This article is written by brother Adnan Khan
Open up the pages of any newspaper or Financial Magazine and you are guaranteed to find advertisements from banks announcing their latest Islamic finance products. Once perceived as a niche market, Islamic finance today is big business with both local and international banks keen to get in on the act. An increasing number of non-Muslims are adopting Islamic compliant products as awareness of the principles behind Shari’ah finance has grown. In 2008, at least $500 billion in assets around the world were managed in accordance with Shari’ah and the sector is growing at more than 10% per year.
Asif Mumtaz, regional head of HSBC Amanah, HSBC’s Islamic banking arm, says: "Within this region the Islamic finance industry is evolving from a niche segment to a mainstream one. "It is our informed opinion that within the next eight to 10 years, the industry will capture half of the savings of l.6 billion Muslims worldwide."
To gain a foothold in the market many conventional banks, including HSBC have launched Islamic versions of their traditional products – including Islamic loans and credit cards. In recent weeks Standard Chartered announced the launch of its global Islamic banking brand in the Middle East, Saadiq and its first Islamic credit card, the Saadiq Gold Credit Card. It followed hot on the heels of First Gulf Bank’s first Islamic credit card the Meccah Credit Card, which rewards customers with the opportunity to earn steps to travel to the Holy City of Mecca.

Islamic Finance and the West
In the West London is turning into a hub for Islamic financial activity, Gordan Brown announced changes to the tax status of Islamic finance in his 2006 budget. Then on the 23rd April The British government announced it will issue Islamic bonds, seeking to meet what it believes is a significant demand for this financial product both inside and outside the UK. The evolution of Islamic finance has resulted in Ford Motor Inc selling Aston Martin – maker of James Bond’s favourite sports car for £479 million ($1.2 billion) to a leveraged buy-out (LBO) consortium organized through Islamic Finance.
Britain currently has five Islamic banks, whilst at the same time Britain’s high street Banks offer a range of products which they claim are Shari’ah compliant. The Islamic Bank of Britain offers a Shari’ah compliant current account, mortgage and personal loan. HSBC offers an Islamic current account and mortgage. A handful of other banks – including some of the biggest international names and the Middle East’s biggest traditional banks – also offer financial products in the UK.
Whilst Islamic finance and Economics has been welcomed with open arms by some, there are some who are sceptical. Islamic finance is sparking a heated debate in France, a strictly secular European heavyweight, though economists contend it would be in the country’s interest to tap into the booming global industry. The French parliament in September approved a number of adjustments to its banking laws to allow sukuk (Islamic bonds) to be issued for the first time. This was at the same time as the Qatar Islamic Bank applied for license to operate in France as the first Islamic bank.
However Socialist MP Henri Emmanuelli told Agence France Presse (AFP) that "We must not allow principles of Shari`ah law, or the ethics of the Qur`an to be introduced into French law." This has led to France’s highest constitutional authority on October 14th to strike down some of the provisions the French Parliament passed.

Islamic banking: The basics
The main difference according to the industry between a banks’ conventional and Islamic products is the absence of interest. Under Shari’ah law interest, whether nominal or excessive, simple or compound, fixed or variable is forbidden. Shari’ah based products also favour asset-based transactions.
Explaining the principles behind it Dr Taha El Tayeb, head of products development and Sharia structuring at Mashreqbank’s Islamic banking division Badr Al-Islami says: "Islamic finance and Sharia law would always recommend people to go for asset-based transactions. If you need to buy a car for instance, instead of borrowing money from a bank – that bank should take the risk, buy the car and sell it to you at a profit rate." he also adds: "The intent of Islamic banking is very much that you are in a socially responsible banking community. Islamic banking moves away from pure speculation and more into activities that will help to grow the industry and the infrastructure-based economy. Every transaction is tied to an asset, which is a real world economy asset."
There are three main Islamic financial instruments which are used to structure Islamic loans.
Ijara works as a leasing agreement whereby the bank buys an item – such as a house or a car – for a customer then leases it back to them until they have paid off the full amount and take over ownership of the item. "When a customer is planning to buy something we at Amlak buy that property then we give it to the customer on a lease period of 15 to 20 years then the ownership passes to the client. There is no interest charged but there is profit based on the fact that when you own a property you have the right to rent it out for however much you want." Says Khalid Zainal, Director of Sales and Marketing of Amlak Finance
Murabaha works by the bank supplying specific goods for resale to the customer at a profit rate.
The customer pays the bank back in monthly instalments – the rate of which are fixed. Commodity Murabaha is designed for customers who want a fixed rate cash loan and involves the purchase and sale of commodities on the London Metal Exchange.
The third Islamic banking instrument, Musharaka, which is a joint venture whereby the customer and bank contribute to the funding of a venture and agree to share the returns – as well as the risks – in proportions agreed in advance.
Islamic credit cards look set for major growth with increasing demand from customers prompting banks such as Standard Chartered and First Gulf Bank to launch their own Sharia compliant products. However Islamic credit cards are still to hit the western high street. Islamic credit cards work in much the same way as conventional cards but in place of interest banks will charge customers annual or quarterly fees. Standard Chartered’s latest offering, the Saadiq Visa Gold Credit Card, for example operates on the Urjah concept, which is based on a fixed fee structure.
Customers are given a grace period to pay the monthly outstanding balance on the card to avoid paying a fee, and a fixed monthly maintenance fee is charged for usage of the card’s service account.

