# Bethak - The Desi Lounge > Student Zone >  Economics In Islam

## raiazlan

You will not attain virtue unless you expend of what you love. (3:82)

Importance of economic affairs can be judged from the fact that the world, till recently, was divided into two hostile camps on the basis of diverging economic theories and was likely to go to war on this issue. On one side was the capitalist who stood for the freedom of individual but kept all the wealth and comforts for a few rich, giving the labourer only sufficient to keep him alive. On the other side was the Communist, who eliminated the Capitalist but handed over all the wealth to the state, which already held political power, leaving the labourer as before, tamed in the hands of a few clever opportunists, who captured power, at a lucky moment, by some means, fair or foul.



Right of Ownership

To possess is a basic human instinct, which has been responsible for all human progress from the beginning of time. It is the only incentive to work harder and harder. Without this instinct the earth would have been a habitat of lotus-eaters who would work only enough to live. How can such a basic human faculty become wrong by mere industrialization? Why should we place the whole of mankind at the mercy of a few tyrants, even for such necessities as food and reduce them to a herd of serfs.

Islam recognises the right to earn and to own for everybody, without limit. Indeed it is the first freedom. Islamic rules on trade, loan, usury, will, inheritance etc. bear testimony to this right. The general rule is:

    Do not covet that whereby God has exalted some of you above others. For men is a share of what they earn, and for women is a share of what they earn; ask God of His bounty; surely God knows all things. (4:32)



You own only what you earn

    O Believers, consume not your wealth between you by false means, except that it be a trade by mutual agreement. (4:29)



Economic Differences Accepted

Without difference in economic status and in ranks, all men would be alike and care-free of others and, therefore, all organised, collective work will be impossible. Without these differences, man would have been still living in the stone-age.

    It is We Who have distributed among them their livelihood in the present life, and raised some of them above others in ranks, that some of them take others in service. (43:32)



Unlawful Earnings Disallowed

    Consume not your wealth between you by false means, and do not proffer it to the judges, so as to consume a portion of the wealth of the people sinfully, while you know. (2:188)

    Fill up the measure and the balance, and do not diminish the goods of men, nor cause disorder in the land after its reformation. (7:85)

    Woe to the stinters who, when they measure against the people, take full measure, but when they measure for themselves or weigh for themselves, give less. Do they not think that they shall be raised up on a Mighty Day, the Day when mankind shall stand before the Lord of the World. (83:1-6)



No Wastage

    Eat and drink, but be not prodigal, for He does not love the prodigal. (7:31)



Hoarding of Gold and Silver

    Those who treasure up gold and silver and do not expend it in the way of God, give them a good news of a painful punishment. (9:34)



Usury Prohibited

Any increase in borrowed money merely with the passage of time is usury, and is prohibited so emphatically that the Quern declares war against the usurers. It asks Muslims to forgo the balance of interest if they are Believers. Money is a measure and it must stay as such; money should not be used to breed money.

    Those who devour usury stand not but like the one whom Devil has confounded by touch; this is because they say, trade is only like usury. But God has permitted trade and forbidden usury --- God blots out usury but adds to the offerings --- O Believers, fear God and give up the remaining usury, if you are Believers. And if you do not, take notice of war with God and His Messenger; and if you repent, then you shall have your principal, neither you do wrong nor be wronged. And if he is in difficulties, respite him till ease. (2:275-280)

The reasons are important. Here, money flows to the rich, as the needy borrow and pay the interest. Again, the earnings are without effort on the part of the usurer; he gets money merely by means of previous holdings. Further, it disturbs the coin as a measure. The price of the commodities when interest is added to it is raised without raising their value. Thus, in a system where usury prevails, prices are ever- rising and value of coin ever-falling, affecting reserves, savings and fixed incomes adversely. The interest thus eats itself away through devaluation of money.

Muslim rulers are required to eradicate usury from the whole world and install an economic system free from it. At present, thanks to this system, the whole world is in the grip of jews.



Due-Alms - Giving

To meet the collective needs of the State and to help the needy, Quran makes payments of Due-Alms (Zakat or Sadaqat) obligatory on all Muslims possessing surplus wealth. Anybody refusing to pay is considered outside the pale of Islam.

