For many years, Muslims in North America have been struggling to find ways to buy houses while adhering to Islamic law, also known as the Shariah. According to the Qur’an, it bans the collection and the payment of interest. For over one million Canadians, these religious structures restricted the possibility of obtaining traditional mortgages.
Recently, however, companies like The Canadian Halal Financial Corporation have been able to fill the void. The establishment of an organization that is based in North America to enable Muslims to finance their home is part of a growing global trend in finance.
I was able to spend more than a full year recording one of the centers of this worldwide phenomenon within Malaysia. In Malaysia, the government is seeking to create the concept of an Islamic Wall Street. The goal is to make the capital city of Malaysia, Kuala Lumpur, what one official has called”the “New York of the Muslim world.”
I’m currently conducting research in Islamic financial markets through the Counter Currency Laboratory at the University of Victoria, where we examine the emergence of debates regarding the future of money.
An international network of Islamic banks.
The Central Bank of Malaysia has created an extensive Islamic financial system that is comprised of a number of banks. They have also facilitated the development of an Islamic cash market Isl, amic financial markets, and other forms of Islamic insurance, also known as the Takaful system.
All across the country, organizations like Bank Muamalat, HSBC Amanah, and Standard Charter Saadiq have actively sought to grow this market. Presently, Islamic financial institutions aggressively advocate Shariah-compliant credit cards along with home loans as well as insurance plans. The government also aims to encourage the development of new technologies by opening its doors to competitors from Islamic financial institutions located within the Arabian Gulf region.
In the streets of Kuala Lumpur, the ubiquity of Islamic financial and banking services within the country was easy to ignore. Advertisements that were brightly lit offered consumers credit cards that offered ” free takaful coverage, low fees, and no compounding finance charges.”
In Kualalumpur’s ultramodern train station attr, active advertisements promoted Islamic finance. Al-Rajhi Bank, one of the Saudi companies that claims to be the world’s most important Islamic bank, advised prospective clients to “Get There Fast” with “Al Rahji Personal Financing.” On the other end of the train station was the predominantly owned Qatari Asian Finance Bank, which boasted the fact that they were “moving the world to Islamic banking.”
The Malaysian currency is available at the many ATMs operated by one of the more than 20 Islamic banks operating across Malaysia. The lines are often long and snaking back to the terminals at high-shopping times.
The rapid growth of Islamic finance has triggered an intriguing question of both practical and intellectual. An Islamic finance professional from Malaysia explained to me, “What, exactly, is the ‘Islamic’ in Islamic finance?”
This raises the issue of what exactly is by this Islamic interdiction against the interest.
Two distinct methods have been devised to prevent the expense of interest. A source described these methods as “shariah-compliant” or “shariah-based.”
A shariah-compliant agreement, like Murabaha, makes use of the repurchase and sale of a particular asset on the basis of deferred payment.
There are a variety of ways that the Murabaha may be structured. In Malaysia, the kind of murabaha that is commonly used as an alternative to a mortgage includes four steps. First, the client identified a property they’d like to own. Then, the financial institution bought the property from its current owner.
Thirdly, the institution sold this property back to the client at a markup, and the repayment was scheduled on an installment basis. In the end, the customer was required to pay the installments due on a regular basis until all the agreed-upon payments were made.
These contracts evade the Qur’anic prohibition against charging interest through 2 distinct sales. The buyer purchases the property from the owner, who is currently in charge, and immediately sells it for a profit to the buyer.
Many bankers favor shariah-compliant agreements such as the Murabaha because they employ a method to duplicate a traditional loan contract. The infrastructure used by banks, including the back office and computer systems process, could be easily modified to suit this kind of arrangement.
However, the amount of markup for this contract was closely correlated with the current interest rates. Numerous experts from Malaysia had reservations about this contract. They believed that even though it was in accordance with the legal requirements of Islamic law, it was not in accordance with its spirit.
Critics and reformers favor another method of facilitating financing, claiming that it is “shariah-based.” This technique is based on partnership principles and is known as the musharakah.
This kind of joint venture agreement was commonplace in the Arabian peninsula prior to the advent of Islam. It became a common economic arrangement during the early Islamic world.
A musharakah is a profit-sharing agreement in which at least two parties are able to pool their resources and labor with the intention of making money.
As of Malaysia, Islamic finance experts created the ” diminishing musharakah.” In this agreement, the financial institution, as well as the homeowner, will jointly purchase a house together. In time, the homeowner would gradually pay out the equity owned by the financial institution through a set amount each.
Alongside the equity component, the installment is also comprised of an income margin. This margin of profit was indexed to rents of comparable homes in the neighborhood.
What are the alternatives?
People who wanted to change Islamic finance favored shariah-based contracts. They saw them as an authentic alternative to the Shariah-compliant agreement.
The legitimacy issues surrounding contracts based on Shariah and Shariah compliance illustrate the lively debates at the core of Islamic finance, which of the options Muslim customers ultimately select is the determining factor in the extent to which Islamic finance will be a viable alternative to the debt-based system that prevails across the world today.