Islamic Economics
The global financial crisis has highlighted some fundamental problems with free market economies. The market as the ideal method to distribute wealth has been discredited, economic growth in free market economies has proven to be unsustainable and the financial markets, for long the showpiece of free market success has proven to be no different to a casino.
In order to stimulate many of the broken economies of the West and overcome many of the structural flaws that cause economic crisis, many free market governments have turned to Islamic finance due to the phenomenal growth it has shown in the last decade. However this deflects attention from the real problems the West faces.
Whilst there is much the West can learn from the Islamic economy – such as the stability Islam brings by being based upon the real economy, the rapid distribution of wealth through a non-interest based economy and the stability Islam’s provided by Islam’s trade rules and the removal of gambling and speculation. Such economic concepts are in reality a few aspects of the Islamic economy, which itself are built upon a fundamental alternative view towards wealth, production, the macroeconomy and property. The mere adoption of some aspects of Islam will not solve the economic problems of the West and even the Muslim world.
Free market economies need a complete overhaul as no amount of regulation will ever curb the motive to make money at any cost. For this reason boom and bust has been a feature of free market economies for over 200 years and will continue to do so.


Conclusions
The Islamic economic system is an integrated system with different aspects of Islamic economics all feeding into each other. The rules of Riba are built upon Islam’s view of wealth, the Islamic rules of trade are built upon Islam’s view towards ownership, Islamic taxation is built upon Islam’s views towards wealth distribution and Islamic finance is built upon Islam’s view towards investment and currency. Taking a part of Islam without its framework will only create contradictions in an economy. Attempts by the West to plug its problems through aspects of Islam are attempts at giving the free market a leg up.
The Ummah should not feel happy when a few elements of Islamic economics are made available. This is an implicit acceptance that Islam can not stand on its own feet. There is a much bigger issue and that is why are the Gulf states and the Far East who are the leaders in Islamic finance not comprehensively implement Islam and make it available in the Muslim world. Such an approach would completely revitalise the economies of the Muslim world and project a positive image of an economic alternative. Islam is a complete system, all of it should be applied.

Source: http://khilafah.com/index.php/the-khilafah/economy/7954-islamic-finance-a-false-dawn

Interesting to see the justice of the islamic system, especially when comparing islamic rules of trade & economy to the western ones we see at present. This comes from Islamic Revival

The bankrupt in language is the one without money and without that by which he would pay for his needs. It is meant by this that he reached a situation in which it is said about him, ‘That he has no (fils) penny’ so he is muflis.

Muslim narrated via the way of Abu Hurayra “that the Messenger of Allah (SAW) said:
‘Do you know who the muflis is?’ They said: ‘The muflis among us is the one without a dirham or effects.’ He said: ‘The muflis in my Ummah is the one who comes on the Day of Judgement with prayer, fasting and zakat. He comes and has insulted this one, falsely accused this one, eaten this one’s wealth, spilt this one’s blood and struck this one. This one is given from his good deeds and this one from his good deeds. If his good deeds finish before that which is upon him is not paid off, it is taken from their sins and they are thrown upon him. Then he is thrown in the Fire.”

This statement of theirs is information about the reality of the muflis and the Prophet (SAW)’s statement, “That is not the muflis” is toleration (in using the word) and not negation to the reality but rather he intended that the bankrupt of the Hereafter is more severe and enormous such that the worldly bankrupt becomes like the rich man in relation to him. The bankrupt in the convention of the fuqaha is the one whose debts are greater than his wealth, and his expenditure greater than his income. They called him bankrupt even though he has money because his wealth is due to be spent in the payment of his debts so it is considered as if it does not exist.

Wherever the debts of the person are obliged immediately and his money is not enough to pay them off so his creditors ask the judge to interdict him, it is obliged upon him to respond to them. It is recommended to announce the (hajr) interdiction upon him so that people avoid transacting with him. If (hajr) interdiction was imposed upon him, four rules are established by that:-
The first of them is rights of the creditors relating to the his wealth itself. The second preventing him from the disposal of his wealth itself. The third is that whoever finds his wealth itself with somebody, he has more right to it than the remaining creditors if the conditions exist. Fourth, the judge has the right to sell his wealth and pay the creditors.

The evidence for the (hajr) interdiction over the bankrupt is what K’ab bin Malik narrated
“that the Messenger of Allah (SAW) interdicted the wealth of Muadh bin Jabal and sold it for the debt upon him” (narrated by Al-Hakim).

