Intros to Islamic Finance

Recently a brother asked my what I would recommend interms of introductions to Islamic Finance. First I would read:

1. El-Gamal’s A Basic Guide to Contemporary Islamic Banking and Finance.

There is also
Meezan Bank’s Guide to Islamic Banking (even though I still have’nt read it)

Then I would read:

2. Taqi Usmani’s An Introduction to Islamic Finance
(Search for this one used or borrow it; it is ridiculously priced for such a small book)

This link to the book as posted in the comment sections

These two books should give the reader an overall view of what is meant in the industry by “Islamic Finance” and which vehicles are being used most commonly in the field.

One thing that has not been written on extensively in the english languauge is the Law of Contracts, however after reading some introductory texts in English from the common law perspective I have not found much difference in objective, approach, and ruling between common law and the Shariah, except of course in the areas of stipulatng Riba etc.

Then read:

3. Vogel and Hayes’ Islamic Law and Finance: Risk, Religion, and Return

Then:

4. El-Gamal’s Islamic Finance: Law, Economics and Practice

These two books will introduce the reader to advanced topics in the field, suggested improvements, as well as present many of the criticisms needed for the industry to grow or evolve into something more Islamically viable and mutually beneficial.

Fending off one evil with another

As you know people pay exorbitant taxes, both property and individual, that may go to questionable causes.
At the same time, many professionals have large savings accounts with no interest that just sit there making money for the respective financial institution they are deposited in.
Taking this into consideration, would it be acceptable to take the interest earned on the money in accounts to pay taxes obligated upon us by the state or authorities (i.e. not for personal use)?
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For starters the far majority of present-day scholars are of the opinion that interest accrued from an account is not to be left in the bank or given up to them, instead it is the be taken and paid to the needy, or used in another charitable like service such as repairing things of shared community use, etc.

This is based on the general principle that:

“The product and its price should never be combined”

In other words, if a person is involved in a haram act and pays money for it, then the money earned by the second party should not be returned to the first party.

A classic example frequently cited is the following:

“A man pays a prostitute for her services.His act is haram, as are her earnings. However the money she made should not be returned to the man who enlisted her service, if that were the case no one would worry about losing money from such haram things, thus guaranteeing for themselves the refund of their money.”

Scholars have also used the example of selling alcohol.

With that said, The majority of scholars today are of the opinion that the interest should not be left in the bank, instead it should be taken and disposed of as mentioned above.

However when searching for the answer to the second part of the question, i.e. using that wealth earned through interest for paying taxes, I recieved varied opinions. These opinions can be generally divided into two broad groups.

The first group when asked about using it to pay taxes replied that this should not be done, fearing that the person might gain some benefit from this, and benefitting from haram earnings is haram. Some were more certain than others about the impermissibility of doing this.

The second group said that it would be permissible to use the interest earned to pay taxes being that

1. One is not religiously obligated in Islam to pay taxes. (although one may have a civil duty)
2. One is not obligated to pay from his halal earnings anything but zakat.
3. The money that you are paying with is haram earnings, so to use it to fend off un-obligated payments should not be a problem.
4. Some scholars, this being mentioned by Ibn al qayyim in al-’Ilaam, state that haram earnings are not to be used at all except in the case of need (ara: Haajah) so if someone had haram earnings in his possesion, and was in need to use them to survive, he would then use the amount that meets his needs, and then give the rest in charity.

So for a person to offset harm that may come to him from a certain authority would be a need (and in some cases more dire than a need), and as such this need would permit him to use this wealth for paying his taxes and preserving his Halal wealth.

And Allah knows best.

Disclaimer: For information purposes only.
This site and the information therein in no way is to be considered nor acted upon as concrete legal advice. Instead qualified legal professionals should be consulted before making any decisions concerning the information presented herein.

Stagnation through a lack of empirical research

After a discussion with a brother at the Masjid tonite about democracy in Islam, the brother and I began to discuss our academic careers, having recently earned his Phd in education with an emphasis on curriculum.

He mentioned to me the importance of empirical research for his field, which after a while got me to think about someone questioning me about the Madhhab that I traditionally study outside of my formal academic life.
He stressed the importance of empirical research, saying that one thing a good paper is known for is having referenced a large number of sources, gathering all relevant matter on a particular subject instead of merely quoting a variant opinion as fact in the issue at hand.

