Christian Peregin
What is Islamic banking?
The government has promised to enable Sharia-compliancy in Malta in order to attract more Muslim investment. But what does this mean for the Maltese and how can we benefit too?
Islamic finance works on simple and common religious principles, those of social justice and mutual assistance. But within this structure, once money is not seen as a commodity, interest is prohibited - ruling out loans as we know them.
Islam also discourages uncertainty in contracts, so every step of an agreement between two parties must be spelled out beforehand. This disallows conventional insurance, where the amount you pay an insurance agency every year depends mostly on things that cannot be planned.
Reuben Buttigieg, chairman of the training and development division of the Malta Institute of Management, who has spearheaded the discussion of Islamic finance in Malta, believes the Sharia alternative to conventional banking can be ideal, not only for Muslims but for anyone who is willing to give it a try.
When it comes to home loans, he explains, a person does not borrow a sum of money from a bank only to pay it back with interest. Instead, there are a number of options that can be used.
One such option is for the bank and the person to enter into a form of partnership and buy the property together. The individual would then rent the property from this partnership and his share of the rent would serve to acquire the bank's share gradually.
A second option is for a bank to purchase the property and then sell it to you at a margin. You then pay the amount of the house over a number of years through an interest free loan.
In the first case, the bank is forced to be extra cautious that you do not overspend because the risk is being shared - and if the price of property drops, it will do so for both. Another benefit is that if, for some reason, you cannot afford the repayments, your house can be sold and the profits can be divided proportionately.
The same applies for business projects. The bank becomes your business partner and supplies the money you need to start up a business, while you invest your time and energy. Once you start to make a profit, you begin buying out the bank. So if your business goes bust, you lose time but not your own money - making the bank extra cautious about your performance.
When it comes to insurance, things are even simpler. A group of people can simply come together, each put in a sum of money into a fund and make an agreement as to what this fund can be used for. Within this structure, they can choose to insure anything and whoever needs the money takes from the fund - which is, in turn, managed by an operator at a small fee.
The good thing is that if no one needs the money by the end of the year, it can be simply withdrawn, invested or put back in, meaning it remains yours rather than going into the pockets of an insurance agency never to be seen again.
For this and other reasons, Islamic finance institutions have sailed through the economic crisis because the structure is more resistant, given that in most transactions there is a tangible asset.
Obviously, all of this is optional, and when Malta enables Sharia-compliancy, such options will be provided over and above the conventional banking system. But even non-Muslims can make use of Sharia banking, as is being done in the UK, which is the only EU country that is successfully catering for such a market.
However, for Sharia-compliancy, certain laws must be changed or adopted so as to remove all forms of discrimination that make it impossible to work within such a framework.
For instance, banks need to be allowed to deal in property and if a bank is buying and reselling the property to people it does not make sense for duty and tax to be paid twice.
Due to all the benefits and security it provides, Islamic banking is the world's fastest growing sector in world finance, with over 300 Islamic financial institutions in 70 countries. However, few of these are based in Europe and north Africa, so Malta has a strategic position to tap a huge and untapped market.
So once Malta gives the go-ahead, it will not only attract widespread investment and employment but it can also be used as a bargaining tool to get double-taxation agreements with many African and Middle Eastern countries.
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Graham Crocker
Mar 6th 2009, 22:28
Sharia Bank is not Sharia law guys, come on a bit of common sense please.
I don't know what is this obsession with conspiracy theories, myths, fairy tales, ... I mean, if you want to sell a story, learn English literature and write a fiction book.
Charles Grixti are you a fan of David Icke? He believes the world is run by Reptilian Aliens, you are not far off.
Charles Grixti
Mar 6th 2009, 14:16
@D. Delia. This is all a sham! Islamic banking just puts the interest up-front and adds it to the principal. It is a way of getting around religious restrictions.
More importantly, how did the Muslims store all the trillions of petro-dollars all these years? They never mentioned Islamic banking before and were happy to use our 'Western" banking system.
This is just a ruse and a way to introduce Shariah, in all its aspects, by stealth into the
West, with the intention that Sharia will eventually replace all secular laws in the West. With the economic and financial disaster, Islamic supremacists are taking every advantage of this opportunity.
I urge the authorities and all people of goodwill to be wary and steer clear of this 'boondoggle'.
Graham Crocker
Mar 5th 2009, 23:53
We've got around 50 banks in Malta.
