Financial services compatible with Islamic rules—already available in Britain—soon will launch in Germany. France and Switzerland are watching with interest
There are four million Muslims living in Germany. They eat, drink and pray in accordance with the precepts of the Prophet Muhammad. But when it comes to monetary transactions, the principles of the Koran have played hardly any role in Germany. That is about to change.
Early next year, the first Islamic bank in Germany to offer products that are in compliance with Sharia law will open its doors. The bank, Kuveyt Türk Beteiligungsbank, will open a branch in the downtown area of Mannheim, a city in western Germany, and branches in other cities are also planned.
The regulators with Germany's Federal Financial Services Authority, known as BaFin, recently issued a limited license to the subsidiary of a Turkish-Kuwaiti bank. It is only permitted to collect funds that are transferred to accounts in Turkey that conform to Islamic rules.
In other countries, the banking industry initially catered to Muslims on an equally small scale. But less than 10 years after first entering the market, all major banks in Great Britain now have Islamic divisions, and there are also five Islamic banks in the country.
The Prophet Muhammad's Prohibition of Interest
Worldwide, assets worth well over $700 billion (€470 billion) are now being managed in accordance with Islamic principles. In Germany, on the other hand, virtually no banks have so far even addressed this market.
The underlying concept of the Islamic banking business is the Prophet Muhammad's prohibition of interest. Like Jesus in the New Testament, Muhammad took action against the usurers of his time, who exploited their contemporaries by charging them exorbitant interest, sometimes well over 100 percent. Muhammad summarily prohibited charging interest unless something was provided in return. Since the 1970s, Islamic banks have sought to satisfy this requirement by offering their customers financial services on the basis of interest-free transactions.
Instead of interest, customers are promised a share in the profits of the bank. However, commercial activities can also be financed in which the Islamic saver collects a surcharge at a level similar to conventional interest.
Instead of taking out a loan to build a new factory, for example, a company would offer its investors a share of its profits. The important aspect of all of these transactions conducted in the name of Allah is that they are in fact based on a real exchange of goods or services. "The connection to reality must be clear," says Michael Saleh Gassner, a financial expert with the Central Council of Muslims in Germany.
Since the financial crisis, the principles of Islamic investors have also attracted the interest of conservative Christian investors. After all, the underlying concept seems so pleasantly removed from the speculative greed of Western financial executives.
Besides, the stock indexes that contain companies selected according to Islamic principles have sometimes outperformed comparable indexes without the religious association. Sharia-compliant banking transactions are "in a position to assume a global leadership role," says Susilo Bambang Yudhoyono, president of the world's most populous Islamic country, Indonesia.
No Investment in Gambling or Sex Trade
Investments that comply with the Koran still represent only 1 percent of the total market, but the market is growing is by 15 to 20 percent a year. Customers from the oil-rich Persian Gulf region, in particular, insist that their capital must be invested in accordance with religious criteria.
In addition to the prohibition of interest, it is also important to ensure that funds are not invested in gambling or the sex trade. Companies that are heavily in debt are excluded, because the large amount of interest they pay is seen as the work of the devil.
The Munich-based insurance giant Allianz (AZ) and Deutsche Bank (DB) have set up funds and certificates to satisfy Sharia-based criteria, but these products are only actively marketed in Islamic countries. "It is a business requirement in the Gulf region to offer products that conform to Sharia," says Hussein Hassan of Deutsche Bank in Dubai. The bank's Gulf region division is already responsible for 20 to 25 percent of profits.
There is no absolute certainty over which transactions conform to the principles of the Koran. Banks address the problem by appointing well-known Islamic scholars to so-called Sharia supervisory boards, which examine all bank products. In the Gulf region, there are about 10 religious scholars who provide consulting to almost every major Western bank and now have their own large staffs.
This leads to the creation of quasi-religious rating agencies, whose pronouncements have many a London investment banker shaking in his boots. Because different religious leaders interpret the Koran in every country, Deutsche Bank has appointed different Sharia supervisory boards for its businesses in Malaysia, Saudi Arabia and the Gulf region.
Markets Paralyzed by a Fatwa
It is clear that clerics can paralyze entire markets with a fatwa, as Muhammad Taqi Usmani demonstrated in 2007. The renowned religious scholar from Pakistan decided that most modern versions of Islamic bonds, known as Sukuks, were not in compliance with Sharia. He imposed a ban, which affected a booming market in which governments, real estate developers and companies raised about $50 billion in capital in 2007 alone.
The business collapsed. The Dubai-based real estate developer Nakheel is currently fighting to survive. The company had borrowed $3.5 billion to build dozens of artificial islands off the Dubai coast for tenants like football star David Beckham. In December, it will become clear whether the largest Sukuk ever issued can be disbursed. Muslims worldwide hope that Dubai will intervene on behalf of the borrower.
This investment sector is at least showing initial signs of recovery. Deutsche Bank introduced two Sukuks, for the Kingdom of Bahrain and for the Islamic Development Bank, into the market this year. Within a few years, the German bank has become one of the major players in the Islamic banking business. Its investment bankers are considered to be particularly creative when it comes to complying with the interest prohibition, while nevertheless offering investors the greatest possible security.
"The products the investment bankers dream up are sometimes bizarre," says Volker Nienhaus, the president of the University of Marburg in western Germany, who has been studying the Islamic banking industry for 30 years. The circumvention of interest stimulates the fantasy of financial engineers, says Nienhaus. For example, an important part of the platinum trade on London's derivatives exchange is indirectly attributable to Sharia. Because platinum, unlike gold and silver, was not a means of payment in Muhammad's day, the precious metal is now used as collateral for short-term financial transactions.
With some creative finesse, a surprising number of Western financial products can be executed in accordance with Islamic law. "The key Sharia products could be offered in Germany," says Robert Elsen, an advisor in BaFin's international division. According to Elsen, there are "no insurmountable obstacles."
Inspired by the British Model
The German financial regulators plan to host a major international conference next week in Frankfurt am Main to address the issue in Germany. If only to attract more business to German markets, BaFin, inspired by the success of the British model, is now eager to approve more financial institutions that offer Islamic products.
Although the Islamic banks were originally established for wealthy Arabs from the Gulf region, British Muslims are now among their most devoted customers. There is also political support for the development of Islamic financial centers in Paris, Zurich and Geneva.
So far the boom has bypassed Germany, despite the results of new studies showing that no other country in Western Europe has such a large Muslim population. The official explanation is that the Turks living in Germany are not particularly interested. But German financial professionals also fear that they could lose more of their existing customers by introducing Sharia-compliant products than gain new customers.
That argument, says Zaid el-Mogadeddi of the Frankfurt-based Institute for Islamic Banking, is pretty arrogant. He cites surveys that conclude that 75 percent of all Muslims in Germany would like to avail of Islamic financial products. According to Mogadeddi, between 1995 and 2002 Turks lost many billions of euros with "Islamic" shares in companies that had been floated by swindlers, and they now have a strong interest in products from established banks.
Islam-compliant real estate financing arrangements are considered particularly promising. In these situations, banks and customers purchase real estate together, with the customer contributing a share corresponding to his equity. The bank pays rent for the rest, gradually acquiring the remaining shares. As a result, no interest accrues, but the property acquisition tax is charged twice.