This made me think of the study of the Madhahib, and how the lack of research among many of the scholars of the Madhahib lead them to become stagnant in thier analysis of issues presented to them, in turn reflecting on society through their Fatwas and teachings, which lead to an attempt to claim that the door to Ijtihad has been closed, which not suprisingly came just before what I like to call the “Muslim Intellectual Dark Ages” in and around the eighth and ninth centuries A.H. until some time after that.

One problem that we now face in Islamic research is the lack of a holistic view of Islamic issues when doing such research.
Many times issued were dealt with on a reactionary basis, i.e. when it happened we asked about it.
Those that delve into a particular science, say for example Fiqh, without having an appreciation for the Sacred Texts of Islam and those things closely related to them, will often relegate Fiqh to the study of minutia discussed in the classical books of Law, and forget the overall objective behind the question or the circumstances surrounding it. This then affects the outcome/ conclusion which is drawn at the end of the research, most of the time leading the researcher to become contradictory in his conclusions of individual issues, which because of his lack of knowledge, are not seen as related in any way, shape, or form.

Things that make you go hmmm…….
(yes that means I’m tired of writing now )

CoBM as Predatory lending??

After spending the last couple of weeks back in the states, the inevitable question of Mortgages comes up once again. Some swear to their impermissibility, others to the opposite, and then others to the need for alternatives. (I touched on a little of this here)

One of the problems that I have with all the alternatives is that they are typically costly and cliché in their approach, i.e. there are justified by two main arguments:
1. Place a religious person between you and Allah
2. Cost of Being Muslim (CoBM)

With several friends who are on the verge of either entering or exiting a mortgage because of the above, I started to think about how difficult of a question this is for anyone faced with it.

He can pay more because the company has a fatwa that says that they are rubber-stamped as “Islamic”, not enjoy any tax breaks, and pay a lot more than he would any where else.
OR
He can go with the conventional mortgage, enjoy the tax breaks, etc that entail a conventional mortgage, and gain the ire of the community for doing what is in their estimate unequivocally “Haram”.

This type of decision process lead me to really think about the reality of “Islamic” finance vehicles, esp. those related to home finance, and how they fit almost all the signs for Predatory Lending

At the Center for Responsible Lending, they identify seven signs for abuse of lending ability:

Predatory mortgage lending involves a wide array of abusive practices.
Here are brief descriptions of some of the most
common:
1. Excessive Fees
2. Abusive Prepayment Penalties
3. Kickbacks to Brokers (Yield Spread Premiums)
4. Loan Flipping
5. Unnecessary Products
6. Mandatory Arbitration
7. Steering & Targeting

So lets take these one by one:

Excessive Fees
Typical of many Islamic Mortgage companies, your _______ rate will be higher than the going interest rate, in fact a lot of times it is the interest rate with a tacked on percentage for “Clerical duties/company profit”

Abusive Prepayment Penalties
Many (I admit here, to my knowledge) of the companies offering “Islamic” Murabahah or Musharakah financing schemes do not allow for any prepayment of the debt incurred from purchasing a home. Thus the Muslim is locked into his debt for the remainder of his payment plan. Not only is this a sign of abuse in lending, but it goes against the principle of “Da’uu wa ta’ajaluu” (ضعوا وتعجلوا) or “Discount your debts for early payment”

Kickbacks to Brokers (Yield Spread Premiums)
Read Shariah Advisory boards and Lawyers that form SPV’s for the companies activities

Loan flipping

A lender “flips” a borrower by refinancing a loan to generate fee income
without providing any net tangible benefit to the borrower. Flipping can quickly
drain borrower equity and increase monthly payments — sometimes on homes that
had previously been owned free of debt.

Exactly what happens when a “Musharakah” loan is used instead of a “Murabahah” one, usually by re-appraisal of the property value according to the terms of the contract, so that as the home is sold off to the tenant/partner, it becomes even more expensive for him to buy because of rising property costs and cost of living.

Unnecessary products

Sometimes borrowers may pay more than necessary because lenders sell and finance
unnecessary insurance or other products along with the loan.

