By: Nesima Aberra
Muslims living in the West are used to having to find creative ways in order to live according to their Islamic principles whether its finding halal food or getting time off for religious holidays. Dealing with interest, riba, in banks and financial transactions, although forbidden in Islam, is one area where many Muslims compromise themselves thinking they have no other choice or simply choose not to be concerned with. Now, the industry of Islamic financing or Sharia-compliant financing has taken hold globally as a popular finance option that both Muslims and non-Muslims are taking advantage of for reasons of morality and stability.
The concept of Sharia-compliant financing basically revolves around avoiding investment in haram items like alcohol, pork, gambling, pornography and avoiding paying or accepting interest as outlined in the Quran. These restrictions are in place so Muslims avoid profiting off of religiously prohibited activities and to encourage more equitable transactions, but the other Abrahamic faiths also mention the prohibition of usury.
Islamic financing notes a difference between financial transactions to assist someone and financial transactions for the purpose of trade. Because interest is avoided, there are alternative permissible transactions such as partnership agreement, musharaka, profit sharing, mudharaba, leasing, ijar, Islamic insurance, takaful, Islamic bonds, sukuk, and cost plus markups, murabaha.
The guidelines that Islamic financial institutions follow can be from different national or international organizations and advisory boards such as the Fiqh Council of North America or the Islamic Financial Services Board.
R. J. Wilson, an economics professor specializing in Islamic finance at Durham University, said the merit of Sharia-compliant banking is that it is about risk sharing between the customer and the bank because the customer is not forced to pay the bank extra for its services. Some well known Islamic banks include the Islamic Development Bank, HSBC Amanah Malaysia and Lariba, an American finance house.
“With conventional loans, the client is taking all of the risk rather then the bank, “ Wilson said. “With Islamic loans, there is risk-sharing and also reward sharing. Essentially it is more just and more moral, so there are many advantages.”
Wilson said that contrary to popular belief, it is possible for a system to exist without interest and that Islamic financing can work side by side with capitalism, as he looks to his own city of London where there are five Islamic banks in business.
He said that Islamic banking has been fairly profitable and that many banks do still charge for the financial services they are giving, just not interest. One practice, murabaha, has caused some controversy because it involves the banks selling a commodity that a buyer wants to purchase at a declared mark-up price. The buyer then must re-pay the bank over time until they own the commodity in full. Critics say that it is simply interest under another name and therefore, no different than a conventional loan.
Wilson disagreed, explaining that murabaha is still in line with Islamic teaching, because in this case, the bank is taking ownership of a business and the risks.
He acknowledged that there is still much disagreement and difference of opinion in the industry from Islamic scholars, but as an evolving industry, Islamic financing will have more consistency with further education.
“There are challenges, but it is like an Islamic form of capitalism, because Islam respects private property and ownership rights. Islamic teaching is not against markets; they are seen as natural,” Wilson said. “The problem is that markets sometimes have unjust consequences which Islamic finance tries to eliminate.”
When it comes to purchasing a house, Sharia-compliant mortgage plans work a bit differently, but are still possible. Based in Northern Virginia, Guidance Residential is the leading Islamic home finance provider in the United States and has provided over $2 billion in financing to customers in 22 states since 2002. It is the mortgage arm of Guidance Financial Group, LLC, an international company dedicated to Sharia financing and services. The company says its services are certified by an “independent Sharia Supervisory Board to ensure strict standards of Sharia compliance.”
Hussam Qutub, vice president of corporate communications at Guidance Residential, said that based on the advice of Sharia scholars, the company adopted a musharaka policy or a “Declining Balance Co-ownership Program”, a partnership with Guidance and its customer to own a home.
“With a conventional mortgage, the company signs as a loaner. Our alternative is a co-ownership agreement. We own it together and over time, transfer the ownership from us to you,” Qutub said.
During the co-ownership, the homebuyer makes monthly payments, including a utility fee for using the home and the rest of Guidance’s ownership until the buyer owns the home completely. There is also a cap on late fees.
Qutub said that Guidance’s program has been favorable and popular with both Muslim and non-Muslim customers especially in current economic times, because the Islamic guidelines prevent the company from “making money off of somebody’s misfortune and hardship or forgetfulness.”
The risk-sharing aspect encourages a company to be more conservative and cautious with the customers it qualifies, Qutub said, leading to more responsible financing that doesn’t put people into homes that they can’t afford.
“As a result of being prudent and conservative as a financier, we looked at our last year and our defaults and delinquencies are half the industry average of conventional industry,” Qutub said. “Life happens. People get laid off, people lose their jobs-Muslims or not-we’re all facing of issue of unemployment.”
In the past few years, Guidance has gotten an increase in media attention, which had led to Islamic countries’ interest in adopting similar financial programs. The company has done consulting in Saudi Arabia with one of the top mortgage companies there and is currently working in Indonesia and Egypt as well.
Amana Mutual Funds is a unique player in the global financial world by following principles of Islamic finance while still remaining a stable and wise investment option. The idea for Amana Mutual Funds came in 1984 when the North American Islamic Trust was concerned about the lack of halal options for Muslim investors. Amana follows guidelines by the Fiqh Council of North America and requires that investors avoid interest, owning bonds, banks and businesses that largely profit from pornography, gambling and liquor. In 2010, Amana Growth and Amana Income had combined assets of $2.7 billion and have about 2,000 US companies that qualify.
Despite the restrictions, Monem Salam, director of Islamic investing and deputy portfolio manager at Amana Funds, said that the funds are growing and people are realizing the benefits of investing according to Sharia principles.
He said the funds use a “buy-hold” philosophy, meaning they don’t constantly buy and sell, per the idea that gambling is not allowed in Islam. Salam is confident that investors in Amana Funds are not compromising profit and that when comparing the conventional indexes and Islamic ones like the Dow Jones Islamic Market Index, that there is no statistical difference in performance over the long-term trend.
“There’s an old myth that people thought about sacrificing returns or paying extra, when it comes to funds, but that has not been the case. In the financial crisis, we didn’t have any banks that we owned and didn’t suffer. We actually outperformed and that helped us to be able get more money,” Salam said.
Although the number of institutions offering Islamic finance options is growing, Muslims may still be skeptical about making the switch or incorporating Sharia-compliant practices into their lives.
“There has been a great amount of information sharing, more accessibility to differences between conventional financing and Islamic financing, yet there is still a thirst for more information and understanding,” Qutub said. Guidance Residential has responded to that desire by writing articles, holding classes and seminars at local mosques and for local real estate agents.
He said that there is wisdom behind Islamic financial practices in that they stress social and economic justice as opposed to the current destructive system that takes advantage of the have-nots.
Salam agreed that people shouldn’t shy away from Islamic financing just because of the differences and that everyone is able to participate if they are willing.
“Islamic finance has a lot to offer. It is an alternative to conventional finance; it would be naïve to think it could take over that finance space,” he said.
It may not take over the space of conventional finance, but as all three interviewees brought up, Islamic financing may look like a more promising and less risky option as the economic crisis continues on.