensively on economic development in the Middle East, international trade and finance, agricultural economics, oil economics, economic sanctions, and on Islamic economics and finance.

Dr. Zamir Iqbal works as Lead Investment Officer in the Treasury of the World Bank in Washington, D.C. He earned his Ph.D. in International Finance from the George Washington University, where he also serves as adjunct faculty of International Finance. He has extensive experience with capital markets, structured products, risk management, financial sector development, and financial modeling. His research interests include Islamic finance, financial engineering, structured finance and risk management. He is co-author of several books on Islamic banking and finance.

Dr. Noureddine Krichene received his Ph.D. in economics, University of California, Los Angeles, 1980; joined the International Monetary Fund (IMF) in 1986; and held the position of advisor at the Islamic Development Bank.

Dr. Abbas Mirakhor received his Ph.D. in Economics from Kansas State University in 1969. After teaching at various universities in the USA and in Iran he joined the staff of the Research Department of the IMF in 1984. He became an Executive Director of the IMF from 1990 until his retirement in 2008. He is the author of a number of articles and books on Islamic economics and finance. He is now the first holder of the INCEIF Chair in Islamic Finance.

source : infozin