See “Kickbacks to Brokers” & “Excessive Fees” above

Mandatory arbitration

Some loan contracts require “mandatory arbitration,” meaning that the borrowers are not allowed to seek legal remedies in a court if they find that their home is threatened by loans with illegal or abusive terms. Mandatory arbitration makes it much less likely that borrowers will receive fair and appropriate remedies in cases of wrongdoing.

I don’t know about this sign, are there such clauses in contracts labels “Islamic”? Your input is needed.

Steering & Targeting

Predatory lenders may steer borrowers into subprime mortgages, even when the
borrowers could qualify for a mainstream loan…

Labeling it “Islamic” and feeding off the sensitivities of Muslims is enough to qualify for this sign.

For more of the Mortgage debate see the following:

• The great Islamic Mortgage caper
• @ ElGamal.blogspot.com
• Pursuing an American Dream While Following the Quran
• Islamic Mortgage (Search)

I know what ever one is saying “You didnt mention the articles and research in favor of Islamic Mortgages!” Well thats because I didnt find any that amounted to anything more than appeals to authority (Approved by XYZ) or that werent fluffy articles in western newspapers that promoted western banks and their “Islamic” endevours.

So if you do have anything more than that than please do post to the comments sections.

Brief Introduction to Islam

This is a brief introduction to Islam that is posted up on IslaminSpanish.org.

The Islam in Spanish site has both audio and video productions in the spanish language. Contact them if you feel you can contribute or know of material out there in spanish for Dawah.

Heres another copy of the text.
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God’s message is a simple one.

He wants good for us in our lives, and wants to make things easy upon us. Everyone who recognizes him recognizes this fact. He wants the best for us in mind, body, and soul. To enable us to gain peace of mind, he made his message simple and understandable. This simple message that God has given us is summed up in the following sentence:

There is no one worthy of worship but God Almighty and Muhammad is his servant and messenger

God’s eternal message is one of submission to him and his will. “Submission to God Almighty” is the exact meaning and definition of “Islam”. One who practices this is known as a “Muslim” which means “anyone who submits himself to God Almighty”. Islam is the continuation of the faith of all prophets, who because of their submission to God Almighty were Muslims, having brought the message of peace and submission to different peoples at different times. The line of prophets starts with Adam, down through Abraham and Isaac, Jacob and Joseph, John and Jesus, and ending with the final messenger Muhammad. Islam is, because of this, considered to be one of the three Abrahamic traditions, i.e. those that recognize Abraham as a religious father-figure and recognize his manner of worship, which is worshipping God Almighty alone without intercessor or partner.

There are five pillars of practice in Islam.
These practices must be undertaken with the best of effort in order to be considered someone that has truly submitted himself to God Almighty (i.e. a true Muslim):

1. Declaring that God Almighty is one, without spouse, son, or partner and that Muhammad is the last prophet of God.
2. Formal prayer five times a day.
3. Fasting during the month of Ramadan.
4. Alms to the Poor.
5. Pilgrimage to Mecca at least once, if physically and financially able.

There are six articles of faith in Islam.
These are the basic beliefs that one must have in order to be considered a true Muslim. They are:

1. Belief in God Almighty, that he is the creator, sustainer, and the only one that controls and holds dominion over all of creation. Belief in him entails recognizing, because of the previous, that he is the only one worthy of our devotion, supplications, and worship.
2. Belief in all the prophets of God; Adam, Noah, Abraham, Isaac, Jacob, Joseph, Moses, Aaron, John the Baptist, Jesus Christ, and Muhammad, as well as those not mentioned. We believe in all of them, recognize their mission, and follow them in their message.
3. Belief in the original scriptures revealed by God to his Prophets. The Torah given to Moses, the Psalms given to David, the Gospel given to Jesus, and the Quran given to Muhammad are all recognized by Muslims as revelation. The Quran, God’s final revelation is a culmination of the previous scriptures, and contains eternal guidance for the salvation of Mankind.
4. Belief in the angels; that they are the unseen servants of God, implementing his will and watching over mankind.
5. Belief in the Day of Judgment and the Hereafter; that all of mankind will be called to account for their deeds, and be righteously judged accordingly on the last day.
6. Belief in the Divine design and decree; that God has knowledge of all things, has written all things, and all things he has willed must come to past.