Sharing the Risk
The same problem used to exist in the UK. Then Prime Minister Gordon Brown, who was finance minister at the time, insightfully abolished the double tax burden. The Central Council for Muslims is now calling for similar measures to be taken in Germany.
A second stumbling block can also be removed with a bit of good will. Under Sharia law, Muslims who deposit money with a bank must also participate in the bank's risk. But what happens to the deposit insurance, which is set by the government? It comes into effect when a bank becomes insolvent. In fact, consumer advocates across the board have welcomed a recent increase in the deposit insurance limit to €50,000.
In Great Britain, a Muslim customer can expressly waive the insurance of his deposits in an individual agreement. The fact that the British government, in the course of the financial crisis, has nationalized entire banks is probably something like an Act of God under Islamic law. At any rate, there are no signs so far that a significant number of Sharia supporters have legally challenged the government's bailout of their bank.
Translated from the German by Christopher Sultan
Provided by Spiegel Online—Read the latest from Europe's largest newsmagazine
www.businessweek.com
Monday, January 17, 2011
Sharia Banking Conquers Europe
From the desk of Thomas Landen on Tue, 2009-03-24 11:53
All over Europe Islamic banks are establishing branches, Western banks are offering Sharia-compliant financial services, and European governments are trying to outcompete each other in welcoming them. Proponents of banking along the lines of Sharia (Islamic law) claim that the Islamic banking system is “more ethical” than the West’s capitalist system. This is not true. Unfortunately, however, in our age of crashing financial markets, many Westerners – not just the traditional anti-capitalist European left – seem very eager to buy that argument.
Early this month, even the Vatican newspaper Osservatore Romano voiced its approval of Sharia banking. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the paper said in a downright stupid and “unethical” article published on March, 4.
The article, entitled “Islamic finance proposals and ideas for the West in crisis” [pdf] suggests that the basic rules of Islamic finance could relieve suffering markets and particularly international financial systems. It says that in the current atmosphere of crisis banks should take Muslims as an example and that the Islamic finance system may pave the way for the establishment of new rules in the Western world.
Islamic or Sharia banks differ from regular banks in two major ways. As commanded in the Koran, the charging of interest is prohibited in all monetary transactions. The other defining feature of Islamic banks is that they are supervised by a board of Islamic scholars and clerics whose job it is to ensure that the banks’ activities comply with Sharia law.
Its proponents argue that Islamic banking is “ethically superior” to the capitalist principles of the “materialistic” West because, as Giovanni Maria Vian, the editor of Osservatore Romano says, Sharia banks take “the human dimension of the economy” into account.
The two dirty secrets of Islamic banking, however, are that, like all banks, Sharia banks do charge interest – they just give it another name – and that the clerics supervising the banks have ties to extremist, even terrorist, groups which work towards the Islamization of Europe and world dominance.
Helena Christofi, an expert on Sharia banking, explains that Islamic banks extend a type of Islamic “credit,” called murabaha, that shifts risk to the borrower in a manner similar to interest.
“An Islamic bank granting murabaha credit to a customer for an automobile, for example, would purchase the automobile for the customer for $15,000 and the customer would owe the bank $20,000 in a year’s time. Similarly, under the ‘diminishing musharaka’ credit, the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns. Ironically, the interest this amounts to ranges between one and two percent higher than the interest on a conventional mortgage. Although the resale price of the vehicle and the rent paid on the house are akin to simple interest charges, the banks’ sharia boards legitimate the charges by renaming them ‘commissions’ or ‘profits.’”
The Sharia boards supervising the Islamic banks and Sharia-compliant financial services offered by regular European banks are composed of members of the European Council for Fatwa and Research. This Council is headed by Sheik Yousef Al-Qaradawi, a leader of the Muslim Brotherhood and instigator and financier of terrorism in Europe and the Middle East. Both Al-Qaradawi and the Council have expressed their hope that “Islam will return to Europe as a conqueror.”
With ever larger Muslim populations there is a growing internal demand for an “ethical alternative” to conventional banking for Muslims. A 2006 poll by Lloyds Trustee Savings Bank in Britain found that over 75% of British Muslims want Sharia-compliant banking products, while in 2005 Mufti Abdul Barkatullah, Sharia adviser to Lloyds TSB and an imam at a North London mosque reported that 20% of inquiries into Islamic products at Lloyds TSB came from non-Muslims who have bought the argument that conventional capitalist banking is somehow unethical.
Alun Williams, marketing director of the Islamic Bank of Britain, established in 2004 and one of the first Sharia banks in Europe, told The Guardian (April 2, 2005):
“Our biggest appeal outside the Muslim community will be to those who feel disenfranchised by, and bitter about, mainstream banks. […] Non-Muslims are fascinated by us, the more so because we intend offering […] an ethical dimension.”
That was four years ago. Meanwhile, Islamic banking has boomed all over Europe and interest from non-Muslims has grown in the wake of the financial crisis, which some, such as the Vatican paper, claim is due to the free-market model having “grown too much and badly in the past two decades.”
Sharia principles, however, not only prohibit the collection and payment of interest and investing in companies involved in gambling, alcohol, tobacco, pornography and the production of pork, but also forbid women from opening bank accounts without their husband’s approval. How “ethical” the latter is for the non-Muslims “fascinated” by Sharia banking is unclear. However, Western banks offering Sharia-compliant services to non-Muslims do not seem to insist on barring women. According to Christofi,
“The justification for replacing capitalism with the Islamic model is based on an intentional corruption of Sharia law, but the banks’ clerics don’t seem to mind undermining their theological philosophy, since the ethical image their misrepresentation has created for Islamic banking has managed to spread Islamic ideology to non-Muslims in Britain. According to Al-Qaradawi, Islam’s ideological infiltration into the West will be the vehicle through which it will establish an Islamic government over the entire globe.”
Although Al-Qaradawi and other members of the European Council for Fatwa and Research are connected to Islamist circles, the British government continues to promote the UK as a hub for Islamic banking. Western governments welcome Sharia-compliant banking because of the huge sums this attracts from Muslim immigrants, “ethically”-driven non-Muslims, and investors from Muslim countries.
In December 2008, the French Senate looked at ways to eliminate legal hurdles for Islamic financial services and products in France. French Finance Minister Christine Lagarde announced France’s intention to make Paris “the capital of Islamic finance” and said several Islamic banks would open branches in the French capital in 2009. French sources estimate this area of the financial market is worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.
In July 2007, Wouter Bos, the Dutch Finance Minister (and leader of the Dutch Labour Party), said the Dutch government actively encourages Islamic banking, despite the risk that this acts as a Trojan horse in the Western banking system for groups linked to terrorists.
“In the first place because Islamic banking meets a demand from the Muslims living in the Netherlands. In the second place because we see an opportunity here for the Dutch financial sector. A third reason is that banning Islamic banking from the perspective of fighting terrorism will have a counter-productive effect. Denial of an actual need can lead to money-flows running via alternative channels out of the sight of the government.”
Switzerland, too, wants its share of Sharia banking. Years ago, Swiss banks already opened branches in the Middle East, offering worldwide Sharia-compliant financial products to wealthy Arabs.
