| Two million Muslims in the UK face an ethical dilemma | | | | earning interest. The ijarah concept is extended to hire |
| if they want a mortgage or a loan. Conventional | | | | and purchase agreements by Ijarah wa iqtinah. |
| mortgages and loans all require the payment of | | | | Maysir: Means gambling. It's another of three |
| interest and "riba" as interest is called under Islamic law, | | | | fundamental prohibitions in Islamic finance (the other |
| is forbidden by the Koran. | | | | two being riba and gharar). The prohibition of maysir is |
| British financial institutions are increasingly catering for | | | | often used as the basis for criticism of standard |
| Muslims' specialist needs through a number of | | | | financial practices such as conventional insurance, |
| alternative arrangements that respects the teachings | | | | speculation and derivative contracts. |
| of the Koran. Here are just two of them: | | | | Mudarabah: A Mudarabah is a form of Investment |
| Ijara with diminishing Musharaka - the mortgage | | | | partnership. Here, capital is provided by the investor |
| alternative. | | | | (the Rab ul Mal) to another party (the Mudarib) in order |
| Ijara with diminishing Musharaka is an Islamic alternative | | | | to undertake a business or investment activity. Profits |
| to a conventional UK mortgage and has been adopted | | | | are then shared according to pre-arranged proportions |
| by several British banks and building societies. | | | | but any loss on the investment is born exclusively by |
| In essence, Musharaka means partnership. Under this | | | | the investor and the mudarib then loses the expected |
| Islamic financial concept, the bank buys the house and | | | | income share. |
| legally becomes its owner. Then throughout the | | | | Mudarib: The mudarib is the investment manager or |
| pre-agreed period, say 25 years, a monthly payment is | | | | entrepreneur in a mudarabah (see above). It is this |
| made. Each monthly payment includes a charge for | | | | managers responsibility to invest the investor's money |
| rent and a charge that buys a small proportion of the | | | | in a project or portfolio in exchange for a share of the |
| house itself. It's form of variable shared equity plan with | | | | profits. A mudarabah is essentially similar to a |
| the proportion of the house being owned by the | | | | diversified pool of assets held in a conventional |
| purchaser, steadily increasing as payments are made. | | | | Discretionary Managed Investment Portfolio. |
| Once the final payment has been made, the house is | | | | Murabaha: means purchase and resale. As opposed to |
| owned outright. Ijara | | | | lending money, the capital provider purchases the |
| Here you tell the bank or financial institution what you | | | | required asset or product (for which a loan would |
| want, for example a car, and they buy it. In return for a | | | | otherwise have been taken out) from a third party. |
| monthly payment that covers the cost of the bank's | | | | The asset is then resold at a higher price to the capital |
| capital, the bank then allows you to use the asset for | | | | user. By paying this higher price by instalments, the |
| an agreed period. In reality, it's a form of leasing | | | | capital user effectively gets credit without paying |
| Islamic finance is not widely available in the UK - so | | | | interest. (Also see tawarruq the opposite of |
| where can find it? Here are three suggestions: | | | | murabaha.) |
| Over the last few years Lloyds TSB has introduced | | | | Musharaka: This means profit and loss sharing. It's a |
| Islamic products to 33 of its branches. Their | | | | partnership where the profits are shared in |
| spokesperson says, "It's important for our customers | | | | pre-arranged proportions and any losses are shared in |
| to see that we are following the right procedures. We | | | | proportion to each partners' capital or investment. In |
| have a panel of four Islamic scholars who over-see | | | | Musharakah, all the partners to the commercial |
| the products. They offer guidance on Islamic law and | | | | undertaking contribute funds and have the right, but |
| audit the products". | | | | without the obligation, to exercise executive powers in |
| Another high street bank, HSBC, is developing a special | | | | that undertaking. It's a similar concept to a conventional |
| range of Islamic products under the Amanah brand | | | | partnership and the holding of voting stock in a limited |
| name. This range includes home finance plans, home | | | | company. Musharakah is regarded as the purest form |
| insurance, commercial finance, and various current | | | | of Islamic financing. |
| accounts and pensions. Hussam Sultan, the Amanah | | | | Riba: This means interest. The legal concept extends |
| product manager says, "As a bank, we are not here | | | | beyond interest, but in simple terms, riba covers any |
