Keeping Muslim Principles as Well as Securing Savings

The Birmingham Post (England), April 3, 2009 | Go to article overview

Keeping Muslim Principles as Well as Securing Savings


Byline: TREVOR LAW

Saving and investing in line with religious principles is important for many Muslims and an increasing range of financial products is now available to meet Sharia rules.

There are 1.8 million Muslims in Britain and surveys show that about threequarters are interested in the idea of running their savings and investments in keeping with principles laid out in the Koran. While Sharia products are in their infancy in the United Kingdom, the uptake is very rapid.

While trade and investment are encouraged, Sharia rules prohibit involvement in companies whose activities touch on a wide range of industries including alcohol, gambling, pornography, human cloning, arms and many forms of entertainment. Industries associated with pork are also out.

However, the biggest difficulty for devout Muslims and those financial groups which aim to serve them is the principle of riba. Riba means that you cannot receive or pay interest, because Islam defines interest as a form of usury.

This makes it very difficult to invest in large Western companies, many of which are funded to a greater or lesser extent by debt. It also rules out investment in conventional banks, which may not be a bad thing at the moment.

Interest is hard to remove from any financial transaction. Interest is the price of money measured over time and one of the cornerstones of economics. The entire conventional banking industry, with products from mortgages through to credit-cards and deposit accounts, depends on calculating interest. How on earth do you remove it? The answer that Sharia-compliant accounts offer is to convert the interest normally paid into a form of profit or loss. Accounts or mortgages will often be marketed as offering competitive rates measured against non-Sharia, interestbased products, but the structure of the financial proposition is different.

Current accounts are not too much of a problem to devise on a Shariah-compliant basis as interest does not play a big role. You get all the facilities you would expect, such as a cheque book, debit card, ATM usage, monthly statements and so on. You do not get any interest, nor are you charged any if you accidentally go overdrawn.

Most Sharia-compliant current accounts merely seek a credit balance and only penalise you, though not with interest, if you go overdrawn.

Most banks are explicit that the money deposited in Sharia-compliant accounts will not be used for non-Sharia purposes, which means it cannot be loaned out and must remain segregated..

The bank have the freedom to invest the deposited money rather than loan it, but the customer still has the right of immediate withdrawal. However, a basic Sharia savings account presents more of a problem. The banning of interest means some other kind of return needs to be offered, but it must be sure and certain, as interest would be.

Banks such as Islamic Bank of Britain typically specify a rate which sounds like interest and is intended to be competitive with banks which do offer interest.

However, the return is generated not through loans to individuals or businesses, but by sale and purchase contracts under the Murabaha principle.

This means, for example, that someone wanting to buy machinery for a factory would have it bought by the bank, who would then charge a premium on top of the cost in exchange for receiving repayment over a number of years. …

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