Comment by doesnotexist | Hacker News Reader

Comment by doesnotexist | Hacker News Reader

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"How is [Islamic finance] different from secular finance?

The difference is, for example, that they don't charge interest. They can't indulge in some particularly risky or speculative transactions. There's actually a whole long list of requirements, such as not selling debt, that are derived from these basic prohibitions against interest taking and against excessive risk. So because of those specific rulings, they have to design the transactions in slightly different ways.

For example, rather than borrowing money to buy some goods, they'll have the bank buy the goods and then resell the goods to the customer, so the bank becomes involved as an owner at one stage of the transaction. That makes it lawful, from the Islamic perspective. Whereas if the bank lent the money to the customer, that's an interest-bearing loan, and that's not allowed. So they use slightly different routes, typically involving ownership of goods at some point, to achieve finance."

https://www.theguardian.com/commentisfree/michaeltomasky/201...

The do charge interests. Sorry, they "don't". They charge "administrative costs", percentual administrative costs that reoccur over time.

Although this comes in many different flavors. And, of course, despite everything sounding nicer ("partnership"), it is in fact a much worse position for the buyer to be in.

An example of islamic finance "without interest": you want to buy a house, and repay your "non-loan" over 30 years. You put down a 10% downpayment.

The bank purchases the home, immediately increases the price by the full interest (let's simplify that calculation to 30yearly interest rate/2, so let's call it 50% for 30 years at 4%) then leases it back to you, and if you run out the lease they promise to transfer (for an additional fee) the ownership of the property to you. This is called a "partnership". This is illegal in most of the world, because it's exploitative. Why?

  1) you are charged all interest on day 0
  2) if you fail to pay, the property is in the hands of the "not-" bank that will kick you out, you will STILL owe them, generally more money than was to be repaid for you to get the property
  3) if the *bank* gets into financial trouble you will lose your house
  4) there are none of the normal protections (such as maximum interest rates, limits on administrative fees, ... and technically 2) is also an example of lack of protections)

In Islam, the bank has to own the house 100% if they want to sell it. You are not allowed to sell item that isn’t yours in Islam. If the bank purchased the house via leasing and that it isn’t 100% owned by them, they are not allowed to sell it to anyone at all. You can not sell loan for loan in Islam.
It is similar to a seller buying some cars for $10k each, and sell them on their dealership for $15k each. They can provide installment payment for the buyer and sell it for $20k each and they can pay it per month for $500. The difference between price is not loan/interest, its their profits.

The bank does own own the house 100% in this case ... The distinction between profit calculated on de amount and duration of a loan and interest is the difference between 4 and IV. It’s the same amount, with the same reasoning behind it. It’s interest.

> 2) if you fail to pay, the property is in the hands of the "not-" bank that will kick you out, you will STILL owe them, generally more money than was to be repaid for you to get the property 3) if the bank gets into financial trouble you will lose your house 4) there are none of the normal protections (such as maximum interest rates, limits on administrative fees, ... and technically 2) is also an example of lack of protections)
Then I assume 2 would no longer be a risk? Bank owned the property, if you failed to pay bank will sold it to someone else who can pay, bank will then return your money if it sold higher than the set price.
Point is 3 is a weak contract issue, when you made the purchase, the contract should be clear that bank can not seize the house unless you failed to pay. If the contract says bank can cancel the transaction however they want or whenever they have issue, no one would want to do business with them. Imagine accepting a project but we put the terms, we can cancel the project and not return your money if we have issues with it.
Again 4 is also a contract issue, we have to draft the contract to make it feasible for both parties. It is basically an installment, you buy $100k house for $100/month. That’s it, the values are clear, the monthly payment will not go higher or lower, you can even pay the remaining directly with hard cash on the next month if you want.

Look if you think this is a good deal, people do the exact same deal in the US. They sell them, generally, to people in trailor parks. It's called "buy and lease back". Go ahead, it's certainly not hard to do.
A lot of states are working to outlaw these deals, because for these reasons and others they are considered abusive.

I am just trying to explain that profits in Islam are different from interest as you mentioned. If you want to learn more, I suggest you find an islamic scholar who had expertise on this field, they have better understanding on the law. It would result in misunderstanding if you tried to applied your terms / perspective without knowing the details of the law.
Best of luck!

Well, I'm trying to explain that they are different in label only, and people are trying to use the different labels to force abusive loan conditions that you should never accept on unsuspecting people.
Stay very, very far away from these types of loans is the best financial advice here.
And, come on man, really, is it that amazing that financial advice from 1500 years ago is a little bit out of date ? Yes, the Jewish and Roman empires experimented a lot with interest rules and had some very bad experiences doing that, especially in the provinces, so yes, they considered it evil at the time Islam was created. Great. They also considered straight lines evil for a thousand years (not joking about the straight lines) ... And while both pieces of advice have some validity to them, they should be reevaluated when practical.

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