Islamic Banking 🕌

[Nizar]

I know the title might through a lot of people out, but this is a very diverse community and I wanted to hear other people’s thoughts on this.

I’m discussing this purely from a financial point of view, so please no religious or political comments.

So, that been said, I’m not going to go through the details of Islamic Banking as with a quick Google search you can find lots of articles about it. But I wanted to explain what I think Islamic Banking is from my perspective, how Monzo is helping me with that and what I wish Monzo could do to help me more.

For me Islamic Banking can be summarized in a few points:

• Money by itself has no value; it is just a means to simplify transactions.
• You can’t buy and sell money, or earn interest on money.
• You can invest your money as long as you do not invest in companies dealing with interest, gambling, pornography, alcohol, …

When it comes to Mortgages you might think the first point above might make things complicated, but it doesn’t. If you need money to buy a car or a house then the lending society will buy it and then sell it back to you in monthly instalments at a slightly higher pre-agreed price, instead of just giving you the money to buy it. But there is another very important point that a lot of “Islamic Banks” miss. The resell price must be agreed on in advance, so there is a fixed rate throughout the mortgage period. As in example, if I want to buy a house for £300,000, the bank could buy it then we agree I’ll buy it back for £360,000 with monthly payments of £1,000/Month over 30 years.
You might say that the above example does not take inflation in consideration, but that is all based on the principal of sharing losses in Islamic Banking. So by the end of the 30 years I might have over paid or under paid, but as we agreed on the price in advance then I’m safe from any unexpected rise in interests and I know exactly what I’m paying.

Also overdraft is forbidden in Islam as you are encourage to manage your money well and only spend what you actually have on what you can afford.
Now coming to Monzo, I’m perfectly with not having interest on Pots as that’s what I need. But if it will offer interest at some point it will be good to have the option to opt out or send it automatically to charity. I also like the fact the overdraft is optional.

One other thing about Islam in general, is that you are expected to pay Zakat each year if you have more than a certain amount in your savings which should be given to the less fortunate. It is calculated as 2.5% of the values of the assets that you have that have not been used for a year.
So usually what I do buy that time it’s due is check what I had in my savings accounts exactly one year before, then add the value of any assets like jewellery that have not been used for a year and take 2.5% of the total value to pay the Zakat.
It will be great if Monzo could make it easier to see historical data and progress of Pots and make it possible to generate custom reports.

TL, DR: What are your thoughts about Islamic Banking principals:

• Money by itself has no value; it is just a means to simplify transactions.
• You can’t buy and sell money, or earn interest on money.
• You can invest your money as long as you do not invest in companies dealing with interest, gambling, pornography, alcohol, …
• Banks can’t lend money, but can buy what you need and sell it back to you at a fixed pre-agreed price.

[louisotto]

Well, I learned some things today - thanks for sharing.

Historical data can be exported through the app, so there’s that - the information is free to you to do whatever you want with.

Regarding the progress of Pots, do you mean that you want a % calculator like Starlings’ Goals? For example, you create a pot with a goal of £10,000 and it shows you what % you are towards that. Or do you mean you want to see a monthly chart (similar to the Pulse Graph) for Pots?

Either seems doable, to be honest. Pulse graph on Pots would be good.

[Nizar]

I’m glad you liked it
I meant more like a chart to see how well it’s progressing over time.

[GalaxyMergirl (eden)]

You said no religion, which is good, since I’m not religious, I’ll respond philosophically to your questions

@Nizar

Money by itself has no value; it is just a means to simplify transactions.

That’s completely true, almost the definition of a fiat currency.

@Nizar

You can’t buy and sell money, or earn interest on money.

I disagree, because that’s exactly what banks do and what foreign exchange is. People buy, sell and earn interest on money all the time. Again, this is a non-religious perspective. A religion might well forbid it. But it’s definitely something that can be done.

@Nizar

You can invest your money as long as you do not invest in companies dealing with interest, gambling, pornography, alcohol, …

First, if you want a non-religious perspective, again you obviously can do these things. This is where I’d be completely opposed to Monzo adopting these principles. At its most extreme, you’re saying I couldn’t use my card at Tescos because they profit from alcohol and Monzo profits from that transaction. No, 100% not okay. My bank is not my moral police, and even if it was, these are not my morals.

