So what exactly is Islamic investing?
moneyrelations :: Dec.10.2007
Here’s something on my Christmas wish list but I don’t think Santa can fit it down the chimney:
The Airbus A380.
This is the largest passenger jet ever built. This caught my attention because Saudi Prince Alaweed Bin Talel al-Saud bought it last month for a cool $320 million. And this doesn’t include the interior decorating.
This princely billionaire ranks 13th in Forbes’ crazy rich list and is worth about $20 billion.
However, what I find interesting is the fact that he is not known as an oil man but rather as an investor.
He is Citigroup’s largest shareholder having a 5% stake valued at more than $10 billion, and is a big investor of companies like Apple, Motorola, News Corp, World Com, etc.
Although the Prince is a supporter of the United States and of Middle East reform, he is a Muslim and this is incongruent with my knowledge of Islamic investing.
Last year, my cousins visited my family from England. They are practicing Muslims. While showing them around Ontario, we decided to stop by Casino Rama near Niagara Falls.
Bzzt! No gambling allowed. Apparently, “games of chance” are prohibited as is profit without work.
And so the conversation progressed and I was introduced to the concepts of Islamic banking.
According to the Wikipedia:
The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba´ (interest). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).
Let me sum up these concepts by saying there is an inherent “perk” but it is just not explicitly expressed that it is interest – whether you’re a lender or a seller. For venture capitalists, the profit/loss is shared with the entrepreneur who provides the labour.
From what I can distill, it’s an honour system:
Islamic banking is restricted to Islamically acceptable deals, which exclude those involving alcohol, pork, gambling, etc. Thus ethical investing is the only acceptable form of investment, and moral purchasing is encouraged.
But getting back to the Prince, do his investments abide by Islamic (Shariah) law? Being a casual observer, I have absolutely no clue. Can this type of investment be considered gambling due to the unknown risks? Probably not as there are mutual funds that invest in companies that comply with Shariah principles and there are even indexes that track the Islamic Global Market such as the Dow Jones Islamic Market Index and the FTSE Global Islamic Index.
To me, this is a fascinating look at another banking system based on ethics and morals – something that was lacking during the credit crunch? I’m not saying that I agree with the semantics but the ideals are there. After all, isn’t this the exact purpose of the burgeoning socially responsible funds industry of the West?
Perhaps we’re not so different after all.
In the news, Warren Buffett ::
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Yes, not that different at all. 40 Lashes for you for insulting Islam for comparing their moral superiority the the insignificant infidels in North America.
It’s supposed to be a joke, even if it wasn’t that funny.
Thanks for the information, Mariam. Islamic banking and investing is getting more and more pronounced in my country though I’ve really yet to know what it is. Now I knew a bit more!
Cheers,
Ellesse
Over here in the UK, a number of high street banks offer Sharia compliant mortgages. Islam forbids the charging of interest, so to get around that, you essentially pay a fixed fee. Of course it’s a bit more involved than that, but it’s a growing market.
Extremely interesting article, and at the end of the day he is doing something correct, $20b is a fair bit of loose change.
I’ve seen some headlines mentioning Islamic investing, but I had never taken the time to click on them and read the full articles. I thought there was no such thing as “Islamic investing” and that those were just some tricky headlines created by copywriters with the sole purpose of drawing people’s attention. Your post showed me that I was wrong.
Now I’m curious about this subject. It would be nice if you tried to gather more info about this and shared it with your readers.
In fact, the whole “banking system based on ethics” issue sounds fascinating and is a topic I’d love to read more about.
P.S.: I’ve sent some stumble love your way.
@ Traciatim, thanks for commenting
I know, I know but it’s the religious ideals that are worth mentioning. I find it funny how as we make advancements in society, we long for the “simple life” or yearn for doing business with ethics.
The problem is, as humans, we often fall short of these ideals and use any holy book to attack or oppress others.
@ GSC, Plonkee, KZ
Hi ladies,
Duly noted and I will try to write up more on a subject in which I’m woefully ignorant and try to do it justice.
I heard about the Islamic mortgages from my English aunt as she was trying to buy a house… Like I said, it’s semantics and sophisticated legal maneuverings. I might call it a canard in French but it’s still a duck in English.
And thanks, Karen
@ Paul
Dude, I dug you out of the dungeons. Bad boy
I don’t see much of the difference between being charged a fee and being charged interest. The banks will make their money no matter what their fee structure is. I haven’t done much reading on Islamic investing and banking since it doens’t really concern me that much but from what I’ve looked at it seems like the exact same thing.
Say you take out a mortgage, your ‘mortgage cost’ will be 120K on 100K mortgage so your balance will be 220K at the start. In ‘normal’ capitalist interest mortgages you will pay 120K in interest over the course of time so you balance doens’t look bad. Maybe I’m missing something big… but what happens if you land a sweet inheritance and want to pay off your mortgage on day 2? In Islam do you have to pay 220K and in our banking system you would pay the 3 month interest penalty and 100K?
Maybe I’m missing something, but I don’t see any advantages other than more profits by banks by offering products to people that believe in things because they are told to.
I really don’t know, Traciatim. I’m not a home owner
However, in the Western system, I would assume that would be in your contract if you can only pay by fixed installments, if you can accelerate your payments, if the payment amount is capped, etc.
For the Islamic system, Wikipedia explained it like this:
“In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the fact that it is profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha.
Another approach is Ijara wa Iqtina, which is similar to real-estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).”
Like I said, semantics. No matter what legal interpretation they have, to me, it’s still “interest”.
Let’s just say I don’t disagree with you but I wouldn’t call them dupes… Maybe I just don’t fully understand it either.
In your scenario, if coming into an inheritance, I would assume that a Muslim would just pay off what he/she owed the bank – seeing as the bank resold the house back at a higher price.
Our equivalent are some of the mennonites who are members of credit unions and interest is not part of the picture. There’s one in particular in Sask – the non-mennonites get hugely disproportionate interest paid on their savings because the mennonite members forgo theirs — I know it exists, but couldn’t find the website.
And of course, Citizens Bank of Canada, while happy in the world of interest, is all about ethics (ie. it’s part of the dna) – and doesn’t do lending/business with animal-testing businesses, nuclear, tobacco, gaming etc.
I had absolutely no idea that the Mennonites didn’t accept interest either! Good to know that these ideas are not specific in Islam but passed into Christianity as well… after all, it’s the same God.
Thanks, Nancy!