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Wednesday, 1 October 2008

Islamic Finance - Safer Haven In A Financial Storm?

September 30, 2008

As bank shares plunge and the world markets see-saw, one arm of banking riding out the storm in calmer waters is the Islamic financial sector.

Islamic finance complies with Sharia, which forbids making interest, or money from money.
In essence, far less exposure to the elements that have driven banks and mortgage lenders wild.
In the past year, the Dow Jones Islamic Titans 100 index has fallen 7%, whereas the FTSE 100 index has plunged by three times that amount.
Some believe that if banks in the West followed the principles of Islamic banking, the recent economic meltdown would not have happened.
"Islamic banks don't rely on lending, they're not involved in derivatives and the short selling of shares is strictly forbidden," says Brian Kettell, senior lecturer in Islamic banking and finance at the London Metropolitan Business School, who took part in our Web Chat on the subject.
"There is no investment in banks paying and receiving interest and so they're not exposed to interest rates."
Under Sharia law, wealth should be generated by legitimate trade and the investment in assets.
The customer and bank share the risks of any investments and split any profits between them at an agreed rate.
"Investment in companies involved with alcohol, gambling, tobacco, pornography, pork, entertainment and night clubs is prohibited," says Mr Kettell. "It's a form of ethical investment with a religious slant."
Yet many of the traditional banking products are available to Islamic bank customers - who do not have to be Muslim.
Several UK banks offer Islamic mortgages. The Islamic Bank of Britain offers a current account, mortgage and personal loan services.
Its commercial director, Sultan Choudhury, argues that Islamic finance is a safer option. "Islamic Banks cannot borrow money from the interest-based money markets," he says. "They have, therefore, escaped the meltdown facing conventional banks who have, or try to, take money in this manner.

"Sharia's finance is based on an underlying asset, trade or service. Islamic banks will therefore not use money they do not have and only trades in quality assets, leaving them in a stronger position than conventional competitors." (Sky News)
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