I had the opportunity to translate technical documents for both conventional and sharia financial products a few years ago, and I find the market fascination of them mind-boggling.
These products seemed to incorporate convoluted jargon and concepts which dramatically increased complexity but at the same time, produced no extra utility for end-users.
On top of that, the addition of ongoing shariah-compliance introduced a level of uncertainty that was simply not there in conventional finance. If the building you constructed ended up being used as a cinema, then the shariah debt you used to finance that building needs to either be restructured or unraveled. Why on board such a risk?
Even as a muslim myself, I feel like sharia finance is a step backwards.
Interest is just another term for the time value of money. The time value of money is a fact of life as long as there are opportunities in the world to invest in something that is productive.
Therein lies the problem: you can't explicitly charge interest, but you are still subject to the time value of money.
The only option is to describe/disguise the time value of money in terms that don't bring up interest. That is a juggling act because interest is really the simplest (imho) way of understanding it.
I must say I once read a prospectus for a sharia financed product. No "interest", only "percentual administrative fees".
Wait, what ?
Other than that, they're essentially "pulling an uber". They're significantly riskier investment schemes that most institutions have had really bad experiences with a few decades ago. They're ignoring regulations that exist for good reason, and regulators seem to let them for some reason (for now).
If you want to do that, great. Risky investments are most often the mispriced ones (cheaper then they ought to be). But please, do it yourself, figure out the risks, and don't let some institution do it for you with the promise of cover or ... or you will regret it.
I agree that your experience is exactly what sounds like: taking a conventional financial instrument, replacing all mention of the word “interest” with something way more complicated, and adding rules that seem difficult to always stay on the right side of. That happens to be exactly what Tarek El Diwany (mentioned in the second last paragraph of article) is saying.
Shariah banks have to operate in a world that has completely accepted conventional banking. As a result, it is in a constant state of playing catch up in terms of fitting in (e.g. having to implement a software interface in which you reject some central tenets of the interface).
I don’t know the answer one way or another. What I do know is that conventional banking remains imperfect in spite of it being totally dominant: the boom-and-bust economic cycles have grown more catastrophic, and we are still grappling with accurately adding phenomena like health and pollution into our financial models.
I applaud you for trying to understand how conventional and sharia financial products fit together. I don’t find your reaction offensive: it just means we aren’t done trying find a good solution that makes both technical and moral sense.
In Spain the Catholic Church created a series of banks for lending to poor people, and investing profit in social causes. I think the concept came from Italy.
Those banks were called "Cajas de ahorros". Most people had their money there instead of private Banks.
The concept worked very well for something like 200 years. Until politicians changed the law to control the Cajas themselves.
After politicians took control,they did things like private lending at 0 interest to their friends and party(they even lent to one of the biggest party 50 Million euro and then totally forgave the debt!!) or putting their almost illiterate friends as counselors.
It took only 15 years after that to totally bankrupt all cajas in Spain, and now they are owned by private banks.
The Catholic Church has always tended to see charging interest as being equivalent to committing the sin of usury and throughout history they've tried to ban it several times. See for instance: https://en.wikipedia.org/wiki/Vix_pervenit#Historical_contex...
In practice these prohibitions weren't too effective because people always found loopholes and ways of charging interest without calling it interest.
Very interesting--I had never heard of this before.
It seems the higher interest rate is predicated on finding investors who want to take loans at higher-than-market-clearing rates. Does anyone have any insight into why non-Muslims are getting loans through these banks? I don't see how this scales to consistently provide higher returns, especially as more money moves into this system. Are tobacco and alcohol related loans failing at a higher rate than the rest of the market?
I would expect a sharia bank to provide market-beating returns to investors because it can charge above-market mortgage rates to borrowers who have no alternative. From the article:
> Al Rayan’s home purchase plan (its sharia-compliant version of a mortgage) charges 4.24% in the first two years, almost double the market average. Even so, 12% of Al Rayan’s home-purchase customers are non-Muslims.
I'm as stumped as you are regarding that 12% number though.
The hypothesis that the war on terror (pointless as it may be) is actually driven by Western banks and the concept of intrest and that the solution lies in sharia banking laws is quite something to get your head around.
This is great. I'm not a Muslim, but learning that there are banks that don't invest in arms and tobacco - this is great news, and I guess I'll take a closer look at halal banking soon. For too long I've been bothered by the fact that I don't have much say in where my funds are invested by the 'normal banks' - the fact that there is an option for those of us who don't want to participate in the military-industrial-pharmaceutical complex, is indeed great news.
It seems if you save money at the bank they will actually loose money for you since their interest rate is lower than inflation. The financial market is such a clusterfuck lmao
I like the idea of more ethical banks, but I think the article is overselling the popularity of Islamic institutions in the UK. I live in London and whilst I'm aware that Sharia banking exists as a concept, I've never heard of BLME. Also the opening sentence comes off as slightly absurd:
>THE HALAL restaurants established by Muslim migrants in Britain quickly inspired an almost religious following among non-believers.
