Dan Hajidah - http://european-muslim.skyrock.com/26 augustus 2008 – 14:11

- Introduction to the basics of Islamic banking and lending

- Is it realistic to have mortgages where no interest is paid?

- Can a Muslim take an interest-paying mortgage if necessary to get a decent home?

- Applauding the historic French government decision to support interest-free Islamic finance

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Muslims are increasingly drawn to the ideal of conducting one's personal financial life as much as possible in accord with the classic principles of Shariah (Islamic religious law), which prohibits "riba" (the payment of interest).

This can sound impossible to many Europeans who have only experienced conventional Western banking arrangements, but it is a more practical idea than many people realise. There are surprisingly simple techniques that are already making interest-free banking and financing a reality.

Islamic banking, providing funding that is entirely free from interest, is now being put into practice on an expanding scale around the world. There is already a dramatically growing global industry of Islamic financial services.

In recent weeks, the government of France has announced a major programme to alter its laws to accommodate Islamic finance and banking, and that they are making a major effort to make Paris a leading centre of Islamic finance. With France taking this lead on the European continent, it may not be long before Islamic interest-free finance is a reality all through the European Union.

Moreover, we are at a moment in history when the world is coming to terms with a global financial crisis, a crisis that seems to have its origins in the worldwide sale of billions of euros' worth of bad, and even worthless, interest-related investments that have been fabricated by Wall Street financiers.

From a Muslim point of view, it might be said that the potential for corruption stemming from 'riba' or interest payments, has now become a whirlwind which is destroying USA financial institutions and damaging the entire global economy.

By striving to live an economic life free of riba, we may be taking a step that is not just spiritually wholesome, but also greatly beneficial for our economic well-being.

On the other hand, there are a number of challenges which remain for those who wish to use interest-free financing. Islamic banking services are not always easily available, even in some predominantly Muslim nations. And there are special limitations and problems for those who wish to avoid paying interest in matters of long-term financing, including that of home mortgage loans.

For the average worker and head of household, it is this particular issue which can be the most difficult when seeking to avoid the payment of interest: How does one finance a home, especially when living in a nation where interest-bearing mortgages are almost the only means to obtain a permanent home residence?

Those who face this practical question often ask: Are there grounds in Shariah, according to sound religious scholars, for sometimes using the traditional interest-charging banking apparatus, for important matters such as buying a home?

What follows is a brief survey of the issues involved in answering these questions: - The ideas of Islamic banking and lending; the current situation of practical possibilities for home loans for a Muslim in Europe; some recent pronouncements of religious scholars; and what may be done to expand the availability of "halal" (permitted under Islamic law) mortgage and financial services.

Contents:

The prohibition of interest

Principles and forms of Islamic financing

The investor, the businessperson, the homeowner

Short-term small loans vs long-term large loans

Islamic banking and the retail customer in Europe

The query of the Muslim home-seeker

Fatwa permitting some mortgages with interest

New possibilities for local Islamic banking

The prohibition of interest

The prohibition of riba, or interest, is found in the Qur'an itself as well as in the Hadith (the sayings of the Prophet). Islamic finance scholar Dr Mohamed Ariff bin Abdul Kareem summarises crisply the general view that, "Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged."

The prohibition of charging or paying interest for the lending of money is not unique to Islam, although it is among Muslims that this ideal remains the most active and honoured. The prohibition against interest was also a classic ideal of Hebrew and Christian religious thought, and also of some ancient Greek texts, all sharing the view that the charging of interest was not moral, that it represented an unfair grasp of someone else's property and livelihood.

However, the Jewish, Christian and of course the Western secular traditions, largely came to accept interest payments as lawful and acceptable, at times depending upon the intentions of the lender, and whether the interest rate charged was "excessive" or not, with a maximum interest rate eventually being set by local secular legal codes.

The history of changing Western views on interest, is also reflected in the ambiguity of the words by which the term 'riba' is translated: Sometimes simply as 'excess', as in "an excess" over the amount originally borrowed; sometimes as 'interest'; and sometimes with the now little-used English term of 'usury'. The term 'usury' originally had a meaning rather like 'riba', meaning any kind of interest charge or payment - though it is now generally understood in English as a legal term meaning merely "interest in excess of the maximum rate allowed by law".

