Why non-Muslims are converting to sharia finance
economist.com
economist.com
These products seemed to incorporate convoluted jargon and concepts which dramatically increased complexity but at the same time, produced no extra utility for end-users.
On top of that, the addition of ongoing shariah-compliance introduced a level of uncertainty that was simply not there in conventional finance. If the building you constructed ended up being used as a cinema, then the shariah debt you used to finance that building needs to either be restructured or unraveled. Why on board such a risk?
Even as a muslim myself, I feel like sharia finance is a step backwards.
Interest is just another term for the time value of money. The time value of money is a fact of life as long as there are opportunities in the world to invest in something that is productive.
Therein lies the problem: you can't explicitly charge interest, but you are still subject to the time value of money.
The only option is to describe/disguise the time value of money in terms that don't bring up interest. That is a juggling act because interest is really the simplest (imho) way of understanding it.
So you get a lot of obfuscation.
One reason is that most humans have a "preference for the present", i.e. given the choice they would rather have something now that the same thing at some point in the future. As a result, most people are not willing to give something away now, unless they have an expectation that they will get something more valuable in the future.
Another reason is that there is always risk involved in lending. The borrower might not be able to fulfil their obligations, whereas the lender might find a better use for whatever it is they're lending. Therefore, it generally is better to keep something, than to lend it at an interest rate of zero.
People forget that the "invisible hand of the market" assumes perfect or at least reasonably accurate understanding of the risks, benefits, and outcomes. Take that info away and you inevitably have snake-oil salesmen and the Housing Bubble (a product of modern financial products)
See also: "Externalities in Economies with Imperfect Information and Incomplete Markets" by Stiglitz
Wait, what ?
Other than that, they're essentially "pulling an uber". They're significantly riskier investment schemes that most institutions have had really bad experiences with a few decades ago. They're ignoring regulations that exist for good reason, and regulators seem to let them for some reason (for now).
If you want to do that, great. Risky investments are most often the mispriced ones (cheaper then they ought to be). But please, do it yourself, figure out the risks, and don't let some institution do it for you with the promise of cover or ... or you will regret it.
Suppose you want to buy a house. The idea is that, you'll agree on a price of the house, which is greater than current market value. Suppose listing price is 100K. You agree on 150K with the lender. Each payment is expected to pay as part of 150K.
This however creates two problem. Lender's profitability depends on accurately determining the future price. Either lender or applicant can suffer from imprecise price.
An alternative I've seen is, the notion of rent. Suppose, at closing the lender buys the house for you, with the intention that you'll reside there and pay market rent.
Suppose the price of house is 100K, and rent is 1000/month. Now suppose, there's no down payment, you'll have to pay above 1000/month to start building equity.
After first payment of 1100, you have equity of 100$, while the lender has 99.9K. So, when the 2nd month payment goes, you can get to keep 0.1% of rent as equity OR use that to build more. Over time, you'll eventually pay it off. This part likens it to interest, except because rents are market based, they don't fly with borrowers.
So lenders have come up with "Administrative" fees, which I equally think are BS. Hence traditional mortgage still are more accessible.
I would love it if there was a rational product out there.
Shariah banks have to operate in a world that has completely accepted conventional banking. As a result, it is in a constant state of playing catch up in terms of fitting in (e.g. having to implement a software interface in which you reject some central tenets of the interface).
I don’t know the answer one way or another. What I do know is that conventional banking remains imperfect in spite of it being totally dominant: the boom-and-bust economic cycles have grown more catastrophic, and we are still grappling with accurately adding phenomena like health and pollution into our financial models.
I applaud you for trying to understand how conventional and sharia financial products fit together. I don’t find your reaction offensive: it just means we aren’t done trying find a good solution that makes both technical and moral sense.
There’s a really long Wikipedia article here about profit-loss sharing, which central concept of how sharia banking is meant to work: https://en.wikipedia.org/wiki/Profit_and_loss_sharing
N.B. I apologize for any typos since I typed/tapped this out on my phone.
While agreeing with your post more generally, this one statement seems a bit off the mark. Shouldn't the Great Recession should fairly be compared with Great Depression? So far, at least, the Great Depression was far more catastrophic, as was for that matter the Long Depression starting in 1873. All three of these were real financial sector collapses, not simple recessions. Independent central banking seems to have done great good, generally, despite of course being imperfect.
That the IMF changed the definition of a global recession is a little weird, but they know better than I do.
From wikipedia:
According to the International Monetary Fund (IMF), "Global recessions seem to occur over a cycle lasting between eight and 10 years."[48] The IMF takes many factors into account when defining a global recession. Until April 2009, IMF several times communicated to the press, that a global annual real GDP growth of 3.0 percent or less in their view was "...equivalent to a global recession."[49][50] By this measure, six periods since 1970 qualify: 1974–1975,[51] 1980–1983,[51] 1990–1993,[51][52] 1998,[51][52] 2001–2002,[51][52] and 2008–2009.[53] During what IMF in April 2002 termed the past three global recessions of the last three decades, global per capita output growth was zero or negative, and IMF argued—at that time—that because of the opposite being found for 2001, the economic state in this year by itself did not qualify as a global recession.[48]
In April 2009, IMF had changed their Global recession definition to:
A decline in annual per‑capita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per‑capita investment, and per‑capita consumption.[54][55]
We have a term for this, it is called “equity financing.” The alternative is called “debt financing.” Islamic orthodoxy effectively banishes debt financing (unless done at zero interest), while offering equity financing as the solution. But it is not a solution at all.
