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Saturday, 26 January 2013

Cost-plus Finance Allowed, Interest Prohibited in Islam

The argument that earning profit is like earning interest by lending money (where profit is fixed like the rate of interest on loan) is indeed an age-old debate which has also been pointed out 1,434 years ago in the holy Qur’an.
“Those who devour usury will not stand except as one whom the Evil one by his touch hath driven to madness. That is because they say: “Trade is like usury,” but Allah Hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (To Judge); but those who repeat (the offence) are companions of the Fire: They will abide therein (for ever).” (Al Qur’ān 2:275)
Money lenders have been trying to claim that earning through trade is like earning interest on loan, but ‘by permitting trade and prohibiting interest’ Islam clearly declined the disbeliever’s view that ‘trade is like usury’. Murabaha is basically a trade activity (quite different from lending money on interest) because under Murabaha the financier purchases and sells goods on credit after adding a margin of profit over the cost of purchase; whereas under interest based lending financier does not take part in any economic activity, but just lends money and gets back along with interest over principal amount after a set time.
There are around 10 Qur’ānic verses and 23 Hadith on prohibition of Interest (Riba) of different nature. According to Shariah, Riba technically refers to the “premium” that must be paid by the borrower along with the principal amount as a condition for the loan or for an extension in its maturity. So, Riba has the same meaning as interest in conventional banking in accordance with the consensus among all Islamic schools of thoughts. There are two major types of Riba in Shari’ah.  The first (Riba al Nasiah) describes prohibition of lending money on interest whereas the second (Riba al Fadl) prohibits all unfair commercial transactions that leads to exploitation. Since Murabaha does not fall under any category of Riba described in Hadith, it cannot be rated alike lending on interest. Furthermore, there are operational differences between lending money on interest and cost plus finance.

Lending Money on Interest
Cost Plus Finance (Murabaha)
Financier lends money to earn interest over principal amount without bearing risks associated with the borrower’s economic activity. Financier practically doing trade by purchasing and selling goods on credit at a price set after adding profit margin over cost of purchase. Money is considered a kind of asset and accumulation of monetary asset is made out of monetary asset without changing its form from money to goods. Money is treated as means to measure value of goods and medium of exchange. Value of goods may enhance only after selling the bought goods to customers. Financier has nothing to contribute towards Government revenue. Financier pays sales tax on trade volume to the Government. Financier does not interfere in business activity of the borrower and does nothing to help the borrower get competitive prices for sought goods or commodities. Financier bargains with the supplier to avail discount in price of goods so as to offer competitive prices of the goods to the customers. Financier has nothing to do with quality of the goods sought by its customer. Financier bears associated risks on quality of the goods sold to its customer. Through lending loan on interest the Financier increases customer’s demand force which may inflate the economy with limited resources for suppliers. Purchase and sale by financier boosts production process and flow of liquidity from the customers to the bank and reduces inflation by slicing purchasing power. Rate of interest on loan amount is related to time factor. There is no interest and the price value of sold goods is not related to time factor. Borrower needs to repay the instalment of interest and principal on due dates. Customer is supposed to repay part of total price value of goods on due dates. Financier does not allow the borrower to reschedule the instalment on due dates even in case of any genuine financial crisis. Penalty may be charged for that. In case of genuine financial crisis, the financier does allow the buyer to reschedule the due instalment dates without any penalty. Financier need not to get any registered sale tax number. Financier needs to obtain registered sales tax number. Financier has nothing to do in collection and submission of sales tax. Financier used to pay and charge sales tax; and submit to sales tax department. Financier need not to have any purchase officer with specialisation in trade. Financier does need to have purchase officer with specialisation in trade.      

Besides above operational differences, it is important to analyse and evaluate the impacts of interest based lending and cost plus finance on the economy. Interestingly, Cost Plus Finance has the potential to increase economic growth by pushing consumption, production and Government revenue with putting customers demand forces under control with flow of liquidity from customer to bank segment. 
We can evaluate the differential impact of interest based lending and cost plus finance by a hypothetical study. Suppose there are two types of banks in our economy. One is lending on interest and the other is offering cost plus finance. Both can offer same rate of returns to their depositors (e.g. 8% annual interest or dividend to the depositors) and charges 15% annual interest on loans or adds 15% profit margin (over cost of purchase) in case of cost plus finance. Since bank extending cost plus finance with intention to get competitive quote for the goods, bargains with the supplier and pass on the discounts to the buyer, it helps the customer pay less for availing required goods; and also provides more revenue for the Government.
The practice of cost plus finance by banks can help us to -
Increase in consumption (as the consumer takes goods from bank on credit) to increase potential for economic growth rate. Decrease in prices as purchase of goods by bank allows the supplier to produce more; and increase in productivity with constant demand would lead to fall in prices. Control in demand side inflation because the customer does not get liquidity rather would need to repay value of bought goods back to the bank; and the customer needs to transfer access of income over expenditure to repay cash to the bank.
We hope that the RBI would introduce cost plus finance under Para banking as an optional product with intention to keep inflation under control with increase in economic growth rate. Hopefully, money lenders would not argue again and again that trade is like lending on interest.

