Fairness of bank loans

#‎Islamic_Finance‬: Applying a fixed price for money (interest rate) is unfair for investors and for the society. Islam prohibits the fact that a borrower carries the total risks of the failure while the lender receive a fixed income out of the venture regardless it is a total failure or a total success.

Someone might clain that the lender bear a minimum risk of default. We know that 70% of startup fails during the first three years of operations. We know also that the default rates on interest bearing rates is no more than 2% in good times and 6% in bad times (Federal reserve delinguishy rate).

Hence, faireness is not established and the entrepreneur cost is way beyond his capacity.

Islamic Finance @ FMA 2012 in Atlanta

Session 058
Islamic Finance
Thursday, 11:30 am - 1:00 pm

Islamic finance is growing at 15 percent annually and will exceed 2 trillion in 2012. Flush capital in the Muslim world attracts and induces many money managers and financial institutions, whether they are from the Arab or western world, to offer Shariah-compliant assets that fit these Muslim religious preferences. Islamic finance is one of the fastest growing and most innovative financial disciplines in the international financial market, as well as one of the least understood by both the western and Islamic financial communities.

Moderator:
Kabir Hassan, Professor of Finance, University of New Orleans
Panelists:
Zamir Iqbal, Lead Investment Officer, The World Bank
Jahangir Sultan, Professor of Finance, Bentley University
Walayet Khan, Professor of Finance, University of Evansville
Taha Abdul-Basser, Harvard Islamic Finance Program, Harvard University
Luqman Zakariyah, Lecturer, Al-Maktoum College of Higher Education

Sharia Compliant Investment: Pass or No Pass

Si quelqu’un a un investissement dans un secteur qui etait classifie comme Sharia compliant, il y a deux méthodes pour s'assurer que cet investissement est VRAIMENT sharia compliant:

1. La compagnie d'investissement a un Conseil de Sharia pour la compagnie elle même et qui a le pouvoir d'examiner tous les investissement directement (ce n'est pas établie dans 95% des petites compagnies. C'est seulement les grandes banques qui ont ce conseil
2. La compagnie d'investissement offrent aux tous les clients un rapport trimestre qui detailes les comptes de chaque investisseur. Ce rapport doit inclure:
1. La liste des compagnies ou la capitale de l'investisseur était investi durant les dernier 3 mois (tous les compagnies peuvent générer ce rapport par un clic de la sourie
2. Le pourcentage de la capitale investie dans chaque compagnie
3. Le profit réalisé pour chaque compagnie et le profit partiel pour l'investisseur de cette companie
4. Un rapport preuve pour la compagnie qui démontre que la compagnie était sharia compliant durant la période de l'investissement. Le rapport doit exactement démontrer que la compagnies passes tous les testes (example: https://ir-iphone.s3.amazonaws.com/056801.pdf)

Je sais que l'explication est un peu obscure pour la plupart entre nous. Alors j'ajoute un exemple.

Example Ahmad aime faire un investissement de $10,000 CAD dans une compagnie d'investissement (sharia compliant) CIE. Avec d'accepter les messages marketing de CIE, Ahmad doit faire le suivant:

1. Assurer que CIE présente un preuve de son compliance. Présenter les conditions de Dow Jones Islamic Index n'est pas suffisant. CIE peut présenter un document qui était fait par un sharia scholar pour la compagnie elle même (dans les dernières 3 années) ou CIE doit faire une référence a une groupe des scholars qui ont la crédibilité et qu'ils démontrent en groupe que CIE est acceptable.
2. Ahmad doit demander a CIE de présenter tous les conditions de l'investissement:
1. Combien est le taux de service annuelle (pour la majorité des compagnies c'est entre 1% et 1.5%)
2. Combien est le taux de service pour le conseiller financier (s'il y a lieu)
3. Combien de temps dans un trimestre l'investissement sera examine pour s'assurer qu'il est toujours sharia compliant. L'investissement peut etre sharia compliant aujourd'hui mais pas demain. Cet exercice sera fait une fois par mois au moins
   
4. Quelle est la pénalité pour finir affaire avec CIE. Pour un investissement halal, ça doit être ZERO (avec des certain conditions). S'il y a un autre taux déclare clairement, et le client accepte, c'est acceptable mais ce montant ne doit pas dépasser le taux de service trimestrielle (parce que tous les investissement sont trimestrielle et chaque client peut finir affaire avec les fonds et le compagnie dans 3 moins au plus). Alors un taux déclaré de 0.3 - 0.5% comme pénalité est accepte. Si c'est plus que 0.5%, c'est pas acceptable.
   