Suppose that I need to purchase a vehicle, in order to drive to work every day (let’s say I live in a country where public transportation is non-existent, e.g. Saudi Arabia). Without a vehicle, I cannot earn a living. However, to purchase a car I need a large amount of cash, which most people don’t have. The normal solution is debt, i.e. borrow money to finance the purchase of a vehicle, and pay back the lender over time with interest. Everyone wins.
But ... Islam forbids such a transaction. Under true Sharia law, I need to either find a lender who is willing to offer me a zero interest loan so I can buy a car, or I need to find someone who is willing to enter into a “profit/loss sharing” arrangement (whatever that means).
Now nobody is willing to lend money for free (especially not oil rich Islamists who oppose non-Sharia Finance). There are a couple reasons why nobody lends money for free (time value of money, credit risk), but it should be quite obvious that no one will lend me money at zero interest to buy a car.
What about “profit/loss sharing?” Well, I do use the car to earn money (by driving to work). It would be wonderful if we could all pay x% of my monthly salary as a car payment. That means if I earn less, I pay less for my car. If I lose my job, I don’t have to pay anything. If I earn more, I pay more for car payments (for the same car). This has some very obvious problems. It might be good for some consumers who have a modest income, but wealthy consumers would not like this. Moreover, no lender would ever be willing to enter into such an arrangement. It’s completely unworkable. You can say the same for other personal loans, like mortgages and student loans.
So what actually happens in “Sharia Compliant Banking” is that Islamic banks lend money at a fixed rate of interest (just like conventional banks) but they disguise the interest using combinations of legal instruments. Christians in medieval Europe did something very similar (see https://en.m.wikipedia.org/wiki/Contractum_trinius). One consequence of this legal gymnastics is that Islamic bank consumers have fewer legal protections. For example, an “Islamic mortgage” requires you to hand over title of your house to the Islamic bank. This is different and less advantageous to a conventional mortgage where you retain the title to your property.
Those banks were called "Cajas de ahorros". Most people had their money there instead of private Banks.
The concept worked very well for something like 200 years. Until politicians changed the law to control the Cajas themselves.
After politicians took control,they did things like private lending at 0 interest to their friends and party(they even lent to one of the biggest party 50 Million euro and then totally forgave the debt!!) or putting their almost illiterate friends as counselors.
It took only 15 years after that to totally bankrupt all cajas in Spain, and now they are owned by private banks.
Some cajas, not all.
The broken cajas typically 'bribed/rewarded' policitians offering them vacancies in their boards of directors.
It seems the higher interest rate is predicated on finding investors who want to take loans at higher-than-market-clearing rates. Does anyone have any insight into why non-Muslims are getting loans through these banks? I don't see how this scales to consistently provide higher returns, especially as more money moves into this system. Are tobacco and alcohol related loans failing at a higher rate than the rest of the market?
> Al Rayan’s home purchase plan (its sharia-compliant version of a mortgage) charges 4.24% in the first two years, almost double the market average. Even so, 12% of Al Rayan’s home-purchase customers are non-Muslims.
I'm as stumped as you are regarding that 12% number though.
Edit: there -> their
Maybe its not a very big thing in the USA. Ethical Banking is pretty big in the UK.
e.g. You can get about 1.5% interest by choosing the best rates (whereas many popular banks offer 0.1% or lower) but the ethical option is 1.35% from Yorkshire Building Society (which is a mutual so your money is being spent buying houses for people and both you & they share the profits from operations). Lots of people will decide that actually not supporting dubious industries is worth 0.15% interest.
Not least because the mutuals tend to have fewer aggressive anti-consumer practices, after all the consumers own them so that would be kinda crazy.
If I take all my money to an ethical (for whatever definition of ethical) institution, or I nominate an ethical profile with my current institution, the same amount of money is doing the same thing, no?
If anything the amazing thing was that people would pay us to look after our money in the first place!
If other people take their money out first you'll end up with zero, if you're lucky though a government bailout will come along and the loss is outsourced onto future taxpayers.
The bank doesn't have your actual money on hold in case you want it.
So, normally you would be correct about the point of low interest, but in this new world, post-QE, low interest rates are really just there to keep the economy limping along by hiding the massive structural issues, instead of encouraging credit growth.
That's why the whole narrative about the Fed heroically saving the economy after 2008 crisis is pretty much nonsense, IMO. The problem still exists and it's worse than ever. Who knows what the next can-kicking solution will be, if there even is one?