    Take Due-Alms out of their wealth to thereby purify them and improve them. (9:102)

    In their wealth is a known right for the beggar and the destitute. (70:24-25)

    You will not attain virtue unless you expend of what you love. (3:82)

No rates are fixed by the Holy Quran but a general rule is prescribed in these words:

    They ask thee as to what they should expend; say, the surplus. (2:219)

The Holy Prophet said that the Due-Alms shall be taken from the rich and diverted towards the poor. Indirect taxes falling ultimately on the poor are thus undesirable.

After payment of State dues, one is still obliged to look after the needy living in the neighborhood and help charitable works. Hoarding is emphatically rejected by the Holy Quran. (see (9:34) above)

Due-Alms are a trust on the public functionaries and cannot be spent at their whims. Expenditure is specified in the Quran in the following words:

    The offerings are only for the poor, the needy, those who work on them, those whose hearts are to be won, ransoming those in bondage and the debtors, in the way of God, and the traveller  it is a duty from God. (9:60)

Thus public money can be spent for the good of the needy, to silence the mischievous, and to establish, maintain and strengthen the way (law) of God viz. Islam, so that it prevails over the world, resulting in unity of mankind, justice and peace.

Incidentally, limitations on expenditure of public money show that, in Islam, agriculture, commerce and industry are private enterprises. The State has only to guide and provide overall control, ensure justice between various groups, collect its share of Zakat and expend it on common good, defense and domination of Gods Religion.



INHERITANCE

A great equalizing factor given by Quran is its Law of Inheritance. The profit goes to children including daughters, parents and wife (or wives). Through daughters, it passes to other families. Through parents, it goes to the brothers and sisters and their inheritors. Through wife, it may go partly to her relations and even to next husband of a widow. It offends nobody, as it goes only to relations. Thus, the wealth is distributed in the whole of society, though unnoticed. The process is much slower than Zakat, as it operates at the close of a generation i.e. in about 25 years.

    God charges you concerning your children  to the male the like of the portion of two females; and if they be women above two, then for them two-thirds of what he leaves; and if she be one, then to her a half; and to his parents, to each one of the two the sixth of what he leaves, if he has children; but if his heirs are his parents, then to his mother a third; or, if he has brothers, then to his mother a sixth after any bequest he may bequeath, or any debt --- And for you, a half of what your wives leave, if they have no children, but if they have children, then for you, of what they leave, a fourth; and for them, a fourth of what you leave, if you have no children; but if you have children, then for them, an eighth, after any bequest you may bequeath or any debt; if a man or a woman has no direct heir, but have a brother or a sister, then for each of the two a sixth; but if they are more than that, then they share a third  after any bequest he may bequeath or a debt not prejudicial. (4:11-12)

    God pronounces to you on indirect heirs; if a man having no children but having a sister dies, she shall have half of what he leaves, and he shall be her heir, if she has no children; but if they are two sisters, then for them shall be two-thirds of what he leaves; and if there be brothers and sisters, then male shall have the portion of two females. (4:176)



DEBTS

    O Believers, when you contract a debt for a stated term, write it down. And let a writer write it down between you justly; and let not a writer refuse to write as God has taught him, so let him write. And let him upon whom is the obligation dictate, and let him fear God, his Lord, and not diminish anything from it. Then if he upon whom is the obligation is foolish, weak or unable to dictate, let his guardian dictate justly. And call in to witness two witnesses out of your men, but if there not be two men, then a man and two women whom you approve of as witnesses, so that if one of the two errs, the other will remind her. And let not the witnesses refuse when they are summoned. And be not loath to write it, whether it be small or big to its term; this is very equitable before God and very upright for testimony and likelier that you will not be in doubt, unless it is a merchandise present that you give and take between you, then there is no blame on you if you do not write it down. And call in witnesses when you trade between you. And let no harm be given to a writer or to a witness; and if you do that, it will be your wickedness; fear God; God teaches you; and God knows everything. And if you are on a journey, and you do not find a writer, then pledge in hand; if one of you trusts the other, then he who is trusted should fulfil his trust and fear God, his Lord; and do not conceal the testimony, for he who conceals it, his heart is sinful; and God knows what you do. (2:282-283)



BEQUEST

For just distribution of property and to save the inheritors from quarrels, bequests are required to be made before death.

