Lets bank the Islamic way?

[VCheng]

Profit is not discouraged, just no interest.

In very simple terms you can grant loans against tangible equities selling the customer an end product on installments for a profit.

Look the end result is not so much different to the buyer but on the industry level its a major paradigm shift. I mean if you buy a car for say USD 50,000 on a loan of 5 years. You may end up paying USD 5000 more on the car from either banking systems. But since you're doing something Islamic you're also bound by laws that would have to make practices more ethical.

You won't see massive profit rates being taken as Islam regulates how much profit you can earn on your goods, sustainable loans are offered... Getting a loan is a little tougher as well, since the banker will ensure you can pay back the loans and will only lend if they have the capability to seize your assets or equities.

Could you please expound on that a little bit?

AA: I am still waiting for your explanation on how Islam regulates profits.

 

[Donatello]

You need to realize that most banks offer interest rates on savings accounts and fixed deposits. However, in most countries that interest rate in terms of percentage is less than the inflation rate. So if you are tying up your money in the name of a savings account, you are actually losing the value of that money year by year.

Islam wouldn't want you to lose the value of your money, now would it? Hence having a savings account is all fine.


The concept of Haram interest is nothing but old.....it was in the days when Muslims needed loans for nothing more than say raising livestock to make a living....so charging interest was made haram.....however in today's world where you can buy anything on credit...from minute groceries on your credit cards to massive purchases like homes, cars etc...the real description has just faded away.


But if you are asking about the savings account concept only, i think it is perfectly fine done the conventional way (i.e. not Islamic banking) as you'll see that when you tie up your money, say 1 million Rupees, that 1 million rupees will be worth a lot less next year in terms of buying power (given the current double digit inflation) where as the bank would only be paying you single digits interest on it.


The banks realized that they have saturated the market, so to expand the market more and take in all those Muslims, they started this thing called Islamic banking.........put a label on food item as "Halal" and that's one way of increasing your sales...say in the west.

 

[livingdead]

What is evil about banks... And if they adhere to the rules...

First of all every bank lives on the edge of the rules, breaks them often and of course has rich politicians change the rules every now and then whenever they need to. Not evil enough?

How about an institution that gives you loans without confirming that you have the means to pay off this loan or not? Normally if you don't pay they should take away your collateral or whatever asset you have lended against. The banks, didn't even do that, just simply said hey USG pay for them.

Voila bail out.

That's another thing the banks lent the money to the USG in the first place...

Where did I say the ethical part is in taking and giving less profit? I said its highly regulated which makes it ethical, oh and btw, that usually means less profit/interest no matter what type of banking you're in.

Also...

You know your bank lends out way more than it has?

Every bank will have these huge government accounts. Filled with a lot of cash. This is not theirs but the government keeps it there so that the bank may lend it ahead, among various other things. Normally banks are allowed to lend set amount of money depending upon how much capital it actually has. You guessed it, the banks lend a lot more.

If at any given time all the deposited money was withdrawn all at one, the bank will not be able to give that money back.

aka Run on the bank.

Let's not forget fees, fudging up documents, changing interest rates, privacy violations, spamming and so on...

If most banks break rules or manipulate then it is job of regulator to regulate it. I still dont understand how they are different from a steel company or oil company which can form cartel, manipulate price etc. The current "evil bankers" is due to recent crisis and subsequent hardship by common men, nothing to do with banks respecting/breaking rules. I have never heard this term before the recent crisis.

If playing with rules is the problem how will it get solved by adopting islamic banking, surely most of them will break the rules, right?
I was mostly hoping that islamic banking is a new way which does the same thing better.

About giving loans disregarding your capability to repay: That is for individual bank to decide. One bank refused credit card to me, another gave considering the risk. If that bank accumulates too much risky loans, it will get shut out of market, or better still punished by regulator for having higher NPA.

Banks do check creditworthyness before lending, this is the last thing anybody should be teaching to banks. However it should better be left to banks to determine that.

At the heart of the current crisis is housing market crisis, not tiny personal loans. Can you tell how islamic banking would have avoided that.
I am sure you know, very few house buyers can afford to give collaterals, as houses are too expensive.

About lending more money than one has:
That is how money is created. Nothing wrong in that. It is for central bank to control money supply if it sees anything wrong.
http://en.wikipedia.org/wiki/Money_creation

 

[livingdead]

You need to realize that most banks offer interest rates on savings accounts and fixed deposits. However, in most countries that interest rate in terms of percentage is less than the inflation rate.
--------------

Thanked you for your post, which mods cant undo.
I seriously thought of posting something along the lines you wrote. I know you wont believe. At least mods dont.

