Islamic Finance - Comparing conventional and Islamic finance
Islamic finance avoids dealing with money directly since it is unable to generate new cash on its own. To make extra money, money must be invested in legitimate business ventures. The entire foundation of trading is this. In other words, IFIs help consumers who require finance by acting as sellers, lessors, or partners, as appropriate. A pool of monies that has been accumulated through multiple Islamic accounts and/or shareholder funds is used to support business, leasing, and investment activities. In order to increase revenue from a micro perspective, the funds have been invested in real economic stock. As a result, IFI profits are produced through working with physical assets rather than financial ones. An easy example of this would be if a bank allocated £100,000 to finance a client's purchase of a home from a vendor for £100,000. The bank will utilize this initial £100,000 to buy the specified residence from the vendor. By doing this, a financial asset—a house—has been changed into a real asset. The customer will then purchase the same house from the bank. Based on a Murabahah contract, the selling price is £120,000 and is paid over ten years. The entire procedure completely deviates from the way lending and borrowing are typically done. Before the house can be sold to the consumer under Murabahah financing, the bank must buy it. This facility is supported by actual sale and purchase transactions, which in some jurisdictions would result in a double stamp duty on the two sets of documents. To prevent paying duplicate stamp duty for these two transactions, the appropriate stamp duty legislation in those countries have been modified.
0 Comments
Islamic Finance - Sharing in profits and losses
Islamic finance is strongly related to the practice of profit and loss sharing in addition to these two prohibited things. This is special because if the agreements made by the two parties are based on either Mudarabah or Musharakah, IFIs will split any profits or losses, as the case may be, with both depositors and fund users. When it comes to deposits, IFIs serve as the manager, while depositors, who give the capital through their savings or investment accounts, serve as the capital suppliers. A specific ratio will determine how much of the bank's profit will go to the depositors. According to the Mudarabah contract, the depositor will likewise be solely responsible for the loss, whereas the banks will lose their time, effort, and anticipated profit. IFIs may use either mudarabah or musharakah to finance their clients. Here, the IFIs take on the role of finance providers and divide any profits made from business ventures with their clients. Under the Mudarabah contract, the IFI will be responsible for any losses; however, under the Musharakah contract, the IFI and the customer will split any losses. Islamic finance stands out from traditional money because of this. Islamic Finance – Gharar
Gharar Another thing to keep out of any transaction is gharar. Gharar simply means a lack of information or ambiguity that could have an adverse effect on one side. This lack of information and control over the result of any transaction may be caused by misrepresentation, error, fraud, coercion, or conditions over which one of the contracting parties has no knowledge or control. The selling of an animal's unborn children while it is pregnant is one example of a Gharar-based transaction that is forbidden because the outcome is manifestly unpredictable and out of the people involved's control. Additionally, it is unlawful to sell flying or swimming fish, flying or swimming birds, or a runaway horse. This is because it's unclear whether the seller will be able to deliver these things. In actuality, gharar may relate to transactional difficulties that could impact the level or kind of consent between the parties to a contract, such as cost, delivery, quantity, and quality of assets. For instance, because a "option" is not ascertainable and therefore unknown, one cannot purchase one at a specific price to have the right to buy its underlying shares. A choice is simply a right. It is not an asset with precise and attainable requirements. Conventional insurance violates Islamic law because both the premium that policyholders pay and the indemnity that the insurer provides in the event of a claim are equally unknown. Contrary to Riba, which is determined by a predetermined formula as previously mentioned, Gharar is determined based on a variety of factors. This is due to the fact that society's tolerance for risk and the knowledge or consent requirements are not set in stone. The contrast between large uncertainty (Gharar Fahish), which must always be avoided, and minor uncertainty (Gharar Yasir), which is acceptable by society, has been embraced by Islamic commercial law. Some societies have a custom of charging a certain fee to use a public restroom, which speaks to the level of tolerance present there. The society accepts varying degrees of ambiguous facility consumption in exchange for a set standard fee. Islamic Finance - Riba