    Prescribed for you, when death visits any of you, if he leaves behind goods, is to make a bequest for the parents and kinsmen in a desirable way; it is an obligation on the godfearing. (2:180)

    O Believers, testimony among you, when death visits any of you at the bequest, shall be two honest men, out of you; or two others from others than you, if you are on journey inn the land and affliction of death befalls you; detain them after the Prayer and they should, if you doubt, swear by God, we do not draw from it any price even though it were a kinsman, and will not hide the testimony of God, for then we surely be among the sinful. If it is discovered that they have merited a sin then, in place of them, two others out of those against whom claim is made should stand and swear by God, our testimony is truer than their testimony, and we have not transgressed, for then we shall be among the wrong-doers. Thus is more likely that they will bear testimony in its proper form and fear that oath, after their oath, may be rebutted. (5:106-108)



Islamic Way For Large Concerns

If institution of Zakat and negation of usury do not allow individuals to become very rich, if the law of inheritance does not allow a family to stay rich and if Government is not a business concern in Islam, then, it may be asked, how large business, farms or industrial concerns could be raised and run.

The Islamic way shall be by pooling of money in co-operative societies and joint-stock companies, under the management of the co-operators and shareholders, where Government may check profiteering, hoarding and other ills.



Banking

Banks may be established for the purpose of credit- formation, safety and transaction of money.

Bank deposits may be used to help agriculture, trade and industry on profit-loss basis and, in that case, a part of the profit may be paid to the depositors, according to mutual agreement. Fee charged by banks for different services will also be lawful.



Land

Land is no exception to other possessions. Owners may give it to others to till, provided they pay the tillers equitably. The correct way is to pay full wages against hours of work done and take all the produce, big or small, for self. Big farms may be managed through co-operative societies.

The old feudal lords have no place now. They were part of the old system of government. The revenue from the land, at that time, was not for merry-making, but was spent on peoples welfare, justice, security and defiance. This is no longer their responsibility and, therefore, jagirs may be taken over by the State and utilized in the best interest of the State and for the good of common man.

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## Shades

[quote="raiazlan, post: 364293"]You will not attain virtue unless you expend of what you love. (3:82)

Usury Prohibited

Any increase in borrowed money merely with the passage of time is usury, and is prohibited so emphatically that the Quern declares war against the usurers. It asks Muslims to forgo the balance of interest if they are Believers. Money is a measure and it must stay as such; money should not be used to breed money.

    Those who devour usury stand not but like the one whom Devil has confounded by touch; this is because they say, trade is only like usury. But God has permitted trade and forbidden usury --- God blots out usury but adds to the offerings --- O Believers, fear God and give up the remaining usury, if you are Believers. And if you do not, take notice of war with God and His Messenger; and if you repent, then you shall have your principal, neither you do wrong nor be wronged. And if he is in difficulties, respite him till ease. (2:275-280)

The reasons are important. Here, money flows to the rich, as the needy borrow and pay the interest. Again, the earnings are without effort on the part of the usurer; he gets money merely by means of previous holdings. Further, it disturbs the coin as a measure. The price of the commodities when interest is added to it is raised without raising their value. Thus, in a system where usury prevails, prices are ever- rising and value of coin ever-falling, affecting reserves, savings and fixed incomes adversely. The interest thus eats itself away through devaluation of money.

Muslim rulers are required to eradicate usury from the whole world and install an economic system free from it. At present, thanks to this system, the whole world is in the grip of jews.

I found an article relating to this ..
Worst of financial crisis yet to come: IMF chief economist
23 Nov 2008, 0913 hrs IST, AFP- Times of India 
ZURICH: The IMF's chief economist has warned that the global financial crisis
is set to worsen and that the situation will not improve until
2010.

Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.

"The worst is yet to come," Blanchard said in an interview with the Finanz und Wirtschaft newspaper on Saturday, adding that "a lot of time is needed before the situation becomes normal."

He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.

The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.