In October 2006, the Swiss authorities granted a banking license to the first Switzerland-based bank that operates according to Sharia principles. Others have followed. “There are simply not enough financial products being created in the West for Muslim clients,” says John Sandwick, managing director of Swiss asset management firm Encore Management. “If no effort is made whatsoever, I am afraid the world will pass Switzerland by in the race to control the rich prize: which today is worth hundreds of billions, but in the future will be trillions of dollars of Islamic wealth.” Michael Fouad Chahine of Credit Suisse says “The development of Islamic banking has so far been limited to countries with a higher percentage of Muslims. But this is changing as more international regulators accept the importance of Sharia. It is now also accepted as socially responsible banking.”
How “socially responsible” and “ethical” is it to try to grab a share of the billions of dollars amassed by rich Arabs, while turning a blind eye to the fact that a substantial part of the money is used to promote terrorism and the establishment of an Islamic government over the entire globe?
In one of his sermons, Sheikh Al-Qaradhawi, one of the supervisors of the Sharia-compliant financial services offered in Britain, speaks of “the conquest of Rome.” In view of the recent article of the Osservatore Romano, Al-Qaradhawi’s words sound rather ominous:
“The city of Hirqil [Constantinople] was conquered by the young 23-year-old Ottoman Muhammad bin Morad, known in history as Muhammad the Conqueror, in 1453. The other city, Romiyya [Rome], remains, and we hope and believe [that it too will be conquered]. This means that Islam will return to Europe as a conqueror and victor, after being expelled from it twice […]. In one of my previous programs, I said that I think that this conquest [of Rome] would not be by the sword or armies, but by preaching and ideology. Europe will see that it suffers from materialistic culture, and will seek an alternative, it will seek a way out, it will seek a lifeboat. It will find no lifesaver but the message of Islam.”
Will the Vatican Bank be the next to go Sharia?
www.brusselsjournal.com
All over Europe Islamic banks are establishing branches, Western banks are offering Sharia-compliant financial services, and European governments are trying to outcompete each other in welcoming them. Proponents of banking along the lines of Sharia (Islamic law) claim that the Islamic banking system is “more ethical” than the West’s capitalist system. This is not true. Unfortunately, however, in our age of crashing financial markets, many Westerners – not just the traditional anti-capitalist European left – seem very eager to buy that argument.
Early this month, even the Vatican newspaper Osservatore Romano voiced its approval of Sharia banking. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the paper said in a downright stupid and “unethical” article published on March, 4.
The article, entitled “Islamic finance proposals and ideas for the West in crisis” [pdf] suggests that the basic rules of Islamic finance could relieve suffering markets and particularly international financial systems. It says that in the current atmosphere of crisis banks should take Muslims as an example and that the Islamic finance system may pave the way for the establishment of new rules in the Western world.
Islamic or Sharia banks differ from regular banks in two major ways. As commanded in the Koran, the charging of interest is prohibited in all monetary transactions. The other defining feature of Islamic banks is that they are supervised by a board of Islamic scholars and clerics whose job it is to ensure that the banks’ activities comply with Sharia law.
Its proponents argue that Islamic banking is “ethically superior” to the capitalist principles of the “materialistic” West because, as Giovanni Maria Vian, the editor of Osservatore Romano says, Sharia banks take “the human dimension of the economy” into account.
The two dirty secrets of Islamic banking, however, are that, like all banks, Sharia banks do charge interest – they just give it another name – and that the clerics supervising the banks have ties to extremist, even terrorist, groups which work towards the Islamization of Europe and world dominance.
Helena Christofi, an expert on Sharia banking, explains that Islamic banks extend a type of Islamic “credit,” called murabaha, that shifts risk to the borrower in a manner similar to interest.
“An Islamic bank granting murabaha credit to a customer for an automobile, for example, would purchase the automobile for the customer for $15,000 and the customer would owe the bank $20,000 in a year’s time. Similarly, under the ‘diminishing musharaka’ credit, the Islamic version of a mortgage, the bank and the customer purchase the property together. The customer must make monthly payments to the bank and pay a monthly rental fee, both based on the portion of the purchase price the bank still owns. Ironically, the interest this amounts to ranges between one and two percent higher than the interest on a conventional mortgage. Although the resale price of the vehicle and the rent paid on the house are akin to simple interest charges, the banks’ sharia boards legitimate the charges by renaming them ‘commissions’ or ‘profits.’”
The Sharia boards supervising the Islamic banks and Sharia-compliant financial services offered by regular European banks are composed of members of the European Council for Fatwa and Research. This Council is headed by Sheik Yousef Al-Qaradawi, a leader of the Muslim Brotherhood and instigator and financier of terrorism in Europe and the Middle East. Both Al-Qaradawi and the Council have expressed their hope that “Islam will return to Europe as a conqueror.”
With ever larger Muslim populations there is a growing internal demand for an “ethical alternative” to conventional banking for Muslims. A 2006 poll by Lloyds Trustee Savings Bank in Britain found that over 75% of British Muslims want Sharia-compliant banking products, while in 2005 Mufti Abdul Barkatullah, Sharia adviser to Lloyds TSB and an imam at a North London mosque reported that 20% of inquiries into Islamic products at Lloyds TSB came from non-Muslims who have bought the argument that conventional capitalist banking is somehow unethical.
Alun Williams, marketing director of the Islamic Bank of Britain, established in 2004 and one of the first Sharia banks in Europe, told The Guardian (April 2, 2005):
“Our biggest appeal outside the Muslim community will be to those who feel disenfranchised by, and bitter about, mainstream banks. […] Non-Muslims are fascinated by us, the more so because we intend offering […] an ethical dimension.”
That was four years ago. Meanwhile, Islamic banking has boomed all over Europe and interest from non-Muslims has grown in the wake of the financial crisis, which some, such as the Vatican paper, claim is due to the free-market model having “grown too much and badly in the past two decades.”
Sharia principles, however, not only prohibit the collection and payment of interest and investing in companies involved in gambling, alcohol, tobacco, pornography and the production of pork, but also forbid women from opening bank accounts without their husband’s approval. How “ethical” the latter is for the non-Muslims “fascinated” by Sharia banking is unclear. However, Western banks offering Sharia-compliant services to non-Muslims do not seem to insist on barring women. According to Christofi,
“The justification for replacing capitalism with the Islamic model is based on an intentional corruption of Sharia law, but the banks’ clerics don’t seem to mind undermining their theological philosophy, since the ethical image their misrepresentation has created for Islamic banking has managed to spread Islamic ideology to non-Muslims in Britain. According to Al-Qaradawi, Islam’s ideological infiltration into the West will be the vehicle through which it will establish an Islamic government over the entire globe.”
Although Al-Qaradawi and other members of the European Council for Fatwa and Research are connected to Islamist circles, the British government continues to promote the UK as a hub for Islamic banking. Western governments welcome Sharia-compliant banking because of the huge sums this attracts from Muslim immigrants, “ethically”-driven non-Muslims, and investors from Muslim countries.
In December 2008, the French Senate looked at ways to eliminate legal hurdles for Islamic financial services and products in France. French Finance Minister Christine Lagarde announced France’s intention to make Paris “the capital of Islamic finance” and said several Islamic banks would open branches in the French capital in 2009. French sources estimate this area of the financial market is worth from 500 to 600 billion dollars and could grow by an average 11 percent a year.
In July 2007, Wouter Bos, the Dutch Finance Minister (and leader of the Dutch Labour Party), said the Dutch government actively encourages Islamic banking, despite the risk that this acts as a Trojan horse in the Western banking system for groups linked to terrorists.
