Posts Tagged ‘murabaha’

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Kuwaiti tycoon runs Hamas’s newest sharia bank

November 21, 2013

In May, Kuwaiti businessman Dr. Riyadh Al-Khulaifi launched Al-Intaj bank, an Islamic financial institution that has no license to operate from the Palestinian Monetary Authority.  Hamas and Al-Khualifi conceived of the bank to help keep Hamas afloat, to help evade international sanctions, and to increase sharia-compliant services in Gaza.

Hamas is probably concerned that Islamic National Bank, the other unlicensed sharia bank upon which the terrorist group relies, could be disrupted again by Israel, prompting the creation of Al-Intaj.

Al-Khulaifi is a member the International Islamic Fiqh Academy, a Muslim Brotherhood affiliated group that supports “armed resistance.”  His leadership over the Gaza bank could indicate an acceleration in Kuwait’s foot race with Saudi Arabia and Qatar to see who can buy the most Islamist loyalty abroad.

From IslamicFinance.de earlier this year:

A new bank is set to be inaugurated in the Gaza Strip next week, although it has not yet received the necessary license from the Ramallah-based Palestinian Monetary Authority (PMA). The Al-Intaj bank has a capital of $20m and a board of directors chaired by Kuwaiti businessman and member of the International Islamic Fiqh Academy, Dr Riyadh Al-Khulaifi. The bank… will be headquartered in Gaza City and have branches in other parts of Gaza Strip in the coming years. 50% of its capital will be channelled to production-oriented activities, while 40% will be allocated to the traditional transactions. The remaining 10% will be set aside to the ‘murabahat’ (Shari’ah-compliant transactions), the lender’s deputy board chairman Rushdi Wadi said.

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Why Minneapolis’s sharia loans must end

February 21, 2012

The city government of Minneapolis made headlines last week for conducting a frightful sharia loan program.  Minneapolis’s “Alternative Financing Program” is dangerous and misguided for four reasons.

First, the program represents a deeper entanglement of the government with sharia law.  What’s next?  Free office space for a Muslim imam to hold a sharia court to rule on Somali divorces?  Privacy screens for local Muslim women at the city pools?  Dog-free zones to comport with Muslim sensibilities?  Gay-free zones to comply with Islamic law against homosexuality?  On the basis of what compelling interest should the government create programs to enact sharia principles in America?  In so doing, Minneapolis runs afoul of the Supreme Court’s Lemon test, which interprets the First Amendment to prohibit measures that create excessive entanglement between government and religion.

Second, although the article does not specify the structural basis of the loans, the description most closely approximates a murabaha model, where interest cross-dresses in the garb of a “markup” embedded in the terms of the loan.  Murabaha has fallen under increasing disrepute by the international Islamic financial advocates, and Minneapolis risks embroiling itself in the same firestorm facing Goldman Sachs.  Staying out of internal religious squabbles is part of the basis of the Supreme Court’s Lemon test.

Third, through the program, Minneapolis legitimizes the notion that charging interest when lending money is somehow inappropriate.  Money has value, and money now has more value than the promise of money later.  In order to get money now instead of later, we pay a small price called interest.  This is an efficient and market-based method to provide capital to businesses and individuals—it is an important factor in the historical economic development of Europe and the United States.  The prohibition on charging interest is a key factor in the economic retardation of the Islamic world.  Despite vast oil wealth, the Middle East faces high poverty, high income inequality, and little innovation.  Catering to Islamic financial principles represents a step backwards toward a foreign system based on superstition, bias, and economic inefficiencies.

Fourth, the program presents an unnecessary financial risk to the taxpayers of Minneapolis.  If the businesses are receiving loans at a lower cost than what they would qualify for through a conventional bank loan, then that means that taxpayers have funded the amount of the difference.

Also, city officials tout a lower default rate through the program than the national rate.  But of course in the conventional financial sector, the costs of default are borne by the banks themselves.  But who bears the costs of default under Minneapolis’s Alternative Financing Program?  The taxpayers of Minneapolis.

For legal, economic, and financial reasons, the government of Minneapolis must cease its alternative lending program.  The taxpayers and voters of Minneapolis should demand it.  If not, legal action against the program should be pursued.