But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.

Withdrawals of capital leading to problems of liquidity "can be so significant that the IMF alone cannot counter them," he said, adding that massive withdrawals of investments from emerging countries could represent "hundreds of billions of dollars.

"We do not have this money. We never had it," he said. The IMF had spent a fifth of its 250 billion dollar fund in the last two weeks, Blanchard added. He also urged central banks around the world to cut interest rates, after the Swiss National Bank made a surprise one percentage point rate cut on Thursday.

The central banks "should lower interest rates to as close to zero as possible"



The central banks "should lower interest rates to as close to zero as possible" this statement says the whole story... y Islam prohibits interest!

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## 385ashley

Its all so boring to read ...

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## Shades

> Its all so boring to read ...


Shall I write any love story for u then?:ltongue:

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## Shades

CAIRO  With many Western countries introducing Shari`ah-compliant banking, Maltese experts believe their country should join in to reap the fruits of the booming industry.

"There can be opportunities for both employers and employees in other industries if Islamic finance is introduced in Malta," Reuben Buttigieg, chairman of the Malta Institute of Management, told the Times of Malta on Sunday, December 21.

"If Malta wants to head that way, we could have the three main branches of Islamic finance in the span of a year."

The Malta Financial Services Authority (MFSA) has issued a consultation document on Islamic finance for the industry to give a feedback.

"It is expected that two other consultation documents will be issued next year regarding Takaful and Sukuk," said Buttigieg, also the managing director of Erremme Business Advisors.

"After that, it very much depends on the MFSA and government to ensure we do not miss this golden boat."

Buttigieg believes that the political establishment in Malta, an island country with a 400,000-strong population, is willing to introduce a Shari`ah-compliant system.

"The good news is that the two political parties have expressed themselves in favor of enabling Islamic finance. Finance Minister Tonio Fenech has also spoken positively about the issue."

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Islamic finance is already one of the fastest growing sectors in the global financial industry.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Buttigieg believes Malta can easily become a ma for Islamic finance.

"Islamic finance in euro is something that seems to be lacking, while it is available in sterling and dollar. There is substantial cost-saving on this aspect alone," he argues.

"If the government wants to attract a massive inflow of investment it should issue Sukuk itself, and then the entire Muslim world would be looking at Malta, particularly people in European countries with no investment opportunities."

The Sukuk market has reached $111.9 billion in the eight years to 2008 and a further $69 billion is expected to be issued in 2008/2009, according to the International Islamic Financial Market.

Buttigieg thinks Malta would be able to attract Islamic finance from Arab as well as European countries.

"Today there are Islamic finance institutions that are setting up in the Cayman Islands to try to tap into Libya and benefit from the tax legislation," he noted.

"Malta can offer that advantage too, with even more added value to it. Our legislation on trusts is also a tool we can use with respect to Islamic finance structures," he added.

"It is also an opportunity for our government to enter into more double taxation agreements with Arab countries."

He sees Italy, which has not yet introduced Shari`ah-compliant systems, as a particular target market.

"There are some 70,000 Arab holding companies in Italy and some one million Muslims. Companies seem to resort to banks in the Middle East to obtain Shari`ah-compliant finance. Malta is 90 kilometers away and an EU member," he notes.

"It would be much more efficient for them to use the available funds in Malta or to invest excessive cash here."
Source: IslamOnline

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## Shades

Dubai- Emirates Islamic Bank (EIB), one of the leading Islamic financial institutions in the region, announced yesterday new and higher profit rates on customer investment deposits for the fourth quarter of 2008.

The bank announced the new rates (p.a.) as under two-year 6.300 %, one-year 6.250 %, 9 months 6.150 %, 6 months 6.100 %, and 3 months 6.075 %. These rates are among the highest returns in the country.

Commenting on the results, Mr. Ebrahim Fayez Al Shamsi, CEO Emirates Islamic Bank stated: "In 2008, we have achieved record breaking results for the bank on all fronts. We continue to lead as the preferred bank in all our target segments. The profit rate results on our deposits are yet another win for our customers and all our stakeholders. We have once again declared the highest profit rates on select deposits in the UAE, in line with our track record for the last few years ".

