N79969
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Islamic Finance- How Does It Work?

Sat Jun 07, 2003 11:02 am

I have read that usury is a sin for Muslims. However the time value of money applies everywhere. Apparently there are financial institutions that abide by Islamic strictures of money lending.

Would anyone be kind of enough to explain how it works?
 
jwenting
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RE: Islamic Finance- How Does It Work?

Sat Jun 07, 2003 2:52 pm

charity.
Usury is forbidden, giving and lending is not...

I imagine the moneylender gives you money which you vow to give back and in payment you give him some of your products or their monetary value.
That way you don't violate the letter of the stricture while still giving what's effectively interest on the money.
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Sat Jun 07, 2003 6:29 pm


Islam encourages charity,and the Zakat,the annual giving to the needy persons is the third pillar of the religion.

Bribary is forbidden for both giver and taker.

Usury is forbidden between persons,but it is allowed by financial institutions.

The financial system is complicated but practical and does not ruine any side.

I should refresh my facts and then give a better response.

 
jwenting
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RE: Islamic Finance- How Does It Work?

Sat Jun 07, 2003 8:59 pm

If you are really strict, there is no difference between persons and companies.
After the revolution in Iran the Ayatollahs prohibited banks and moneylenders from charging interest on loans (and in fact more than a few bankers and moneylenders were executed for crimes against Islam).
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N79969
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RE: Islamic Finance- How Does It Work?

Sun Jun 08, 2003 12:24 am

Interesting. I wonder if people in early Islamic societies only borrowed during financial hardship and not for business purposes. In that context, I could see the moral argument behind the prohibition on interest.
 
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Sun Jun 08, 2003 12:45 am


Of course there is a difference between persons and companies.

Companies have taxes,wages,and other expenses to pay,regardless to the fact that its business is to loan money and provide funds,and Islam encourages "clean" benefits,whereas persons may help someone friendly and consider that as a favour and not an obligation,that's way there must be no rates on return.

Islam relies on a unified society and if money and material things become a priority,hate could print the way of life and you may know how much problems and troubles it could bring.
 
N79969
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RE: Islamic Finance- How Does It Work?

Sun Jun 08, 2003 3:44 am

Ts-ior,

I don't follow the distinction that you are drawing. Isn't the act of charging interest a sin irrespective of who is doing it? You could also that an individual person has taxes to pay, children to feed, and a mortgage to pay off.
 
N79969
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RE: Islamic Finance- How Does It Work?

Mon Jun 09, 2003 4:24 pm

Could anyone else explain in further detail?
 
ryanb741
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RE: Islamic Finance- How Does It Work?

Mon Jun 09, 2003 6:41 pm

Basically - if you get a mortgage from an Islamic bank, you are lent the value of the mortgage interest free (charging interest is illegal in Islam) but then a further 'admin charge' is made, which funnily enough works out to be about the same as what the prevailing interest would have been! So really you are paying 'interest' - they just call it something else.
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Mon Jun 09, 2003 7:55 pm


Interest between individuals is strictly forbidden.

One can lend money if he is able to do that,and as a favour and not an obligation,so why having extra rates on ?
 
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Mon Jun 09, 2003 8:29 pm


Verses that frohibit usury in Quran :

Surate,Chapter Al Bakara,the Cow;verses 275-281 :

"Those who devour usury will not stand except as stand one whom the evil one by his touch driven to madness.That is because they say:" Trade is like usury",but Allah hath permitted trade and forbidden usury.THose who after receiving direction from their Lord,desist,shall be pardoned for the past,their case is for Allah(to judge);but those who repeat (The offence) are companions of the fire:they will abide therein (for ever)."

"Allah will deprive usury of all blesssing,but will give increase for deeds of charity:For he loveth not creatures ungrateful and wicked."

"Those who believe,and do deeds of righteousness,and establish regular prayers and regular charity,will have their reward with their lord:on them shall be no fear,nor shall they grieve."

"O ye who believe! Fear Allah,and give up what remains of your demand of usury,if ye are indeed believers."

"If ye do it not,Take notice of war from Allah and his Messenger:But if ye turn back,ye shall have your capital sums:Deal not unjustly,and ye shall not be dealt with unjustly."

"If the debtor is in a difficulty,grant him time till it is easy for him to repay.But if ye remit it by way of charity,that is best for you if ye only knew."

