Interest Free Banking

As-Salaam-O-Alaikum Shahzad

Islamic banking is working and prospering in USA. There are atleast four banks, that I know of, who are providing interest free loans for buying homes.

Popularity of these interest free loans can be judged by the fact that one has to wait anywhere from six months to two years to get this loan.

The mechanics of the loan is this:

If one wants to buy a house he has to put down 20 percent of the value of the house as down payment. The rest of the 80 percent is payed back in 120 or 180 equal instalments. Since the owner of the house owns 20 percent of the house he ends up paying 80 percent of the market rent of this property.

So his total payment is 80 percent of the rent plus the loan instalment.

As the amount of loan goes down so as the rent since the owner own more share in the house.

For example if the amount of loan after 3 years is 35 percent of the house value then the owner will pay 65 percent of the prevailing rent.

Eventually the loan is payed off and the owner stops making the rent payment as he owns the house completely.

Still this is small scale banking. What happens on a large scale is still needs to be tested. I agree with Ras on this issue.

Asfand Siddiqui
Sacramento

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pakfin #18 Actually, on credit card interest rates I think these represent another example where interest is being abused. (Although perhaps a somewhat lesser evil that the other example I mentioned of the abuse of the interest rate, namely the enslavement of peasants).
Having said this, these remain exceptions that prove the rule: the mixing of religion with economics is a recipe for economic disaster. Just as the mixing of religion with politics has been a political disaster for Pakistan in many ways, and the mixing of religion with the legal system has left Pakistan with one of the most unjust legal systems on earth.

#16 by gen.rani . A person borrowing money should be well aware that it needs to be repaid. Once a loan is past due, the issuing bank will attempt to collect on it. I am not trying to defend any institution here and am not aware of the various collection techniques used by different banks in Lahore, but am just talking about the principal of the thing.

Unfortunately many people in Pakistan have gotten so used to borrowing from banks and not repaying their loans, that they resent it when a bank asks them for repayment and they start protesting. This culture of defaulting on loans, bill payments and taxes varies slightly between different cities, with the residents of certain cities being more resistant to paying their dues.

Interest rates of 36% on a credit card are not prohibitively high. Without getting into specifics, I can think of a few countries where the interest rates on credit cards are close to a 100%.

Interest free banking appeals to people who are being ripped off by the likes of Citibank Visa. The effecting interest rate is over 36% and if you do not pay on time you start receiving endless harassing phone calls and threats by Citibank staff and hired guns. They even have thugs on the payroll who inflict psychological torture. Normal legal recourses available to Pakistanis are by passed because the bank has hired relatives of people serving in security agencies including a colonel whose brother is a DIG in the police. This guy ensures that no FIR`s get registered against Citibank in the Lahore area. Citibank staff will even call and threaten children and have in once instance threatened to tear off clothes of a lady
client.

digit #14 you write ``From the discussions I`ve had with proponents of Islamic Banking, it`s clear they harbor no illusions of some great divinely inspired economic order. Rather, they`re trying to develop a banking system that is free of what they consider a moral travesty``.
This is not the way I have understood their arguments. The basic argument given has been ``because it says this in the Quran`` therefore interest is haram. There is no thought given to the moral implications. E.g., I have not heard one of them concern himself with the effect on small-time savers (aged people with no pensions, lower income people like small-time shopkeepers saving to send their children to college e.g.) whose savings would suddenly be forced into a much higher risk category. THAT is moral travesty. And that is what these spokesmen for God would inflict upon the long-suffering people of Pakistan if the Pakistan economy is declared an interest free economy as they have been arguing.
The fact is that interest, as commonly practiced in Pakistan and even more so in modern economies, cannot by any reasonable standard be termed a moral travesty. There is only one form of interest that IS a moral travesty, and that is the bondage of tenants by rich landlords in sindh and southern panjab by putting them into debt. If any proponent of Islamic banking really was driven by a sense of morality, he would focus on this one, isolated and important problem. But not a peep here. So much for their morality. They dont even mind the fact that some of these ``islamic financial instruments`` like mark-up and morabaha are simply a form of interest, except they dont call it that. That is hypocrisy, and clearly hypocrisy does not count as immorality either with these people.

tahmed32 wrote in post 9:

`An ``Islamic System`` by definition cannot be improved, since that means God designs systems that are less than perfect.`

Incorrect. From the discussions I`ve had with proponents of Islamic Banking, it`s clear they harbor no illusions of some great divinely inspired economic order. Rather, they`re trying to develop a banking system that is free of what they consider a moral travesty, namely interest (which is equated with Ribba). It is readily admitted that the task is not easy, and I know of no one who purports to have all the answers. This is healthy, imho.