>THE HALAL restaurants established by Muslim migrants in Britain quickly inspired an almost religious following among non-believers.
I think some people (not massive numbers, admittedly) avoid Halal restaurants/meat because the method of slaughter is less humane and doesn't typically involve stunning the animal first.
Yeah, some actual growth numbers and customer numbers would have been nice, but I don't see The Economist overselling the popularity at all; instead, I just see them saying that it is growing (based on my reading of the first paragraph).
I don't see anything more or less ethical here. The bank has to get a return. Whether it does so through interest or a "share of the profit" is more a matter of risk and transaction cost. It's hard for me to believe that what it costs to maintain a knowledge of a borrower's profit and then collect from that is really competitive.
The title and article are using reglion as a context when it's not. As a consumer I am not converting to Sharia finance, I have just found a product which meets my requirements.
The index fund I am invested in turns out to be mainly high tech stocks with a low fee, just because it has 'Islamic' in the fund name doesn't mean I'm a convert to the religious philosophy.
Would you still be concerned if the title said "Why non-Muslims are converting to financial institutions which abide by sharia law"?
They're a publication; the job of all headline is to convince people to read articles, and on the "clickbait" scale, this seems to be pretty solidly "not clickbait".
Common question here - standard Economist policy is never to name their writers and correspondents, except very very rarely. Their content is published under the name of the newspaper, not the individual author.
Usury (/ˈjuːʒəri/)[1][2] is, as defined today, the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors. Historically, in some Christian societies, and in many Islamic societies even today, charging any interest at all would be considered usury. Someone who practices usury can be called a usurer, but a more common term in contemporary English is loan shark. [0]
On-Topic: Anything that good hackers would find interesting. That includes more than hacking and startups. If you had to reduce it to a sentence, the answer might be: anything that gratifies one's intellectual curiosity
"anything that's interesting" was already mentioned, but even ignoring that I don't understand your question. The article is about businesses following certain rules that have to act in interesting ways, and how that plays out with financing. That's right at the core of HN!
Its quite interesting. I'm a hacker, and I'd really rather not invest my money in things I find morally objectionable, such as arms and tobacco. So this is indeed a great article.
I once read that "sharia finance" is just a buzzword and those banks are doing business as every other bank, just with different naming of their processes/products.
[+] [-] Mengkudulangsat|7 years ago|reply
These products seemed to incorporate convoluted jargon and concepts which dramatically increased complexity but at the same time, produced no extra utility for end-users.
On top of that, the addition of ongoing shariah-compliance introduced a level of uncertainty that was simply not there in conventional finance. If the building you constructed ended up being used as a cinema, then the shariah debt you used to finance that building needs to either be restructured or unraveled. Why on board such a risk?
Even as a muslim myself, I feel like sharia finance is a step backwards.
[+] [-] projectramo|7 years ago|reply
Interest is just another term for the time value of money. The time value of money is a fact of life as long as there are opportunities in the world to invest in something that is productive.
Therein lies the problem: you can't explicitly charge interest, but you are still subject to the time value of money.
The only option is to describe/disguise the time value of money in terms that don't bring up interest. That is a juggling act because interest is really the simplest (imho) way of understanding it.
So you get a lot of obfuscation.
[+] [-] superhuzza|7 years ago|reply
[+] [-] candiodari|7 years ago|reply
Wait, what ?
Other than that, they're essentially "pulling an uber". They're significantly riskier investment schemes that most institutions have had really bad experiences with a few decades ago. They're ignoring regulations that exist for good reason, and regulators seem to let them for some reason (for now).
If you want to do that, great. Risky investments are most often the mispriced ones (cheaper then they ought to be). But please, do it yourself, figure out the risks, and don't let some institution do it for you with the promise of cover or ... or you will regret it.
[+] [-] tareqak|7 years ago|reply
Shariah banks have to operate in a world that has completely accepted conventional banking. As a result, it is in a constant state of playing catch up in terms of fitting in (e.g. having to implement a software interface in which you reject some central tenets of the interface).
I don’t know the answer one way or another. What I do know is that conventional banking remains imperfect in spite of it being totally dominant: the boom-and-bust economic cycles have grown more catastrophic, and we are still grappling with accurately adding phenomena like health and pollution into our financial models.
I applaud you for trying to understand how conventional and sharia financial products fit together. I don’t find your reaction offensive: it just means we aren’t done trying find a good solution that makes both technical and moral sense.
There’s a really long Wikipedia article here about profit-loss sharing, which central concept of how sharia banking is meant to work: https://en.wikipedia.org/wiki/Profit_and_loss_sharing
N.B. I apologize for any typos since I typed/tapped this out on my phone.