(Radiance Views Weekly / 25 Jan 2013)

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Top 10 Halal Friendly Holiday Destinations for 2013

Halal Tourism has finally come of age. The tourism industry has finally woken up to  the potential that halal tourism industry holds, with 1.6 billion Muslims under it. The word halal refers to ‘Islamically permissible’. Halal tourism involves, serving  halal food, having separate swimming pools, spa and leisure activities for men and women, cafés, lounges and restaurants that serve non-alcoholic drinks etc. Some of them even have private beaches exclusively for women, and mixed beaches for families where women can wear the Islamic swimming dress code and hang out with their families. Countries that promote halal vacations,  makes the holiday experience for a Sharia abiding Muslim, a pleasant  and memorable one.
The management consultancy firm AT Kearney estimate that the global halal market to be around US $2 trillion, underpinned by one of the fastest growing religions in the world.
In a study by the Singapore based research company Dinar Standard, the Muslim tourists globally represent a major niche market worth $126.1 billion in 2011 growing at a higher 4.8% through 2020, compared to global average of 3.8%.
The Muslim tourism market (US $126.1 billion) is 12.3% of the total global outbound tourism market in 2011, estimated at US $1,034 billion by the U.N. World Trade Organization (UNWTO). The Middle East and North Africa markets represents 60% of total global Muslim tourist outbound expenditure in 2011, with Saudi Arabia topping the list, followed by Iran, UAE, Indonesia and Kuwait.
Singapore based Crescentrating Pte Ltd., a company focused on the development of the halal friendly travel market segment worldwide, has come out with its ranking of the Top Halal Friendly Holiday Destinations for 2013.
Some of the ranking criteria for being the top halal friendly destinations for 2013 were, the level of halal food availability, halal certified restaurants, prayer facilities, halal friendly accommodation, family recreation and entertainment centers, etc, at the main tourist spots of the destination.


Malaysia with its vibrant, bustling, multicultural/multiethnic population, its diverse culture, tradition of impeccable hospitality  and fusion of gastronomic creations, has made Malaysia a traveller’s delight. The lush green tropical landscape and stunning island resorts have made Malaysia one of the top rated destinations for holidays. It has also been rated as the No.1 on halal friendly destinations  in the world among 10 member states of Organization for Islamic Co-operation (OIC) for 2013. Because of its easy access to halal food and prayer facility no matter where they are, be it a shopping mall or an airport, has  made Malaysia the No.1 choice with an aggregate of 8.3 /10 points.


The rise of Islamists in Egypt had sceptics consider if the Tourism industry would be hit in Egypt. But halal friendly tourism has paved its way into Egypt. A survey conducted by Ogilvy Noor, an international Islamic branding company, found that the halal market was worth $2.1 trillion last year, with halal tourism worth $100 billion. Egypt expects its halal tourists turning to family oriented activities, halal food, dry hotels, separate female recreational facilities and hotel rooms with prayer directions. During the month of Ramadan, muslim travellers may ask for special facilities during Suhoor. Egypt is considered one of the top destinations for halal tourism.


Keeping in mind the sensitivities of muslim tourists, several hotel groups in UAE, have announced the development of hotel chains complying with Islamic law. The Almulla Hospitality has announced its plans to open 150 Halal Hotels by 2015, not only in the Middle East but also in Europe and North America. The Jawhara Chain has sets it target on 25% Sharia compliant hotels in Dubai in the near future. With UAE becoming the Middle East’s most preferred tourist destination, halal tourism, will only add to the appeal.


Turkey, a nation that’s a beautiful blend of the East and the West. Situated strategically between the Europe and Asia,Turkey has considerable influence in the region. Though an Islamic country, liberalism is mostly in practice. A country that was the melting pot of civilization, has a lot to offer to the Tourist in terms of Historical and Archaeological. With many open air historical sites, and sea side resorts, Turkey is ranked as the 6th most favoured tourist destination in the World. It ranks 4th in the recent Top 10 Halal Destinations in the world, due to availability of halal food and other facilities favourable to the Muslim traveller.