@Nizar

Banks can’t lend money, but can buy what you need and sell it back to you at a fixed pre-agreed price.

Frankly, again, I see the religious need and I respect that. But from a non-religious perspective like you asked for, this is just calling a rose by another name and believing that somehow makes it not a rose. This is a fixed interest loan, nothing more, nothing less.

[Chalky (Daniel White)]

@GalaxyMergirl

Frankly, again, I see the religious need and I respect that. But from a non-religious perspective like you asked for, this is just calling a rose by another name and believing that somehow makes it not a rose. This is a fixed interest loan, nothing more, nothing less.

I’ve always found this bit confusing too, like you say it’s still just a loan.

@Nizar

Also overdraft is forbidden in Islam as you are encourage to manage your money well and only spend what you actually have on what you can afford.

Surely that means that a Mortgage should also be forbidden, if you can’t afford a house out-right, you shouldn’t have one? I can’t quite understand why there’s a workaround for Mortgages but not Overdrafts/Loans?

[markembling]

@Chalky

Surely that means that a Mortgage should also be forbidden, if you can’t afford a house out-right, you shouldn’t have one? I can’t quite understand why there’s a workaround for Mortgages but not Overdrafts/Loans?

I guess pragmatism? It’s literally impossible to have enough money to buy a house outright ever, unless you’re from an extremely wealthy background. It’s hard enough to do so with a mortgage, as is being borne out right now with the constantly-rising average first time buyer age. That just wouldn’t be fair.

[SC95]

There are few UK banks offering Islamic Mortgages

https://www.alrayanbank.co.uk/home-finance/home-purchase-plan/

https://www.ubluk.com/pages/index/islamic_mortgages

[SC95]

@Nizar well done for writing this very good overview of Islamic banking. One of the reasons I use Monzo is at the moment there is no interest. I am not sure things will change but would be great to have an option to opt out of things offered just as you said.

[mark1 (Mark E)]

My understanding of Islamic Mortgage, is it isn’t a mortgage at all as that would involve interest. In fact it’s a purchase hire plan, where the provider will buy the property and own it.

[markembling]

@mark1

My understanding of Islamic Mortgage, is it isn’t a mortgage at all as that would involve interest. In fact it’s a purchase hire plan, where the provider will buy the property and own it.

That’s what I took as well from @Nizar’s post (which was a very interesting read; I never knew Islamic banking was a thing). However I think what @Chalky was getting at is that it seems to be at odds with this point…

@Chalky

Also overdraft is forbidden in Islam as you are encourage to manage your money well and only spend what you actually have on what you can afford.

Spending what you actually have on what you can afford seems to be the opposite of getting a bank to buy you something (which you can’t afford) and giving you use of it, with a slow purchase process over time. IT addresses the interest aspect, but that’s all. I think it’s probably a case of pragmatism because otherwise you’d be effectively locked out of the property market.

That said, I’d be very interested to hear @Nizar, @SC95 or anyone else’s input here, as I’d love to hear the real answer. Also, what’s the view on car purchase plans which can also be structured a bit like this (hire purchase)?

[SC95]

So the key word is ‘encourage’ …

@Nizar

you are encourage to manage your money well and only spend what you actually have on what you can afford.

There a lot of misconceptions about Islam but believe me it does not stop anyone to make an effort to make your life better in any way.
The main reason for Mortgages to be different is the principles of Interest which Muslims call Riba. Islamic banking operates on profit/loss sharing (PLS). There are few different ways to get a property under Islamic finance - I am not good at explaining stuff so quoting a newspaper article here which explained this very well.
As @mark1 said Islamic Morgage is called Home Purchase Plan (HPP).