Emirates Islamic Bank has 28 branches across the country and is expected to open several other new branches in different areas of the UAE in the coming months.

Source: Zawya

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## Shades

In today's scenario where the banks are shutting down due to lack of liquidity, e.g, more than 24 American banks have been closed and many companies have gone bankrupt(GM Motors is asking for billions of dollars from the bill passed by obama to survive the bankruptcy), still the Islamic Banks are making profits do we ever pondered why?, The world bank chief said bring the Interest rates to zero if u wanna survive this recession, but if Islam says that 1430 years before then it's a backward religion?. Take a look at the report below.



United Arab Emirates, Dubai February 14th 2009: Emirates Islamic Bank has announced the results of 2008, recording a net profit, excluding depositors' share, of AED 401 million, an outstanding increase of 68% on compared to AED 239 million for 2007.

Total income for 2008 grew to AED 1.5 billion from AED 961 million in previous year, reflecting strong growth of 56%. As for depositors' share of profit, it reached an outstanding amount of AED 634 million. The Bank's total assets increased by 56% to AED 26 billion compared to the end of December 2007.

The customers' accounts (including banks and government accounts) grew by 60% to AED 23.7 billion, with an increase of AED 8.8 billion than that at the end of December 2007. Shareholders' equity reached AED 1.6 billion at the end of 2008, recording an increase of 19% compared to end of December 2007. Meanwhile, return on capital has reached 43% for 2008.

Commenting on the results, Mr. Ebrahim Al Shamsi, CEO, Emirates Islamic Bank Emirates Islamic Bank , said: "Our success in achieving our strategies led us, Praise be to Allah, to strengthening our stand as one of the fastest growing and developing Islamic banks.

The impressive financial results and winning two prestigious awards (The MRM and Ethos Awards) are the best evidence of the ability of the Bank to achieve its targets". The CEO has further added "This has ensured that our customers as well as our shareholders and employees get their due rewards from this success which, with the Blessing of Allah, would not have been possible without them. I take this opportunity to thank them all and would like to say with confidence that we will grow from success to success in the future, In Sha' Allah".

Among the Bank's key initiatives in 2008 was the launch of "Skywards Emirates Islamic Bank Emirates Islamic Bank Credit Card", the first air miles credit card in full compliance with Islamic Sharia in the region, tailored to suit the needs of frequent travelling customers.

The Emirates Islamic Bank Emirates Islamic Bank had won the 2008 Mohammed Bin Rashid Al Maktoum Business Award for Finance category which is considered one of the most sought-after categories within the MRM Business Awards. Furthermore, the bank had won the prestigious Ethos Consultancy Award as the Best Islamic Bank for 2008.

Also during 2008, the Bank along with other Gulf and Arab financial institutions, as Gulf Finance House Gulf Finance House , have incepted " First Energy Bank First Energy Bank " in Bahrain with a capital of $ 1 Billion (Our share is $ 103 million), as well as "Cemena Holding" for cement industries in Bahrain with a capital of $ 500 Million (Our share is $ 60 million).

In addition, the Bank launched a number of successful funds such as "Jawhara Greens" with a value of $ 250 Million (Our share is $ 30 million) and "Danat India" with a value of $ 163 Million (Our share is $ 10 million).

Apart from achieving these outstanding results, the Bank's management spares no effort in offering innovative products and services that cater to the different customers' needs.  
Source: Zawya

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## Shades

28 February 2009 Manama, Bahrain: Bahrain-based ABC Islamic Bank ABC Islamic Bank today announced a net profit for the year to 31 December 2008 of US$25.6 million, compared to a figure of US$50.9 million for 2007.

Gross operating income was US$33.8 million which, excluding an exceptional US$32.8 million capital gain in 2007 arising from the partial disposal of a sukuk investment, represented a 34% increase over the previous year. Reduced operating expenses led to a net operating income of US$28.84 million. This strong performance in core profitability reflected a higher proportion of fee income, enabling balance sheet growth to be kept down to 7.1% year-on-year. Unfortunately it became necessary to set aside provisions in the fourth quarter, which were a direct consequence of the impact of the economic slowdown in the region. Notwithstanding these provisions ABC Islamic Bank ABC Islamic Bank closed 2008 with a net profit for the year of US$25.6 million, compared with 2007's net profit of US$50.9 million.