[+] [-] Salamat|7 years ago|reply
[+] [-] stealthcat|7 years ago|reply
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[+] [-] hevi_jos|7 years ago|reply
Those banks were called "Cajas de ahorros". Most people had their money there instead of private Banks.
The concept worked very well for something like 200 years. Until politicians changed the law to control the Cajas themselves.
After politicians took control,they did things like private lending at 0 interest to their friends and party(they even lent to one of the biggest party 50 Million euro and then totally forgave the debt!!) or putting their almost illiterate friends as counselors.
It took only 15 years after that to totally bankrupt all cajas in Spain, and now they are owned by private banks.
[+] [-] lottin|7 years ago|reply
[+] [-] pvaldes|7 years ago|reply
Some cajas, not all.
The broken cajas typically 'bribed/rewarded' policitians offering them vacancies in their boards of directors.
[+] [-] my_username_is_|7 years ago|reply
It seems the higher interest rate is predicated on finding investors who want to take loans at higher-than-market-clearing rates. Does anyone have any insight into why non-Muslims are getting loans through these banks? I don't see how this scales to consistently provide higher returns, especially as more money moves into this system. Are tobacco and alcohol related loans failing at a higher rate than the rest of the market?
[+] [-] lmm|7 years ago|reply
> Al Rayan’s home purchase plan (its sharia-compliant version of a mortgage) charges 4.24% in the first two years, almost double the market average. Even so, 12% of Al Rayan’s home-purchase customers are non-Muslims.
I'm as stumped as you are regarding that 12% number though.
[+] [-] tareqak|7 years ago|reply
Edit: there -> their
[+] [-] unknown|7 years ago|reply
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[+] [-] tareqak|7 years ago|reply
[+] [-] stef25|7 years ago|reply
[+] [-] mmjaa|7 years ago|reply
[+] [-] codeulike|7 years ago|reply
Maybe its not a very big thing in the USA. Ethical Banking is pretty big in the UK.
[+] [-] TheSpiceIsLife|7 years ago|reply
[+] [-] ElBarto|7 years ago|reply
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[+] [-] SuoDuanDao|7 years ago|reply
[+] [-] ru999gol|7 years ago|reply
[+] [-] n4r9|7 years ago|reply
>THE HALAL restaurants established by Muslim migrants in Britain quickly inspired an almost religious following among non-believers.
[+] [-] gadders|7 years ago|reply
I think some people (not massive numbers, admittedly) avoid Halal restaurants/meat because the method of slaughter is less humane and doesn't typically involve stunning the animal first.
[+] [-] ElBarto|7 years ago|reply
What they do is a lot of mental gymnastics to avoid calling what you pay for a loan 'interest'.
[+] [-] tareqak|7 years ago|reply
Edit: fix typo
[+] [-] hjek|7 years ago|reply
[+] [-] mbostleman|7 years ago|reply
[+] [-] vectorEQ|7 years ago|reply
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[+] [-] nextweek2|7 years ago|reply
The index fund I am invested in turns out to be mainly high tech stocks with a low fee, just because it has 'Islamic' in the fund name doesn't mean I'm a convert to the religious philosophy.
[+] [-] akerl_|7 years ago|reply
They're a publication; the job of all headline is to convince people to read articles, and on the "clickbait" scale, this seems to be pretty solidly "not clickbait".
[+] [-] dang|7 years ago|reply
[+] [-] comesee|7 years ago|reply
[+] [-] vmlinuz|7 years ago|reply
[+] [-] jpatokal|7 years ago|reply
[+] [-] raverbashing|7 years ago|reply
[+] [-] tareqak|7 years ago|reply
[+] [-] titanix2|7 years ago|reply
This very neutral way of writing is telling.
[+] [-] agumonkey|7 years ago|reply
[+] [-] tareqak|7 years ago|reply
Usury (/ˈjuːʒəri/)[1][2] is, as defined today, the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Originally, usury meant interest of any kind. A loan may be considered usurious because of excessive or abusive interest rates or other factors. Historically, in some Christian societies, and in many Islamic societies even today, charging any interest at all would be considered usury. Someone who practices usury can be called a usurer, but a more common term in contemporary English is loan shark. [0]
[0] https://en.wikipedia.org/wiki/Usury
[+] [-] frogeg|7 years ago|reply
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[+] [-] peapicker|7 years ago|reply
[+] [-] Proven|7 years ago|reply
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[+] [-] blijf|7 years ago|reply
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[+] [-] tareqak|7 years ago|reply
On-Topic: Anything that good hackers would find interesting. That includes more than hacking and startups. If you had to reduce it to a sentence, the answer might be: anything that gratifies one's intellectual curiosity
[+] [-] Dylan16807|7 years ago|reply
[+] [-] mmjaa|7 years ago|reply
[+] [-] simplysimple|7 years ago|reply
[+] [-] SpikeDad|7 years ago|reply
[+] [-] k__|7 years ago|reply