Banking: Islam waits
June 26, 2009 by ImanK
Source: Canadian Business on line
© Greeks Rethink
As the Anglo-Saxon ex-masters of the financial universe struggle to emerge from a perfect storm of bad loans, bad bets and a deep recession, an alternative approach to business transactions is having a moment in the sun: Islamic finance, based on teachings from the Qur’an.
Some governments, including the United Kingdom and Japan, have begun trying to tap into money from the Middle East by floating debt as sukuk, or Shariah-compliant bonds. At the retail level, Islamic mortgages and other banking products — based on a no-interest equity-pool form of finance — are becoming more popular. Here in Canada, Standard & Poor’s recently set up a Shariah-compliant index that has already led to the proposed creation of the first Islamic ETF in this country.
But as the Islamic finance movement begins to get off the ground, a tug-of-war about how fast this new religious economy should emerge has broken out among those hoping to be players in this market.
The federal government declines to say how many applications it has received from organizations hoping to be the first Canadian institution to set up a licensed Islamic-focused bank in this country. But observers estimate there are about half a dozen applications sitting with the Department of Finance, and some of those asking for consideration are getting impatient with the time it has taken the government to come up with a yes or no.
Steve Watts, a partner with KPMG in Toronto, is involved with one of the applications. (KPMG is also handling another.) He says he’s worried Canada is falling behind other countries in its development of this sector. He points to London, which has decided to be proactive in developing that city as a “centre of excellence” in Islamic finance. “This is the next big shift in retail banking for the Muslim community. Looking to the future, this is going to be great for banks,” says Watts. “What are we waiting for? If this is being done in the rest of the Commonwealth, why can’t it be done here? Why can’t the laws of Canada accommodate this?” A conventional application usually takes up to 12 months; the Islamic applications have been sitting with the government for two to three years.
Watts points out that Islamic finance is one of the fastest-growing sectors in financial services. Authorities have done background checks around the applications; the backing of KPMG helps to ensure the commercial accounting on the applications is up to par. And anyway, despite what some critics argue, the products offered under the Islamic finance banner are not all that unconventional; the techniques used in Islamic finance are the same as or similar to some used at credit unions, in private equity and in venture capital.
Watts argues that the bureaucratic delays are leaving the sector under-regulated. “Mainstream Canadians are protected, but regulation is non-existent in this sector,” he says. “This is about taking something that is currently unregulated and bringing it into the mainstream. We want to show Canadians that they are represented under the regulatory system of Canada.”
Interestingly, the proposals were submitted for approval to the Office of the Superintendent of Financial Institutions, as is typical in such filings. But all the applications were subsequently punted to Finance. What might have held up the approval process? Only four years ago, the Ontario government found itself mired in a debate around accommodating Shariah-based law in provincial courts; the plan was eventually tossed out amid the populist backlash. The federal Conservatives might be hoping to avoid a similar kind of debate, especially given a minority in the House. As well, groups such as the Muslim Canadian Congress, the self-styled voice of moderate Muslims, has criticized the Islamic finance movement, calling it a con job by “Islamists, with backing from Middle Eastern financial institutions and their Western partners,” as one letter to the Canada Mortgage and Housing Corp. put it, intended to scare Muslims into paying more for financial services out of a sense of religious duty.
And others in the Islamic finance sector suggest there is no rush to hand out a banking licence. Among them is Omar Kalair, the president and CEO of UM Financial Inc., a company that offers Islamic mortgages and is proposing a new Islamic ETF. UM Financial doesn’t have a banking licence. It offers its services through an agreement with an existing financial services company, Central 1 Credit Union, which provides capital to UM. That and partnerships with other companies allow it to offer a limited number of mortgages as well as a couple of other services, like insurance, and, more recently, a “prepaid”(interest free) Islamic credit card. But as one of the first movers in this space in Canada, Kalair would like to see more development of the market first, before a stand-alone bank is approved. “The market is not yet ready for this,” he says. “The fact that the big Canadian banks are not yet offering these services suggests that.” Kalair assumes the applications with Finance are mainly offshore Mideast groups hoping to set up shop here.