1 more won't make a difference, actually it will make more jobs .
Albert Muscat
Mar 5th 2009, 20:55
As things stand today things are bad, the worst yet tome though. The global economy is facing an unprecedented crisis which is generating a certain degree of anguish due to the financial failure of some major banks.
So what is the solution? Are we facing a banking crisis, a credit meltdown or the early stages of a new Great Depression? In truth, we are facing all three.
@ Isabella Barbaro-Sant
'I am not saying our banks do not need to be more friendly towards us… anzi, far from that… but this is not an alternative to offer us..'
Could you provide an idea for a solution or alternative please?. My A - B -C logic: if I don’t like a product simply I don’t buy it..but what if the list of options full of bad products?
thank you
Daniel Russell
Mar 5th 2009, 16:28
@Denis Catania and others
I fully agree, don't sell out in Malta as we have here in the UK. Finance should not have religious connotations attached.
S. Calleja
Mar 5th 2009, 14:48
@Isabella Barbaro-Sant
"St John’s project was shelved for many a good reason, one of which was that, first and foremost, this being a place of worship, not a museum piece"
Have you ever been to the Vatican? Now this is the HQ we're talking about...
Isabella Barbaro-Sant
Mar 5th 2009, 11:47
For the sake of reason & goodness..this is a NO NO for our country and for all men and women of good will.. We all know what Sharia means… oppression, fanaticism, extremism at its purest form, zero rights for women, lack of education… ( just to name a few ), and now we are dreaming of welcoming amongst us its academic branch in the form of ISLAMIC BANKING !!
I am not saying our banks do not need to be more friendly towards us… anzi, far from that… but this is not an alternative to offer us.. I expected better than this from our financial Institutions, and pray and urge the learned gentleman who spearheaded this proposal to rethink it with its full implications .. Remember, the St John’s project was shelved for many a good reason, one of which was that, first and foremost, this being a place of worship, not a museum piece. This must be treated on similar lines.. we are a proud Catholic nation and like so, very proud of our roots.. with all our revered potholes and other defects !; any other intrusion is not acceptable, in whatever form this may come by..
D Delia
Mar 5th 2009, 08:22
How would one who deposit money in an islamic bank get a return if not by interest?
Albert Muscat
Mar 4th 2009, 17:41
If you ask a conventional banker exactly what Islamic banking is, he will mumble something about religion. He will then say they cannot charge interest but use something else which is the same thing. This "something else", incidentally, is never defined. He will then move on to describe Islamic banking as being about smoke and mirrors. To conclude he will then profoundly announce that, with a few tweaks, it is what he does every day anyway. And that is the end of it.
If you push him to actually describe an Islamic financial instrument, and worse if you actually use some Islamic terminology like murabaha, mudaraba etc, then his eyes will start to gloss over.
Frankly this stereotyped image is all too prevalent within the banking world. Islamic banking is not about smoke and mirrors. It is,in fact, about banking based on Islamic ethical principles, which are, in many ways, very different indeed from conventional banking principles.
The major pillars of Islamic banking system are:
Discouraging economy on papers and encourage real economy.
No fixed interests rates
No toxic assets involvement in the banking system.
This is exactly the pull-out plan that would save all failed bailed-out plans.
Nicholas Calleja
Mar 4th 2009, 16:04
I would really opt for this type of bank cos in the present system a homeloan over a period of 40 yrs is paid at 150% profit for the bank...for example if you take a loan of 100,000 on a period of 40 yrs you end up paying 250,000!
Eager to see this system up and running...good for everybody in my opinion
Denis Catania
Mar 4th 2009, 14:18
Keep religion out of Malta's system. Whether it's Catholic, Jewish, Islam and any other religion and if some Catholic ways is still in Maltese system, do away with it. I motion to keep it out anyone seconds it.
P Debono
Mar 4th 2009, 11:24
I agree with Mr. Sammut on this one.
That is primarily the reason why many Maltese bigwigs are lobbying for the introduction of Islamic banking in Malta.
However, I believe such a system would work in Malta, especially with our mainly generous corporate and investment tax legislation and I see no reason why it should not be introduced as an alternative option.
R Sammut
Mar 4th 2009, 10:12
"For instance, banks need to be allowed to deal in property..."
Allowing this is risky in Malta, unless heavily regulated. Or else banks would buy as much property as they can, adding to the speculation and in turn putting up prices.. making it less affordable for the first-time buyer.