5. Quelle est la fréquence des rapport (trimestrielle au mois) et quelle est la dégrée de transparence dans ces rapports. Les rapport pour les investissement islamique sont reglee par l'AAOIFI standards (un autre exemple: https://ir-iphone.s3.amazonaws.com/CEC901.pdf)
3. Ahmad a le droit de savoir la distribution de sa capitale et dans quel compagnies ou fonds. L’investissent doit changer avec le temps, mais Ahmad a toujours le droit a chaque point de savoir la nouvelle distribution s'il ya lieu (d'habitude, le changement est fait une ou deux fois max par trimestre).   
4. Si la capitale est met dans une fond (fund) et cette fund est gere sans aucun sharia-compliance, alors l'investissement est très douteux d'un point de vue islamique. La fonds elle même doit générer les rapport qui preuve sa validité. Il n'y a aucune fund qui fait ca a Canada (je pense). Dans 'EU, il y a plusieurs (IMANX ou AMANX). Example: http://www.google.ca/finance?client=ob&q=MUTF:IMANX
5. Quand Ahmad recoit le rapport trimestre de son conseiller financier, Ahmad peut ré-calculer son profit lui même

• Companie	Compliance	Pourcentage	Montant	Profit	Profit partiel
  A	PASS	25.00%	$2,500.00	-1.50%	-0.375%
  B	PASS	35.00%	$3,500.00	6%	2.100%
  C	PASS	25.00%	$2,500.00	5%	1.250%
  D	PASS	10.00%	$1,000.00	-5%	-0.500%
  E	PASS	5.00%	$500.00	8%	0.375%
  Total		100.00%	$10,000.00		2.850%

Alors comme tu vois dans le tableau, chaque comapnie doit etre PASS (en rouge). Le profit est simplement calcule. Alors pour un trimestre comme ca, Ahmad doit avoir le profit de 2.85% mois le taux de service par trimestre (0.5% par exemple). Alors son profit net pour le trimestre est 2.35% ou $235 pour le trimestre 

Si le rapport trimestre n'inclus pas ces information, l'investissement est douteux et on a le droit (selon les lois canadiennes et Américaines) de demander plus d'information. Si les conditions ne sont pas toujours établis, on a le droit d'aller a l'ombudsman des banques et service financiers pour récupérer nos argents).

Si l'investissement est dans les fonds (70% des cas pour les petit investisseurs, Ahmad doit reçoit le même tableau en haut) mais pour les fonds. Après ça, c'est le travail de conseiller financier de démontrer que la fonds est compliant (faire une preuve concret sur le site Morning Star pour démontrer l'allocation des fonds comme sur cette page: http://portfolios.morningstar.com/fund/summary?t=IMANX&region=USA&culture=en-us). AVIS: La plupart des fonds qui sont classifiée Sharia compliant ne passent toujours.

Par exemple. ce fonds (http://quote.morningstar.ca/QuickTakes/fund/PortfolioOverview.aspx?t=F0CAN05PAW&region=CAN&culture=en-CA) ne passent pas deux testes: Il y a 22.2% de cash (ou ce cash est investi???) et 12.5% de fixed income (Riba) dans le portfolio. 65.3% dans catégorie (Autres). Alors c'est très douteux. C'est le travail d'Ahmad et son conseiller de voir tous les détails avant d’être satisfait avec le profit.

Investissement Halal ou non?

Je n'aime pas participer dans les longues discussions sur la validité des investissent d'un point de vue islamique. Mais de temps en temps, on peut voir des débats qui commencent positivement et virent après (c'etait sur un mailing list pour des musulmans a Montréal).

Pour le sujet d'investissement islamique, il y a certains conditions nécessaires pour pouvoir coincer un terme halal ou haram. Ces conditions sont surtout islamiques avec des autres conditions relies au marche (3orf).

Alors pour Investors Group ou autres, pour etre sur que c'est halal, c'est la responsabilité du fournisseur de donner les preuves. Par exemple, on dit que Tim Hortons a fait 8% du profit dans 2010. N’importe quel person doit être capable de calculer ce profit et s'assurer que Tim Hortons a fait ce profit. Si, Tim Hortons essaye de cacher le vraie profit, chaque investisseur peut calculer ce profit lui même. C'est la beauté de la transparence financière au Amérique du Nord.