| to moralise or tell our customers that Amanah finance | | | | return of money on money. It does not matter whether |
| is the way to please Allah. We're just here to provide | | | | the interest is floating or floating, simple or |
| them with a choice". | | | | compounded, or what the rate is. Riba is strictly |
| The Islamic Bank of Britain has three branches in | | | | prohibited under Islamic law.. |
| London, two in Birmingham and one each in Leicester | | | | Shariah: This is the Islamic law as disclosed in the |
| and Manchester. They're the only British bank | | | | Quran and through the example of Prophet |
| specifically providing for Muslim customers and claim to | | | | Muhammad (PBUH). A Shariah product must meet all |
| be halal throughout their operations. All their financial | | | | the requirements of Islamic law. To facilitate this, a |
| products are approved by their Sharia'a Supervisory | | | | Shariah board is usually appointed. This board or |
| Committee - all Muslim scholars who are experts in all | | | | committee is usually comprised of Islamic scholars |
| aspects of Islamic finance. | | | | available to the organisation for guidance and |
| For your interest we show below, definitions of some | | | | supervision for the development of Shariah compliant |
| words used widely in connection with Islamic finance. | | | | products. |
| A Glossary of selected Islamic words used in finance. | | | | Shariah adviser: Means an independent professional, |
| Amanah: Means trustworthiness, with associated | | | | usually a classically trained Islamic legal scholar, |
| aspects of faithfulness and honesty. As a central | | | | appointed to advise an Islamic financial organisation on |
| supplementary meaning, amanah also describes a | | | | the compliance of its products and services with |
| business deal where one party keeps another's funds | | | | Islamic law, the Shariah. While some organisations |
| or property in trust. This actually the most widely used | | | | consult individual Shariah advisers, most establish a |
| and understood application of the term, having a long | | | | committee of Shariah advisers (often known as a |
| history of use in Islamic commercial law. It can also be | | | | Shariah committee or Shariah board). |
| used to describe different financial activities such as | | | | Shariah compliant: Means the activity that ensures that |
| deposit taking, custody or goods on consignment. | | | | the requirements of the Shariah, or Islamic law are |
| Arbun: Means a down payment. It's a non-refundable | | | | observed. The term is often used in the Islamic banking |
| deposit paid to the seller by the buyer upon agreeing a | | | | industry as a synonym for "Islamic"- for example, |
| sale contract together with an undertaking that the | | | | Shariah compliant financing or Shariah compliant |
| sale contract will be completed during a prearranged | | | | investment. |
| period. | | | | Sukuk: This has similar characteristics to a conventional |
| Gharar: This means uncertainty. It's one of three | | | | bond. The difference is that that they are asset |
| essential prohibitions in Islamic finance (the others being | | | | backed and a sukuk represents the proportionate |
| riba and maysir). Gharar is a sophisticated concept that | | | | beneficial ownership in the underlying asset. The asset |
| encompasses certain types of uncertainty or | | | | is then leased to the client to yield the profit on the |
| contingency in a contract. The prohibition on gharar is | | | | sukuk. |
| often used as the grounds for criticism of conventional | | | | Takaful: This is Islamic insurance. Takaful plans are |
| financial practices such as speculation, derivatives and | | | | designed to avoid the characteristics of conventional |
| short selling contracts. | | | | insurance (i.e. interest and gambling) that are so |
| Islamic financial services / Islamic banking / Islamic | | | | problematical for Muslims. They structure the |
| finance : Means financial services that meet the | | | | arrangement as a charitable collective pool of funds |
| specific requirements of Islamic law or Shariah. Whilst | | | | based on the comcept of mutual assistance. |
| designed to meet specific Muslim religious | | | | Tawarruq: When used in personal finance, a customer |
| requirements, Islamic banking is not restricted to | | | | with a cash requirement buys something on credit on a |
| Muslims. Both the customers and the service providers | | | | deferred payment basis. That customer then |
| can be non-Muslim as well as Muslim. | | | | immediately resells the item for cash to a third party. |
| Ijara: Means an Islamic leasing agreement. Ijarah | | | | The customer thereby obtains cash without taking an |
| permits the financial institution to earn a profit by | | | | interest-based loan. Tawarruq is the opposite to |
| charging leasing rentals instead of lending money and | | | | murabahah. |