Riba is simply translated as usury or interest in English. Regardless of the amount paid, every premium levied on borrowed funds qualifies as riba. Riba, to put it simply, is when one party benefits at the expense of another without giving them the proper attention. In a loan or currency exchange contract as well as in a barter trade contract, Islamic commercial law handles the problem of this unjustified gain from two potential transactions. Muslim jurists have all agreed that two distinct sorts of assets—cash or money and a few commodities, primarily food—are subject to riba. These two asset classes have the same requirements for exchanges. The Prophet Muhammad is attributed with saying: "Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt, like for like, equal for equal, hand-to-hand; if the commodities differ, then you may sell as you wish provided the trade is hand-to-hand." Only when a currency is exchanged for another, regardless of whether it is for the same or a different currency, are these rules relevant. The requirements also apply when exchanging one food item for another, whether it be another of the same kind of food or one of a different kind. Riba is limited to these types of assets as long as they are traded among members of the same class, that is, currency for currency. When exchanging assets of the same class, an equivalent amount of the counter value is necessary. When exchanging one money for another or one item of food for another, regardless of whether the two currencies or foods are of the same sort or not, spot exchange, or the simultaneous delivery of counter values, is also necessary. Any delay in the delivery of these two countervalues will make the transaction ripe for riba, also known as riba al-nasiah, or riba by reason of postponing the exchange or delivery of these two countervalues. From a different angle, if the two assets are of the same type, the exchange of these two assets is likewise subject to the same sum or quantity of the two counter values. If this were not followed, it would result in the Riba practice known as Riba al-fadl, which is Riba by an excess of one of the counter values. However, if they are different sorts, such as GBP for USD or wheat for barley, the requirement to have the same quantity does not apply. This custom serves as the basis for the legal exchange of currencies at the current rate of exchange, such as when exchanging £1000 for $3000, as long as it is done on a spot basis. Any delay in the exchange or delivery, such as would occur in a forward money exchange, is against the tradition's standards and is, thus, forbidden. When exchanging two separate usurious products, like USD for GBP, the value of the exchange is irrelevant. Therefore, the Riba theory could be summed up as follows: RIBA(1) is the exchange of two identical usurious items for differing counter values and/or for a deferred exchange, such as exchanging £1,000 for £1,200 on a deferred basis. RIBA(2) refers to the exchange of two different usurious things for a postponed exchange, such as exchanging £1000 for $1,000 on a deferred exchange. As a result of the foregoing, a loan made in GBP by traditional banks and other institutions that requires the borrower to repay the principal amount borrowed along with a premium in the same currency would be considered riba (interest/usury). Due to the borrower's obligation to pay more than he borrowed and the fact that payback will occur in the future, this modern Riba practice in the banking industry is related to both Riba al-nasiah (Riba by postponement) and Riba al-fadl (Riba by excess). This is the reason why traditional savings accounts, fixed deposit accounts, and all loan-for-interest financing methods are incompatible with Shari'ah principles. The Riba theory also holds true for currency exchange, which can only be done on the moment. Transactions in future or forward-looking currencies are prohibited. It is crucial to clarify one exception to the aforementioned rules of trade involving either money or food. Islamic business law does permit loan agreements known as Qard/Hassan, but the loan repayment terms must be free of Riba. The demand to swap two counter values on a spot basis is, however, "tolerated" by Islamic commercial law because it contradicts the idea and philosophy of loans, which essentially allow the borrower to settle their loan obligation in the future. The loan has no purpose if it must be repaid nearly soon after being taken out. This exception is given to permit the practice of lending money or fungible products without charging interest. The rule against making excessive loan repayments is more important. If the borrower is someone who needs financial assistance in the form of money, the loan's time deferral can be tolerated. Islamic Finance - fundamental tenets of Islamic law
Islamic financial practices are those that adhere to the Shari'ah. Islamic financial products and services must also adhere to the aforementioned characteristics and not contain any principles, terms, or conditions that are at odds with recognized legal maxims or legal principles. These legal precepts, which are largely acknowledged by Muslim jurists, are the guiding principles and fundamental guidelines of Islamic law. An illustration of this rule is that the management or another partner cannot guarantee the capital in an equity-based financing or investment. To represent the basic nature of equity investment, which is that equity investors must shoulder the risk of capital loss, an equity contract must be devoid of capital guarantees. Islamic Finance - Illegal products or services
