Islamic Banking 🕌

[DaveTMG]

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.

[Nizar]

@mark1

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?

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

[Nizar]

Variable rates were one of the main causes of the housing Crisis in the US. I guess that has changed because I was not aware they offer fixed rates for that long.

[DaveTMG]

Generally the fixed rate you were offered depended on your credit rating and the sub prime customers were not offered attractive fixed rates, such that the variable rate was cheaper. Also, to sweeten it even further, they had staircase rates which started cheap and got more expensive over the first few years.

[Nizar]

And that’s the issue Islamic Banking is trying to fix. A lot of people take morgages but are no longuer able to afford paying for them because the rates keep going higher. Personally I’m prepared to take a morgage with a higher fixed rate till it’s paied off rather than a lower variable rate.

[maxjwalker (Max Walker)]

Kudos for the really interesting post btw. I was aware of the concept of no interest but nothing else so it’s always nice to learn something new and how this affects financial instruments such as mortgages.

[anon4562461]

I love the idea behind that mortgage lending. Entirely different way of looking at things.

[GalaxyMergirl (eden)]

Agreed, very good insight into a totally different group of people’s way of life. Even if I don’t agree, I love learning how others see the world.

[SC95]

@GalaxyMergirl

totally different group of people’s way of life

We are not totally different group of people We are just like you and everyone else just with some different beliefs. Way of life is not too different we do most things you do btw

[Jfmurciego (Jesus Murciego)]

What about the Fractional Reserve System. As you know almost all the banks nowadays operates with a coefficient of 8 to 10% of the total money saved as a reserve.

That means that they if you deposit 100 pounds the bank are legally able to lend 1000 pounds and keep you deposit a reserve for the case that the person fails to payback.

My question to @Nizar is the following: Is the fractional reserve banking system compliance with the Sharia Law?

Thanks for teach us different ways of banking

[GalaxyMergirl (eden)]

@SC95

We are not totally different group of people We are just like you and everyone else just with some different beliefs. Way of life is not too different we do most things you do btw

Ah, I’m sorry. I didn’t mean it that way at all! We have far more in common than different and you’re right, thinking of people as ‘totally different’ is what breeds fear and eventually, hate. I assure you I don’t think of anyone as totally different. I meant only in this limited context (religious views on personal finance). Regardless, very interesting to learn!

[SC95]

I found this as an answer to your question;

https://www.linkedin.com/pulse/islamic-banking-fractional-reserve-system-hussain-kureshi/

[Nizar]

I don’t think it is. In Sharia law it is forbidden to charge for non payment or late payment fees.
But I’m not quit sure about the details.
So in the example of the house it is still owned by the bank until it’s payed off. I guess in that case that bank could sell it and give you back what you have already paid.
I’ll try to get back to you on this one.

[Nizar]

@Nizar

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.

I’m also interested in knowing the community thoughts about Zakat. Any comments on this?

Zakat is a compulsory act of worship that requires Muslims who own wealth at or above a certain threshold to donate a portion of that wealth, typically 2.5%, to those who are eligible. This threshold is called the Nisab.
Zakat calculator - How much Zakat to pay - NZF

[GalaxyMergirl (eden)]

@Nizar

I’m also interested in knowing the community thoughts about Zakat. Any comments on this?

Personally, I’m not into anything prescriptive. But, that said, I do strongly support charities and would love it if Monzo had a way to manage your giving. For you, that may be Zakat. For me, it might be groups like Amnesty International and Stonewall.

If Monzo helped people manage giving in a really nice, easy to use way, all charities might end up better off due to the extra encouragement and ease of seeing what you’ve given and can give.

[Avian946 (P Burrows)]

Thanks for sharing this @Nizar !

Like others here I knew about not earning interest on savings, but I had never thought about the implications for mortgages, pensions, loans and overdrafts.

It’s an interesting concept that I will be looking into a bit more! I really like the idea of mortgage that is fully agreed at the start.

[Intrepid (Jason)]

Thanks for these explanations. I noticed on a Lloyds Bank letter explaning new overdraft charges a much lower cap of fees for Islamic Banking and in my ignorance thought whoa! whats all this about?

And now I know.

And fully agree with ALL the principles described.

[beirdo]

@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.

Pretty much yes. The spending what you have, is guidance around prudence rather than hard & fast rule. If it’s a luxury (yes subjective, I know), consider not buying it if you’re having to borrow for it/over stretch your financial capability (i.e you can still borrow but it’s a lot compared to your income/wealth). If it’s considered a necessity (again subjective) then a financial plan may be appropriate.

Now if you take religion out of the above, then it’s just common sense that Mum & Dad would(should!) have taught us anyway.

@markembling

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)?

Hire Purchase involves borrowing money in order to purchase the vehicle, as i understand it. I have a PCH (or commonly known as lease), which is just longer term rental agreement.

I also have a HPP. The example @Nizar gave was one way a house purchase is structured i.e you buy the house and sell it to me at an agreed profit, over a period of time.

The HPP I have is slightly different. You and I agree to buy a property for X in which you have a larger share and I have a smaller share. I actually want to live in the house but also eventually own it outright.

Each month i Pay you an amount which consists of a) the rent for the portion of the house i don’t own and b) a small acquisition payment to increase my share of the house.
This goes on for say 25 (or whatever) at fixed(ish) payments. With each payment, the contribution of rent tips in favour of acquisition of the property. I say fixed-ish the thing that may change is the amount of rent being charged. Rents can go up and down and you can use various benchmarks (but agree at outset) from local market rent , to BoE rate, to LIBOR.

[Teapot]

What a fascinating thread! I learned something new today, thank you for sharing

[simonb]

I believe there’s at least one fintech startup hoping to operate in this space. I don’t recall the name, but I received a request and a description of them on LinkedIn, I think they were angling for staff…