Islamic VS Conventional Westernized Banking

[Danish]

This is interesting. Please read and understand the followong link where a member named "Prissy" makes a revolutionary counter: http://free-minds.org/forum/index.php?t ... #msg184760

Can anyone here further clarify the advantages and disadvantages of Islamic Banking Systems VS Conventional Westernized Banking Systems and why you think that one is better than the other and in what ways? I would appreciate if any members who are economists or accountants or perhaps more knowledgeable on this forum can discuss this issue. Thanks.

[jawanmardan]

There is a modern development of Islamic banking centered around personal and civic transactions by private individuals rather than international financial services.

Islamic banking traditionally relies on the limiting of interest, for example to prevent interest, there is a sharing of profit and loss, between lender and borrower which is seen as more ethical.

Generally a commodities trader adds a mark-up on goods and commodities (to avoid interest) which is declared to the purchaser prior to a transaction in property or asset values.

The trader must in fact be trading and not merely involved in a financial transaction therefore they must actually take ownership of the commodity first, before selling it on, and at the specified mark Up.

Although they may make an additional charge based on administrative fees and the monitory value of time spent upon a transaction. A bank may also wish to make penalty charges for late or irregular payments by the purchaser or borrower, but these must go to charity to avoid them being acknowledged as interest.

Riba (interest) is permissible under very certain conditions, i.e if guarantees are backed by state intervention but thats another issue. Hope this helps as an introduction.

For an Islamic perspective, the Pakistani economist Khurshid Ahmad, may be a good place to start, he has been involved in both the development of an Islamic theory of economics and the actual application during his time in government as a cabinet Minister in Pakistan.

Khurshid Ahmad is a key figure in Pakistan's Jamaat-i-Islami, it's founder Mawlana al-Mawdudi has influenced the development of Ahmad's economic thought and helped in his his political career.

His "Studies in Islamic Economics" may be a good place to start. Its an incredibly complicated subject matter; I am aware of the basics in certain areas so if you can be more specific I would be happy to help in any way I can.

[Average Bohra]

Islamic banking traditionally relies on the limiting of interest, for example to prevent interest, there is a sharing of profit and loss, between lender and borrower which is seen as more ethical.

This is not the case, please explain how there is a "sharing" of profit and loss in Islamic banking. Islamic banking does not prevent interest, it just re-classifies it to rent, administrative fees, etc. etc. However, that topic has been put to rest before so please simply explain how profit and loss is shared.

Thanks

[jawanmardan]

Islamic banking traditionally relies on the limiting of interest, for example to prevent interest, there is a sharing of profit and loss, between lender and borrower which is seen as more ethical.

This is not the case, please explain how there is a "sharing" of profit and loss in Islamic banking. Islamic banking does not prevent interest, it just re-classifies it to rent, administrative fees, etc. etc. However, that topic has been put to rest before so please simply explain how profit and loss is shared.

Thanks

I agree Islamic Banking does not prevent interest; my post does attempt to make that clear. In the interest of brevity I chose not delve too deeply into the issues of "Riba" and its definition in regards to interest, my mistake.

In regards to your question, a profit and loss approach takes the form of a a contractual arrangement involving two or more parties, where each contributes capital, management, specialized skills, toward a business. Two examples are oil drilling in the Gulf, where investors invest their capital in the a drilling operation, and the oil drilling company brings the experience of drilling, and the rights to drill at specified locations. Potential profits and losses are shared. The actual contracts can be sold on as bond certificates to other investors, as the represent ownership of claims on produced assets by the oil firm. Another example may be where a bank and capital supplier reach an agreement whereby a Bank pays a proportion of the cost of imported good in say a foreign currency, and also guarantees the purchase price. the Capital supplier then puts up the remaining capital. The bank will then deduct the cost of putting up the insurance (purchase price), from any revenue. Profits are then distributed according to original capital investment.

Generally on a smaller scale a somone may receive a riba free loan, based on the equity participation and profit or loss from the bank. Liability from the point of view of the borrower is only upto the original capital borrowed from the bank. The bank however will take a share of any revenues minus administrative fees and value of time.

Hope this helps

[jawanmardan]

A double post

[Danish]

Unlike Westernized mortgage banking systems, there's no riba-free loans in Islamic Banking nor are there several options to fit the variant needs of individuals. The overall price of an Islamic loan is much higher due to its "halalism"; in much the same way as "halal meat" is more expensive......all in the name of a "FAKE GOD" and meaningless ideologies.