“In the first place because Islamic banking meets a demand from the Muslims living in the Netherlands. In the second place because we see an opportunity here for the Dutch financial sector. A third reason is that banning Islamic banking from the perspective of fighting terrorism will have a counter-productive effect. Denial of an actual need can lead to money-flows running via alternative channels out of the sight of the government.”
Switzerland, too, wants its share of Sharia banking. Years ago, Swiss banks already opened branches in the Middle East, offering worldwide Sharia-compliant financial products to wealthy Arabs.
In October 2006, the Swiss authorities granted a banking license to the first Switzerland-based bank that operates according to Sharia principles. Others have followed. “There are simply not enough financial products being created in the West for Muslim clients,” says John Sandwick, managing director of Swiss asset management firm Encore Management. “If no effort is made whatsoever, I am afraid the world will pass Switzerland by in the race to control the rich prize: which today is worth hundreds of billions, but in the future will be trillions of dollars of Islamic wealth.” Michael Fouad Chahine of Credit Suisse says “The development of Islamic banking has so far been limited to countries with a higher percentage of Muslims. But this is changing as more international regulators accept the importance of Sharia. It is now also accepted as socially responsible banking.”
How “socially responsible” and “ethical” is it to try to grab a share of the billions of dollars amassed by rich Arabs, while turning a blind eye to the fact that a substantial part of the money is used to promote terrorism and the establishment of an Islamic government over the entire globe?
In one of his sermons, Sheikh Al-Qaradhawi, one of the supervisors of the Sharia-compliant financial services offered in Britain, speaks of “the conquest of Rome.” In view of the recent article of the Osservatore Romano, Al-Qaradhawi’s words sound rather ominous:
“The city of Hirqil [Constantinople] was conquered by the young 23-year-old Ottoman Muhammad bin Morad, known in history as Muhammad the Conqueror, in 1453. The other city, Romiyya [Rome], remains, and we hope and believe [that it too will be conquered]. This means that Islam will return to Europe as a conqueror and victor, after being expelled from it twice […]. In one of my previous programs, I said that I think that this conquest [of Rome] would not be by the sword or armies, but by preaching and ideology. Europe will see that it suffers from materialistic culture, and will seek an alternative, it will seek a way out, it will seek a lifeboat. It will find no lifesaver but the message of Islam.”
Will the Vatican Bank be the next to go Sharia?
www.brusselsjournal.com
Wednesday, September 15, 2010
The End of Prosperity: Can Islamic Finance Help?
The End of Prosperity: Can Islamic Finance Help?
POSTED: 21 DHUL HIJJAH 1429, 20 DECEMBER 2008
The immediate cause of the current financial crisis appears to be the excessive and imprudent lending by banks (2). This in turn is attributed to the unbridled power of private bankers to create money out of nothing, and then to loan this bank-created money on interest (described as fractional reserve banking). In this present monetary framework, money is traded as a commodity, instead of performing its true function of operating as a medium of exchange. This system favours the rich against the industrious poor. Despite the fact that deposits are sourced from a broad cross- section of the society, their benefit goes mainly to the rich. James Robertson in “Transforming Economic Life”(3) states that:
“Today’s money and finance system is unfair, ecologically destructive and economically inefficient. The money – must – grow imperative … skews economic effort towards money out of money, and against providing real services and goods”.
A substantial proportion of this privately created bank-money is invested in speculative wagering instruments, such as derivatives based on futures, swaps, and options. Such betting instruments are not connected with transactions in the real economy. According to Prof John Gray of Oxford University, (4) derivatives have created a “virtual financial economy” which “has a terrible potential for disrupting the underlying real economy as seen in the collapse in 1995 of Barings, Britain’s oldest bank”. It is therefore no surprise that George Soros has described derivatives as “hydrogen bombs”. Warren Buffet described them as “financial weapons of mass destruction”. The Bank for International Settlements (BIS) currently estimates the notional amount of all outstanding derivatives (including credit default swaps) to be a staggering 600 trillion dollars, more than 10 times the size of the world economy. (BIS, September 2008, pg 20).
Although debt-financing cannot be ruled out, the solution lies in a shift to equity-based financing, posited on profit and loss sharing, which is the primary characteristic of Islamic Finance. In this equitable manner, economic effort would be directed at providing useful goods and services, instead of simply making money out of money. At the same time, the wide gap between the supply of money and the supply of real goods and services would be decisively narrowed. The distinguishing features and benefits of Islamic Banking were aptly summarized by the Islamic Development Bank, based in Jeddah, (established 1975) in the following words:
“Islamic banking is distinctive in two respects: concentrating on the real sector of the economy, it imparts tremendous stability to the economic system by achieving an identity between monetary flows and goods and services, and by operating on a system of profit and loss sharing in its evolved state, it insulates the society from the debt-mountain on the analogy that if the economies enter into recessionary or deflationary phases, the principles of profit and loss sharing protects the states and economic operators from the evils of accumulation of interest and minimizes defaults and bankruptcies.” (5)
--
1. See generally the article entitled “The End of Prosperity” by Prof. Ferguson of Harvard, published in Time, October 13, 2008, at pages 18 to 21.
2. Dr M Umer Chapra, economics advisor to the Islamic Development Bank of Jeddah in a paper entitled “The Global Financial Crisis”. (Can Islamic Finance Help? (5/11/2008) (shorter version).
3. James Robertson, Transforming Economic Life : A Millennial Challenge, Green Books, Devon, 1998.
4. John Gray, False Dawn : The Delusions of Capitalism, Grunte Books, London, 1998, p62.
5. See the written submission of the Islamic Development Bank to the Supreme Court of Pakistan in 1999 in connection with its landmark judgment declaring all prevailing forms of interest as unlawful according to Islamic Law. The judgment was delivered on the 23 December 1999.
www.albalagh.net
Saturday, July 10, 2010
Sharia Banking
Islamic Banking and It's Chronology
(تعود جذور الخدمات المصرفية الإسلامية التي تتمحور حول قبول الودائع ورفض الربا الى أيام ar- Rasul صلّى الله عليه وسلّم). The roots of Islamic banking services that focus on acceptance of deposits and refused to usury to the days of the Prophet (peace be upon him).
ففي ذلك الوقت، كان الناس يودعون الأموال لدى النبي محمد عليه الصلاة والسلام، أو لدى أبو بكر الصدّيق رضي الله عنه، أول خليفة للمسلمين. At that time, the people entrusted their money to the Prophet Muhammad peace be upon him, or Abu Bakr, may Allah be pleased with him, the first Caliph of the Muslims.
لكن الخدمات المصرفية الإسلامية بصورتها الحالية بدأت بالظهور في نهاية الستينات من القرن الماضي، عندما عملت عدة دول إسلامية على وضع الفكرة موضع التنفيذ. But Islamic banking in its current form began to appear at the end of the sixties of the last century, when several Muslim countries to put the idea into practice.
حيث بدأت بعض أشكال الخدمات المصرفية الإسلامية بالظهور في سبعينات القرن الماضي، لكنها واجهت عدداً من المشكلات من ناحية الإلتزام الكلي بأسس الشريعة الإسلامية. As some forms of Islamic banking services to appear in the seventies of last century, but has faced a number of problems in terms of commitment total bases of Islamic law.