After signing the year-end accounts, ABC Islamic Bank ABC Islamic Bank Chairman and ABC Group Deputy Chief Executive & Head of International Wholesale Banking, Mr. Abdulmagid Breish, ed "While the performance on core business and revenue was satisfactory for 2008, more efforts will be made in 2009 to take the bank into higher level end products of a more structured nature."

Reflecting on the year as a whole, Naveed Khan, Managing Director of ABC Islamic Bank ABC Islamic Bank said, "The growth in our operating results and profitability over the past four years clearly shows the achievements arising from our renewed focus on our target market customer base in the GCC and Arab world region. ABC Islamic Bank ABC Islamic Bank will continue offering a full range of Shari'a-compliant products and solutions to our customer base, from basic working capital needs to complex hedging structures combined with a comprehensive & innovative liquidity management platform."

-Ends- About ABC Islamic Bank ABC Islamic Bank Arab Banking Corporation (ABC) launched its Islamic Banking Division through ABC Investment & Services Co. (E.C.) a wholly-owned subsidiary, based in Bahrain in 1987. The objective was to establish a leading Islamic banking unit, which conformed completely to Shari'a principles.

In March 1998 ABC Investment & Services Co. (E.C.) was converted into a fully fledged Islamic entity and was consequently renamed ABC Islamic Bank ABC Islamic Bank (E.C.), with the express purpose of reassuring customers and counterparties of the continued purity and integrity of its Islamic products and services. ABC Islamic Bank ABC Islamic Bank is supported by the ABC Group's extensive global network, which includes ABC IB Islamic Asset Management in London in addition to ABC branch offices, subsidiaries and affiliates across the globe.

© Press Release 2009

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## Shades

NZ central bank cuts interest rate to an all-time low
12 Mar 2009, 0646 hrs IST, REUTERS
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WELLINGTON: New Zealand's central bank cut interest rates to an all-time low on Thursday and left the door open for more small cuts as the bank
forecast the struggling economy to slowly recover later this year.

The Reserve Bank of New Zealand (RBNZ) cut its benchmark rate by 50 basis points to 3.0 percent, sending the kiwi up as much as 2.4 percent to $0.5144 from late Wednesday trade. The New Zealand dollar settled around $0.5102/07 at 2345 GMT, while the yield on the June bank bill contract rose 16 basis points to 3 percent.

"As economic activity troughs, we expect rapid easing of monetary policy to slow," said RBNZ Governor Alan Bollard, adding that he did not expect to see in New Zealand the near-zero policy rates of some countries. "New Zealand needs to retain competitiveness in the international capital markets." The central bank now sees the economy troughing in the middle of this year, helped by the substantial reduction in borrowing costs, fiscal stimulus and the lower New Zealand dollar.

The RBNZ has scaled back the amount of easing, after two hefty cuts of 1.5 percentage points each in December and January. Nine of 14 economists in a Reuters poll had picked a 50 basis point cut for the March review. The cut, the sixth since last July, took the official cash rate to its lowest level since it was instituted in March 1999. It peaked in July last year at 8.25 percent. Economists said more rate cuts were on the agenda as New Zealand braced for its longest recession on record. "There is more easing planned, the size is the question that is most uncertain," said UBS senior economist Robin Clements. "I've got another 50 basis points next month, and if there's signs of the world stabilising that might be chopped back to 25."

A Reuters poll after the rate move showed nine of 15 economists expect another 25 basis point cut at the RBNZ's April 30 monetary review. Five each picked 50 and one saw no change. The cash rate is seen bottoming at 2.5 percent by mid-year. Bollard told CNBC television he might cut the rate below that level depending on broad economic conditions. "It could go a little bit lower if we get softer news out of the rest of the world or if the New Zealand economy looks softer."