From Abdurrahman bin K’ab: “Muadh bin Jabal was of the best youth of his people and he would not hold onto anything. He would not stop borrowing until his wealth was engrossed in debt and his creditors spoke to the Prophet (SAW). Were anyone left for the sake of anyone, they would have left Muadh for the sake of the Messenger of Allah (SAW). So the Messenger of Allah (SAW) sold to them his wealth until Muadh stood without anything.”

When there is proved over the bankrupt rights for people or that which obliges a money fine via trustworthy testimony or a correct confession from him, it is sold from him all that he has and the creditors treated equitably. In principle it is not allowed that he be imprisoned just as it is absolutely not allowed to imprison a debtor in difficulty due to the statement of Allah (swt):

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“And if the debtor is in difficulty, then grant him time till it is easy for him to repay ” [TMQ 2: 280].

Muslim and Abu Dawud narrated also from Abu Said Al-Khudri who said: “A man was afflicted at the time of the Messenger of Allah (SAW) in produce he had bought and his debts increased. So the Messenger of Allah (SAW) said: ‘Give charity to him’ and the people gave charity to him but that did not reach the payment of his debts so the Messenger of Allah (SAW) said: ‘Take what you find, and there is nothing for you except that.’”

It is narrated also that he divided the money of the bankrupt between the creditors but never imprisoned.
From Muhammad bin ‘Ali bin Al-Husain who said: ‘Ali bin Abi Talib said: ‘Jailing the man in prison after it is known what is upon him of debts is injustice.’

As for what was narrated from Umar via the way of Said bin Al-Musayyab “that Umar imprisoned the relatives on the father’s side (‘asaba)—the men not the women–of the (manfus) child bed baby whom they financially support”, this does not indicate imprisoning the debtor but rather only indicates imprisoning the one upon whom financial maintenance is obliged if he does not maintain the child. Maintenance is of the money which is obliged upon the one capable to provide maintenance. That indicates the imprisonment of the one who does not support particularly the young child who is the child-bed baby.

The rule regarding the bankrupt is that the judge sells to the creditors the debtor’s wealth and divides it among them in portions as there is no way to do them justice other than this.
From Umar bin Abdurrahman bin Dalaf that a man from Juhayna would buy camels for a deferred period so he did this for high price. He became bankrupt and the matter was raised to Umar bin Al-Khattab who said: ‘As for what follows, O people. Verily Al-Asfa’a Asfa’a Bani Juhaynah was satisfied of his deen and trustworthiness that it is said he overtook the pilgrims. He expanded in taking debt till he became debted. So whoever has something from him, let him come tomorrow morning, for we will divide his wealth in lots.’ From Umar bin Abdulazia that he judged about the bankrupt that his wealth be divided between the creditors and then he is left until Allah provides sustenance for him.

The bankrupt’s wealth which is found with him is divided amongst the creditors by shares of the value only between those present claimants whose time of their rights became due. It is not included among them the one present but not claiming or the absent who did not delegate or the absent and present whose time of his right was not due whether he claims or not. This is because the one whose time of his right was not due has no right yet, while the one not claiming is not necessary to be given until he claims.

This is where the bankrupt is alive. As for the deceased bankrupt, it is judged for everyone, present or absent, claiming or not, and each one with a debt whether immediate or to a named period. This is because all periods become due at the death of the one who has right or the one against whom there is a right. If there combines on the bankrupt the rights of Allah and the rights of the people (‘ibad), the rights of Allah ta’ala precede the rights of the slaves. So it is commenced with what he missed of zakat or expiation (kaffara); if it does not cover everything, this is divided upon all these rights by lots without preferring anything over another. Similarly the debts of people; if his wealth is not enough to pay all of them then each one takes according to his money of what exists.

The evidence that the rights of Allah precede the rights of the people is what was proved of the Messenger of Allah (SAW) that he said:
“…the debt of Allah has more right that it be paid” and his statement: “…repay Allah as He has more right to be repaid” (Al-Bukhari narrated the two via the way of ibn Abbas).

When the wealth of the bankrupt is sold, his maintenance and the maintenance of those whose maintenance is obliged upon him is examined, so his house which he has need of residing therein is not sold. Whereas if he has two houses, one of them could be used without so the other, the one which there is no need for is sold. If the bankrupt earns what maintains him and those whom he is obliged to maintain or he is able to earn that actually by employing himself, in this situation all his wealth is sold except his house which he needs to reside therein.

If he is unable to do anything of that, it is left for him from hs wealth that which is enough for him to maintain himself and those whom it is obliged upon him to maintain according to what is (ma’rouf) reasonable of his wealth, until it is finished of its division between his creditors.