>THE HALAL restaurants established by Muslim migrants in Britain quickly inspired an almost religious following among non-believers.
I think some people (not massive numbers, admittedly) avoid Halal restaurants/meat because the method of slaughter is less humane and doesn't typically involve stunning the animal first.
Mind you, kosher slaughter is no better.
What they do is a lot of mental gymnastics to avoid calling what you pay for a loan 'interest'.
Some purists dislike the way modern sharia finance is run. Tarek El Diwany, a consultant, says banks are devising loopholes to sell nominally sharia-compliant products that are essentially the same as any other. For 1,400 years Islamic finance has been based on mutual ownership and profit-sharing, he says. But most sharia deposits return a specified rate similar to interest, not a share of actual profits earned. He describes it as “blank-faced copy-catting”.
But Tarek El Diwany repeats himself.
There could be some real differences between conventional and Sharia-based lending, but, no sarcasm, banks are great at moving around risks in ways non-finance people can hardly imagine and it would be a trivial exercise for them to move the chips around to make the Sharia stuff merely appear to be Sharia while still being conventional, using the mass of conventional investments as raw material, in a way that also is set up so it works 99% of the time but will in some manner catastrophically fail in a Black Swan [1] event because of the games they played with moving risks around until even their own computers don't really understand it anymore.
[1]: Though as Taleb says, is it really a "Black Swan" when it was really quite predictable all along, if you just reject their statistical framework and use something with more realistic fat tails?
In theory, strict rules like these should be extremely hard to game; in practice, banks and other financial institutions are a little too creative.
From my perspective, a "sharia bank" is an oxymoron. Muslims should be exclusively patronizing "sharia credit unions". Professional bankers are too clever by far to be obeying the spirit of the Muslim business laws. If there were doing it correctly, they would have zero non-Muslim customers, because sharia banking is fundamentally uncompetitive with non-Muslim banking in such a way that even academic macro-economists can prove it.
http://www.kreatoczest.com/kz_publishing_ourtitles-pwi.htm
http://www.kreatoczest.com/kz_publishing_ourtitles-wawaid.ht...
Edit: fix typo
The claim that halal restaurants have an "almost religious following" among non-Muslims raises my eyebrows almost as much as the claims that e.g. there are "no-go areas" in Muslim parts of Birmingham.
I've lived in various parts of the UK all my life, I've been involved in Muslim communities and I've been to a lot of restaurants, both halal and otherwise. Basically the only reason a restaurant will advertise its halal status is to indicate this fact to Muslims. It might be the case that e.g. Lebanese or Indian cuisine is popular among non-Muslim Brits, but that's because of the taste of the food. If anything, there are ethical concerns about halal meat in my peer groups due to the controversies over stunning, and undercover videos showing cruelty in some halal slaughterhouses.
Honestly, the first paragraph reads to me like a string of inflated claims that's been shivved in there to exaggerate the significance of the article's content.
Umm.. Majority of indians are hindus not muslims.
I wouldn’t say that that’s the only reason either. Even if a non-Muslim Indian does set up an Indian restaurant, they have a high chance of attracting recurring customers that happen to be Muslims that observe a keeping a halal diet.
But, yes, in terms of personal health vegetable oil might not be better in any way. I know very little about that, and I have no reason to doubt your claim.
You're probably right that cows are not killed mainly for their tallow. Yet, let me try to illustrate why this can be off putting anyway (not trying to flame troll, but just to politely answer your comment): If your cat (or dog, or horse, etc) died in a traffic accident, would you cook a meal from it, even if it was not killed for that purpose? Some people respect the rights of all animals to the degree that they refuse to consider them as food; just like we do with our animal pets and other humans (even the humans we don't like, if any).
But as you say, it may not be because beef dripping as such is haram, but rather that the beef dripping that is available and used at traditional English chippies is not.
Honestly, I don't know why. I still look out for the halal sign on chippies, but I've also become better at telling just by the smell.
tl;dr Vegetable oil ticks boxes for multiple sets of clientele.
The index fund I am invested in turns out to be mainly high tech stocks with a low fee, just because it has 'Islamic' in the fund name doesn't mean I'm a convert to the religious philosophy.
They're a publication; the job of all headline is to convince people to read articles, and on the "clickbait" scale, this seems to be pretty solidly "not clickbait".
https://www.economist.com/the-economist-explains/2013/09/04/...
This very neutral way of writing is telling.
Usury (/ˈjuːʒəri/)[1][2] is, as defined today, the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors. Historically, in some Christian societies, and in many Islamic societies even today, charging any interest at all would be considered usury. Someone who practices usury can be called a usurer, but a more common term in contemporary English is loan shark. [0]
This is in the FAQ at https://news.ycombinator.com/newsfaq.html and there's more explanation here:
https://news.ycombinator.com/item?id=10178989
https://hn.algolia.com/?sort=byDate&dateRange=all&type=comme...
On HN the idea is: if you have a substantive point to make, make it thoughtfully; if you don't, please don't comment until you do.