Religious law/Financial practice

Like you, perhaps, I’ve been perplexed, even bewildered, by what’s happening to our world’s banking systems. So, a recent article in the SAN FRANCISCO CHRONICLE ("Michigan bank operates by Islamic law,” Wednesday, January 21, 2009, page E4) caught my eye. The authors, Jeff Karoub and Sebastian Abbot, wrote: “Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest. Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky. It also rules out some of the activity that got Western finance in trouble – sub-prime mortgages, credit default swaps and the like.”

Now I know that many in our nation are wary of anything remotely related to Islamic law or Sharia. But that might just be a result of our ignorance. Most of us know only what our news sources tell us about Sharia, and mostly that’s about women stoned and hands severed, because those events get our attention. However, like other bodies of law, Sharia deals with many topics, including financial matters.

According to Karoub and Abbot, “Islamic law says money cannot grow by itself, the way it does with compounding interest.” Fairly negotiated prices are the basis of trade. Also, “short selling” is not allowed. You have to own it before you can sell it. Now, there’s a concept.

Installment purchases are allowed. In other words, to purchase a home, one might enter into a rent-to-purchase agreement. A part of the monthly rent payment is put toward the purchase price of the property. One would not borrow money from a bank at interest to purchase a home from a third party. In theory, a property owner might be more conservative about selling, if he/she was receiving those payments over a long time.

Other models of Sharia-compliant financing include the following (from BBC News at http://news.bbc.co.uk/go/pr/fr/-/1/hi/business/3548656.stm):

• Ijara is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period.

• Ijara-wa-Iqtina is a similar arrangement, except that the customer is able to buy the item at the end of the contract.

• Mudaraba offers specialist investment by a financial expert in which the bank and the customer shares any profits. Customers risks losing their money if the investment is unsuccessful, although the bank will not charge a handling fee unless it turns a profit.

• Murabaha is a form of credit which enables customers to make a purchase without having to take out an interest bearing loan. The bank buys an item and then sells it on to the customer on a deferred basis.

• Musharaka is a investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested.

Jews find prohibitions against lending money at interest in the Torah. See, for example, Exodus 22:25 and Deuteronomy 23:20-21. Also, Ezekiel 18 describes a “good man” as one who doesn’t charge interest when lending money.

Christians find even stronger admonitions against loaning money for profit. Read again Jesus’ words about loving your neighbor in Luke 6:34-35, and Matthew 7:12: “Treat others as you want them to treat you. That’s what the Law and the Prophets are all about.” (Holy Bible, Contemporary English Version)

We can learn from the banks which have embraced Sharia-based financing concepts, but it seems that the Prophet may have received instructions (Qur’an 2:275-276) which mirror the laws found in the Torah. No surprise there!