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.

House of Debt

The book is deep and offering an alternative point of view that is of prime importance to understand the deep depression cycle of the economy. 

 

Dr. Asad Zaman wrote:

Ben Bernanke has called explaining the Great Depression (GD) the “Holy Grail” of Macroeconomics. In the course of providing a convincing and surprising explanation of both GD and the Global Financial Crisis (GFC) of 2007-8, Mian & Sufi (2014) remark nonchalantly that Keynes did not have access to the wealth of data that is now available. “House of Debt” is a tour-de-force which succeeds in solving a problem which eminent economists like Keynes, Friedman, and many others failed to do. Not only does the book explain the root causes of the GFC, but it also shows how the continuing economic problems created by it can be resolved. In addition, Mian and Sufi suggest radical changes that need to be made to avoid such crises in the future. Even though the authors do not mention the Islamic angle, the main message of the book resonates strongly with Islamic ideas about finance. In particular, replacing debt and interest with equity based contracts is the key to avoiding recurrent financial crises in a capitalist system. In this review, we make some of these connections explicit. 

Mian and Sufi have written a thriller; a detective story in which we pursue many false leads, rejected by empirical evidence, before identifying the culprit (interest based debt) by putting together a variety of clues. This review offers a spoiler: a summary of the main arguments. The most exciting part, which is the strong empirical evidence offered in support of all of the assertions, is omitted from this brief summary. Although Mian and Sufi modestly attribute their success to the data, this data was available to all. Their tremendous contribution lies in focussing on the relevant portions and extracting extremely valuable information from delicate and subtle clues. We review some basic elements of the explanation to be provided, before plunging into the details.

To buy: http://www.amazon.ca/House-Debt-Recession-Prevent-Happening/dp/022608194X

Adam Smith "own interest" theory in a family context

In 1776, Adam Smith famously wrote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

Own interest is not only greed. If they care for the quality, their clients will stick and thus they will make more money on long term.

The same concept applies at home, if the father cares for his retirement welfare, he should care for his wife and children and put efforts to treat them well. If the mother cares for her future happiness, she will treat her husband and children well not to loose their future care.

A good butcher is the one who smile and please his clients. An attractive bakery is the one whose owner is always nice with people and she strive to serve them well.

A happy family needs a smart father and a gentle pleasant mother.

Le Québec pourrait devenir un chef de file en matière de finance islamique

«Le Québec pourrait devenir un chef de file en matière de finance islamique» - Walid Hejazi, de la Rotman School of Management

 

Pourquoi croyez-vous qu'il serait avantageux pour le Canada de faire preuve de plus d'ouverture à l'égard de la finance islamique ?

L'industrie conforme à la charia est en croissance rapide à l'échelle mondiale. Aujourd'hui, il y a quelque 2 000 milliards de dollars dans les produits conformes à la charia. Or, les États-Unis, le Royaume-Uni et l'Australie sont beaucoup plus attrayants que le Canada pour les investisseurs islamiques. Ces pays ont fait en sorte que tous les investisseurs soient traités de la même manière sur le plan fiscal, qu'ils soient conformes à la charia ou non. Le Canada a besoin de dizaines de milliards d'investissements et il y a des milliards de dollars dans le Golfe qui ne demandent qu'à venir au pays.

Pourquoi les grandes banques canadiennes n'offrent-elles pas de services bancaires conformes à la charia ?

Le problème ne vient pas des banques, mais des lois en matière de fiscalité. Notamment, les investisseurs islamiques sont soumis à une double taxation. Par exemple, si un entrepreneur islamique veut emprunter 10 millions de dollars, il devra transférer dans une entité à vocation spéciale des actifs d'une valeur équivalente, puis les racheter au terme de l'emprunt. Dans l'intervalle, il devra payer un loyer pour utiliser ces actifs, ledit loyer remplaçant les intérêts, qui sont proscrits en finance islamique. Le problème, c'est que des taxes de vente seront imposées deux fois sur le montant du prêt. Il y a toujours moyen de créer des structures à l'étranger pour fabriquer des instruments financiers conformes à la charia, mais c'est aussi compliqué que coûteux. De plus, les sociétés qui le font sont mal encadrées et il y a un risque de fraude. Ce qu'il faudrait, c'est faire en sorte que les grandes banques offrent des instruments conformes à la charia, pas pour être gentils, mais parce que c'est rentable de le faire.

Le projet de charte des valeurs québécoises du gouvernement Marois fera-t-il reculer les investissements islamiques au Québec ?

C'est un risque, mais on peut aussi y voir une occasion. Si cette charte est accompagnée d'une législation facilitant l'accès aux instruments financiers islamiques, le Québec pourrait au contraire attirer ces investisseurs. De plus, si les institutions traditionnelles offraient des produits conformes à la charia, tous les musulmans pourraient effectuer leurs opérations bancaires à l'extérieur de leur communauté. C'est une approche qui favorise l'intégration et ce n'est pas un avantage qu'on confère aux musulmans, mais une option que les institutions offriraient à tous leurs clients, quelle que soit leur religion. En Grande-Bretagne, 40 % des hypothèques conformes à la charia qui sont accordées le sont à des non-musulmans.
 

http://www.lesaffaires.com/archives/generale/le-quebec-pourrait-devenir-un-chef-de-file-en-matiere-de-finance-islamique---walid-hejazi-de-la-rotman-school-of-management/561359#.Ujxsn9Jt55s

 

A brother wrote a touching story about his first approach with a potential lady for his life. He put up a very interesting story from the first sight to the minute he decided to forget about this un-ongoing relationship.



