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Thursday, 26 July 2012

Islamic Finance - An alternative banking model?

Whether you're bored of bank bashing or not, there's no denying that people are searching for more trustworthy, transparent places to place their cash. And with the Islamic Bank of Britain (IBB) launching a table-topping 4% expected profit rate for its two-year fixed account, will faith-based bank accounts prove a popular alternative?
Contrary to what you may think, the account is open for anyone to apply. And as an Islamic bank, IBB does not pay interest. The rate is offered as an 'expected profit rate', because the Bank invests the funds into Sharia compliant and ethical trading activities. These activities deliver a profit over the 24 month term.
But you can trust in this, as IBB said it has never failed to deliver the expected rate.
How do Islamic bank accounts work?
Islamic banking products forbid the payment or receipt of interest and refuse to invest in "unethical" industries such as the gambling, pornography or the tobacco trades. They have become increasingly popular across a wide range of religious groups and general consumers.
Islamic finance turns traditional financial institutions on their head. It has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets - that money has no intrinsic value - might sound alien to the denizens of the City.
The principles of Islamic banking are more than 1,400 years old, but the practice is relatively new. It was launched in Egypt in 1963.
"As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty," reports the Times.
The UK now has a handful of fully Sharia compliant banks and dozens of other financial institutions have set up special branches or firms. They include the Qatar Islamic Bank(QIB), and the Islamic Bank of Britain, which has headquarters in Birmingham.
So are the basic principles what banking needs?
Could Sharia principles set us on the path to building real and sustainable economies?
Central to Islamic finance is the fact that money itself has no intrinsic value, it is simply a medium of exchange. Each unit is 100% equal in value to another unit of the same denomination and you are not allowed to make a profit by exchanging cash with another person.
But it does not abolish inherent business risk, and it can finance an asset bubble as well as any Western bank. Reflecting in part the world it comes from, it can be conservative and far from enthusiastic about innovation in either technology or finance.  And - this may be positive or negative - Islamic banking would have been unable or unwilling to finance growth through debt.
However, authors Andrew Sheng, ex-chairman of the Hong Kong Securities & Futures Commission and Ajit Singh, emeritus professor of economics at Cambridge University, said there is growing convergence between Islamic and western finance. It has an important role to play in reframing western finance in an ethical framework.
 "...Islamic finance could prove to be a serious alternative to current models of derivative finance."
"The test of any alternative financial system depends ultimately on whether it is - or can be -
more efficient, ethical, stable, and adaptable than the prevailing system.

"For now, there is no Islamic global reserve currency and no lender of last resort. But the Islamic world is the custodian of huge natural resources that back its trading and financial activities."
There should be a return to "back to basics" banking across the board, rather than merely among Islamic banks.
Some mainstream banks such as Lloyds and HSBC offer Islamic products. HSBC, for example, has Islamic mortgages that are in demand even from non-Muslims.
Some of the tenets of Islamic banking will appeal to anyone who agrees with the underlying principles of equitable distribution for everyone. And they are deemed efficient and productive by many.  
The International Herald Tribune adds: "Islamic banking and financial institutions provide a good example of Sharia sensitive business. There are a number of studies comparing efficiency and productivity of Islamic banks with their conventional interest-based counterparts, on the global, regional and national levels. The results of such studies are at best inconclusive, suggesting that Islamic banks are on average at least as productive, profitable and efficient as conventional banks in the jurisdictions wherein they co-exist with conventional banks."
(Mindfull Money / 25 July 2012)

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