وخلال الفترة ذاتها، بدأ العمل على تطوير أسس المحاسبة الإسلامية، التي تعتبر أداة حيوية ورئيسية لنجاح المصارف الإسلامية، وتم في العام 1973 عقد أول اجتماع لمؤتمر المنظمة الإسلامية في جدة وتم التناقش والتباحث في إيقاف العمل بمعدلات الفائدة المحدّدة وابتكار أنظمة مالية جديدة ترتكز على تعاليم الدين الحنيف. During the same period, work started on developing the foundations of Islamic accounting, which is a vital tool and key to the success of Islamic banks were in 1973 held its first meeting of the Conference of the Islamic Organization in Jeddah has been discussion and discuss the discontinuation of the interest rates specified and invented new financial based on the teachings of religion religion.
وفي العام 1975 تم تأسيس بنك دبي الإسلامي كأول مصرف إسلامي متكامل، ومنذ ذلك الوقت، ظهرت العديد من المؤسسات المالية الأخرى التي ترتكز على مبدأ مشاركة الربح والخسارة. In 1975 was established by Dubai Islamic Bank's first fully fledged Islamic bank, and since that time, there have been many other financial institutions that are based on the principle of participation of profit and loss.
ولقد ارتكز النموذج النظري الأول للخدمات المصرفية الإسلامية على مبدأ المضاربة متعددة الأطراف، عبر اعتماد مبدأ مشاركة الربح بدلاً من مبدأ الفائدة على الودائع والقروض. And has been based theoretical model for Islamic banking services on the principle of speculation multilateral, through the adoption of the principle of profit-sharing principle instead of interest rates on deposits and loans.
ويمكن للمصارف الإسلامية أن تكون وسيطاً مالياً، مثل المصارف التجارية التقليدية، لكن عبر إلغاء مبدأ الفائدة من جميع التعاملات والإعتماد على الشراكة الحقيقة ومبدأ مشاركة الأرباح. Can Islamic banks as financial intermediaries, such as conventional commercial banks, but by abolishing the principle of interest from all the transactions, relying on partnership and profit-sharing.
وخلال فترة الثمانينات من القرن الماضي، لاقت الخدمات والنشاطات المالية الإسلامية اهتماماً واسعاً شمل الأكاديميين والمتخصصين. During the eighties of the last century, they received services and activities of Islamic financial interest in broad-based academic and professionals.
وبدأت العديد من الجامعات والمعاهد بتدريس أسس الخدمات المصرفية الإسلامية وتشجيع إجراء الدراسات والبحوث منها من جامعات بارزة في أوروبا وأميركا. And started many universities and colleges teach the foundations of Islamic banking services and to encourage studies and research, including from prominent universities in Europe and America.
وتم عقد الكثير من المؤتمرات والندوات في مختلف المدن العالمية مثل كوالالمبور وإسلام أباد ودكا والمنامة وجدة والقاهرة والخرطوم وسوكوتو (نيجيريا) وتونس وجنيف ولندن ونيويورك. Have been held many conferences and symposia in various international cities such as Kuala Lumpur, Dhaka, Islamabad, Bahrain, Jeddah, Cairo, Khartoum, Sokoto (Nigeria), Tunis, Geneva, London and New York.
وتخصّصت العديد من مراكز الأبحاث بالأسس الإقتصادية الإسلامية مركزة على الشؤون المالية والمصرفية. And specialized research centers, many of the foundations of Islamic economics, focusing on finance and banking.
وقامت بعض هذه المراكز بنشر المجلات الأكاديمية المتخصّصة موفرة بذلك منصة لتبادل الأفكار ونشر المعلومات حول العالم. The deployment of some of these centers specialized academic journals, thereby providing a platform for exchange of ideas and dissemination of information around the world.
وقد تم لاحقاً تطوير الأسس الأوليّة وتنقيتها وصقلها حيث شهد مجال الودائع وضع أسس محدّدة للتعامل مع الحسابات وعمليات التمويل ورؤوس الأموال والبيانات المالية، وذلك ارتكازاً على مبادئ الإجارة والمرابحة. Was subsequently developed for the initial purification and refinement of the area where he witnessed the deposits develop specific grounds for dealing with accounts and finance, capital and financial statements, and that based on the principles of Ijara and Murabaha.
كما تم خلال هذه الفترة تطوير التقنيات الخاصة لإطلاق المنتجات المالية وفقاً للشريعة الإسلامية، وشمل هذا الأمر اختيار شركات ومؤسسات يمكن التعامل بأسهمها كونها تتوافق مع مبادئ الشريعة. It was also during this period, the development of techniques for launching financial products in accordance with Islamic law, and this included selecting companies whose shares can handle being consistent with the principles of Sharia.
واليوم، أصبحت المصارف الإسلامية، وعلى رأسها بنك دبي الإسلامي، تشكل منافسة قوية في جميع مجالات العمل المصرفي بعد أن أزالت الصورة التي لازمتها بأنها فقط للمتعاملين المسلمين وتهدف الى تحقيق بعض الأهداف الدينية. Today, Islamic banks, led by Dubai Islamic Bank, a strong competition in all areas of banking business after it removed the image of the Haunted that it is just for clients Muslims and aims to achieve some of the goals of religion.
حيث أصبحت الخدمات المصرفية الإسلامية تتمتع بمستوى عال من التقدير وتعتبر بديلاً أكثر عدلاً وانصافاً من المصارف التجارية التقليدية، وهي تجذب المزيد من المتعاملين غير المسلمين، يحفزهم على ذلك تميّز النظام المصرفي الإسلامي. Where services have become the Islamic banking has a high level of appreciation and considered as an alternative, more just and more equitable than the conventional commercial banks, which attract more customers non-Muslims, the incentive to discriminate the Islamic banking system.
source: www.alislami.ae
Wednesday, March 3, 2010
Syariah Economics: Feasibility in Countering Global Crisis
Looking at to what has happened to the world’s economic condition, experts are seeking for solvency to counter the problem. The problem starts from the investment of sub prime mortgage in the United States done by one the Real Estate company in that country, i.e. Lehman Bro’s., who had made investments through bank loan. The company has unfortunately invest the money in a, somehow, wrong way. It is quite becoming a problem right now to the world, by that investment made by the company (the kind of investment will not be explained here as it has become a general notice of what kind of “wrong investment” was made. It will be explained in the other post).
A discourse appear to the surface, to counter the problem of Global Crisis by the implementation of Syariah Economics. Syariah Economics, in a nut shell, is a concept of economics, which somehow is sourced from the Muslims, based on Quran and Hadits, to be implemented to the human beings actual life with the base of share (it may be share of loss or share of profits. So, may it be called “win-win solution” economics system). The first problem of implementing this concept (well actually it still becomes a pro contra until today anyway) was the consideration of the source of the concept, which is Muslims. Non-Muslims sees that it may lead them to a discrimination, wherein that concept includes only something coming from the Quran. On the other side, Muslims were believed to be radical in some ways (like those terrorist acts done by them), so that Muslims were no longer trusted. Nevertheless, it has now come to the phase were this concept is seen from the objective side.
