Islamic Banking 🕌

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

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

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

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.

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.

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.

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

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?

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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.

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

@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.

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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.

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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…

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)?

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So the key word is ‘encourage’ …

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.

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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.

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.

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

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

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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.

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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!

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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.

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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?

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.

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.

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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.

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I rather like the idea of knowing the final price at the beginning - it is more like the US mortgages which are often fixed rate for 25 or 30 years.

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There are different option there. The company I work with has different option, one of them is HSBC Amanah which invests only in approved companies.

http://www.londonstockexchange.com/exchange/prices-and-markets/funds/company-summary/UK/25032081.html?lang=en