Pour les fonds, l'histoire est un peu plus compliqué. Chaque fond mutuel a son rapport financier regulier qui donne tous les détails opérationnels et financières du fond. Par exemple, ce fond Investor Group Real Estate (http://quote.morningstar.ca/quicktakes/fund/f_ca.aspx?t=F0CAN05PAW&region=can&culture=en-CA). Ce page vous donne tous les information qu'un investisseur a besoin pour comprendre ou son argent est investi.

Pour les musulman qui font affaires avec IG, ce fond peut représenter une bonne tranche de leur portfolio avec des autres (pharma, infrastructure globale, énergie ...). Chaque investisseur a le droit de savoir ou est son argent (dans quel fonds et le proportions). Au fin de l'année ou au fin du trimestre, vous avez le droit de recevoir un bilan avec tous ces information, et le profit réalise.

Alors, pour chaque investisseur, c'est votre responsabilité de chercher le halal ou le haram ou c'est la responsabilité de votre consultant financier. S'il y a des problèmes, c'est la responsabilité de l'investisseur seulement parce que de temps en temps on voit des consultant qui font des cache cache.

Très simplement, pour chacun qui demande la preuve, veuillez demander la structure de votre investissement (fonds, pourcentage, et profit total). Vous aves l'option de comparer ces résultats avec les résultats publique des fonds. S'il y a des différences, c'est le travail de votre consultant d'expliquer parce que ces gens vous chargent 2% de votre capital chaque année. Si vous avez les réponses et vous êtes satisfaite, Hamdulilah et bonne chance. Si vous n'avez pas satisfaite, vous avez les régulations Canadiennes pour corriger la situation.

Les meilleurs question qu'on doit demander au consultant:

1. Quelles sont les fonds ou ma capital est investi (dans le cas de IG, c'est toujours un fond mutuel IG)
2. Comment est le profit calculer. C'est le devoir du consultant de lier le profit total au profit partiel de chaque fond.
3. Ou arrive le profit de chaque fond (c'est publique sur Morning star).
4. Qui est en charge de vérifier si l'investissement est toujours accepter islamique-ment et a quel fréquence?
5. Quelles sont les mesures et les garanties que tout le profit de votre capital est paye pour toi (moins les 2%). Quelles sont les mesure de transparence?

Pardon pour un courriel aussi long et j’espère q'Allah nous donne le courage et la patience et la tolérance.

Can Islamic Finance add value to the global recovery in 2011?

This question was posted on the "Islamic Banker" Group on Linked In. Below is my modest comment on that question. I can not claim that I can answer it of course because the Islamic banking sector is one of the poorest in terms of empirical data and statistical resources.

My Comment

I am not sure if the Islamic banks can add to the global recovery because they were in a neutral shell during the crash. Islamic banks do not contribute much to the global growth as well (so far).

If Islamic banks want to add value to the global recovery, they have to fund production at a decent scale. So far, banks were not involved in the production funding mechanism neither in their home countries nor in the west.

Another major area where Islamic banks can create a real value is by enabling the under-utilized Muslim resources in the west. A lot of the Muslim communities in the west are not fully efficient because of the non-friendly environment that is welcoming them to live in and do the low level jobs whatever degrees they have. If Islamic banks want to do well in the recovery of the big west, a good starting point for them is to invest in real projects that benefit the Muslims minorities and consequently the whole economy.

What kind of projects can they get involved in?
The best two sectors to start with is the SME financing and housing. These two sectors are very stable in North America and Western Europe and they have a decent return that can be mutually beneficial to the host countries and the banks as well.

Why would Islamic banks invest in the Muslim minorities activities in the West?
First of all, they will be franc to their original mission statement (creating well fare for the Muslim societies).
Second, Islamic banks have a minor stake in the global economy and they can fund a minor portion of the recovery. If this funding portion is allocated for the under-utilized human resources in the west, the resulting synergies are many folds more important than the yield of investing Islamic banks capital in the conventional investment venues that they pursue.

Time value of money in Islamic banking: By Najmul Hassan

Unlike conventional banking based on interest-bearing loans, funds invested in an Islamic bank are used essentially for trade. There is no room for ambiguity in Islam “every loan that draws a gain is riba.”

Many people question whether Islamic finance differs meaningfully from conventional finance. Outwardly in form, many structures do bear a similarity in various respects. The present day operating environment is a conventional one, from market structuring and dynamics, to rate benchmarks and circulation of money, to regulatory controls as well. However, the way these two types of finances function with respect to core defining parameters is very different. Many things look the same but are in essence differ in fundamental perspectives.