Saudi Arabia’s tourism industry is estimated to be worth around 14.88 billion in 2012. Saudi Arabia is expected to welcome 15.8 million tourists by 2014, out of which business tourists and the hajj tourists will account for most of the tourism share, Saudi Arabia is still considered too conservative for western tourists. With  the growing number of muslim tourists favouring halal tourist destinations, and with  Saudi Arabia’s strict Islamic code of conduct and practices, the country is Top 5 on the preferred list.


Indonesia is the largest archipelago in the world. It has 17,504 tropical islands with mesmerising white sandy beaches and crystal clear waters. Because of its location, geology and diverse landscape, the country boasts of fertile rice fields to  rain forests and snow capped peaks. It is this diverse landscape, along with historical & cultural diversity that makes Indonesia a favoured destination fort tourists. From Jakarta, Bali to Sumatra and Java, Indonesia truly is a nature lover’s  paradise. Being an Islamic nation, all cultural and food practices are centered around Islamic tradition. Indonesia ranks 6th on the Most Halal Friendly Holiday Destinations.


Morocco’s varied geography sets it apart from the rest of the African nations. Situated in the extreme north western tip of Africa, it’s amazing beaches, lush highlands, snow capped mountains, the expansive Sahara in a distance and haunting aura of the old cities, will capture a Traveller’s mind than any other. It’s a country “that travels within you“. What is striking about Moroccans is their tradition of hospitality, and their openness and willingness to share their culture. No matter where you are , in the mesmerising streets of Marrakesh, or the beautiful lanes of Casablanca, there are story tellers everywhere, willing to share the exoticism and mysticism that has long bound Morocco to the world. Along with a surge in Morocco’s tourism industry, Morocco’s predominantly Islamic culture and tradition makes it one of the most preferred among halal tourists as well.


Jordan, the land of mesmerizing beauty and diversity. The imposing Petra never leaves one mind, when one’s thoughts travel to this mystical land. From the amazing sand castles to the haunting Wadi Rum, Jordan is truly a land of superlatives. The Red Sea and the Dead Sea enthralls every visitor who longs to bathe in them and indulge in the myriad spa facilities that the resorts provide . The Dead Sea coastline with its  beautiful natural and spiritual  aura, attracts tourists from far and wide. Its  soothing,  high salt content and buoyancy makes it very easy to float for a swimmer. Jordan’s rich and varied history and remnants of ancient civilization has made it one of the most favoured destinations worldwide. No wonder then that it is placed No. 8 on Halal Holiday Destination.


The Sultanate of Brunei is a very small but extremely wealthy nation thanks to its oil and gas reserves. A large part of the country is covered with lush rain forests. With both natural and cultural heritage to boast of, Brunei offers the best of luxury and relaxation. With its modern lifestyle and facilities, it is able to offer  natural and material world to the weary traveller. Brunei is an Islamic country. Sale of Alcohol is banned and selling meat that is not halal is also banned. No wonder then that Brunei too has made it to the top 10 halal friendly holiday destinations.


Qatar is one of the fastest growing economies in the world, thanks to large natural gas reserves & petroleum. In recent years it also has taken the center stage for tourism. It is a much preferred luxury travel destination, with many top brand hotels vying for space. Qatar Race & Equestrian Club attracts visitors from far and wide to watch races and show jumps. Being an Islamic country, Qatar has ,this year been rated No.10 on the halal holiday destination for 2013.

(Arabian Gazette / 25 Jan 2013)

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Pakistan: SBP streamlines disclosures of Islamic banks

KARACHI: In order to streamline and standardise disclosures of Islamic banks and Islamic banking branches, the State Bank of Pakistan (SBP) has decided to introduce some changes in the statement of financial position of the Islamic banking institutions, according to a circular issued on Tuesday.

The SBP has also directed banks that head financings used by Islamic banks in their balance-sheet and the related note should be renamed as “Islamic Financing and Related Assets”.

According to the circular, all financings, advances (against Murabaha, etc), inventories and any other related item(s) pertaining to Islamic modes of financing, presently being reported under other assets or any other head, would become part of the Islamic Financing and Related Assets.

“The break-up of Islamic Financing and Related Assets into Islamic modes of financing and their respective subdivision into financings, advances, inventories and any other related item(s) shall be reported in the notes to financial statements,” it said.

(The International News / 23 Jan 2013)

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