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Islamic Finance

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by

Sadeq Khan

on 21 December 2012

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Transcript of Islamic Finance

Conventional Mortgage v. Islamic Financing Conventional Mortgage Potential Bridge Between Two Divided Worlds? - Increased demand for socially responsible financial institutions following 2008 crisis
- Occupy Wall-Street Movement
- Attempts to legislate bank morality Can the Islamic Principles of Ethical Transactions & Mandatory Risk Sharing Bridge Together Two Increasingly Divided Worlds? Islamic Finance as a
Free Market Option Example of Debt vs. Equity Financing Interested in purchasing a home
-Price: $250,000
-Down payment: $50,000
-Annual Interest/Rent: 4.5% Benefits for Investors 1) Escaped sub-prime mortgage crisis unharmed
- Always connected to a tangible asset
- Not invested in government debt
or any interest-bearing instruments Buyer/
Borrower Seller
(Bank/Investor) Objective: Achieve economic justice &
fair distribution of resources 1) Risk Sharing
2) An identifiable asset
3) Ethical Transaction
or
Investment
CANNOT Include: 1) Excessive speculation
2) Ambiguity, uncertainty, lack of transparency
3) Forbidden products or activities
4) Interest (usury) 1) cost-plus sale
2) lease 1) Partnerships
- general
- limited
2) Bonds Credit (loan) Surplus in Sale Guaranteed profit on a loan (in addition to original principal) to compensate for delayed payment Exchange of one asset now for a similar fungible asset of greater value in the future
(e.g. 1 oz of silver now for 2 oz in the future) Why? Islamic Finance as a Free Market Option Can the Islamic Principles of Equitable Transactions & Mandatory Risk Sharing Bridge Together Two Increasingly Divided Worlds? 1) loans are considered an act of charity
2) money is a "means of exchange'' not an end itself Islamic Financing - Monetary loan secured by an asset

- Bank owns no share of the property

- No ceiling due to compounding interest

- Fixed or adjustable interest rate - Partnership with the bank

- Both parties own a share of the property

- Maximum payment known from Day 1

- No interest or fees for late payment 1) Ability to fully assess purchase before entering contract - Fixed payments, can only decrease
- No compounding interest 2) Always entitled to a percentage, even when home goes under water 3) Pay less overall when payments are completed as scheduled 2) Grew at a rate of 15-20% throughout the recession 3) Still growing rapidly
-Currently $1 trillion invested globally
-Expected to reach $5 trillion by 2020 - Islamic finance is already meeting this demand around the world; availability in the U.S. will put pressure on financial sector - Implementation must be motivated by a desire to improve society
- Unstandardized nature makes it easy to "shop around" for Sharia Board
- Conventional banks already seeking profits (e.g. Citi Bank late fee) Questions? Principles & objectives of Islamic banking Compare conventional vs. Islamic home financing Prohibition of Interest Potential bridge between two divided worlds?
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