Sub Prime Mortgage
If wee see what happened to USA, the problem of sub prime mortgage, started from Fannie Mae and Freddie Mac, the biggest credit housing company, lend money to the bank. Bank was wrongly to not see the potential of the company to not be ably to return the money. In the actual system, loaner should supervise the asset of the company to see the feasibility of returning the money loaned. For this case, even both concepts explained that in every kinds of debts, creditor should supervise the asset of debtors. This, the first is to make sure that the money will be returned. Second, to keep the business running. In fact, if the money was not returned, business would be stocked in problem of liabilities. This happened to the bank in USA, wherein the bank merely lend the money, without a proper supervision. The company then did a so-called bad investment by establishing Mortgage Backed Security (MBS-fzm), in which is the derivation of the debt to another party. Several MBS’s was bought by Lehman Brothers company, where again it was derived with the name of Collateralized Debt Obligation (CBO-fzm). So on, it was derived until seven steps.
The problem of the derivation was such a big problem in the US. Govt and experts could not predict the real loss and the number of the money circled by that system. In such a condition, it gives direct impact to the world also, because the position of America as the central base for the economy in the whole world. As America falls down, the rest of the world falls down as well, moreover those who are dependent to America in terms of economy.
Derivation of Debt in Islamic Finance Concept
According to the holy Quran (Islams Holy Bible), in Surah Al-Baqarah; Verse 278-279; Chapter 2, that every kinds of debts may not be attributed by any kinds of interests, because it consist riba. Riba, in Islam is a sum of money in which the acceptance is based on immoral way, i.e. causing the other party’s loss or through fraud, etc. In Islamic Economics and Finance itself, as explained previously, is a system of share. The implementation of interests may cause other party’s loss, while in the other side, our profit. It is based on information disclose, all kinds of interests are known by all parties. It is an effective way of running an economy if all party has the equal share. Because, if we see what happened in the US, one party, Bank, was being ………
On the second part, in Islamic financial concepts, derivation of debt does not have any excuses. One derivation from the Creditor to the Debtors is called as Mudharabah. Mudharabah is the Islamic investment system, carried by Mudharib as the executor and Shahibul Maal as the investor who has the money.
Syariah Banking to be Implemented: Advantages
More about other concepts of Islamic Banking maybe seen in previous posts, i.e. Analisis Kelayakan Pegadaian Syariah (in Indonesian), or Mudharabah Scheme for Syariah Banking.
The features available in Syariah, win-win, may be looked vague. The debate raises that either investments, commerce, or other divisions of economy is won by the party who has higher ability in their respective fields or not….
www.kampusislam.com
A discourse appear to the surface, to counter the problem of Global Crisis by the implementation of Syariah Economics. Syariah Economics, in a nut shell, is a concept of economics, which somehow is sourced from the Muslims, based on Quran and Hadits, to be implemented to the human beings actual life with the base of share (it may be share of loss or share of profits. So, may it be called “win-win solution” economics system). The first problem of implementing this concept (well actually it still becomes a pro contra until today anyway) was the consideration of the source of the concept, which is Muslims. Non-Muslims sees that it may lead them to a discrimination, wherein that concept includes only something coming from the Quran. On the other side, Muslims were believed to be radical in some ways (like those terrorist acts done by them), so that Muslims were no longer trusted. Nevertheless, it has now come to the phase were this concept is seen from the objective side.
Sub Prime Mortgage
If wee see what happened to USA, the problem of sub prime mortgage, started from Fannie Mae and Freddie Mac, the biggest credit housing company, lend money to the bank. Bank was wrongly to not see the potential of the company to not be ably to return the money. In the actual system, loaner should supervise the asset of the company to see the feasibility of returning the money loaned. For this case, even both concepts explained that in every kinds of debts, creditor should supervise the asset of debtors. This, the first is to make sure that the money will be returned. Second, to keep the business running. In fact, if the money was not returned, business would be stocked in problem of liabilities. This happened to the bank in USA, wherein the bank merely lend the money, without a proper supervision. The company then did a so-called bad investment by establishing Mortgage Backed Security (MBS-fzm), in which is the derivation of the debt to another party. Several MBS’s was bought by Lehman Brothers company, where again it was derived with the name of Collateralized Debt Obligation (CBO-fzm). So on, it was derived until seven steps.
The problem of the derivation was such a big problem in the US. Govt and experts could not predict the real loss and the number of the money circled by that system. In such a condition, it gives direct impact to the world also, because the position of America as the central base for the economy in the whole world. As America falls down, the rest of the world falls down as well, moreover those who are dependent to America in terms of economy.
Derivation of Debt in Islamic Finance Concept
According to the holy Quran (Islams Holy Bible), in Surah Al-Baqarah; Verse 278-279; Chapter 2, that every kinds of debts may not be attributed by any kinds of interests, because it consist riba. Riba, in Islam is a sum of money in which the acceptance is based on immoral way, i.e. causing the other party’s loss or through fraud, etc. In Islamic Economics and Finance itself, as explained previously, is a system of share. The implementation of interests may cause other party’s loss, while in the other side, our profit. It is based on information disclose, all kinds of interests are known by all parties. It is an effective way of running an economy if all party has the equal share. Because, if we see what happened in the US, one party, Bank, was being ………
On the second part, in Islamic financial concepts, derivation of debt does not have any excuses. One derivation from the Creditor to the Debtors is called as Mudharabah. Mudharabah is the Islamic investment system, carried by Mudharib as the executor and Shahibul Maal as the investor who has the money.
Syariah Banking to be Implemented: Advantages
More about other concepts of Islamic Banking maybe seen in previous posts, i.e. Analisis Kelayakan Pegadaian Syariah (in Indonesian), or Mudharabah Scheme for Syariah Banking.
The features available in Syariah, win-win, may be looked vague. The debate raises that either investments, commerce, or other divisions of economy is won by the party who has higher ability in their respective fields or not….
Note: This post is not done. Author will finish the post after three days. It need research and analysis. This is published to stay along with readers which has interest in this field of research.
www.kampusislam.com
Thursday, January 28, 2010
THE CONCEPT OF MUSYARAKAH
Another solution of partnership contract than Mudharabah
Session 9
The basic rules and Features of Musharakah
Musharakah means relationship established under a contract by the mutual consent of the parties for sharing of profits and losses,arising from a joint enterprise or venture.
Investments come from all partners/shareholders hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually agreed in the contract.
The basic rules and Features of Musharakah
The existence of Muta’aqideen (Partners):
Capability of Partners: Must be sane & mature and be able of entering into a contract. The contract must take place with free consent of the parties without any fraud or misrepresentation.
If one or more partners choose to become non-working or silent partners. The ratio of their profit cannot exceed the ratio which their capital investment bears so the total capital investment in Musharakah.
The basic rules and Features of Musharakah
It is not allowed to fix a lump sum amount for any of the partners,or any rate of profit tied up with his capital. A management fee however, can be paid to the partner managing the Musharakah provided the agreement for the payment of such fee is independent of the Musharakah agreement.
Losses are shared by all partners in proportion to their capital.
The basic rules and Features of Musharakah
All assets of Musharakah are jointly owned in proportion to the capital of each partner.
All partners must contribute their capital in terms of money or species at an agreed valuation.
Share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.
The basic rules and Features of Musharakah
The presence of the commodity: This means the price and commodity itself.
The rate of profit sharing should be determined: The share of each partner in the profit earned should be identified at the time of the contract. If however, the ratio is not determined before hand the contract becomes void (Fasid).
