>EMEA Mondays: A Primer on Islamic FinancePosted: October 4, 2010
>How does getting a loan without paying interest sound? Impossible? Not if you get a loan from an Islamic bank. Islamic banking principles are guided by Sharia, or Islamic law. Generally, that means Islamic banks can’t charge you interest (riba) on the loan (Islam says it’s unethical to make money off of money that you personally did not work to earn) and, in the case of stockbrokers, not investing in firms that deal with things that are haram, or forbidden, e.g. pork, alcohol, pornography (in some ways, similar to socially responsible investing).
The Institute of Islamic Banking and Insurance says that anyone can receive a loan from an Islamic bank (they do not need to be Muslim), but the individual must accept the terms of the loan according to Sharia. Islamic finance prohibits trading in derivatives or futures (assets that derive their value from some other object, or derivatives that are agreed to be bought for a future specified sum, e.g. agreeing to purchase units of currency in the future at the current exchange rate), as this would be considered speculation, another no-no according to Islamic finance principles.
Sukuk is another useful term to know. Similar to bonds in that they are used to finance existing projects, they use return on assets to pay the investors (who own portions of whatever the bonds are helping to raise money more) instead of interest.
Another one of the things that Islamic banking suggests is for the lender and the recipient to share equally in the risk of the loan. Generally, if a homeowner needs capital to purchase a house, an Islamic bank will buy the house in question, and lease it to the homeowner, until the all of the payments are made; then the homeowner will have his house in full. No interest is made, and if the homeowner can’t pay the money, the bank owns the property.
Do you think Islamic banking and finance sounds more ethical than traditional Western finance practices? Would you consider using an Islamic bank?
Also, read this article about Asia-Pacific universities adding courses in Islamic finance.