Islamic Banking

I ran by this topic while going through my daily consumption of news from both national and international sources. Islamic Banking. It's going international. Now if you have a phobia about Islam or have some irregular hatred for them that is emotionally driven this may help change your opinion on Islam.

Islamic banking has existed for a while but was never considered a good kind of banking, namely, because Islamic/Muslim banks don't charge interests. That's right folk, no interest, on car, house, business, or any other kind of loan. Traditional banks charge interest, and that's where they make most of their money. In fact, any basic lesson in Financing will show you that banks earn more in interest (on average) than the total sum of the loan itself. So for example, you take a 16,000 dollar car loan. If you are lucky you may get 6.5%, but for practical reasons we will say you get a 8% interest rate (nationally). The amount of interest you will pay if you make the minimum payments (lets say 200, though that is pushing it) each month, it would take you about 9 1/2 years to pay off the loan. In that time, the total you would have paid to the bank would be around 30,000 dollars. That's almost double the total amount for the entire loan. As you can see, for those that didn't know, banks make a HUGE net profit margin in their investments.

So how is Islamic banking related?


Well for one, they don't charge interest. That means, when you take a 16k loan from an islamic bank, all you pay is the 16k. That isn't a preferable system for western banks to adopt when they make so much money from interest. The reason why Islamic banks don't charge interest is because it is against Islam to earn money you haven't worked for; interest is a charge for using someone's money and not earned at all. This Islamic teaching has been interpreted to apply to banks and for some time now, interest charges have been a banned practice (they are also banned in the Old testament).

Amidst the recent financial crisis, Islamic banks (although having their troubles) have, for the most part, weathered the storm better than most western banking systems (Note: They aren't big on derivatives). Furthermore, consumers find the idea of a no interest loan from a bank more appealing than the loans they typically have received which has led to growth of this kind of banking.

So if they don't charge interest, how do they make money? Ruediger Prenzlin who is the CFO of HK Islamic Index Limited, Hong Kong's first equity index to feature an Islamic compliant portfolio of companies gives an example that goes along the lines of:

"For example, in Islamic housing finance the risks involved are shared between the bank and the borrower, rather than transferring all the risk to the latter. The most commonly used contract is the diminishing musharaka (partnership) contract. In this case the bank and the borrower form a partnership, with the bank providing up to 95 percent of the purchase price, and the borrower 5 percent.

The borrower buys out the ownership share of the bank which makes its profit from the rent paid by the client for the share the bank owns. This happens over a period of, usually, 15 to 30 years.

Should the borrower default on a rental or principal repayment, the bank may advance the borrower an interest-free loan to enable him to continue their payments in anticipation that he will pay in full when he is able to. The good news is that during this period of distress, the borrower retains his home rather than face eviction.

Having said this, Islamic banks still appraise credit risk, and indeed are more cautious about who they finance than conventional banks."

So maybe Islamic banking is good? Maybe you should give it a try (or at least the principle)? Maybe, just maybe, Islam has a solution to modern day problems and can be pictured in a positive light rather than one with an enraged masked terrorist rambling on about infidels.... think about it.