What is Islamic banking?

Last week one of my colleagues at the APM club could not attend a seminar because he was attending a curse in South Africa on Islamic banking. I recall a few years ago, my very good friend Eric, was sent to Malaysia to study Islamic banking and financing. Chota also years ago, was involved in setting up investment portfolio of shares from the Mauritius stock exchange that were compliant with Islamic rules. I heard that Chee Peng Tan who I knew years back will be organizing some seminars in Mauritius on the same subject.

The accumulation of the recent events moved me to look closer in the subject and possibly to refresh and upgrade my knowledge thereon. As far as I recall there was a strong element of social equity in the practice of Islamic banking, earning interests on money was not allowed and also there was prohibition in investing in economic activities which were in opposition to the Muslim faith such as: liquor, gambling, pork, drugs.

Admittedly, if Mauritius has aimed to be a world financial center or at least a meaningful regional financial center: the operators have to provide service to this type of funds which are growing in leaps and bounds. Could Mauritian institutions join the Lariba Islamic Banking network? I would well imaging that a large amount of the petro-dollars are invested through Islamic Banking.

What I gathered in summary:

Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:

1. While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
2. While acknowledging the individual’s right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
3. While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.
4. While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.
5. Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.

It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.

The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management.

Islamic banks are structured to retain a clearly differentiated status between shareholders’ capital and clients’ deposits in order to ensure correct profit-sharing according to Islamic Law.

Could some of the funds handled in Mauritius be ‘Islam finance’ compliant?

I fully subscribe to the statement below which have to be read without any religious undertone:

We Advocate Socially Responsible Investing. We DO NOT Invest in Alcohol Related Businesses, Gambling, Gaming, unhealthy food products and Unethical Activities. We do not invest in Businesses that harm the Environment and that does not treat its employees and customers fairly. We are Sensitive about who we deal with. We scrutinize our customers and investors as to their character and community standing.