Therefore identifying the profit share is necessary.
Distribution of Profit
The proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined. The contract is not valid in Shari’ah.
The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners, or any rate of profit tied up with his investment.
ILLUSTRATION
If A and B enter into a partnership and it is agreed between them that A shall be given Rs. 10,000/- per month as his share in the profit, and the rest will go to B, the partnership is invalid. Similarly, if it is agreed between them that A will get 15% of his investment, the contract is not valid. The correct basis for distribution would be an agreed percentages of the actual profit accrued to the business.
OBSERVATIONS
If a lump sum amount or a certain percentage of the investment has been agreed for any one of the partners, it must be expressly mentioned in the agreement that it will be subject to the final settlement at the end of the term, meaning thereby that any amount so drawn by any partner shall be treated as on account payment and will be adjusted to the actual profit he may deserve at the end of the term.
But if no profit is actually earned or is less than anticipated, the amount drawn by the partner shall have to be returned.
OBSERVATIONS
However, if a partner has put an express condition in the agreement that he will never work for the Musharakah and will remain a sleeping partner throughout the term of Musharakha, then his share of profit cannot be more than the ratio of his investment.
Sharing of loss
In the case of a loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of investment. Therefore, if a partner have invested 40% of the capital, he must suffer 40% of the loss, not more, not less, and any condition to the contrary shall render the contract invalid. There is a complete consensus of jurists on this principle.
Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment.
Termination of Musharakah
Musharakah is deemed to be terminated in any one of the following events:
(1) Every partner has a right to terminate the Musharakah at any time after giving his partner a notice to this effect, whereby the Musharakah will come to an end.
In this case, if the assets of the musharakah are in cash form, all of them will be distributed pro rata between the partners. But if the assets are not liquidated, the partners may agree either on the liquidation of the assets, or on their distribution or partition between the partners as they are.
Termination of Musharakah
IN CASE OF A DISPUTE
If there is a dispute between the partners in this matter i.e. one partner seeks liquidation while the other wants partition or distribution of the non-liquid assets themselves,the latter shall be preferred, because after the termination of musharakah, all the assets are in the joint ownership of the partners, and a co-owner has a right to seek partition or separation, and no one can compel him on liquidation. However, if the assets are such that they cannot be separated or partitioned, such as machinery, then they shall be sold and the sale-proceeds shall be distributed.
Termination of Musharakah
(2)If any one of the partners dies during the musharakah, the contract of musharakah with him stands terminated. His heirs in this case, will have the option either to draw the share of the deceased from the business, or to continue with the contract of musharakah.
(3)If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the musharakah stands terminated.
Termination of Musharakah without closing the business
If one of the partners wants termination of the musharakah, while the other partner or partners like to continue with the business, this purpose can be achieved by mutual agreement. The partners who want to run the business may purchase the share of the partner who wants to terminate his partnership, because the termination of musharakah with one partner does not imply its termination between the other partners.
Termination of Musharakah without closing the business
However, in this case, the price of the share of the leaving partner must be determined by mutual consent, and if there is a dispute about the valuation of the share and the partners do not arrive at an agreed price, the leaving partner may compel other partners on the liquidation or on the distribution of the assets themselves.
by: lecturer of FEUI
Session 9
The basic rules and Features of Musharakah
Musharakah means relationship established under a contract by the mutual consent of the parties for sharing of profits and losses,arising from a joint enterprise or venture.
Investments come from all partners/shareholders hereinafter referred to as partners.
Profits shall be distributed in the proportion mutually agreed in the contract.
The basic rules and Features of Musharakah
The existence of Muta’aqideen (Partners):
Capability of Partners: Must be sane & mature and be able of entering into a contract. The contract must take place with free consent of the parties without any fraud or misrepresentation.
If one or more partners choose to become non-working or silent partners. The ratio of their profit cannot exceed the ratio which their capital investment bears so the total capital investment in Musharakah.
The basic rules and Features of Musharakah
It is not allowed to fix a lump sum amount for any of the partners,or any rate of profit tied up with his capital. A management fee however, can be paid to the partner managing the Musharakah provided the agreement for the payment of such fee is independent of the Musharakah agreement.
Losses are shared by all partners in proportion to their capital.
The basic rules and Features of Musharakah
All assets of Musharakah are jointly owned in proportion to the capital of each partner.
All partners must contribute their capital in terms of money or species at an agreed valuation.
Share capital in a Musharakah can be contributed either in cash or in the form of commodities. In the latter case, the market value of the commodities shall determine the share of the partner in the capital.
The basic rules and Features of Musharakah
The presence of the commodity: This means the price and commodity itself.
The rate of profit sharing should be determined: The share of each partner in the profit earned should be identified at the time of the contract. If however, the ratio is not determined before hand the contract becomes void (Fasid).
Therefore identifying the profit share is necessary.
Distribution of Profit
The proportion of profit to be distributed between the partners must be agreed upon at the time of effecting the contract. If no such proportion has been determined. The contract is not valid in Shari’ah.
The ratio of profit for each partner must be determined in proportion to the actual profit accrued to the business, and not in proportion to the capital invested by him. It is not allowed to fix a lump sum amount for any one of the partners, or any rate of profit tied up with his investment.
ILLUSTRATION
If A and B enter into a partnership and it is agreed between them that A shall be given Rs. 10,000/- per month as his share in the profit, and the rest will go to B, the partnership is invalid. Similarly, if it is agreed between them that A will get 15% of his investment, the contract is not valid. The correct basis for distribution would be an agreed percentages of the actual profit accrued to the business.
OBSERVATIONS
If a lump sum amount or a certain percentage of the investment has been agreed for any one of the partners, it must be expressly mentioned in the agreement that it will be subject to the final settlement at the end of the term, meaning thereby that any amount so drawn by any partner shall be treated as on account payment and will be adjusted to the actual profit he may deserve at the end of the term.
But if no profit is actually earned or is less than anticipated, the amount drawn by the partner shall have to be returned.
OBSERVATIONS
However, if a partner has put an express condition in the agreement that he will never work for the Musharakah and will remain a sleeping partner throughout the term of Musharakha, then his share of profit cannot be more than the ratio of his investment.
Sharing of loss
In the case of a loss, all the Muslim jurists are unanimous on the point that each partner shall suffer the loss exactly according to the ratio of investment. Therefore, if a partner have invested 40% of the capital, he must suffer 40% of the loss, not more, not less, and any condition to the contrary shall render the contract invalid. There is a complete consensus of jurists on this principle.
Profit is based on the agreement of the parties, but loss is always subject to the ratio of investment.
Termination of Musharakah
Musharakah is deemed to be terminated in any one of the following events:
(1) Every partner has a right to terminate the Musharakah at any time after giving his partner a notice to this effect, whereby the Musharakah will come to an end.
In this case, if the assets of the musharakah are in cash form, all of them will be distributed pro rata between the partners. But if the assets are not liquidated, the partners may agree either on the liquidation of the assets, or on their distribution or partition between the partners as they are.
Termination of Musharakah
IN CASE OF A DISPUTE
If there is a dispute between the partners in this matter i.e. one partner seeks liquidation while the other wants partition or distribution of the non-liquid assets themselves,the latter shall be preferred, because after the termination of musharakah, all the assets are in the joint ownership of the partners, and a co-owner has a right to seek partition or separation, and no one can compel him on liquidation. However, if the assets are such that they cannot be separated or partitioned, such as machinery, then they shall be sold and the sale-proceeds shall be distributed.