Nevertheless, the rest of the world is moving quickly. According to a report by Stikeman Elliott LLP, the sector has grown by between 20% and 30% a year since 2001. Watts wants to see Canada catch up to the U.K., which speeded the approval process in Islamic finance on the principle of “no obstacles, but no special favours.” That is, the government won’t stand in the way of the sector just because the word “Islamic” is attached. If the products fit into existing regulations, then banks will get a licence.
Watts calls this an enlightened, rational approach that meshes with western traditions of free markets and religious freedom. The idea that technically sound applications would be held up on any other concern would be to undermine western values. “The bureaucrats can’t have their heads in the sand on this. The applicants are making a business case here — nothing more,” says Watts. “They don’t want any special favours. They just want this considered.”
Those in the world of Islamic finance believe that now is the time to strike. One of the key developments in western finance leading to the current meltdown was the 25-year expansion in consumer credit. Deregulation, the rise of the offshore-shadow banking system, cultural attitudes toward debt — all led to a sharp rise in the amount of debt held by each individual. But as formerly non-creditworthy people were offered mortgages, demand in the economy was artificially expanded as well. That worked like a charm for a while — home prices skyrocketed, the auto industry continued to sell cars at a rapid pace, corporate earnings advanced — but once the credit bubble began to deflate, crisis quickly followed.
Proponents of Islamic finance argue that had its principles been followed, the big crash would have been avoided. Not only are profits from pornography and alcohol banned, but so too are unstable debt levels. That is an idea that may find favour with many in the West, especially in the wake of the recent meltdown. Watts suggests that even non-Muslim Canadians, recognizing the advantages, might at some point hope to access these services, just as some non-Muslim Canadians choose to eat halal. “You don’t have to be Muslim to enjoy the benefits. How many Canadians might want that — invest ethically in a system that isn’t debt-based?” asks Watts.
That possibility might soon be tested in the real world. The federal Department of Finance has confirmed that it recently finished its assessments and sent the applications back to OSFI for normal processing.
I say at long last….
Here in UK we have a series of Halal Sharia Approved Financilal Products for sometime now. I am glad that the rest of the world is awakening to the damage caused by the Western way of running the Finances.
Allah (s.w.t.) said: those who devour usury will not stand except as the one whom has been touched by the evil stands. driven to madness. that is because they say “trade is like usury” but Allah has permitted trade and forbidden usury.
As we all know, trade is the trading between merchant and custoner but the usury is the money addition on loans.
Usury is forbidden in Christianity too (Luke, chapter6, verses34), loan your money, not awaiting usury, and then your reward is great
Usury is forbidden in Judaism. According to verses 71(if you lend money to the children of my people don’t ask them to pay interest), and verses 35(if your brother is in need don’t ask any interest from him). Jewish people forbid usury among them, and deal with it among other people.
Islam has forbidden usury in the wording of the Qur’an and the prophet (p.b.u.h) and by the unanimous decision of all the schools of Islam.
Allah (s.w.t) said O you, who believe, fear Allah and give up what remains of your demand of usury, you are indeed believers. If you do it not, take a notice of war from Allah and his messenger. But if you turn back (return to Allah) from usury, you shall have your capital sums, don’t deal unjustly and you shall not dealt unjustly.
Xenia
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Assalamu alaikom wa rahmatu’llahi wa barakatuh,
Thank you for posting this interesting article.
Nevertheless, I caution everyone from getting over-excited about “Islamic banking” or “Islamic financing”.
According to Sheikh Imran Hosein, who’s apparantly an expert when it comes to these matters (Wa’llahu aalam), most of the “Islamic” banks out there are actually practicing a policy of what he calls “riba through the backdoor”!
He believes that it is not to the interest of the Western financial world that is controlled by the filthy rich that a riba-free economy should exist.
Therefore, the West will fight such economies/banking systems either directly or indirectly (presenting riba-dealing banks as “Islamic banks”).
I hope I haven’t misunderstood or misrepresented the sheikh’s words; but his lectures are out there (on the net) for anyone who cares to listen.
Wa’ssalamu alaikom wa rahmatu’llahi wa barakatuh,
And a quick note about the words usury and riba. From what I recall, usury is a lot of interest and does not include a little bit of interest made on money so when some non-Muslims saw the translation of the word “riba” to be “usury” this is what they thought it meant until I explained that the translation of riba is any interest made on money even if it is only 1%.