But the Muslim understanding of the prohibition of riba, has remained close to the classic view that this is a comprehensive ban on the charging of interest altogether. Even if this has not been a consistent practice in Muslim societies over the centuries, the ideal has remained generally intact among Muslim scholars.

Although there is a general "consensus" view of scholars on the principles involving riba or interest, and what is permitted in Islamic banking, it should also be said that a learned Muslim voice can nearly always be found with a critical perspective on any issue within this topic. What is presented here is a humble informal summary of the common learned consensus, among scholars who have devoted themselves both to the Qur'an and to enabling a financial structure consistent with their faith.

To many Westerners, the idea of a banking and credit system without interest would seem unworkable. - Yet, today, as Dr Ishrat Husain, former Governor of the State Bank of Pakistan, has noted, the Islamic financial services sector may now comprise approaching USD $1 trillion in assets, and is growing at a rate of 10 to 15 per cent every year.

This is still only a tiny fraction, still less than one per cent, of the world's global asset picture - Islamic banking is yet only a small part of banking commerce in even predominantly Muslim nations, and its structures are still in relatively early stages of development. Nonetheless, an Islamic banking and loan industry that is an alternative to the common Western financial framework, is already functioning with great success, and Islamic banking is clearly expanding with impressive momentum.

How does it work? How can banks lend without interest, and still make money?

It is actually much more realistic than many people realise, and many people around the world actually use - without knowing it - some of the positive banking practices that enable an Islamic bank to thrive and prosper.

Principles and forms of Islamic financing

An Islamic bank - or a private investor - may earn a return on capital by trade and commerce that is not interest-based lending. What is important for such trade to be permitted, is that the amount or rate of return on the capital is not fixed in advance, and that the owner of capital may only share in the return if he also shares in the risks of the economic activity. And of course the business activity or goods involved must be ethical of themselves under Shariah; thus there can be, for example, no funding of equipment or enterprises involved in gambling, and no deception in a trade transaction.

In other words, it is understood that you can supply capital funding to others, and make a profit on supplying such capital - but ONLY if you share in the risk of the permitted activity, and if there is no specific rate of return guaranteed to you.

This can take one of several forms, among the most important of which are as follows:

(1) Mudaraba

One form of permitted trade is that known as "mudaraba", whereby one person supplies capital to a tradesman or entrepreneur. In this case, one is permitted to share in the profits of the business venture - but the lender must also bear the entire risk of loss as well.

(2) Musharaka

Another form of permitted trade is that known as "musharaka", a kind of partnership among two or more people who all supply some capital for a business enterprise. Here, all share in profits, and all share in losses, which can be of different proportions, depending on the amount of capital that is supplied by each.

The above two methods are considered as more central than others, in the traditional literature on Islamic commerce. - But other methods are often more practically significant in the activities of Islamic banks, as follows:

(3) Murabaha

A extremely common transaction form in Islamic finance is that of "murabaha", which refers to an acquisition by the banker and then resale for a higher amount to the client, often described as "cost-plus" financing. Murabaha is very central for the business of Islamic home mortgage lending. With some Islamic banks, this encompasses the vast majority of their transactions.

Here, a banker buys something, such as a house or an automobile, that is desired by a person who does not have the funds to purchase the item himself. The banker adds an amount to the purchase price, and then in turn sells the item to the person desiring it, perhaps accepting monthly payments until the full amount is paid.

There is no interest paid in these transactions. The banker earns a profit by marking-up the cost of the item by some figure, and then re-selling the item so that he profits from his provision of the capital. The banker, it should be noted, does take various risks in purchasing the item, as he is safeguarding it for a time, he is risking that it may drop in value, and he also risks that the party who desires it may not be able to complete the purchase from the banker.

This is occasionally criticised as a method that is not truly sincere in avoiding the charging of interest, since the banker's profit on buying the item and then re-selling it, may be similar to the level of profit another banker would earn by making a loan at some interest rate.

