1. Islamic Banking and Finance:
a novel, increasingly significant expression of Islamic law and faith
Dr Scott Morrison

2. Muslim societies and this research
1995 Indonesia 1997 Yemen 1998 Morocco Turkey Maldives UAE India 2015 Oman, Brunei

3. Introduction

4. Why?
Piety and faith Principles of intrinsic worth, a corrective Commercial importance in Muslim majority and minority societies

5. Consumer (retail) financial services
I) Foundational principles II) Hypothetical consumer: the case of Dimithri III) Conclusion: a caveat

6. I) Foundational principles

7. Law and freedom ‘prohibition driven’
exclusion/reduction of harãm (حرام) goods and services
‘silence of the shari‘a’
rule of law
‘If it is law, it will be found in our books. If it is not to be found there, it is not law.’
Entick v Carrington [1765] EWHC KB 98, Camden J

8. Cardinal rules/values
Control of:
Gharar (غرر)
Maysir (ميسر)
Interdiction of:
Ribã (ربا)

9. Gharar and maysir Gharar ‘uncertainty’ ‘excessive’ risk
sale contracts for future or unascertained goods VOID
Maysir
speculation
games of chance (e.g. drawing lots, lottery)
gambling (betting, casino and card games etc)
Business and commerce are uncertain, risky and speculative.
However profits/losses from trading an asset or investing in business venture exempt from control as gharar and maysir.

10. Ribã usury charging/paying interest Jurists divide into two types:
credit: payment date changed in exchange for price change
surplus: trading
a) commodities of same type, different grades
b) different ribãwĩ commodities
Qur’an (4), Hadith (10-20), Fiqh
Draft paper: ‘Characteristics of Money in Islamic and English Law’

11. Example (1): credit A sells B one widget
for £5 cash on delivery today [no change] or
for £4 for delivery in 90 days [decrease]
for £7 90 days after delivery [increase]

12. Example (2): surplus
A trades B 2 litres low grade oil for 1 litre high grade oil Bilal brought the Prophet Muhammad Barni dates. Bilal explained he traded 2 units inferior dates for 1 unit Barni dates. The Prophet said this is Ribã, and ‘if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money.’ Bukhari, Sahih 3:38:506

13. Ribã: Application 1) Credit (time) A loans B £10 today
for £12 in 30 days or
£200,000
for £220,000 in 20 years
– secured loan (mortgage)
However interest-free loan (philanthropic) fine.
2) Surplus (goods or money)
Purpose of attaching money price:
Reduce informational asymmetry and exploitation.
Surplus ribã not relevant for most purposes in modern finance – only credit ribã.

14. Structure of Islamic commercial law
Contract
bilateral, in person
Sale (goods or real property)
lease, gift, guaranty, pledge
Agency
Partnerships (joint venture; general & limited partnerships)
in lieu of limited companies
Charitable trust (waqf)

15. Global incidence of interest
Essentially all businesses and governments borrow money at interest
from each other
from financial intermediaries
Banks borrow from each other, from customers and from Bank of England
Consumers rely upon
credit cards, consumer loans (including student loans)
secured loans for housing
interest-bearing bank accounts
Interest is the life-blood of the modern economy!

16. II) Hypothetical consumer: the case of Dimithri

17. Introducing Dimithri Dimithri lives in London.
He is married and has 2.6 children.
He is an accountant.
His employer pays him a monthly salary.
He has food and utility bills.
He tries to save money for emergencies, but sometimes borrows to pay school fees.
He buys a flat.
He insures his car.
He has a workplace pension.

18. Dimithri’s financial needs
Bank account for salary.
Debit and credit cards for bills.
Financing to buy the house.
Borrowing for school fees.
Accident insurance for the car.
Pension and investing during working years, for retirement.

19. Assumption #1
Dimithri’s religion and beliefs do not impact his economic life. Interest bearing savings and demand/notice accounts with any bank fine. Credit cards, overdrafts, bridge loans, consumer loans – good stuff! Mortgage for the flat – no probs. Any insurer acceptable for the car. The retail investment universe is wide open: mutual funds, ETFs, active/passive funds, commodities – no restriction on companies’ shares, bonds.

20. Assumption #2
Dimithri seeks to live in a manner consistent with his Islamic faith or with his ethics.
Can Dimithri observe the foundational principles?
Economic ends are the same under Assumptions #1 & #2,
but the means are different.

21. Ends Place to put the salary. Ways to pay. Financing to buy the house.
Borrowing for school fees.
Insurance for the car.
Pension and investing for retirement.

22. 1) Bank accounts & 2) Payments

23. Bank accounts Demand: current account
Islamic: wadi‘a ( وضيعة) - deposit; amãna (امانة ) - bailment/trust
English law: contractual debt, payable on demand
UK/EU deposit insurance (€100K, £85K)
Notice: fixed deposit not compliant
Investment accounts
Islamic law: no capital guarantee – must be at risk
projected returns; ‘smoothing’ of returns
additional UK compliance costs

24. Payments No difference: Excluded payment methods Cash and coin
Cheques (personal, banker’s draft, postal orders etc)
Bank transfers (CHAPS, BACS), direct debit etc
Cards: debit, charge
Paypal – or any (crypto-) currency, virtual wallets
Excluded payment methods
credit card poses problems (unless paid in full)
overdraft is a commercial (i.e. interest bearing) loan

25. 3) Buying the flat

27. Home purchase Secured loan Mortgage is principal legal device
Security of real property induces bank to lend
at interest (fixed or variable), agreed term
default: bank takes possession, liquidates
Bank would be lender, and Dimithri borrower.
Not an option for Dimithri.