Islamic finance must not participate in any activity related to illegal goods and services, which is another crucial requirement. These forbidden products and services include, among others, pork, non-slaughtered animals, animals that were not killed in accordance with Islamic law, alcoholic beverages, pornographic entertainment, tobacco-related items, and weapons. Non-involvement encompasses all production and distribution chains, including the packaging, transportation, warehousing, and marketing of these illegal goods and services, in addition to buying and selling. Islamic Finance - adhering to shariah ( Shariah Compliance)
Shari'ah compliance is the main goal of Islamic finance. Establishing a Shari'ah advisory or supervisory board to advise (Islamic Financial Institution) IFIs, Islamic insurance firms, Islamic funds, and any other suppliers of Islamic financial products is a characteristic aspect of Islamic finance that helps to assure compliance. To steer the institutions toward Shari'ah compliance, a board must be established whose recommendations are enforceable on all IFIs. Until and unless it establishes a Shari'ah board or committee made up of qualified scholars who are of high reputation and who possess the essential qualifications, an institution cannot claim to be engaged in Islamic financial activity. Islamic Finance - Banks' and consumers' obligations and rights
The rights and obligations of banks and their clients are clearly outlined not only in traditional banking laws but also in numerous national laws such as hire purchase laws, contracts acts, and laws governing the sale of goods and consumer protection. The unique perspective that Islamic banking offers on this connection is one of its most essential and vital characteristics. As a result, Islamic banking has advanced beyond standard and traditional "banking business." An Islamic bank can instead turn into a legitimate dealer who is authorized by banking legislation; it is neither a lender nor a borrower. Despite certain changes to various legal systems, this component of the transaction has not received the required attention until now. This point is illustrated by changes made to the stamp duty laws and the real property gains tax in places like Malaysia, the UK, and Singapore. For instance, the purchase and sale of real estate would necessitate two transactions in order to satisfy the financing features of the product, resulting in a double stamp duty charge. A gains tax that might have resulted from the second of two sales transactions—the bank selling the property to the customer—is also excluded by the modifications. The financier buys the asset from the vendor in the first transaction. The second transaction takes place when the financier marks up the asset and sells it to their client. Without these essential changes, both deals would result in profits. In reality, the client would be responsible for paying this additional fee or tax, making Islamic goods more expensive in the eyes of the consumer. Islamic Finance - Sharing in profits and losses
It is conceivable for some Islamic banking activities to share profits and losses. Customers will get a percentage of the bank's profits, either proportionately or according to a predetermined profit-sharing ratio. If there is a loss, the bank shall take responsibility for it in accordance with a a Musharakah contract, or equally by both parties in the case of a Mudarabah contract. This idea stands in stark contrast to goods that are based on fixed income. Despite the fact that strictly speaking Islamic banking is not an equity market, which is typically represented by the stock market, the idea of profit and loss sharing is specific to Islamic banking. A contract for profit sharing is known as a mudarabah. In a Mudarabah agreement, the capital provider and the entrepreneur agree to divide the earnings in accordance with a predetermined ratio or percentage. A Musharakah contract is a type of equity investment in a partnership. It is comparable to investing in stocks and financial securities in a traditional capital market, but the investments made must only be in assets that are compliant with Shari'ah law. Islamic Finance - Salient Feature of Islamic Finance - The abstention from risk-taking or gambling11/10/2022 Islamic Finance - Salient Feature of Islamic Finance - The abstention from risk-taking or gambling
Gharar, the Islamic financial institution's term for uncertainty, and gambling are not permitted in any transactions made by IFIs (Maisir). This is due to the possibility that Gharar would result in legal problems brought on by an arbitrary clause in a contract that results from deception and fraud. Gambling is viewed as a zero-sum game in which one party is always enriched at the expense of the other. |
AuthorAnything you need to know about finance, money and business Archives
May 2023
Categories
All
|