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Weekly word: musharaka

October 12, 2011

Musharaka is the Islamic financial concept of a joint venture or equity partnership.  Two or more parties provide the capital (which distinguishes it from mudarabah, in which one party generally provides the capital and the other party manages the asset).  Because the profits and risks are shared, musharaka is considered the “purest,” or most truly Islamic, form of sharia finance.  One source offers this definition:

Musharaka is a form of partnership between an Islamic bank and its clients whereby each party contributes to the partnership capital, in equal or varying degrees, to establish a new project or share in an existing one, and whereby each of the parties becomes an owner of the capital on a permanent or declining basis and is owed its due share of profits.  Losses, however, are shared in proportion to the contributed capital.*

Musharaka can be used for home loans, often under a diminishing musharaka model in which the home buyer takes on a greater equity in the home over time, and the bank has gradually diminishing equity.  But musharaka can be applied to any project or asset:

Sharia joint venture chart

There are several problems with musharaka.  Although musharaka is more “Islamic” than murabaha (which employs a “markup” similar to conventional interest charges), musharaka is used less often than murabaha arrangements.  Musharaka can end up costing a borrower more than a conventional loan, thus tarnishing the (false) notion that Islamic banking is more “ethical” and generous than conventional Western-style loans.  The larger profits for the Islamic banks owing to musharaka also means larger pots of money for the sharia advisors to play with.

Still, musharaka is gaining in popularity among Arab investors, and musharaka has become the primary method used to structure sukuk (Islamic bonds).

* Kettell, Brian B., Introduction to Islamic Banking and Finance (Chippenham:  John Wiley and Sons, 2011).

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Murabaha markup funds sharia

September 26, 2011

Following up on last Wednesday’s post about murabaha, a typical home loan obtained through sharia finance would look something like this chart:

Graphic depicting sharia home loan

The bank holds the title until the borrower has paid off the loan, although some sharia bankers have even figured out ways to go ahead and transfer the title to the borrower immediately.

One question springing immediately to mind when looking at this chart and seeing “Payment of Marked Up Price (P+X)” is “what is X“?

X is often called a markup.  Kind of like, um, well, an interest charge.  Except the sharia bankers have to call it “X” or “markup” or “profit”—just so long as you don’t call it riba or interest.

But whether murabaha is halal or haram is a somewhat distracting issue.  The main problem with murabaha isn’t whether it is genuinely Islamic or an infidel copycat financial instrument.  The main problem is that X doesn’t just equal profit.

X goes into the revenues of the Islamic bank.  A portion of X is diverted into the Islamic bank’s zakat account.  X is overseen by virulent anti-Semitic and terrorist sympathizing Islamic scholars sitting on the bank’s sharia advisory board who have been documented to transfer a portion of X from their bank’s zakat fund as “charity” for jihadist militants in accordance with their Koran.

Muslims say they invented algebra, but they won’t tell you what the X really stands for in this equation.

The X, it must be said, is for sharia.

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Weekly word: murabaha

September 21, 2011

Suppose that John Consumer lives paycheck to paycheck.  John has no credit card.  He can’t afford to buy that nice flat-panel television he wants.  So he visits his local Rent-A-Center or Aaron’s store, picks out at TV, signs a rent-to-own contract, and takes the TV home, and makes monthly payments while the store remains the legal owner of the merchandise until John has paid off the terms and owns the TV outright.

In the process, John has spent more money in total payments than he would have if he’d been able to buy the TV set upfront, as is the case when any purchase is financed over time.  But that’s okay with him because he got a product he could not afford otherwise.  And it’s okay with the store because they made a little profit in the transaction, which is why they’re in business.

On its face, the rent-to-own approach or installment sale approach is somewhat similar to the sharia financial device known as murabaha.  Vogel & Hayes define murabaha as:

A sale contract which fixes the price in terms of the seller’s cost plus a specified percentage markup.  The seller must disclose all items of expense which are included in the cost if these are not known through custom.*

However, several distinctions between murabaha and Western style rent-to-own agreements come to mind immediately:

  1. There is no fundamental effort by rent-to-own sellers to introduce an alternative set of orthodox religious financial laws to Western markets in order eventually to replace them.
  2. Rent-to-own is just one way out of many available to Western consumers to finance their purchases.  Buyers without enough cash on hand still have options including credit cards, conventional loans, leases, ordinary renting, and lay-away.  Western financial laws do not force people into rent-to-own agreements.
  3. Rent-to-own options are typically designed for items like furniture, electronics, and major appliances.  The free market has determined that for more expensive items such as homes and commercial property, traditional interest-bearing traditional loans are a more responsible way of factoring in the time value of money over the life of the loan.  Murabaha, however, is often applied to big ticket items such as home mortgages, interbank and business-to-business transactions, and commodities trading.

The “profit” or markup added to murabaha transactions is often criticized by Muslim traditionalists as a smokescreen for riba (interest), which is banned by the Koran.  However, many sharia advocates stand by murabaha since it is their likeliest way to supplant conventional financing methods.

Next week, Money Jihad will evaluate the #1 biggest difference and danger that murabaha presents relative to the conventional loan process.

* Vogel, Frank and Hayes, Samuel, Islamic Law and Finance (Boston: Kluwer Law International, 1998).