I have added few points that I would like to share with the few single brothers on my friends' list:

Bilal wrote: 

An interesting story indeed. Humans have a strong tendency to be in a relation. It might happened to a lot other people. Since, there is no way to go forward, I think you have taken the best step. Sleep well and get up because tomorrow will bring new sun, new hope, new chances and of course new ways to let the other side know that: Hey I am more serious than I look 
Wish you all the best and in sha2 Allah soon, you will find your soul mate. I suggest to get some help and not rely on the first sight feeling especially in an elevator. Eyes are deceiving believe it or not. 
For all brothers looking to get married:
You need to see the girl when she takes off her outdoor look. Mothers and sisters can help a lot with this. If you are not fortunate enough to have a mother to your side, ask the help from a woman you trust. Get some insights about the real life of the one that you appreciate. 
A final note, make sure she is able to understand you as well (with all your pitfalls and little things that we hide at home). Make sure she has a strong belief in Allah because you need her to raise your future children according to your life style.

No one has ever become poor by giving / charity does not decrease wealth

No one has ever become poor by giving / charity does not decrease wealth

I was reading on the net and suddenly found this quote. “No one has ever become poor by giving.” Anne Frank

It reminded be of an authentic hadeeth for the prophet Mouhammad (Peace be upon him) who said "Sadaqa does not decrease wealth".

It is an important concept that should be kept in mind. When humans tend to give, they might got puzzled by the fact that charity is a cost. However, this cost will bring happiness and it does not have associated risk or collateral damage to our wealth.

We need to rethink our giving insights and be generous when giving. Winter is a good time to give. Do not only think of X-mas as the commercial giving season.

Think of a sustainable act that will bring a smile to a poor face.
Think of a sustainable move that can go viral
Think of a sustainable trigger that awaken our humane nature.

High Frequency Trading, Providing Liquidity, or HFT

A student was asking me about high frequency trading as he is getting offers to work for such companies in Montreal. I wanted to give him a short briefing on the financial aspect of it and the IT aspect (as I am mixing both worlds).

I found a very interesting story on /. (slashdot.org) that simplifies the concept in very concise manner.

It is and this is the basis of high frequency trading... though on Wallstreet they call it "providing liquidity". It works like this:
Alice wants to sell 1000 shares of Acme Corp. She places an sell order for 1000 shares at $25.00 on the exchange, but she also places a minimum bid of $23.90 on the sell order. This minimum bid what Alice is willing to accept should someone counter-offer but is suppose to be secret, only the sell price will be published.
Bob is looking for 1000 shares of Acme Corp. He wants to place it in his portfolio for long-term growth, but he thinks it is currently worth less. Bob places a general buy order at $24.40 on the exchange. For the sake of simplicity we will say that is his only price, though he too could have a maximum bid he is will to pay.
So there is a sell order at $25.00 and a buy order at $24.40 pending on the exchange, nothing trades. Now Bob could make a buy offer to Alice at $24.40 and the trade would go thru, or Alice could make a sell offer to Bob at a lower price and follow thru. In a perfect world the exchange would figure it out and match the orders... but that doesn't happen without further action on the part of Alice or Bob.
Eve is a high frequency trader... Actually, Eve is a high frequency trading program at MegaTraders LLC. and has spotted that there are buy and sell orders for Acme Corp on the exchange. Eve places a bid at $24.99 for Alice's share, the exchange accepts, and then Eve immediately cancels the bid order. Eve has just learned that Alice is will to sell for less than the sell order posted. Eve then continues placing bids on Alice's stock, $24.98, $24.97, $24.96, etc., each time immediately canceling the buy when the exchange accepts the bid. Eve gets down to $23.89, at which point the exchange does not accept the bid for Alice's stock. Eve has just learned that Alice is willing to sell for as little as $23.90 and all of this has happened within 10s of milliseconds.
Remember all those articles on Slashdot about high frequency firm X laying their own fiber directly to the exchange to cut milliseconds off transit time? Having custom L2 firmware on their switches and no firewalls on their trading links to cut milliseconds off transit time? This is why they do it, so they can submit hundreds/thousands of buy/sell/cancel orders on a single stock within a fraction of a second to learn pricing differences between orders that otherwise should be secret.
So Eve now knows that Alice is will to sell for $23.90 and would perform the same procedure against Bob to discover his highest buy price. Once found Eve can now see a price difference advantages to herself. Eve buys the 1000 shares from Alice at $23.90 and then immediately sells the shares to Bob at $24.40, pocketing the $500 difference. On Wallstreet they call this "providing liquidity", anywhere else this would be considered insider trading and illegal. Multiple all this by several hundred firms with special inside access to the market place, each running their own competing Eve programs, and you quickly realize how the market can go into turmoil within seconds....

You will find more interesting stories about HFT online.It seems robots are already playing with our money. Nora Young (http://www.cbc.ca/spark/) was speaking last week about robots helping humans. It seems, there is a need now to explore the options of looking at how robots can beat humans. Yes computers are dummy machines that execute what they are told to do. However, computers can accumulate knowledge and use it much faster than humans. This is the horror part of it.