This short piece comes from Islamic Revival

The capitalist system in economics was implemented upon the western world, and upon Russia before the communist party ruled it. Among the principles of the capitalist ideology is freedom of ownership from which resulted the owners manipulation (misuse) of the employees i.e. the workers as long as there existed mutual consent and as long as the theory of liability is the one dominating over them. Labourers received from the employers evil, injustice and exploitation of their sweat and efforts. When the socialist thought appeared and called for justice to the employee, it emerged upon the basis of solving the problems of the labourers; not on the basis of treating the hiring contract. Accordingly socialism came with solutions to give justice to the worker, by determining the time of work, the wage of worker, guaranteeing his leisure etc….So it destroyed the theory of liability and showed its incompetence to solve the problems. So the jurists of the western law were forced to change their view towards liability, so that the theory of liability can stand/face before the problems; therefore they inserted amendments to patch up their theory.

Principles and rules were inserted into the work contract aiming to protect workers and to give them rights which they did not have before, like the right to get together, the right to form syndicates/unions, the right to strike, beside giving them retirement bonuses or compensation etc…even though the text of the theory of liability does not permit such rights. However interpolation had been made to the theory to solve the problems of workers which Socialist thought provoked/evoked amongst the workers. Then the socialist theory came to prevent ownership of wealth and give the worker everything he needs. Due to the contradiction of the viewpoints between the two ideologies, socialism from which emanates communism and capitalism, in respect of ownership and in respect of the employee, there emerged to them the labours problem. Each one of the two came to have a specific method in solving this problem which was generated by their two different viewpoints with respect to life.

As for Islam, there does not exist a problem known as labours problem nor is the Islamic Ummah divided into classes of workers and capitalists, or peasants and landlords etc….The whole issue is related to the employee, whether he was hired based on the work like specialists or technicians (faniyyeen) or he was hired based on his work only, like the rest employees; and whether he was an employee for persons or an employee for groups or a State employee, and whether he is a private employee or a common employee; they are all employees. The rules for such employees have been clarified and explained.

Once the employees commenced with a named wage, they are entitled of the named wage for the hiring period, and they can leave their employer after their hiring period ends; and if they differed with him, there comes the role of experts to estimate the equivalent wage. These experts are chosen by the two parties but if they could not agree upon them, the ruler chooses them and obliges the two sides to accept the experts say by force. It is not allowed that the ruler decides a specific wage by making analogy with the impermissibility of price-fixing for goods, because the wage is the price of the benefit and the price is the price for the good. Just as the market of goods decides the price of the good naturally, the market of the benefits of workers is decided by the need for workers. However it is duty upon the State to prepare work for workers:

“The Imam is a shepherd (ra’i) and he is responsible (mas’ul) for his subjects (ra’iyah)” (narrated by Al-Bukhari).

It is duty upon the State to remove the injustice of the owners of work upon workers, for silence upon injustice with the ability to remove it is forbidden and therein is great sin. If the State was complacent in lifting injustice or it itself oppressed employees, then the whole Ummah is obliged to account the State over this injustice and to endeavour to remove it. The Court of Unjust Acts is also obliged to look in this injustice and lift if from the oppressed people, and its verdict in the matter is executed upon the ruler and the State. This duty is not left to the employees who were oppressed alone as is the situation today in solving the problems of workers with strikes and demonstrations. This is because the injustice against any invidual of the citizens and the State’s complacence in taking care of the affairs of any individual citizen is a matter related to taking care of the whole Ummah even if it were specific to a person or persons. This is because it is execution of a Shar’ai rule, and it is not related to a specific group, even if it falls upon a specific group.

As for what workers require of medical/health guarantee for them and their families, and guarantee of their expenses in the situation of leaving work and at old age and guarantee of education for their children and similar guarantees usually discussed to secure the labourers, Islam does not discuss them when discussing the employees and employers because these are not the duty of the employer but rather the State. They are not also for workers only but rather for each unabled person among the citizens. This is because the State secures health and education freely for all, and secures for the unable person his expenditure whether he is a worker or not, since this is duty upon Bait ul-Mal and upon all Muslims.

Accordingly there does not exist labours problem nor a problem specific for a particular group or section of the Ummah. Any problem related to taking care of the affairs of citizens the State is responsible to solve it. The whole Ummah accounts the State so as to solve this problem and remove the injustice, not the official alone is responsible for the problem, nor the one upon whom the injustice falls

Introduction

The concept of empowerment is a particularly important one as the world moves toward globalization and a knowledge economy. The ability of every man to earn a living and accumulate wealth is no more in direct proportion to how much effort he exerts in a chosen field of endeavour. The fact that labour is now internationally mobile, means that every person is competing against a global pool of human capital, all vying for deployment in a limited pool of organizations. Thus, although a man may be willing to work very hard, the value of his work has been diminished by the forces of supply and demand. The demand for a paying job far outstrips the supply, and the ability to earn a living from entrepreneurial activities is being steadily diminished. Globalisation of the supply of capital has resulted in huge multinational corporations invading the towns and villages of every nation, offering products and services much cheaper than local providers, due to their economies of scale and access to capital. Therefore, the cornershop owner and the family business is fast becoming a thing of the past. Anecdotal evidence points to the offspring of established merchants opting to go into the professions, rather than trying to go into the family business. The common reason is that the chain stores and big business are just making life too difficult for the family business. Many of the people who choose to forego the chance of building the family business firmly believe that the lifecycle of business has reached the death phase and is not sustainable over their lifetimes. Thus, the demand for jobs in the corporate world far exceeds supply. From this observation, another factor rapidly creeps into view: knowledge. The skills needed to capitalize and run large multi-nationals and corporates is often very complex, further reducing the eligibility of many people to even begin competing for jobs. Thus, against a climate which is systematically disempowering people, there is a huge need for a mechanism to empower them.