28. Islamic ‘mortgage’ or home purchase plan
Legal Analysis
1) Bank and home buyer are partners.
Dimithri and bank buy/sell shares of the home.
and
2) Bank=landlord; Dimithri=tenant.
buy and leaseback
hire purchase agreement
PURPOSE: avoid credit ribã and lender/borrower relation.

29. Example
£200,000 flat 1. Bank and Dimithri agree rent for possession. 2. Bank purchases the house, waives possession. 3. Dimithri pays bank £12,000 pa (£10,000 plus agreed rent of £2,000 pa). 4. In 20 years bank transfers title to Dimithri. Bank profit of £40,000, on £200,000 investment. Dimithri gets the flat.

30. Analysis Economic function: loan at interest.
20 % [fixed, 20 year] loan = £40,000 interest.
Presence of the asset (the flat) means not credit ribã.
Not trading money for money (with increase: £200,000 now for £240,000 later )
Instead: paying money for shares in a tangible asset and usufruct (shelter).

31. 4) Consumer financing facilities: buying the car

32. Unsecured loan If not seeking Islamic legal compliance:
Unsecured loan contrasts with mortgage
Like credit card or overdraft
Contractual, not proprietary, debt
If fail to pay lender: no proprietary interest, bank can only sue on the debt (breach of contract).
Cars depreciate more reliably and rapidly than real property.
Bank may not want security interest in car – might prefer unsecured lending (at higher interest rate).

34. Islamic financing for a car purchase
Dimithri and his family decide to buy a VW Touran. Bank buys the car for £23,000. Bank and Dimithri agree a mark-up of £5,000. Bank acting as trader, not lender. Dimithri pays the bank £500 each month for 56 months. Then, title to the car passes to Dimithri. Economic effect same as loan at interest/credit sale. Presence of the asset (the Touran) means not credit ribã. Trading money not for money but for a tangible asset with an agreed mark-up (profit for trader/financier).

35. 5) Insuring the car

36. Insurance Insurer undertakes to pay insured
if uncertain, adverse event takes place.
This is an indemnity.
life insurance different
Death not uncertain -- not whether, only when.
Adverse event could be a frontal collision…

38. Don’t worry – Dimithri is unhurt!
Insurer trades in (or speculates on) risk for profit.
Insurance is essentially a sophisticated game of chance: placing bets on probabilities of bad things (!) happening.
Not ribã
But
Gharar
Maysir

39. Islamic substitute -- تكافل
Takãful removes profit element.
Based on contract of guaranty -- كفل
Insureds guaranty one another, spread liability and disburse risk.
Insureds pay into a fund.
Each receives payment if adverse event (car crash – property damage) transpires.
If fund in profit at end of agreed period (e.g. one year), proceeds divided pro rata amongst insureds (not shareholders).
Insureds may pay fee for management of fund and administration.

40. 6) Saving and investing, pensions

41. Excluded asset classes
Interest bearing bank accounts Bonds and other debentures Shares of companies trading in harãm goods or services Derivatives (futures, options, warrants) – binary trading Forex (other than at spot) Day trading, spread betting, contracts for differences Lottery tickets are not a great pension plan anyway!

42. Included asset classes
Equities (screened) [for dividends, capital appreciation]
Shares
Mutual funds
Index/tracker funds
Actively managed funds
Real property [for rent, capital gain]
family home, buy to let; commercial property funds
Commodities [diversification, appreciation]
gold, silver, oil, LNG etc and funds thereof
Specific goods/personal property – tangible assets
fine art, jewelry, coins, rare books etc
None of these produce risk free returns – can depreciate, lose all value.

43. Islamic banking and finance
’Neither a borrower nor a lender be…’ (Hamlet I iii)

44. III) Conclusion: a caveat
About cost

45. Consumer (retail) financial services
1) Foundational principles 2) Hypothetical consumer: the case of Dimithri 3) Conclusion: a caveat

46. Dimithri can: Get paid Save money Pay bills Buy a flat and car
And insure them
And invest for the future…
BUT IT WILL COST HIM!

47. Limitations to retail Islamic financial services
Islamic finance and banking tends to be more costly for the consumer.
Higher institutional costs
Two boards of bank
Small scale – therefore no economies of scale
Additional legal compliance and tax
where not exempted
multiple transactions
Lower profits
conservatism
less scope for speculation unanchored to assets
low leverage
Yet…some reasons for optimism and progress globally.

48. Law of Sukuk: Shari‘a Compliant Securities

49. IDRAK Ltd Islamic finance consultancy Mission
Bridging Islamic legal authorities and the Islamic finance and banking industry.
Disseminating training and knowledge about Islamic commercial law and finance predicated upon it.

50. Further Reading and Credits
‘The Pull of Islamic Finance,’ Counsel (Sept 2017), 6-7.
‘Brexit: Bane or Boon for Islamic Finance and Banking,’ Journal of International Banking Law and Regulation (Sweet and Maxwell)Vol 32 Issue 7 (2017),
‘The Application of UK Prospectus Rules to Sukuk (Islamic Securities) on the London Stock Exchange,’ Journal of International Banking Law and Regulation (Sweet and Maxwell), Vol 31 Issue 4 (2016),
Credits: photo of flat (One Hyde Park) and car (VW)