The RBNZ will next review the cash rate on April 30. Even at that predicted poll level, the kiwi would still be attractive at a time when returns in other currencies diminish. Interest rates are already near zero in the United States, Japan, Canada and Britain. In the euro zone, rates were slashed to a record low of 1.5 percent. Thursday's move also comes after the Reserve Bank of Australia (RBA) last week decided to keep its key rates steady at 3.25 percent, pinning its hopes on stimulus already in place to help the country avoid the depths of recession seen elsewhere. Australia is New Zealand's biggest trading partner. Unlike neighbouring Australia, which was only hit with its first economic contraction in eight years last quarter, New Zealand was in recession in the first three quarters of 2008. The last time New Zealand suffered such a long period of economic contraction was in 1997/98 following the Asian financial crisis and drought.

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## Shades

The Islamic finance industry is becoming popular worldwide. This popularity has not come without certain misunderstandings or misconceptions.

One major issue is the question of how Islamic finance is different from conventional finance when the rates (or profit margins) charged by Islamic financial institutions from borrowers are the same as those charged by conventional financial institutions. The layman does not differentiate between the Islamic finance contract and the conventional finance contract when the repayment schedule of a financing transaction looks similar.

The conceptual difference between an Islamic finance and a conventional finance transaction lies in the fact that in conventional finance, the financial institution generally lends cash for a length of time, often direct to the client or borrower, of course based on a credit rating or evaluation, on the basis that the borrower would return the borrowed amount plus an interest amount. The interest amount and the original borrowed amount is required to be repaid to the lender over the loan period or by the end of the loan period. Thus the transaction in essence is the lending of cash against the return of a higher amount of cash, and not necessarily for a specific purpose. One of the basic ideas behind the interest rate is the time value of the money lent. The excess cash returned to the lender over and above the borrowed amount is considered riba in Islamic finance.

In Islamic finance, there is no direct lending of cash against return of a higher amount of cash, unless the transaction is asset backed implying that the transaction has to involve the sale and purchase of an asset. In a typical financing transaction, the Islamic financial institution will purchase assets required to be financed by a borrower at a price and sell them to the borrower at an agreed (higher) price allowing the financial institution to make a profit. This purchase and sale of an asset basically renders the financing as Shariah-compliant. Islamic Shariah laws allow cash to be lent, but generally only as Qard Hassan where only the same amount of cash is required to be returned, if returned at all.

The point to note is that in an Islamic finance transaction, the financier takes an element of risk, that of ownership of an asset and consequent non-payment by the client of the assets sale price. Any default penalties imposed to encourage payment on time do not accrue for the benefit of the lender but get paid to charity. There are other inherent risks in the transaction but the idea is that this risk-taking is what allows the Islamic financial institution to make a profit on the financing transaction. Therefore, even though the payment terms in a conventional and Islamic financing contract may look alike, there are differences in the conceptual structure of the transaction. Usually the profit margins charged by Islamic financial institutions are about the same as interest rates of conventional financial institutions, but this is largely due to competition, the required profits of shareholders of such institutions, and also quite possibly driven by higher legal and administrative costs pertaining to the financing transactions.

It can be logically derived that Islamic financiers would need a deeper understanding of a borrower and his business to allow minimizing risks of borrowers defaulting on purchase of the asset underlying a finance transaction. This effectively results in lending to real businesses and not speculative and high risk businesses, quite a relevant topic these days. Even Qard Hassan generally implies money moving into productive activities since lenders would not in general fund leisure or speculative activities of any borrower.

In conclusion, using Islamic finance or even regulating it, requires an understanding of concepts that underlie the industry  in this case the Islamic code of law  the Shariah. An understanding of Shariah and its goals or maqasid will greatly enhance ones perception of Islamic finance and economics.

(Saeed Jawed Ahmad is an Islamic banker and investment analyst based in Jeddah. The views or opinions expressed in the article are solely his own and do not necessarily reflect the views of any institution.)

¬
Source: Arab News

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## keilysmith

In Islamic finance, there is no direct loans of cash against the return of a greater quantity of cash, unless the transaction is well supported &quot;indicates that the transaction must involve sales or purchases of assets. In a typical transaction financing, procurement Islamic financial institutions require assets to be financed by borrowing at one price and sell them to a borrower with an agreement (higher) prices allows financial institutions to make a profit .

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