 

[Maira La]

There is nothing new in an investor(a banker or otherwise) taking some equity and later selling it at much higher profit.
Why do you call it islamic banking?
Also, if I am an enterprenure, I will try my best to get money without sacrificing any equity, even if I have to pay an interest. For most business, it is much cheaper to borrow from bank.
Which is why banks are most popular. People who are refused money from bank, go elsewhere.

Can you pass your documentary which says banks are in bad shape because they charge interest. Also please discuss the details of islamic banking here so that people can know what the beast is.

Take it easy. I'm not suggesting the world should adopt Islamic banking principles. A lot of your post is in response to what you "wanted to see in my post", and not what I have actually written.

Even in your last sentence, you assumed I said banks are in bad shape. I never said that. It's actually the other way around: the whole world is in bad shape, except the banks.

Well nvm, I don't have too much time to argue. You sound like an intelligent man so I'm providing you two links on how the banks contributed to the world economic meltdown. The first is for people without basic knowledge on economics and finance (not that you are one), but it's very interesting to watch:

The American Dream By The Provocateur Network - YouTube

This one consists of 4 episodes. Here is the first one:

Episode 1: The men who crashed the world - YouTube

You see, I wasn't bs'ing about links.

PS: I'm as atheist as you are - so if you have to pick someone to fight with on the basis of religion, count me out!

 

[harpoon]

Ummm well i am not so sure, those who make Islamic banking rules are very knowledgeable in both the fields. So i guess there must be some sort of difference. I guess its something of that risk is shared by both parties.

So it means if I take a loan and if the business/investment fails, I only have to payback half of the loan.

 

[Ahmad]

Im sory ...but i fail to understand the bold part....losses and gains on what..

if lets say i invest in a product ..it fails miserably ..do my loses get shared by the bank from where i loaned my money?
or do the gains i made on the money get shared evenly? ...tht would be extortion lol (Joking)

yes, they both will shared, loss and gain.

 

[Ahmad]

Look the end result is not so much different to the buyer but on the industry level its a major paradigm shift. I mean if you buy a car for say USD 50,000 on a loan of 5 years. You may end up paying USD 5000 more on the car from either banking systems. But since you're doing something Islamic you're also bound by laws that would have to make practices more ethical.

if there is no interest, then how come you pay $5000 more?

 

[S.M.R]

if there is no interest, then how come you pay $5000 more?

In present Islamic Banking being followed by the so called Islamic banks, the interest element is much there. It is just termed as profit.

However, if I want to buy a home, i dont have much resources, i contact an islamic bank, they say, ok we buy a home for you. initially you have to pay a 30% cost of house. You live in there for a period say of 10 years. During that 10 years you will have to pay rent per month. as per terms agreed, I will have the first right of refusal to buy that house after period of 10 years at a certain amount (which i ll definitely pay considering the market value that will go up for the home).

Now if the transaction is shown to a finance expert, he will work out the interest element in the transaction. In other words he is referring the 'extra amount' in the transaction as interest.

the only problem which resembles the extra amount with interest, is the holding period or timing difference. Like if I buy a car for reselling, say for Rs.1 Million, I keep it in a garage with an intention to sell it for profit. I am paying 3K per month for the garage rent. I ll definitely look for the buyer who is ready to pay all my costs plus profit.

 

[Ahmad]

i wanted to know 2 things about islamic banking, i am not sure if they have previousely addressed: 1-What happens to the devaluation of money and inflation? who will be responsible to recover those losses! 2-If somebody buys a house for 100000 over 25 years, how does he pay his monthly mortgage and based on what principles/calculations?

 

[nForce]

Now this is an interesting topic.
From my little knowledge about Islamic way of Banking,I understand that there is no interest being charged.

That will immediately result in two things.
Firstly,share market will dissolve(I will go bankrupt )
Secondly,the banks will cease to exist.
The very basic balance of profit and loss will not exist any more,considering the way the present World is.
Lets take a simple picture.
Lot of people keep there money in the bank.They get interests in return.The bank uses this money to,say,finance some company that builds hydel power plants.It would not have been possible for that company to roam door-to-door to raise money for the project.Hence the bank comes to the rescue.Since the people are providing a service to the bank,hence they get a sum of money,in terms of interest and since the bank is proving a service to the company,hence they charge a certain sum of money in the form on interest.
Had there been no chance of profit involved,then why would have the people kept the money in the bank and why would have the bank lended the money to the company? We stop that,we stop development.
Share market is a little more complex than that,but the basic remains more or less the same.
Investing in share market is more like a gambling.I guess the Islamic system of banking will not allow that as well.

