Comments on: Islamic Banking – A Way Forward?

By: ozrisk

ozrisk — Mon, 11 Sep 2006 08:18:56 +0000

amir,
I have asked a friend of mine that handles mortgages day to day to comment on its workability. Basel would be a problem – the exposure would be judged as one to the equity in the house, rather than a secured mortgage over residential real estate. The difference is not a logical one in this instance, but who said regulation had to be logical? I will ask a question next time I have a discussion with APRA. I might get a chance in a forum on Wednesday. I will let you know.

By: Amir

Amir — Mon, 11 Sep 2006 02:40:10 +0000

On a related note, there is a company in the UK that is now offering a housing loan product which has been given the tick of approval by some of the most conservative scholars in the UK. In fact, it’s the only product that they agree with. I’ve linked to the fatwa and a description of the product at http://austrolabe.com/2006/09/10/sheikh-haitham-al-haddad-a-model-for-true-islamic-finance/

The only two issues that I can see are the double stamp duty implications and the question of whether banks would be willing to accept the capital risk that comes with the shares being valued based on current market rates (or whether the fixed ‘rent’ for the term of the loan would compensate for that risk). If you or anyone else reading this with banking experience has any time, I would be interested in knowing your thoughts on this model and whether it would be workable in an Australian context?

By: ozrisk

ozrisk — Sun, 03 Sep 2006 09:47:08 +0000

In Australia, Basel II will apply to all ADIs (Authorised deposit taking institutions) regulated by APRA. This means (almost) anyone taking deposits from the general public. The only exceptions will be the religious charitable funds (church funds).
This is by the choice of APRA.
In some other countries the rules are different. In the US Basel II will apply to the internationally active banks, but Basel I, slightly modified, will apply to the rest.

By: Amir

Amir — Sun, 03 Sep 2006 08:56:21 +0000

Would the rules of the Basel Accord apply though? My understanding was that they only applied to banks that operated internationally.

By: ozrisk

ozrisk — Sun, 03 Sep 2006 08:36:45 +0000

Worth considering, therefore.
I expect that the situations with mortgages will be more difficult, as the double transfer of ownership entailed in the normal arrangements (as I understand them) would both attract duty – except in Victoria as noted. I might speak to my local MP to see if this can be changed in WA, where I live.
The other difficulty is the Basel rules – this would be a federal matter. My federal MP is not very convensant on these matters, but I will approach her anyway. You might want to do likewise.

By: Amir

Amir — Sun, 03 Sep 2006 08:10:55 +0000

It is the contract between the lender and the borrower that determines whether the contract is halal or haram. If a novated lease contract is halal, then the fact that the company providing it may be involved in other haram transactions doesn’t negate the permissability of taking out the lease (assuming that particular contract is halal).

Note that novated leases are problematic because they involve multiple contracts in one. i.e. the buyer contracts with the leasing company, the employer contracts with the buyer, and the employer enters a contract with the leasing company. Chattal Mortgages and CHP are a lot easier to make shariah-compliant provided certain simple conditions are met (such as the company providing the lease having ‘ownership’ over the asset at the time the contract is made; an easy condition if you are buying a new Toyota via Toyota Finance, for example)

By: ozrisk

ozrisk — Sun, 03 Sep 2006 00:41:06 +0000

amir,
If the funds come from interest bearing deposits does that render the whole arrangement harām?
For example, if the novated lease as an arrangement was halal, but the funds for the lease were derived from a riba transaction is the lease halal?

By: amir

amir — Fri, 01 Sep 2006 09:56:11 +0000

Interesting points. It seems to me that, given the small size of the Muslim community and that demand for borrowing funds far exceeds the demand for deposit/investment opportunities in the community, the biggest challenge facing any Islamic ‘bank’ is being able to meet this demand. Perhaps, a good option is for existing banks to develop halal contracts that they can then market to both Muslim and non-Muslim alike. I know Arab Bank looked at it, and I had some initial discussions with ANZ a few years ago (they already have an Islamic Banking Unit which they took over when they bought Grindlays) but nothing ever eventuated because the market was seen as too small.

As an aside, there are a number of existing and widely used financial instruments that are halal but which most Muslims don’t possess the knowledge to assess or even know about. For example, even the most conservative scholars allow car leasing with certain conditions (for example, that the company providing the finance ‘owns’ the car that is being financed). It would be great for someone appropriately qualified to review alll these products — such as chattal mortgages, CHP, novated leases, etc — and produce a report on what is and what is not halal (in its current form) and what, if any, conditions need to be applied to them to make them halal.

By: ozrisk

ozrisk — Wed, 30 Aug 2006 05:48:13 +0000

Baybers,
I think perhaps you should look more at the deposit side institutions being more like fund managers – no guaranteed returns, but a share of the profits of the funds. Looked at it this way there is considerable amount of expertise in the regulatory community. It would be good to see it used in this way.
On the question of the jurists – being a believer in the freedom of the individual I strongly endorse that approach. People learning the religious reasons for themselves and making their own decisions is the best way. That way, when we come to make an accounting for our actions we will be able to say we were not simply led and blame someone else – we decided.
On the other hand, regulators like to see documents and records and not everyone is capable of understanding all products, which is why I suggested the approach above.

By: baybers

baybers — Wed, 30 Aug 2006 04:50:44 +0000

Your point is spot on, the time value of money is prohibited precisely because it deals in the uncertain, I am unsure about the second part of your comment (I am no economist, nor even a gifted amateur).

The other point that you make about deposit security being uncertain, is also correct. There would be no banks as such but venture capital firms that would invest your money.

But that should be compensated for by the dramatic reduction in prices one pays for the big ticket items such as a house in a market where there economic benefit in selling money.

The last point about assuring sharia compliance, is also a matter for the markets and for religious education.

Link: http://www.alkauthar.org/content.asp?pgc=less_busstrans101&From=Our%20Courses%20:%202006

When Sheikh Tawfiq Chaudry began a series of weekend courses for Muslims on the basics of Islamic finance, it had an immediate impact on the market, with a well educated consumers, Islamic lenders were forced to defend some of their more questionable products. In a free market, quality and religious fidelity will inform the choice of Islamic financial products.