Asset ownership is often the best way to empower people. The drive by government to increase the number of previously disadvantaged individuals completing a tertiary education is a drive to help them acquire an asset from which income can be produced: intellectual capital. The various funds set up to help entrepreneurs is also an attempt to help them acquire an asset: an income producing business. The question now arises as to which asset class is perhaps most suited to producing income for the largest possible number of individuals? This asset class would also need to provide passive income with low volatility and regular cash payouts, as well as long term capital growth. The ability to provide passive income is important, as not everyone will be able to adequately exploit an asset that requires active effort, for e.g. not everyone can run a business well, and not everyone can study and make money from their knowledge. Regular cash payouts are needed to supplement the other income sources of the recipient, and to provide a cash buffer against external and internal disruptions to earnings and savings, for e.g. an economic downturn or sickness. Long term capital growth is needed as a mechanism for facilitating generational wealth and the requirement for low volatility levels is important as a means of ensuring that the features of this asset which are so desirable are not rendered useless due to wild swings in value and income generation. The asset which satisfies this criterion is fixed immovable property. For the purposes of exploring how facilitating property ownership brings about empowerment, the asset class will be split into two sub-groups: residential property and commercial property.

Residential Property as a facilitator of Empowerment

Residential property ownership offers a number of empowerment advantages. Firstly, the ownership of a home provides a sense of security and stability. Without having to worry about the stability of his source of shelter, a man can focus on more important needs in life. Maslow accurately described a hierarchy of needs, and true to this hierarchy, if the lower order needs, such as food and shelter are not met, the higher order needs, such as the need for achievement and independence, can never be fulfilled. Also, a home houses families, through generations. Thus, a young entrepreneur with a family owned home to provide him with support, can afford to take risks in life and spend his earnings on trying to pursue ventures, as opposed to having to conserve cash in order to secure a dwelling for himself. Also, due to rising property prices over time, the equity inherent in homes can provide the collateral that a person needs in order to secure funding to be used in the acquisition of even more assets. A home is usually the most useful and valuable item to have on your personal balance sheet, as it provides stability, security, collateral and capital appreciation over time. Therefore, privatizing the ownership of homes is crucial, and as a second step, developing vehicles to help people own homes is very important in the empowerment process.

Commercial Property as a facilitator of Empowerment

All economic activity can ultimately be tied back to property. Service businesses, manufacturing, hospitals, etc. all need a fixed property premises from which to operate. Government departments, the civil service, etc. all also need a premises and land in order to operate. The surest way to ensure that you benefit from as wide a range of economic activity as possible, is to own as wide a range of land and property as possible. Therefore, if true empowerment entails sharing the proceeds of the countries economic activity across a wide range of stakeholders, then a broad investment in property is one of the best ways of doing that. Imagine an investment of just R1000 made into a property owning company that has a wide range of property interests. That R1000 will be deriving profits from retail, manufacturing, services, education, medical services, etc. Now, imagine that a million people each put in R1000 to establish such a company, and that each of the million people are rural farmers – you would have the situation where some of the best property in the country is owned by poor, rural people and the fruits of some of the best businesses in the country is being used to uplift them, by means of money transfer through rental. Thus, offering the masses the chance to own the prime property of the country is the best way to ensure that economic development benefits those that need it the most.

Conclusion

The investment in property by a community has the ability to uplift the community and to put the entire economic cycle of their radius of investment within their control. It is thus crucial that members of a community support efforts to establish such schemes, and that they move rapidly to secure the valuable property they so desire.

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“Islamic Finance and Economics is a Complete System”

The above statement has far reaching consequences for the way that we, as an Ummah, conducts our financial affairs.
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The concept of rights and obligations in Islamic Finance

The concept of rights and obligations play a central role in Islamic Finance. The prohibition of interest is a major facet of Islamic Finance, and the primary outcome of this prohibition is the preservation of the rights of both parties – the party that requires financial assistance and the party rendering it. By replacing the concept of lending money for interest, with the concept of equal risk sharing and trade, the rights of each party to a fair deal is cemented, as well as the obligation of each party to act fairly and justly. Islamic Finance, however, is more than just the prohibition of interest. Every facet of trade must be conducted in a manner such that the rights of each transacting party are protected, and the obligations of each party to each other is duly recognized and enforced. A person cannot renounce his rights, or sign them away, and any transaction structured on this basis will still be considered to be flawed in terms of Shariah.