 

[S.M.R]

i wanted to know 2 things about islamic banking, i am not sure if they have previousely addressed: 1-What happens to the devaluation of money and inflation? who will be responsible to recover those losses! 2-If somebody buys a house for 100000 over 25 years, how does he pay his monthly mortgage and based on what principles/calculations?

In addition to your question ahmed, what if I lend someone 1000 grams of gold and ask him to return me 1000 grams of gold. No interest, but i think i ll be secured for the inflation.

 

[S.M.R]

Now this is an interesting topic.
From my little knowledge about Islamic way of Banking,I understand that there is no interest being charged.

That will immediately result in two things.
Firstly,share market will dissolve(I will go bankrupt )
Secondly,the banks will cease to exist.
The very basic balance of profit and loss will not exist any more,considering the way the present World is.
Lets take a simple picture.
Lot of people keep there money in the bank.They get interests in return.The bank uses this money to,say,finance some company that builds hydel power plants.It would not have been possible for that company to roam door-to-door to raise money for the project.Hence the bank comes to the rescue.Since the people are providing a service to the bank,hence they get a sum of money,in terms of interest and since the bank is proving a service to the company,hence they charge a certain sum of money in the form on interest.
Had there been no chance of profit involved,then why would have the people kept the money in the bank and why would have the bank lended the money to the company? We stop that,we stop development.
Share market is a little more complex than that,but the basic remains more or less the same.
Investing in share market is more like a gambling.I guess the Islamic system of banking will not allow that as well.

Let me explain the devil of interest based transaction. Suppose I have 100K Rs. and i go to bank and deposit it with bank. The bank keeps 10% of that amount and lends 90K to MR. B. Now Mr. B deposits in his bank, that banks again keeps 10% and lends 81K to another person and cycle goes on. This is called credit multiplier. Now look at the transaction, I will say I have 100K in my bank, Mr. B will say he has 90K in his bank and Mr. C will say he has Rs.81K in his bank. B and C will be showing their corresponding liabilities as well, if MR. C goes bankrupt, the entire cycle will go bankrupt. As it was just a baloon without having any real value, and was showing a very huge economy, but in real those were just Rs. 100K.

 

[nForce]

In addition to your question ahmed, what if I lend someone 1000 grams of gold and ask him to return me 1000 grams of gold. No interest, but i think i ll be secured for the inflation.

allow me..

you are advocating the use of gold as a currency.
In this case you will not be secure from inflation.See, inflation is the rise in price of commodities.
Say,you could have bought a bag of rice for that 1000 gm of gold when you had lended it.But a draught follows after that,and rice goes scarce.So people want more gold for the same bag of rice which used to cost 1000gm of gold before.Hence the value of gold has now reduced by the time you are getting back your 1000gm.

It does not really matter,what you are using as currency,be it paper,be it gold.It is not like the gold,being a metal has some supernatural magical properties to defy the natural course of economy.No matter what you call your currency,they will all follow the same rules sooner or later.

 

[nForce]

Let me explain the devil of interest based transaction. Suppose I have 100K Rs. and i go to bank and deposit it with bank. The bank keeps 10% of that amount and lends 90K to MR. B. Now Mr. B deposits in his bank, that banks again keeps 10% and lends 81K to another person and cycle goes on. This is called credit multiplier. Now look at the transaction, I will say I have 100K in my bank, Mr. B will say he has 90K in his bank and Mr. C will say he has Rs.81K in his bank. B and C will be showing their corresponding liabilities as well, if MR. C goes bankrupt, the entire cycle will go bankrupt. As it was just a baloon without having any real value, and was showing a very huge economy, but in real those were just Rs. 100K.

I get your point.
As a matter of fact,what you are saying is what happened during the recession of 2008-'09 that had affected US.
But,I hope if you go through your post,then you will understand,that drawing interest from deposit has got nothing to do with it.It is dependent upon the Mr C who goes bankrupt.

Let us consider a system where there is no interest.A lends to B,B to C.C goes bankrupt.So all go bankrupt!!
What has the system of interest got anything to do with this? How are you relating the two?

I work for a company,I provide my services for the company,and in return I would like to get paid for my services at the end of the month.Nobody is doing any charity here,neither me,nor the company that employes me.
Similarly,if I provide my services to a financial institution,I would like to get benefited from it,would you not?