Thursday, 24 October 2013

Talk : Islamic Finance

Interesting Cafe Sci talk recently entitled "Islamic Finance - Why? How? Dos it matter?" presented by Islamic Finance expert and former PWC partner Mohammed Amin

Amin gave an introduction to what banks and insurance companies do (such as converting low risk, low interest deposits into high risk, high interest loans and transfering risk from the insuree to the insurer)

He then outlined some of the practices that Shariah law prohibits:

RIBA (Paying or receiving interest)

GHARAR (excessive uncertainty)

MAYSIR (gambling)

between them these essentially prohibit conventional banking and insurance.

An example of a Sharia compliant loan is the "Murabaha" contract, which works as described in the example below :

1) Bank purchases £100 of, say, copper (or other physical asset)
2) Bank sells copper to customer for £105, with payment deferred for 12months.
3) Customer immediately sells copper and gets his £100
4) 12 months later, the customer repays the bank £105

Other examples of Islamic finance products were also described, such as Sukuk, which is a Sharia compliant version of company bonds and Takaful, which is an Islamic insurance model. The UK government is supportive of Islamic finance in order to encourage the financial inclusion of Muslims and also in the hope that London becomes a hub for Islamic finance products

A mancus or gold dinar of the English king Offa of Mercia (757–796),
 a copy of the dinars of the Abbasid Caliphate

The inital Islamic banking commercial loan products in the 1950s were often based on a profit-sharing model. Unfortunately, what often happened was the the loan recipients would keep a separate set of books showing that they were not making a profit, so the bank would make a loss. Unsurprisingly, these types of profit sharing loans are now much less common, although they can work in large companies that have the infrastructure to ensure good reporting of information.

Amin pointed out that the Islamic financial products were more complex in their structure than the conventional financial products and that the small customer base in the UK meant that it was difficult for Islamic banks to be competitive here. In contrast, in countries such as Malaysia, where there is a large Islamic banking sector, Islamic banks can be as (sometimes more) competitive than conventional banks.

He also commented that the idea that all money could be based on gold was "economically bonkers" as the availablility of gold grows much more slowly than the economy, resulting in deflationary effects (which is a bad thing)

Unsurprisingly, Amin commented on how Islamic scholars differed in their views somewhat, for example in what level of uncertainty made a transaction Gharar and it was also a surprise to hear that some of the financial products being sold by Islamic banks were only relatively recent innovations, in some cases only having being offered for the last decade or so.

In a response to a question about inflation, Amin said that his view was that inflation was caused by too much money chasing too few resources, and that this could happen in an Islamic financial environment as well as a conventional one. He also pointed out that a small positive inflation rate allowed some items, such as wages, to be greadually reduced without actually paying people a fewer number of pound notes.

Image Source : Wikipedia

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