Thoughts on Islamic Investment, Banking and Finance

Islamic (Shari’a) law has a framework derived from the Qur’an, Sunnah, qiyas and other religious text and several rules and governing principles have been established from this. Islamic finance entails risk sharing, partnership, and mutual agreement. However, as there are strict guidelines there are also certain concepts that are impermissible, such as:

Riba - this is “interest” from an Islamic perspective (in modern finance and economics, the term interest is now used to describe some things that do not necessarily constitute riba)

Gharar - when there is an unacceptable degree of ambiguity in the transaction

Oppression in any form

Anything that will credibly lead to any of the above

These guidelines in summary render practices such as gambling, uncertainty or doubtful deals and interest based lending haram. From what I gather, money itself is not considered valuable, rather it is an investment used as a placeholder for the value of another asset.

Challenges

Money cannot make more money - as interest is forbidden, investments should not be made into funds that grow by taking interest. Depending on the fund holdings these days, a portion of the fund may be cash. These cash portions should not be invested in interest bearing instruments.

No portfolio company may be involved in the business of alcohol, firearms, pork rearing and handling, pornography, gambling or tobacco.

Debt to market capitalization of each portfolio company cannot be greater than 25% - 30%.

It is difficult to create a fund portfolio strictly adhering to all principles of Shari’a as the fund may require that interest income for any of its companies may not exceed 5% of the total revenue.

Retail Forex

There are some scholars who do not believe that retail forex should be regarded as halal as they use leverage (borrowing) which although not haram, constitutes a loan from the forex broker with conditions ie a fixed return on basis of a loan, which is not permissible.

Even if you were to argue on forex trading as a derivative, this is inadmissible as interest is charged. The broker in this case is only lending to you provided you go through them and they are paid a commission on your transaction.

The traders that offer “Islamic forex trading” take away the interest portion of the trade but still leave non-Shari’a compliant issues. In these cases, brokers should be challenged to show a Shari’a certification and this should be followed up by contacting the scholar that certified them.

Student Loans

Interestingly enough, student loan systems which tend to be performance based or rather income contingent in operation do not fall under the definition of a debt contract in Islamic law. This is because in the event of being unemployed or employment with a salary below a certain threshold the borrower is either not required to repay or the loan is repaid at a lower rate (dependent on the country/region).

Mortgage

Any transaction involving a house in Islamic banking can be seen as a deception to hide the condition of riba. This is because a mortgage though generally viewed as a loan on your house is actually a loan based on a person’s income; which is further secured by the house.

Solution

The bank sells the property at a higher price under an installment plan - the bank will either sell the property at a higher price to the borrower under an installment plan, or rent it to the tenant/homeowner, and have them pay a contribution toward the principal balance of the home each month until it is paid off in full. The rent price is typically established by looking at comparable homes in the area where the subject property is located.

Lease to purchase contract - the homeowner “rents” the property while paying down principal and gaining home equity. Once a significant chunk has been paid down, they might be able to buy the property outright with cash.

Create an LLC - whereby the finance company and the home buyer own shares in the property.

Fintech and Bitcoin

During my research it was interesting to see the silent progress of Islamic fintech, notably being led by the UK followed by Malaysia and the UAE. This completely changed the way I viewed the sector, as my preconceived notions led me to believe this was a niche. However when faced with the reality of the sheer number of practicing Muslims worldwide (1.6 bn Muslims which make up 23% of the population) it was clear that there was a huge gap in my knowledge.

It was particularly interesting to note that the relationship between a distributed, autonomous Blockchain management system (virtual currency) like Bitcoin can conform with the prohibition of riba and incorporate mutual risk-sharing. This means as a payment network, not only is Bitcoin halal but it is more halal than any currency in wide circulation today as is not based on debt — it’s based on a proof of work.

Conclusion

In conclusion, the principles behind Islamic banking, investment and finance seem to be ethical and fair. When it comes to investment and financing there are already occasions where funds and collectives have to operate by strict rules be it value based, activism or religious.

For a startup or someone seeking funding, you may find yourself limited by the values and interests that you represent. Likewise as a business operator it is always interesting to observe the way the services you offer can be customized to have a wider reach and to suit a more globalized economy in order for you to not be caught unawares and stuck behind the times.