"And fear the Day when ye shall be brought back to Allah.Then shall every soul be paid what it earned,and none shall be dealt with unjustly."

---------------------------------------------------------------------------


Others verses talk about usury and i will be posting them later on.

 
jaysit
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 2:57 am

It works if you're sitting on the world's largest reserves of oil. The Saudis come to mind.

Its a fabulous flop if you're a Third World country with little to no energy resources - Pakistan as an example.
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 9:18 pm


Saudi-Arabia is investing in almost all the Muslim countries,and is also providing work for millions of Arabs and Muslims,so it could be considered as a part of the religious interpretation of aid and financing.
 
N79969
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 10:12 pm

I think Saudi Arabia's charity abroad is arguably an attempt to increase their influence abroad. This is foreign policy.

I am more curious about how Islamic societies allocate money to people who need it now from people who need it later. How are people compensated for the risk they take by lending? How are borrowers deterred from taking money they don't need or using borrowed money for unprofitable endeavors?

Thanks for replies.
 
ryanb741
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 10:17 pm

As I stated earlier - it is nonsense to suggest that Islamic banks don't charge for lending - they do and often it costs more to borrow with an Islamic bank than a Western bank! Western banks call their margin (interest) whereas Islamic banks call it 'bank fees'. It doesn't matter what you call it - it is still a charge on borrowing.
I used to think the brain is the most fascinating part of my body. But, hey, who is telling me that?
 
N79969
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 10:36 pm

Ryanb741,

Thanks...so you are saying that the prohibition on interest is more or less a legal fiction?

Any rebuttals? If Ryanb741 is correct, how do they reconcile the apparent contradiction?
 
ryanb741
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RE: Islamic Finance- How Does It Work?

Wed Jun 11, 2003 10:42 pm


Correct. It is all a bit hypocritical if you ask me.
I used to think the brain is the most fascinating part of my body. But, hey, who is telling me that?
 
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Thu Jun 12, 2003 6:35 pm


A gap could be seen between what is in practice and what should be,simply because Arab and Muslims countries entered the worldwide financial system without considering the Islamic rules,and now it is a bit hard to get reed of them.

In my case,i have limited relations with banks,and i only have an asset which does not afford me an annual extra benefit,a way to avoid what could be a sin.

For the moment i am lending a certain amount of money to a friend,and i did not even designed a date to be reimbursed,and of course i will not take usury,and i am even thinking of pardoning him so as he could consider them as a gift !!! God knows how i am in need for money,but my friend needs them more than i do,so i can pardon that.

Money comes and goes,so why giving it such importance.
 
khi747
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RE: Islamic Finance- How Does It Work?

Fri Jun 13, 2003 11:57 pm

Thats a very good question N79969 .....as a student of finance myself in the US i want to understand my religions financial system a little bit better.
I still have not studied Islamic finance enough to tell you scientifically about it but i can tell you the logic behind the prohibition of interest. The thing is back in the days some 14-15 hundred years ago when our religion was introduced needy people would be lent money and then be charged ACCESSIVE interest...something like a rip off of the poor by the people who had the funds.In order to eradicate that mess in society the interest issue was addressed in that manner.However different Islamic scholars have different opinions on interest and many consider it FINE as you and me know it in terms of normal business lending and investing.....present values and things like that. What alot of Islamic banks also do, other then what Ryanb741 has mentioned, is they would lend you money but then instead of taking finance charges they would share your profits, in other words they would essentially act as partners.
 
N79969
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RE: Islamic Finance- How Does It Work?

Sat Jun 14, 2003 12:04 am

KHI747,

Thank you for the reply. That is very interesting. It seems that there is really little difference between ordinary finance and Islamic finance in practical terms. People are compensated for the risk of parting with their money. The last practice you mention is more like the purchase of equity rather than the lending of money.

As far as the problem of excessive interest, that is still a problem and there are laws against in many countries. The US has laws against loan-sharking as well.
 
pacificjourney
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RE: Islamic Finance- How Does It Work?

Sat Jun 14, 2003 12:05 am

Bad news, usury is actually a sin for christians also, not to mention illegal under most common law systems.
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TS-IOR
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RE: Islamic Finance- How Does It Work?

Sat Jun 14, 2003 1:41 am


...and it should have been forbidden to the Jews also.

Divine law couldn't be contradictory.

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