Termination of Musharakah
(2)If any one of the partners dies during the musharakah, the contract of musharakah with him stands terminated. His heirs in this case, will have the option either to draw the share of the deceased from the business, or to continue with the contract of musharakah.
(3)If any one of the partners becomes insane or otherwise becomes incapable of effecting commercial transactions, the musharakah stands terminated.
Termination of Musharakah without closing the business
If one of the partners wants termination of the musharakah, while the other partner or partners like to continue with the business, this purpose can be achieved by mutual agreement. The partners who want to run the business may purchase the share of the partner who wants to terminate his partnership, because the termination of musharakah with one partner does not imply its termination between the other partners.
Termination of Musharakah without closing the business
However, in this case, the price of the share of the leaving partner must be determined by mutual consent, and if there is a dispute about the valuation of the share and the partners do not arrive at an agreed price, the leaving partner may compel other partners on the liquidation or on the distribution of the assets themselves.
by: lecturer of FEUI
The Concept of Mudarabah
The Concept of Mudarabah
Session 9
Definition
This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise.
The investment comes from the first partner who is called “Rabb-ul-Maal” (Investor) while the management and work is an exclusive responsibility of the other, who is called “Mudarib” (Working Partner) and the profits generated are shared in a predetermined ratio.
Types of Mudarabah
Al Mudarabah Al Muqayyadah
(Restricted Mudarabah)
Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)
Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
Rabb-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).
Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Rabb-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah).
However, he is not authorized to:
a) keep another Mudarib or a partner
b) mix his own investment in that particular Mudarabah without the consent of Rabb-ul Maal.
Authority of Rabb-ul-Maal
Rabb-ul-Maal has authority to:
a) Oversee the Mudarib’s activities and
b) Work with Mudarib if the Mudarib consents.
Different Capacities of the Mudarib
Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust.
Wakeel (Agent) : In purchasing goods for trade, he is an agent of Rabb-ul-maal.
Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rabb-ul-maal who shares the profit in agreed ratio.
Capital of Mudarabah
The capital in Mudarabah may be either cash or in kind. If the capital is in kind, its valuation is necessary, without which Mudarabah becomes void.
Distribution of Profit & Loss
Distribution of Profit & Loss
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah.
The Mudarib & Rabb-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital.
Termination of Mudarabah
Mudarabah can be terminated any time by either of the two parties by giving notice.
If Mudarabah was for a particular term, it will terminate at the end of the term.
Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination.
Distribution at Termination
If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.
If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual profit may be determined.
Collective Mudarabah
“Collective Mudarabah” means a joint Pool created by many investors and handled over to a single Mudarib who is normally a juristic person.
Collective Mudarabah creates two different relationships:
Relationship between investors inter se, which is Shirkah or Partnership.
Relationship of all the investors with mudarib, which is mudarabah
When Mudarib is a Juristic Person
Who is the Mudarib?
Shareholders?
Management or Directors?
Juristic Person
Expenses of Mudarabah
Direct expenses are borne by the Mudarabah pool.
Indirect expenses are borne by the mudarib.
Running Mudarabah
Investors come in and go out at different dates
Profits are calculated on daily product basis.
Redemption before maturity
If the assets of mudarabah are in illiquid form, an investor may redeem his share by selling it to the pool..
If the assets are in liquid form, a provisional amount may be given to him subject to final settlement
by: lecturer of FEUI
If you find something wrong, unclear or the interesting one, please comment
Session 9
Definition
This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise.
The investment comes from the first partner who is called “Rabb-ul-Maal” (Investor) while the management and work is an exclusive responsibility of the other, who is called “Mudarib” (Working Partner) and the profits generated are shared in a predetermined ratio.
Types of Mudarabah
Al Mudarabah Al Muqayyadah
(Restricted Mudarabah)
Al Mudarabah Al Mutlaqah
(Unrestricted Mudarabah)
Al Mudarabah Al Muqayyadah (Restricted Mudarabah)
Rabb-ul-Maal may specify a particular business or a particular place for the mudarib, in which case he shall invest the money in that particular business or place. This is called Al Mudarabah Al Muqayyadah (restricted Mudarabah).
Al Mudarabah Al Mutlaqah (Unrestricted Mudarabah)
Rabb-ul-maal gives full freedom to Mudarib to undertake whatever business he deems fit, this is called Al Mudarabah Al Mutlaqah (unrestricted Mudarabah).
However, he is not authorized to:
a) keep another Mudarib or a partner
b) mix his own investment in that particular Mudarabah without the consent of Rabb-ul Maal.
Authority of Rabb-ul-Maal
Rabb-ul-Maal has authority to:
a) Oversee the Mudarib’s activities and
b) Work with Mudarib if the Mudarib consents.
Different Capacities of the Mudarib
Ameen (Trustee): The money given by Rabb-ul-maal (investor) and the assets required therewith are held by him as a trust.
Wakeel (Agent) : In purchasing goods for trade, he is an agent of Rabb-ul-maal.
Shareek (Partner): In case the enterprise earns a profit, he is a partner of Rabb-ul-maal who shares the profit in agreed ratio.
Capital of Mudarabah
The capital in Mudarabah may be either cash or in kind. If the capital is in kind, its valuation is necessary, without which Mudarabah becomes void.
Distribution of Profit & Loss
Distribution of Profit & Loss
Apart from the agreed proportion of the profit, the Mudarib cannot claim any periodical salary or a fee or remuneration for the work done by him for the Mudarabah.
The Mudarib & Rabb-ul-Maal cannot allocate a lump sum amount of profit for any party nor can they determine the share of any party at a specific rate tied up with the capital.
Termination of Mudarabah
Mudarabah can be terminated any time by either of the two parties by giving notice.
If Mudarabah was for a particular term, it will terminate at the end of the term.
Termination of Mudarabah means that the Mudarib cannot purchase new goods for the Mudarabah. However, he may sell the existing goods that were purchased before termination.
Distribution at Termination
If all assets of the Mudarabah are in cash form at the time of termination, and some profit has been earned on the principal amount, it shall be distributed between the parties according to the agreed ratio.
If the assets of Mudarabah are not in cash form, they will be sold and liquidated so that the actual profit may be determined.
Collective Mudarabah
“Collective Mudarabah” means a joint Pool created by many investors and handled over to a single Mudarib who is normally a juristic person.
Collective Mudarabah creates two different relationships:
Relationship between investors inter se, which is Shirkah or Partnership.
Relationship of all the investors with mudarib, which is mudarabah
When Mudarib is a Juristic Person
Who is the Mudarib?
Shareholders?
Management or Directors?
Juristic Person
Expenses of Mudarabah
Direct expenses are borne by the Mudarabah pool.
Indirect expenses are borne by the mudarib.
Running Mudarabah
Investors come in and go out at different dates
Profits are calculated on daily product basis.
Redemption before maturity
If the assets of mudarabah are in illiquid form, an investor may redeem his share by selling it to the pool..
If the assets are in liquid form, a provisional amount may be given to him subject to final settlement
by: lecturer of FEUI
If you find something wrong, unclear or the interesting one, please comment
BELOW
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