Freedom's Fidelity

Thursday, June 23, 2005

Islamic Banking and Interest

Kind of an interesting article from the Chicago Trib's business section this week. The relevant grafs:

LONDON -- Retail banks offering interest-free mortgages and declining to charge fees for millions of customers?

That is increasingly the reality as banks around the world try to tap into the booming Islamic finance market, tailoring products for consumers who follow strict Shariah law, which forbids the giving or receiving of interest. The banks still find ways to make money through arrangements such as mortgages structured to include rental payments instead of interest, with the bank becoming the borrower's landlord.

...Lloyd's current account pays no interest and has no overdraft facility. Under the Ijarah home financing plan, the bank buys up to 90 percent of a house on behalf of a customer, who pays back an amount each month along with a rental payment as an acknowledgment that the property belongs to the bank until all payments are made.

...Amjid Ali, UK head of HSBC Amanah, agreed that education will expand the market.

"If I take myself as an example, I was born in this country, went to the mosque from the age of 5. ... It wasn't until I was 16 that I read my first translation [of the Koran] and I came across the issue of riba," he said. "At that point in my life, it wasn't the most important thing, but then later on ... I came to understand how serious an offense it is in Islam."

My first thought, is that I know who I am going to borrow money from going forward. My second thought is that this could be an opportunity to take some sizeable profits in a relatively untapped market. However, I have no idea how this kind of loan structure does not constitute 'interest' in the eyes of the Koran. Ok, lenders have changed the name from 'interest' to 'rent,' but the Koran never uses the word 'interest' to begin with, so I don't see how that is relevant at all.

I suppose the structure is slightly different from a traditional mortgage, in that banks are technically charging rent on the house that they own and are allowing the consumer to make the purchase one floor tile at a time so to speak, but for all practical purposes interest is nothing more than a rental payment on money. I have no idea how rent on items one purchases with money are less offensive than rent on money itself, but I am anything but an expert on the Koran. Genius marketing semantics though, slightly alter the ownership structure, change the name of a payment and VOILA, you are inline with the teachings of the Koran and you got yourself a whole new customer pool.

Seems a bit spurious to me, but maybe I am just jealous that I didn't think of it first.

posted by Paul  permalink | |