Friday, December 4, 2009

Learning more about Islamic Finance

With concerns unfolding about the stability of Dubai World and it's sovereign backing, many reporters have questions about financing in this part of the world.
The U.S. Treasury Department has a downloadable publication that explains Islamic Finance components and here's the link: https://treas.gov/offices/international.../08042006_OccasionalPaper4.pdf

Islamic finance is based on principles of Islamic law, or shariah. The market for Islamic finance has grown 10% - 15% annually in recent years. Islamic finance historically has been concentrated in oil-rich Arab and Southeast Asian countries, but has expanded globally to non-Muslim countries.

What makes Islamic finance different?

Ban on interest (riba): In conventional finance, a distinction is made between acceptable interest and excessive interest. Under Islamic law, any level of interest is considered usurious and is prohibited. So how do lenders profit from financial transactions under Islamic law? For instance, in a real estate, it could takes the form of leasing, as opposed to loans. Instead of borrowing money, the bank obtains the property and leases it to the shariah-compliant investor, who pays rent, not interest.

Ban on uncertainty: Uncertainty in contractual terms and conditions is not allowed, unless all of terms and conditions of the risk are understood by all parties to a financial transaction.

Risk-sharing and profit-sharing: Parties involved in a financial transaction must share both associated risks and profits. Profits or returns from assets are permitted so long as the business risks are shared by borrower and lender.

Ethical investments: Investment in industries prohibited by the Qur’an, such as alcohol, pornography, gambling, and pork- based products, are discouraged.

Asset-backing: Each financial transaction must be tied to a “tangible, identifiable underlying asset.” Money is not considered an asset class because it is not tangible and thus, may not earn a return.


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