But this criticism ignores the fact that the banker who buys and then re-sells, is truly making a trade for which he is at some risk while the item he is selling is in his possession and ownership. This is different from the circumstance of a money-lender who buys and sells nothing, and is only lending money for which he requires a fixed increase to be returned to him.

(4) Ijara

The banking practice of "ijara" is very similar to what is known in conventional banking terms as 'leasing' or 'renting' - the latter two words are often interchangeable in English, with 'leasing' being thought of as somewhat more lengthy in term than 'renting'. Here, as in murabaha just above, the banker buys an item that is desired by a person who does not have the money to purchase it himself - a house, an apartment, an automobile, business equipment or other items. But here, the banker will retain ownership of the item, and rent or lease the item to the user. The banker may well earn a profit and income, although also risk a loss, given his own long-term risks of ownership.

Ijara dovetails with the "vehicle leasing" or "equipment leasing" already quite common with conventional non-Islamic banking and lending institutions. Among customers around the world, many of them from non-Islamic cultures, there is increasing satisfaction with the concept of leasing items like automobiles, and thus avoiding the burden and knowledge of paying interest. This popularity of leasing among humanity generally, may show that the wish to avoid interest payments is very deeply rooted in human nature and psychology.

Ijara can not only be compared with murabaha above, but can also be combined with it, so that the customer leasing or renting the item, may agree or be allowed to purchase the item after a period of leasing, and part of the lease payment may be credited toward the item's purchase. - An ijara lease-purchase agreement is thus a method of home financing by Islamic banks.

(5) Bai'muajjal

Another variety of Islamic banking is that of "bai'muajjal", or acquisition for payment at a later date. The banker buys an item, and resells it at a higher price with the understanding that the price will be higher because of the difference in time. The tradition of Islamic jurisprudence speaks positively of such a transaction as permitted, exactly because of the time difference; in other words, it is allowed to charge more for an item if payment will be made at some date in the future.

Bai'muajjal has very clear applications, not only in cases where someone will have income at a later date (harvest time, for example) thanks to equipment and supplies purchased now, but also is serving as the basis for Islamic bank credit cards allowing the purchaser to "buy now and pay later".

(6) Bai'salam

Another form of banking is that of "bai'salam", somewhat the opposite of "bai'muajjal", in that here the banker will pay now for goods that are to be delivered at a later date. A banker here is, for example, buying inventory - such as manufactured goods - that will be produced at a later time. The banker pays now, enabling the recipient of funds to produce the goods - and the banker is able to profit when he later takes ownership of the goods which are produced, and is able to profit from their re-sale.

(7) Al-wadiah

With regard to Islamic banking, one should mention the important service of "al-wadiah" or safekeeping of funds, a major purpose of banks and a major benefit to customers in itself. Banks who keep funds in safety for their clients, can then use those funds, investing and sharing them in ways that earn profit.

It is also important to see how depositors in an Islamic bank can earn an income from funds in savings accounts, given that interest is not permitted.

Though an Islamic bank is not allowed to guarantee any fixed rate of return, it may on occasion freely provide gifts of varying kinds to the depositors, including gifts of money. Furthermore, depositors can be truly partners of the bank: they can share their capital with the bank on the musharaka principle outlined above, and the bank may also share its profits with those depositors who are understood as sharing the bank's risks of profit and less. - Such profit-sharing may not be declared in advance in any fixed amount or rate, but may freely be decided and distributed as the bank continues to earn profit from its operations. Of course, the objective of Islamic bank management is to manage operations so carefully, with sufficient reserves and safeguards, that depositors do not in practice bear losses.

In summary, just as an Islamic bank cannot charge any rate of interest, and can only earn profit in trading transactions - Likewise the depositors may not receive a fixed rate of interest or return from the bank, even on their "savings" accounts which they commit to the bank for a long term. - But, very happily, depositors at Islamic banks have often earned excellent income from their deposits, via the bank's gifts and profit-sharing, and in many documented cases they received an income that was higher than that received by depositors at conventional interest-paying banks.

Article continues, full article is found here:

http://european-muslim.skyrock.com/1975329689-Home-Mortgage-Funding-and-...