For example, the owner of a property has the right to charge a rental for the use of his property, provided that such rental is charged in a manner consistent with Shariah, but he also has the corresponding obligation to maintain the property. If the landlord and tenant agree that the tenant will be responsible for maintenance and absolves the landlord of his responsibility, such a transaction will not be valid. The reasoning behind this is that in times of desperation, people are often tempted to waive the rights given to them, where such rights protect them, in order to relieve themselves of their plight. Upon the immediate release, people often realize that divesting themselves of their rights has left them open to exploitation, without the chance of protection.

Exploitation and oppression is expressly forbidden in Islam, and as such, a persons rights are of utmost importance, and cannot be renounced. One of the foremost negative effects of interest based lending is the undue pressure that it places on debtors to repay funds, and the increase in the amount payable over time. Thus, if a debtor delays in paying, for a valid reason, his debt continually increases, to the point where ultimate repayment is out of his reach. Thus the debtors obligation to pay has to be balanced off with his right to accommodation and understanding in the face of difficulties, and the lenders right to collect payment has to be balanced with the lenders obligation to have compassion towards a person in distress. The operation of an interest system makes the implementation and protection of the rights and obligations of both parties in a lending transaction impossible.

The concept of rights and obligations also comes into play in the relationship between employer and employee. The rights and obligations contained in an employment contract need to be fair and equitable, or the contract will be invalid in terms of the Shariah. Employees form the backbone of any business, and if the basis upon which they are undertaking their responsibilities is incorrect, the validity of all income earned by such employees for the business can also be regarded as doubtful. So important are the rights and obligations of transacting parties, that the Islamic Laws of Inheritance are entrenched and unchangeable, even by the person to whom the wealth belongs. In marketing and advertising, there is the right of the trader to advertise and explain the benefits of the products, but also the obligation to remain absolutely truthful and not to unduly coerce consumers into buying the product. When evaluating a transaction for validity in Shariah, the concept of rights and obligations is of utmost importance, and can determine the validity of even seemingly harmless transactions.

Any queries on Islamic finance issues can be directed to Mufti M.A. Minty at almazaahir@gmail.com

Fundamentals of Islamic Finance

Islamic Finance provides for the making of profits in an inclusionary and socially equitable manner
The prohibition of debt and fractional reserve banking serves as a buffer against rampant inflation
The goals of Islamic Finance are in many respects similar to the goals of conventional finance
The manner in which these goals are achieved is vastly different

The purpose of this article is to explain the fundamental principles and underlying philosophy of Islamic Finance, and to explore the possibilities of the implementation thereof in South Africa. Firstly, the philosophy and socio-economic rationale underpinning Islamic Finance will be introduced, as it will be difficult to appreciate the resultant financial techniques without an understanding and appreciation of these principles. The next step will be to compare the aims and objectives of Islamic Finance with that of conventional finance. This will, in turn, introduce the reader to the major points of difference between Islamic Finance and conventional finance. Having firmly established the philosophy, rationale and difference in approach of Islamic Finance, the different modes of financing in Islam will be explained, and examples given of their application. The status of certain conventional financial instruments in Islam will then be discussed, followed by a discussion of the application of Islamic Finance techniques to achieve specific financing objectives. Having explained the mechanism and application of Islamic Finance techniques, the focus will shift toward creating specific investment products, and risk/return profiles using these techniques as the building blocks. Finally the scope and possibility for application in South Africa and Africa will be examined, and the role of religious scholars and institutions will be examined and explained. A brief examination of the way forward for Islamic Finance in South Africa will conclude the article.

Contrary to popular belief, Islam does permit the making of a profit. In fact, profit forms the basis of the Islamic financial system, in that every technique of Islamic Finance allows for the making of a profit by the party that provides the risk capital, as well as the party that uses the capital. There are, however, conditions on the manner in which the profit is made, and Islam certainly does not espouse the making of a profit in any way that violates religious law or is harmful to the stakeholders inherent in the business or economic activity. Profits in Islam must be inclusionary and ethical. By inclusionary, it is meant that both the provider and user of capital needs to assume risk, and share in rewards. The major tenant of Islamic Finance is that interest, in any way, shape or form is strictly and utterly prohibited. Islam regards interest financing as immoral and socially and economically harmful, for a number of reasons: the extension of credit increases money supply, which stimulates demand, but does not always result in real, tangible economic activity – resulting in a variety of economic ills such as inflation, continued unemployment, widening income gaps, etc. In Islamic financing, money is never the object of trade, and every transaction must involve a tangible, useable asset – therefore, the only way for an individual to increase his/her income is through undertaking greater trade, manufacturing or service provision. This emphasis on economic activity ensures that as money changes hands( from the provider to the user) , this change is accompanied by an increase in trade, manufacture, service provision and, as a result, employment. Greater economic activity will stimulate the need and development of infrastructure, basic services, etc. There are also strict requirements regarding the nature of profit sharing, the interaction between business partners, the types of businesses that may be invested in, prohibited activities, responsibility to the community and environment etc. Thus, while CSI and business ethics are very much flavour of the day in conventional finance, Islamic finance has been entrenching, in fact demanding, these qualities of business for over 1400 years. Islamic Finance is therefore built on divine principles governing and enforcing accountability to stakeholders, moral behaviour, fairness, equality, promotion of free trade, the harnessing of resources through partnership as opposed to debt, etc.

