Sharia and Economy [split from: Why do US officials say such things in Pakistan?]

[USResident]

Re: Sharia and Economy [split from: Why do US officials say such things in Pakistan?

@mAd_ScIeNtIsT

Islamic banks don’t really work with interest - they work with profit/loss sharing ratios. They have operate similarly to interest, giving returns on deposited assets, but the difference is that the financial risk is split between the two parties when an profit/loss ratio is applied.

Islamic banks present on the surface a face similar to conventional banks - but behind the scenes, the ownership of assets, the split of returns and losses, and other financial and regulatory details are different.

The example of Islamic banking shows that shariah compliant economics is not that different from conventional economics. However, differences exist which are important from a religious perspective.

A simple example is a form of Islamic house mortgage.

In a conventional mortgage, you may borrow $100,000 to buy a $100,000 house. The house belongs to you legally from Day 1, the money is secured against this asset that you own. The bank charges you interest on the borrowed money, and so you may end up paying back $125,000. You generally don’t have a fixed interest rate for the whole loan - you have a rate that is locked for a period of up to several years, or you have a variable rate mortgage. So you don’t really know exactly how much you’ll pay back.

However, Islam prevents you from making profit from a loan - it counts as Riba.

So how could an Islamic bank turn a profit? The bank would use it’s own money to buy the $100,000 house, and then allow you to move into the house that it now owns. The agreement between you and the bank is that every month, you will hand over to the bank a certain amount of money that will build up over the years. Once this sum reaches $100,000, it will be used to buy the house from the bank at the price of $100,000.

However, since you are living in the bank’s house, you will also have to pay it rent each month, for it is your landlord. By the time the amount you save each month reaches $100,000, you may have paid the bank $125,000 in rent. hence the total amount the bank receives is $125,000

In other words, despite the ban in interest, you can still provide a financial service in a profitable, interest-free way. Allah SWT has seen fit to give us loopholes in his mercy . Let us use them, Aameen.

Thank you for taking the discussion further. The PLS aspect of Islamic banking is not yet in full swing and it is only applicable if you are depositing the your money into an Islamic bank with the intention of making an investment. Here lies a difference, whether the money you deposit in an Islamic bank is to be treated as a loan to the bank or an investment amount. The PLS only applies to the investment amount whereas if you are acting as a lender to the bank by making a deposit then your capital should remain interest-free and guaranteed. On the other hand if you are acting as an investor with the financier using the expertise of the bank to invest the money then your capital is not guaranteed and the in case of a loss the bank bares none of it, its all your capital that goes. Incase of a profit they also share the profits. There profit covers their expenses to provide the investment services but in case of the loss, you loose out but they do not. So the PLS is still one-sided when it comes to losses. This is what I understand thus far. The bank is providing investment servicing which can bring you profit and loss but in reality they are not sharing the profit loss with you in totality.

The mortgage example you gave is one of the most popular trends in Islamic home financing. Rent-to-own is what it can be summarized as, and it is quite appealing to many but I did not see how it changed my rights on the investment in anyway. Renting and owning are two different concepts. Renting means you are paying for the usage of something and its maintenance costs are not your concern whereas if you own something then you are liable to maintenance costs of it as well. Incase I am renting the banks house, the bank should provide the same maintenance services as other market rental properties are provided with. This should not be my burden to bare. If the proportion of rent I have paid is considered as some percentage share in the house then I should have ownership of it, meaning in the event of failuire to further pay the remaining portion I should still retain the ownership of what I have paid for. This would mean division of the assets. This interchange of intention that it remains rent and becomes ownership is not correct. This ambiguity makes it no different than if I had secured a mortage from a conventional bank because they will keep the principal amount I have paid in the event I fail to make further payments (this is the same as calling it renting during the process until I’ve finished payments). In either case I loose ownership of the house. Will the Islamic bank forgoe the remaining amount of rent needed to gain complete ownership of the house? If yes, then this is the only factor that makes it better than conventional loans because then I would not be liable to the remaining principal balance on the house, which would get usurped once the house is sold. If no, changing the terminilogy and operating under the same end-user terms does not make it Islamic at all IMO.