I will admit, you will find those who do try to conjure up all sorts of absurd benefits of interest free banking, however these types tend to be either illiterate mullahs or cyber sophists who have nothing better to do with their time then harp on about the benefits of a beard, etc. Talk to someone with a background in economics, and the nature of the conversation is quite different.

I guess the major issue here is that most forms of Islamic financing may become administratively unworkable because of the number and the complexity of transactions. The way I see it is that most banks using the Mark-up and the Morabaha forms of financing are essentially calculating their loan repayments on the basis of a pre-determined interest rate and then are converting this into a so called Islamic transaction.

The Musharika and the Modarba forms of financing may be workable as they are essentially partnerships or equity participation arrangements and work in a fashion similar to a Mutual Fund.

Banker #8 So now that even your example is proven to be hollow, you blame it on the people since obviously an ``Islamic institution`` cant be wrong. This is what happens when you send your common sense on vacation and look towards religious dogma instead to provide easy solutions.
(Incidentally, sending common sense on vacation is counter to the over-all spirit of the Quran, although in keeping with the spirit of the jamaatias).

The article is poorly written. I don`t mean grammatically but substance wise. There are over 60 institutions working internationally which deal in Interest free banking not to mention the local institutions that are on top of that meaning that the interest free banking is past its infantile stage, and all the author had to offer was his opinions. There is nothing wrong with presenting one`s opinion but at least in an article the opinion must not be based on hypothetical scenarios. It would have helped raise the level of awareness of general public had he based his opinions on actual facts. May be SR can help here.

Banker #8 One more thing: you wrote ``The stock market bubble burst recently in USA. DId it make the people lose faith altogether in stock market. No. They are pushing for tougher regulations, strengthening of SEC and seperation of Invesment Banking and Research arms. ``
Right. They are trying to improve the system based on experience. An ``Islamic System`` by definition cannot be improved, since that means God designs systems that are less than perfect. I find it incredible that you have the all to blame the greed of individual depositors for expecting high returns from this failed Islamic Bank, after having lured them in with the impression that these Islamic Banks are somehow sanctioned by God. They are sanctioned by nothing more than an irrational ideology that these people think is ``Islam``, but in fact is nothing more than superstitious nonsense that violates the spirit of the Quran at every turn.

Banker #8 When I write ``you have the all``, I meant ``you have the gall`` in my post below.

I believe that lot of us have our concepts wrong here. Just because Taj Company has fleeced the people, does not mean that all such companies are bad. People are greedy and that is what these companies made use of. Taj company promised a return that was not feasible. But the people deposited their money blindly with the company. That was bound to happen. It was the failure of regulation. The stock market bubble burst recently in USA. DId it make the people lose faith altogether in stock market. No. They are pushing for tougher regulations, strengthening of SEC and seperation of Invesment Banking and Research arms.

The present banking system is not perfect even after centuries. Islamic banking which is just in its inception will need some time to prove itself. Every number of banks go bankrupt. We have FDIC in USA. Does this mean that banking is not workable. By no means. Barings and BCCI did not led us to believe that banking is failure.

For those of you who are really interested to know about islamic banking, an excellent guide is available at
http://www.ruf.rice.edu/~elgamal/files/primer.pdf

I hope it clears lot of your misconceptions

This was quite interesting but the question is (and maybe Banker #1
can enlighten us here) is it even remotely workable on a large scale?

Ras

Re: Banker

Please explain to novice like me,

what incentive does a person have in interest free banking?
where is the transparency of profit sharing?
which saver [read invester] would be interested in a loss?

Is there going to be loss?

I checked the Meezan.com, it does not tell the process by which it intends to deliver profit. Just because it has a website means nothing. Taj company in on record saying that it had a loss [while the owners were making duped investments for their next generations].