Category Archives: Financial crisis of 2008

Islamic banks weather global financial turmoil: Country Head, Al Baraka Islamic Bank Pakistan

Islamic banks weather global financial turmoil: Country Head, Al Baraka Islamic Bank Pakistan

boat in lake

Islamic banks have withstood the recent turmoil in the global banking industry triggered by the subprime mortgage crisis because their rules do not allow dealings in products like derivatives, options or papers that caused the meltdown.

While financial institutions in the developed world lined up for huge state assistance, the few Islamic banking institutions in these countries like the European Islamic Bank in the United Kingdom emerged unscathed from the crisis.

“The recent financial crisis exposed the flaws in the western banking system and proved that Islamic banks are safe which do not offer any risky product in line with the injunctions of Islam,” said Al-baraka Islamic Bank Country Head Shafqat Ahmad. He said the French president had appreciated the modes of financing offered by Islamic banks and expressed willingness to allow the setting up of these banks in France.

Shafqat said Shariah experts ensured that Islamic banks operated strictly according to the Islamic financial laws. “These banks do give profit to their depositors but it is based on the true principle of profit and loss. This is the reason that profits on savings in Islamic banks are not pre-determined.” However, “Islamic banks generally distribute more profit to their depositors than conventional banks.”

An Islamic Shariah expert said majority of the credit provided by Islamic banks was under the Morahaba mode (sale-purchase agreement). Explaining, he said “an Islamic bank purchases an item, for instance cotton, on behalf of the client (in fact the client selects the quality and quantity of cotton and the bank makes the payment) and the client agrees to the date when the amount will be returned. The Islamic bank charges certain profit on the purchased cotton that the client has to pay along with the principal amount.”

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Islamic finance provides way out of economic crisis

Islamic finance provides way out of economic crisis

boat in lake

The last few months witnessed the most remarkable period of global financial market turmoil followed by the most astounding government intervention in the world since the Great Depression. There were unprecedented coordinated actions by central banks around the world to cut interest rates, guarantee bank deposits and raise guarantee limits in a bid to address the financial market turmoil.

In the capitalist financial system, which is based on credit and fiat money, money is a commodity that can be freely traded. Banks and financial institutions are able to sell money easily to the consumer market with methods such as subprime housing loans, personal financing and credit cards, leading to a global debt trap and bankruptcies.

The ease with which money is sold leads to inflation. Authorities will then raise interest rates to address inflation, and the corporate sector will be negatively affected as the cost of borrowing rises.

This then leads to a recession, culminating in redundancies and job cuts. Thus, in a fiat money regime, the vicious cycle of inflation and recession will always prevail.

Islamic finance is more than just about making a profit. Every investment proposition should be tested against the “Maqasid al-Shariah” (objectives of the Shariah), where the primary objective is the realization of benefit to people, concerning affairs both in this world and the hereafter.

Islam seeks to realize greater justice in human society. The financial system may be able to promote justice if, in addition to being strong and stable, it satisfies at least two conditions based on moral values:

The financier should also share the risk of financing to avoid shifting the entire loss to the entrepreneur and making unjustifiable profit without taking any risk.

An equitable share of financial resources mobilized by financial institutions should be made available for social welfare projects, such as helping eliminate poverty, expanding employment and reducing income inequalities.

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Shariah-compliant finance is the best choice: Islamic bankers

Shariah-compliant finance is the best choice: Islamic bankers

riba free

In these times of financial turbulence, Shariah-compliant banking and finance is being endorsed for its  stability and is evolving as the best choice on the road to economic recovery.

According to Imtiazz Sarfaraz Khan, Head of Retail Banking and Finance Department at Abu Dhabi National Islamic Finance, Shariah-compliant finance has always been an appropriate and relatively risk-free route for financial dealings but was downplayed for quite some time mainly due to political considerations across the globe.

Khan said the definitions of Shariah-compliant or Islamic banking were endless.
"Some non-Shariah-compliant banks and financial institutions may choose to call it ‘interest-free banking’, while others are comfortable with ‘zero interest on asset-backed finance’," Khan added.

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Islamic Banking and Bending Like the Reed

Islamic Banking and Bending Like the Reed

reed

Have you ever seen how a reed bends in the wind? It curves and twists in the direction as the wind, aided by the flexibility of its stalk, and the strength of its roots. Yet after the storm abates, the root returns to its original upright position, standing tall with pride and dignity. I find a strong resemblance between the way that a reed bends in the wind, and the way that Islamic banking has handled the storm of the international financial crisis which has hit the entire global economy, including the Islamic banking sector. We have seen how the tempest of this crisis has bankrupted many prestigious financial institutions as if they were merely leaves on the wind. In fact some conventional financial institutions are still struggling to survive today.

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Islamic finance offers tips to correct faulty conventional system: M. Umer Chapra

Islamic finance offers tips to correct faulty conventional system: M. Umer Chapra

Dawn

The current global financial crisis stems from the absence of adequate market discipline, and Islamic finance can help fix it by injecting a greater discipline into the system, an expert at the Islamic Development Bank said.

Speaking at an international gathering here Saturday, Umer Chapra from the Bank’s Islamic Research and Training Institute said the global financial system lacks discipline because the reward and punishment mechanism in the banking system was not working.

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