The underlying aims of Islamic Finance are the same as those of conventional finance, namely:

• To utilize the funds of surplus economic units to facilitate investment and asset allocation
• To facilitate trade
• To provide financial services
• To create investment opportunities

The difference, however, between Islamic Finance and conventional finance is in the manner in which they proceed to meet their objectives. The basis of Islamic Finance is equity (through profit and loss sharing schemes) and rental income whereas the pillar of conventional fiancé is debt (through interest). The Islamic financier/investor deals in physical assets, whereas the conventional financier deals mainly in paper assets. Therefore an Islamic financier will assume the risk of the purpose of the funds he is investing and share in pre-agreed ratios in the profit or loss resultant there from, while the conventional financier will only assume the risk of default of the entity or person to whom he is advancing funds, and the only upside that he will receive is the interest payable on the loan. Therefore, if the interest payable on a loan is 10% p.a, the conventional financier will receive a return of R10 000 000 on a R100 million loan, regardless of the trading profit generated from that amount. If the Islamic financier had agreed to a 40% share of the profit or loss in return for investing R100 million in the entity, and the entity generated a net profit of R30 million, the financier would receive R12 million in dividends( much more tax efficient than interest!). Thus, the Islamic financier assumes business and operational risk in exchange of higher profits.

Seven major transactions form the building blocks of Islamic Finance techniques:

• Musharakah – this entails forming a partnership to undertake some economic activity
• Diminishing Musharakah – this entails one partner (or partners) buying out the interest of the other partner(s) over time, so that the interest of the other partner(s) in the venture diminishes.
• Ijara – this entails the rental of a physical asset to another party.
• Salam – this entails paying “now” for a commodity for delivery at some later, pre-agreed time.
• Istisna – this entails paying “now” for delivery at some later, pre-agreed time for a commodity that has yet to come into existence.
• Murabaha – this entails buying an asset, adding a fixed mark-up as profit, and then selling it, either as an installment sale or at spot.
• Mudaraba – this entails a form of partnership where one partner provides the capital and the other partner provides the skills.

It is crucial to note that there are numerous factors regarding the execution, nature of commodity, etc. of the above transactions that will affect it’s validity in terms of Shariah (Islamic religious law) – the above descriptions are meant to provide a broad, conceptual overview of the different permissible transactions. A complete discussion on the technical details and finer points of the above transactions are beyond the scope of this article.

It should now be obvious to the reader that any financial instrument or product involving the use of interest in any way is forbidden in Islam. But what about listed equity and derivatives? There are numerous equity funds that invest in listed equity and claim to be Shariah compliant. Worldwide, a screening mechanism and certain debt/equity ratios, dividend cleansing etc. are used to evaluate the suitability of a listed equity as a Shariah compliant investment. There are, however, scholars who render investing in listed equity to be forbidden, and some conservative scholars in South Africa agree – the important point, however, is to note that investing in listed equity has not gotten blanket approval as being permissible. Due to the fact that there is no physical underlying being traded (with a guarantee of exchange), any form of derivative is outlawed in Shariah. The precise reasons for the outlawing of derivatives are, again, beyond the scope of this article.

The true power of Islamic Finance comes to the fore when one considers the wide range of applications for the techniques described earlier. The possibilities are endless, but the following list gives a relatively comprehensive overview of the scope of application of the various Islamic Finance techniques:

• Murabaha – House Finance, Fixed Asset Finance
• Musharakah – Venture Capital, Private Equity, Project Finance
• Diminishing Musharakah – Venture Capital, Private Equity, House Finance
• Ijara – Asset Finance
• Salam – Agricultural Finance, Hedging
• Istisna – Asset Finance, Trade Finance
• Mudaraba – Venture Capital, Investment Funds

Diverse risk and payoff profiles can be created by constructing an investment portfolio consisting of investments using different modes of Islamic Financing. For example, an investor wanting regular income from his capital could buy assets and utilize an ijara agreement, whereby he would rent them out for a specified period of time at a specified monthly rental. An investor wanting high returns could enter into a musharakah agreement and buy a stake in a business. An investor wanting a balanced risk profile could invest half his money in an Ijara investment, and the other half in a Musharakah investment. Therefore, the principles of investment management, such as diversification, income versus capital growth, low risk versus high risk, sector diversification etc. will still apply to an Islamic investor, but the manner in which these objectives are achieved, as well as the investments utilized, will differ from conventional finance.