We begin with basic principles. One is interest-based money lending while the other operates like a trading house. What allows this difference? Two core principles lie at the centre, elimination of Riba and Gharar. Any Islamic transaction needs to assess these two things first.

Keeping in mind the definition given in Hadith, one can discuss time value of money and the workings of present day Islamic banks. For this, we would have to look at the differences in ways in which modern capitalist theory views ‘money’ and ‘commodity’ from the principles defined by Islam.

According to capitalist theory, there is no difference between money and commodity in so far as commercial transactions are concerned. Accordingly, both are treated at par and can be sold at whatever price parties agree upon. For them selling Rs100 for Rs110 or renting Rs100 for a monthly rental of Rs10 is the same as selling a bag of rice costing Rs100 for Rs110 or renting a fixed asset costing Rs100 for a monthly rental of Rs10.

Islamic principles differ from this concept as money and commodity have different characteristics, for instance:

money has no intrinsic value but is only a measure of value or a medium of exchange, it is not capable of fulfilling human needs by itself unless converted into a commodity, while on the other hand a commodity can fulfil human needs directly, 
the commodities can be of different quality while money has no differential quality in the sense that a new note of Rs1,000 is exactly equal in value and quality to an old note of Rs1,000,
commodities are transacted or sold by pinpointing the commodity in question or at least by giving certain specifications.


Money however cannot be pinpointed in a transaction of exchange. Even if it is, it would be of no use since the different denominations of money summing into equal amount are exactly the same.

Keeping in view these differences, one would agree that exchanging Rs1000 with Rs1100 in a spot transaction would make no sense since the money in itself has no intrinsic utility or a specified quality and thus the excess of amount on either side is without consideration and hence not allowed under Shariah.

The same would hold true if we were to exchange these Rs1000 with Rs1100 to be delivered after a period of one month, since the excess of Rs100 would be without any consideration of either any utility or quality but only against time. 

The same is not true when commodities are involved. Since a commodity is known to posses an intrinsic value and quality, the owner of such a commodity is allowed to sell it at whatever price the buyer and himself mutually agree provided the seller does not commit a fraud but is subjected to the forces of demand and supply. This would hold true even if the price that is mutually agreed upon is higher than the prevailing market price.

In conclusion, any excess amount charged against deferred payment is Riba only where money is exchanged for money, since the excess charged is against nothing but time. 

The proof lies in the fact that if the debtor fails to repay at the stipulated time, extra money is charged from him. In contrast, where a commodity is being exchanged for money, the seller may take into consideration different factors (like demand and supply situation, quality, utility, special features etc) including the time of deferred payment.

It is true the seller may take the factor of time in increasing the price of his commodity in credit sale but the increased price is being fixed for the commodity and not exclusively for time nor the time is the exclusive consideration in fixing the price; therefore once the price is fixed it relates to the commodity and not to the time. 

For the same reason if the purchaser fails to pay at the agreed time, the price will remain the same and the seller under no circumstances would be allowed to charge more than what he actually owes.

Keeping in mind the above discussion, the use of KIBOR [or LIBOR] as a benchmark by Islamic banks in calculating the selling price of their commodities in Murabaha sale transactions is not only justified but necessary to remain competitive given the current banking industry dynamics in which Islamic banks have a pretty low share in the banking industry.

It must be understood that the use of KIBOR as a benchmark to determine the profit is only for indicative purposes and this does not make the transaction impermissible if all the conditions of a valid sale are fulfilled. 

It is quite frequently observed that every trader whether large multinational trading corporations or a roadside store decide on their profit margin rates based on various factors of which a major variable is the competitive environment in which the trader operates his business.

If a rice trader or a cloth merchant uses KIBOR as the basis of adding profit margins to the cost of their commodities and arriving at the price, this would not tantamount to interest or Riba and would not make transaction impermissible. 

Similar is the case with Islamic banks when they arrive at the selling price of their commodities using the KIBOR. In contrast conventional banks price their loans based on the KIBOR, which does result in Riba since it is an exchange between money and money and not a sale transaction in which commodities are exchanged with money.

It is being questioned in some circles whether Islamic banks could price their commodities by applying some other benchmark rate. The rationale behind using KIBOR is the banking environment dominated by conventional banks, which discourages the development of an Islamic benchmark rate. However, as more and more Islamic banks come into the operation, an inter-bank market between Islamic banks will be created and a new benchmark for the Islamic banking industry can be developed.