[jawanmardan]

Danish,

The spirit of Islamic banking is intended to address social justice, it's not based on random laws the Prophet (saw) pulled out of thin air, social justice is hardly a "meaningless" ideology.

Whether Classical Islamic Bankings approach is effective at addressing social justice in the contemporary world is altogether separate matter.

[Average Bohra]

Jawanmardan,

No offence but your knowledge regarding banking & finance appears to be rudimentary. I am asking you a simple question, please explain how under Islamic banking “profit and loss” is shared. I am not asking about basic business partnerships that you have described.

Another example may be where a bank and capital supplier reach an agreement whereby a Bank pays a proportion of the cost of imported good in say a foreign currency, and also guarantees the purchase price. the Capital supplier then puts up the remaining capital. The bank will then deduct the cost of putting up the insurance (purchase price), from any revenue. Profits are then distributed according to original capital investment.

In this scenario there are two capital suppliers, who is the borrower ? Assuming you are confusing terms, let’s assume that the other capital supplier is also the borrower, and the bank has guaranteed the purchase price but this capital supplier (also the borrower) loses money on the transaction because he has to sell it for less than the purchase price that the bank had guaranteed. He incurs a loss, does he now share the loss with the bank and the bank takes a hit ? If so, please post the contact information for this bank as I would like to do business with them !

In an Islamic mortgage scam, the bank buy the house (say $100,00) and then “rents” (interest) it to the buyer for $700 per month. Then the value of the home plummets to $75,000 and the borrower decides to sell it. Does the Islamic bank then write him a check for $12,500 for their share of the loss ? If so, please post that banks contact information as well.

[jawanmardan]

Peace Average,

No offense taken (i've been called worse) as I mentioned at the end of my first post I have only a very basic understanding of this issue. The business partnerships I mention enact both Profit and Loss, although rereading my previous post I see I was not clear enough on the loss aspect.

The Bank and the capital supplier (also a borrower), under the circumstances you mention would both take a "hit", as I mentioned this process is undertaken under a Contractual agreement so the measure of the hit would certainly vary, broadly speaking it would be in proportion to the capital invested (although not necessarily), the Bank would also take a share of the profits.

I'll ask to find out specific banks, which operate the profit and loss contract.

My apologies again, I was trying to deal with conveying several issues, and while things made sense to me, I see that they may not have done to others.

Regards

[znanwalla]

There is great difference between usury and trade....usury and reasonable interest and between usury and Interest there exists a word known as "excessive" which comes sometimes with compounding interest also.... The worst sin, which can be committed in a society is that the government and the profiteers should unite to exploit the weak and helpless people....now this is haram but we see this happening all around us !

Allah has allowed "business" and disallowed "usury". Usurers have been warned of severe torture, because it is a sort of forced labour and amounts to enslaving others". ...so there must not be any excessiveness in anything that we do....but then who cares huh?

The Qur'an says: "There were many cities whose residents were drowned in pleasure. We annihilated them and their houses were ruined. None was left to reside there except a few".

At another place the Qur'an warns the people in a very eloquent manner and says: "When We wish to destroy a city We order its pleasure-loving citizens to become libertines (i.e. We provide them the means of the life of luxury and pleasure) so that they may become deserving of annihilation and then We destroy that city"....to me all this amounts to a form of usury....

The traders procure the provisions from appropriate place at cheaper rates. The traders take these commodities to suitable markets for sale.

At times they earn some profit and at other times they sustain loss. Why would the same principle not apply to a Financial services or banking industry? and how would the business survive and sustain if it is unable to recoup the overhead expenses or costs of borrowing or refinancing? or do we have two weights and two measures?

Thus a small profit and which does not sustain any losses is not usury but customary as is for trading. I would consider anything in EXCESS as haram...why only Interest ?

Abu Hurayra says: "Once I accompanied the prophet to the bazar. He purchased some things from a shop-keeper and advised him to take only reasonable profit on the sale of his merchandise, not to hoard things, not to earn anything by unlawful means".....so what is the "merchandize" or commodity of a banker? it is money? why would he then not be allowed to make a reasonable profit when running a legitimate business and having to maintain overheads like rent and salaries and insurances?

The Prophet of Islam has explained to his followers every now and then that good morals take birth from practical training and not only from verbal recommendations and advice or from ignorance !

zn