The scope of application of Islamic Finance in Africa and South Africa is enormous. Islamic Financing structures can be used to encourage SME development, provide affordable housing, finance infrastructure projects, facilitate BEE deals, etc. while always ensuring fair, ethical business practices aligned with an increase in real assets and employment. The role of Muslim scholars in sanctioning the validity of Islamic Finance products and transactions is vital, as seemingly unimportant details can change the Shariah status of a product or transaction. The problem at the moment is that there is no unified approval structure for the entire country. The way forward for Islamic Finance will emerge as entrepreneurs realize the scope of the potential market for Islamic products, and innovation and vision take hold of the country. Judging by the success of ethical funds worldwide, the need to bolster GDP in South Africa, and the intense focus on business ethics, Islamic Finance is going to become a permanent feature of South Africa and Africa’s economic landscape.

Any queries on Islamic finance issues can be directed to Mufti M.A. Minty at almazaahir@gmail.com

By Mahomed Shoaib Omar (Specialist Corporate & Islamic Finance Attorney) from Albalagh.netThe meltdown of the global financial system has raised profound questions of its fundamental structural reform. The downward spiral in the US and Western Europe is described by financial experts as deleveraging : the forced reduction of accumulated debt by households and financial institutions. As more assets get dumped into the market, prices are driven down further, which in turn necessitates more deleveraging. This vicious cycle has gained such momentum that even the massive bailout packages may not be sufficient to stop it. The bursting of the debt-fuelled property bubble in the US, together with the crippling losses suffered by banks, has set in motion a chain-reaction that, in a worst-case scenario, (according to Prof Niall Ferguson of Harvard) could lead to a 21st century version of the Great Depression (1).

The immediate cause of the current financial crisis appears to be the excessive and imprudent lending by banks (2). This in turn is attributed to the unbridled power of private bankers to create money out of nothing, and then to loan this bank-created money on interest (described as fractional reserve banking). In this present monetary framework, money is traded as a commodity, instead of performing its true function of operating as a medium of exchange. This system favours the rich against the industrious poor. Despite the fact that deposits are sourced from a broad cross- section of the society, their benefit goes mainly to the rich. James Robertson in “Transforming Economic Life”(3) states that:

“Today’s money and finance system is unfair, ecologically destructive and economically inefficient. The money – must – grow imperative … skews economic effort towards money out of money, and against providing real services and goods”.

A substantial proportion of this privately created bank-money is invested in speculative wagering instruments, such as derivatives based on futures, swaps, and options. Such betting instruments are not connected with transactions in the real economy. According to Prof John Gray of Oxford University, (4) derivatives have created a “virtual financial economy” which “has a terrible potential for disrupting the underlying real economy as seen in the collapse in 1995 of Barings, Britain’s oldest bank”. It is therefore no surprise that George Soros has described derivatives as “hydrogen bombs”. Warren Buffet described them as “financial weapons of mass destruction”. The Bank for International Settlements (BIS) currently estimates the notional amount of all outstanding derivatives (including credit default swaps) to be a staggering 600 trillion dollars, more than 10 times the size of the world economy. (BIS, September 2008, pg 20).

Although debt-financing cannot be ruled out, the solution lies in a shift to equity-based financing, posited on profit and loss sharing, which is the primary characteristic of Islamic Finance. In this equitable manner, economic effort would be directed at providing useful goods and services, instead of simply making money out of money. At the same time, the wide gap between the supply of money and the supply of real goods and services would be decisively narrowed. The distinguishing features and benefits of Islamic Banking were aptly summarized by the Islamic Development Bank, based in Jeddah, (established 1975) in the following words:

“Islamic banking is distinctive in two respects: concentrating on the real sector of the economy, it imparts tremendous stability to the economic system by achieving an identity between monetary flows and goods and services, and by operating on a system of profit and loss sharing in its evolved state, it insulates the society from the debt-mountain on the analogy that if the economies enter into recessionary or deflationary phases, the principles of profit and loss sharing protects the states and economic operators from the evils of accumulation of interest and minimizes defaults and bankruptcies.” (5)

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1. See generally the article entitled “The End of Prosperity” by Prof. Ferguson of Harvard, published in Time, October 13, 2008, at pages 18 to 21.
2. Dr M Umer Chapra, economics advisor to the Islamic Development Bank of Jeddah in a paper entitled “The Global Financial Crisis”. (Can Islamic Finance Help? (5/11/2008) (shorter version).
3. James Robertson, Transforming Economic Life : A Millennial Challenge, Green Books, Devon, 1998.
4. John Gray, False Dawn : The Delusions of Capitalism, Grunte Books, London, 1998, p62.
5. See the written submission of the Islamic Development Bank to the Supreme Court of Pakistan in 1999 in connection with its landmark judgment declaring all prevailing forms of interest as unlawful according to Islamic Law. The judgment was delivered on the 23 December 1999.