There are three models of Home Purchase Plans (HPPs): Ijara, which means ‘lease’ in Arabic; Musharaka, which means ‘partnership’; and Murabaha, meaning ‘profit’. Depending on the model, the lender will levy rent or add profit to the amount you pay back instead of charging interest.
An Ijara is a lease-to-own HPP: the bank purchases the property you want then leases it out to you. At the end of the term the bank transfers ownership of the property to you.
Under a Musharaka plan (also known as ‘diminishing Musharaka’), you buy the property jointly with your provider and gradually buy the bank out of it. So if you put down 10 per cent of the purchase price, the bank will buy the remaining 90 per cent. You pay the bank monthly rent on the share you don’t own as well as buying more shares in the property with each monthly payment, with a view to owning the property outright at the end of the term - hence the ‘diminishing’ nature of the partnership. The more shares you own, the less rent you pay to the bank, and the cost of a share in the property is based on the property’s original cost price, not its market value.
In a Murabaha plan, the bank will buy the property you want then immediately sell it on to you for a profit. You then pay fixed monthly repayments on the higher price, but with no interest to pay back to the bank. So the bank might buy a property that costs £200,000 and sell it on to a customer for £250,000; the customer then pays that sum back over a fixed term.

Sharia-compliant mortgages are here - and they're not just for Muslims

[Nizar]

@GalaxyMergirl

First, if you want a non-religious perspective, again you obviously can do these things. This is where I’d be completely opposed to Monzo adopting these principles. At its most extreme, you’re saying I couldn’t use my card at Tescos because they profit from alcohol and Monzo profits from that transaction. No, 100% not okay. My bank is not my moral police, and even if it was, these are not my morals.

I think you missed my point here. I’m not expecting Monzo to do anything or for someone to stop using the card.
I’m talking about actually investing and buying shares on those companies. And that is why I’m excited about Freetrade, as it can allow me shares in companies that represent what I believe in.

@GalaxyMergirl

This is a fixed interest loan, nothing more, nothing less.

I partially agree with that, it is just a different name for a fixed interest loan. The difference is that the bank does not give you the money directly to buy the house. It is owned by the bank until you pay for it. So you get to actually own it in your name only when you have paid for it in full.

[SC95]

Another old article from BBC is worth reading if you want to know more;

http://news.bbc.co.uk/1/hi/business/2525635.stm

[Nizar]

@Chalky

Surely that means that a Mortgage should also be forbidden, if you can’t afford a house out-right, you shouldn’t have one? I can’t quite understand why there’s a workaround for Mortgages but not Overdrafts/Loans?

I think @markembling has replied to this well.
Not everyone can offord a house or a car directly. But you shouldn’t get a loan for day to day expecses as that we drag you into a never ending spiral, and that is what islam is trying to avoid.

[GalaxyMergirl (eden)]

@Nizar

I’m talking about actually investing and buying shares on those companies. And that is why I’m excited about Freetrade, as it can allow me shares in companies that represent what I believe in.

Ah yes, I did misunderstand that to some extent. I’m still not sure I’d agree, but there’s lots of companies that go against my views and morals, too. It would be really cool if we could vote on who our investments support!

[Nizar]

That is true, but it olso should be a fixed rate. The point is for the buyer to know exactly what are they going to pay in 20, 25 or 30 years.

[mark1 (Mark E)]

@Nizar

I’m talking about actually investing and buying shares on those companies. And that is why I’m excited about Freetrade, as it can allow me shares in companies that represent what I believe in.

I have a question along the lines of trading. A pension, there are many out there that deal in arms, banks etc. How do you approach say a pension scheme thats the only one through your company?

[Nizar]

The problem is most of those banks use smoke and mirors, and at the end offer a variable rate mortage even for a Purchase/Hire plan.

[markembling]

This snippet from the BBC article @SC95 posted is a good little sentence as well in terms of quantifying the difference. It’s probably philosophical as much as financial…?

In Islamic terms, the rent is not another name for interest: It is seen as a fair payment for use of the property rather than a charge for borrowing money.

That, combined with the fact that it all seems to be centred around the knowledge of the final price, seems to be the crux of the difference.

[Nizar]

@markembling

Spending what you actually have on what you can afford seems to be the opposite of getting a bank to buy you something (which you can’t afford) and giving you use of it, with a slow purchase process over time. IT addresses the interest aspect, but that’s all. I think it’s probably a case of pragmatism because otherwise you’d be effectively locked out of the property market.

That works for day to day spending, but almost no one can afford to pay for a house in full. You could but you have to save for 40+ years and by then it’s too late. Unlike money, in Islam time does have a value. So for example you can buy a TV worth £600 from Argos but pay £52 a month for a year. The extra £24 is the value of the time Argos has to wait for it. That is completly acceptable in Islam as long as it’s agreed upon in advance and the cost is fixed.
Same things apply for a car or a house.