The writer is general manager, corporate and business development, Meezan Bank

Islamic financial services in Canada: Recent developments and long-term prospects

Stuart Carruthers  (http://www.stikeman.com/cps/rde/xchg/se-en/hs.xsl/11424.htm)


As in many Western nations, the awareness and availability of Islamic financial services in Canada continue to grow, although still at a relatively modest rate.  While some limited Shari'ah-compliant products are currently available, there has been limited activity to date, and no major financial institution yet offers a meaningful suite of Islamic financial products or services.  However, given the burgeoning Islamic population in Canada, the growing potential for Islamic financial services in Canada is being carefully followed by Canadian financial institutions, regulators, government agencies, professional advisors and media outlets. For additional background on Islamic finance, please see Stikeman Elliott's Financial Services Updates of April 2007 and January 2008. 


Much like in the United Kingdom, Canada's Muslim population has experienced significant recent growth - from an estimated 253,000 in 1991 to between 800,000 and 1,000,000 in 2006.  By 2017, Muslim Canadians are expected to comprise from 3.7% to 4.9% of the Canadian population.  Moreover, the Muslim population, which is younger and more educated than the overall population, is concentrated in Canada's largest cities.  Consequently, there is expected to be increased demand for Islamic financial services in Canada in the coming years, potentially providing a tremendous opportunity for financial firms prepared to serve this growing community.

The Canadian financial and economic environment

A number of other factors may also support the growth of Islamic finance in Canada in the longer term. Canada continues to enjoy a relatively stable economic and political environment and has generally avoided the level of turmoil currently being experienced in the United States with respect to subprime lending and restricted credit availability issues. Further, a world-class regulator, the federal Office of the Superintendent of Financial Institutions (Canada) (OSFI), regulates the solvency of most of the larger financial institutions, including the large banks and life insurance groups, while also regulating the market conduct of the large banks. Canada also benefits from a strongly multicultural and tolerant society, a rapidly appreciating currency, robust regulatory and legal systems, a neutral and balanced foreign policy and favourable tax treaties with certain Gulf states.

Activity to date

Despite significant recent media coverage of issues related to Islamic financial services in Canada, there has been limited meaningful activity to date.  As previously widely reported, an Ontario-based Islamic mortgage provider, UM Financial, has been indicating for some time that it expects to launch a suite of products in collaboration with a major Canadian financial institution. No further announcements in this regard, however, have recently been made.  One of the large banks offers Shari'ah-linked notes through its private banking division and in 2004 offered a similar retail investment product through its branches.  The Co-operators mutual insurance group, meanwhile, offers certain limited Islamic insurance products, and Islamic mutual funds have also been sold across Canada.  Many of the products, however, have been short-lived, including a group of funds, offered through a leading mutual fund group, which were discontinued in 2006 with only C$6.1 million in assets under management.
Overall, participation in the Islamic financial services sector is still rather peripheral and limited, and no major financial institution is currently offering a meaningful package of Islamic financial services.  It is suspected that the current significant credit crunch and subprime mortgage exposures, although not as significant an issue in Canada as in the United States, are currently more pressing priorities for the larger Canadian financial institutions.
A number of applications have recently been made to OSFI, however, for newly-incorporated Canadian banks offering Islamic financial services.  While some of the applications are understood to be quite far advanced, they appear to be on hold pending the response of a federal multi-agency task force established last year to consider issues related to Islamic finance in the Canadian financial services marketplace.  Interestingly, earlier this year, the Canada Mortgage and Housing Corporation, a federal Canadian crown corporation, also turned its attention to the issue of Islamic finance in the Canadian marketplace, issuing a Request for Proposal for a research report on the subject. As previously widely reported, the request generated some controversy and resulting media coverage, with UM Financial and others supporting the exercise and at least one other Islamic group in Canada criticizing the exercise.

Prospects for the future

Canada is still a number of steps behind the United Kingdom, where Islamic finance is in turn still growing slowly.  Major developments in Canada are likely some time away, although, as noted above, the demographic prospects are excellent.  The same structural issues are present in Canada as were identified in the U.K. by the Financial Services Authority's November 2007 discussion paper respecting developments in Islamic finance in that country.  While there is significant interest from a wide variety of stakeholders, the eventual products will need to be extremely competitive in order to achieve wide distribution in the Canadian marketplace. 
Future activity will likely include one or more of the major international financial institutions with Islamic windows offering retail home finance products in Canada, credit unions and mid-size banks offering home finance products in Canada, major existing Canadian banks breaking into the retail market, and, in the longer term, one or more newly-established Canadian Islamic banks.