Also, another thing. When I was explaining the no riba banking system to non-Muslims many years ago, they basically laughed like it’s a ridiculous idea because no one becomes rich without riba. Now, I see it ironically funny that the state of the economy is like this because of riba.
Asalamu Alaykum Br Adelfos and all.
I agree that now more and more Western Banks have started offering financial products that they claim they have been endorsed and approved by The Sharia.
In my mind this move would be more for profit and competition with the other Islamic Banks. As Muslims how do we stand if we were to take such product from a Western Bank? They seem to have all the right certificates and stamps in the right places. I personally would use due dilligence. I would ask more questions and take it from there.
We have to be realistic though about the Islamic Bank Financial products. They are not perfect and there is room for improvement. But at least as Muslims we should consider this option as an acceptable for the time being alternative. I personally have found that some of their financial products ,work out far too expensive like their Islamic Mortgages( Brackets as I am not sure….???). For that The Bank purchases your chosen property and each month you pay them back part of the loan plus RENTAL until you pay off the original borrowed capital. Now some say that this Rental is Riba in disguise. Allahu Allam. And their Home Insurance and Car insurance products work out three times more expensive. I have spoken with Muslims in my line of job and I have been told: ” We want to take out a Halal ……. (product) but we can not afford it. I think Islamic Banks should concentrate in making their products more affordable and as Sharia compliant as possible. I think the Western Banks are not presenting as ” Islamic Banks” but they are presenting some of their products as Islamic and they like to use the word Halal Finance. As with all matters if in doubt is better to leave it. And Allah knows best.
I thought I will also add:
Abu Bakr ibn Abi Maryam reported that he heard the Messenger of Allah, may Allah bless him and grant him peace, say: “A time is certainly coming over mankind in which there will be nothing [left] which will be of use save a dinar and a dirham.”
(The Musnad of Imam Ahmad ibn Hanbal)
With the financial Banking crisis we can see how the words of our Prophet PBUH are coming true.
Gold and silver are the most stable currency the world has ever seen
From the beginning of Islam until today, the value of the Islamic bimetallic currency has remained surprisingly stable in relation to basic consumable goods:
A chicken at the time of the Prophet, salla’llahu alaihi wa sallam, cost one dirham; today, 1,400 years later, a chicken costs approximately one dirham.
In 1,400 years inflation is zero.
Could we say the same about the dollar or any other paper currency in the last 25 years?
In the long term the bimetallic currency has proved to be the most stable currency the world has ever seen. It has survived, despite all the attempts by governments to transform it into a symbolic currency by imposing a nominal value different from its weight.
Reliability
Gold cannot be inflated by printing more of it; it cannot be devalued by government decree, and unlike paper currency it is an asset which does not depend upon anybody’s promise to pay.
Portability and anonymity of gold are both important, but the most significant fact is that gold is an asset that is no-one else´s liability.
All forms of paper assets: bonds, shares, and even bank deposits, are promises to repay money borrowed. Their value is dependent upon the investor’s belief that the promise will be fulfilled. As junk bonds and the Mexican peso have illustrated, a questionable promise soon loses value.
Gold is not like this. A piece of gold is independent of the financial system, and its worth is underwritten by 5,000 years of human experience.
And Allah SWT knows best.
Wa salaam
Xenia
Assalamu alaikom,
Masha’Allah! Sister Xenia, may Allah bless you!
Very important comment.
If anyone has some extra money to buy gold and/or silver, please do so.
It is said, the world is moving toward the “electronic” money, which is even worse than the current worthless paper notes in our hands.
Truly, the only thing that would be of value then (and even now) is gold and silver.
For information only this is an example of the certificates the Bank of Britain financial products have:
http://www.islamic-bank.com/islamicbanklive/ShariaaCompliance/1/Home/1/Home.jsp;jsessionid=C7D052D57CD9FD999AF8D95FCD6F92D6
At least we have to try.Insha Allah
Xenia
Br Adelfos,
What was Bretton Woods?
Back to a gold based monetary system(but with no US dollar as refferal currency) perfectly matches Islamic finance.
But we are condemned all the others to feed the FED ,to support the $ ,buying US state bonds.
Poor Chinamerica.
I think the the meaning of this post might be overlooked due to lack of knowledge or in formation about finance and banking.
Some valuable information;
http://english.aljazeera.net/focus/2009/06/2009624121059292378.html
Read also the author’s article’ un the same window