Das Kreditgeschäft im Islamic Banking (German Edition)

The past has shown that the architects of the Islamic finance industry try to create new investment instruments either based on already existing ones or by transforming conventional instruments into Sharia -compliant replicates. In recent years, however, some financing instruments have been developed that have a close resemblance to interest-bearing loans but are by most scholars still regarded as Sharia -compliant. This financing scheme has to fulfill two preconditions in order to be Sharia -compliant.

Firstly, the mark-up has to be a fixed sum and cannot be dependent on other parameters. A floating rate would be considered as interest and is, therefore, prohibited. Secondly, the financier, for example a bank, has to carry some of the risks associated with owning the demanded good. The bank could buy the good, own it for a certain period of time, [33] and then sell it to the client. The possibility that the client could back out of the deal after the investor has already purchased the good poses another risk to the financier.

Such kinds of deals are not regarded as loans but as sales on credit.

equity and debt capital markets - German translation – Linguee

For a sale on credit it is legitimate to ask for a fee on top of the value of the associated good. In addition to possible disagreements whether a certain financing mode is Sharia -compliant or not, many Muslims accept the concept of darura necessity while others do not. The concept indicates that due to economic necessities it might be permissible to employ financial means that are, in fact, not compliant with Islam, if there are no Sharia -compliant instruments available.

Vissermentions in that context the example of home financing in Europe and North America. After having described broad principles of Islamic finance, there are some specific aspects left that should be examined more closely. These aspects are considered in single sub-chapters because they have far-reaching consequences for any Islamic financing scheme and, thus, also for the schemes I will construct later on for ship financing in Germany.

Islamic contract law contains some decisive features that usually do not play a role in conventional business contracts.

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To ensure limited complexity in Islamic commerce, business contracts are not allowed to cover more than one transaction at a time. Furthermore, contracts that are entailed or directly linked to each other are also prohibited. Often, of course, it is necessary to execute more than one transaction in order to complete a business deal. If we take the example of murabaha again, then,the financier has to close separate contracts with the third party, from whom he buys the good, and his client, to whom he sells the demanded good.

Another example would be, when party A sells a good to party B and, afterwards, buys it back at a higher price. Such a deal is not allowed if both transactions are arranged together and at the same time. Otherwise, there would be either two transactions within one contract or the first contract would presuppose the second one. Though, there are some hurdles to take, in general, Islamic financial products can be structured as long as there are individual contracts to each transaction and as long as each transaction itself is Sharia -compliant.

Moreover, most scholars demand a time lag between each transaction, so that, at least in theory, one contract does not entail another contract.

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Islamic finance endorses a strong linkage between the real economy and the financial sector. Being opposed to credit-based financing, Islamic finance advocates financial transactions that are backed by tangible assets. The financing activities of a company, thus, have to be directly linked to underlying assets.

Ship Financing in Germany: A possible Area of Application for Islamic Finance?

The main goal in strictly coupling financing with underlying assets is to restrict speculation. Critics, however, emphasize the downside of these financing techniques, which are namely limited possibilities to hedge against certain risks. Another critique often brought forward is that these financing restrictions can formally, but not in essence, be overcome in a Sharia -compliant way.

Tawarruq is one example of an Islamic financing instrument where Sharia -compliance is formally maintained, although the basic intention of the underlying asset rule is circumvented. The Sharia bans the production, consumption or usage of certain assets and services that are assumed to be contradictoryto Islamic norms.

These assets or services are referred to as haram. Not just direct trading with these goods is forbidden but also, for example, the investment in shares of a company that produces pork or alcoholic beverages. At first sight, it seems easy to avoid investing in these goods. However, it is questionable how ample the relation between the investment and the haram goods can be. For instance, is it permissible to buy shares of a company, which itself owns shares of a company that produces beer?

How far must this line be extended in order to be still haram? A typical example is the investment in a hotel. Usually, in a hotel alcoholic beverages are sold. Opinions differ if such an investment is Sharia -compliant or not. Furthermore, the definitions of pornography and gambling may vary widely. In many Muslim countries a plunging neckline is considered as outright pornography; in other Muslim countries the interpretation of pornography may be more liberal. Besides the above listed goods there are also some assets and services where there is controversy whether they are haram or not.

Conservative Islamic scholars, for example, interpret investments in entertainment such as movies and music as not compliant with the Sharia. One also cannot invest in companies that supposedlyprofit from unethical practices. The debatable question here certainly is: One example could be biotechnology firms that engage in genetic engineering.

Since a large part of the profits in the conventional financial service sector derives from interest, investments in this sector do not pass as Sharia -compliant either. In the Islamic world, the view that riba and interest are two different words for the same thing is prevalent today. Among experts there is still a controversial dispute going on if the prohibition of riba originally covered all forms of interest or just excessive rates that were unjustified and lead to impoverished borrowers. In addition to arguments concerning Sharia -conformity, often, secular arguments are invoked by Muslim scholars to justify the complete ban on riba.

In their opinion, interest boosts the transfer of wealth from the poor to the already rich and turns people away from productive enterprises. Interest, they say, determines profits ex ante irrespective of the outcome of the business venture and, hence, abets the party with the stronger bargaining power without necessarily creating additional wealth forsociety. The ban on riba does not only affect loans and other forms of credit-financing but also covers the purchase of goods and penalties for delayed payments.

Any accessory charge on top of the principal amount is considered as riba , as long as this accessory charge is not regarded as compensation for an increase in incurred risks or additional services. The fact that in Islamic financial practice conventional reference interest rates such as LIBOR [46] are often taken as benchmark to calculate such mark-ups further blurs this thin line.

Money, in Islamic philosophy, is not an asset in its own right but only becomes an asset if put to productive use. In a murabaha scheme, for instance, a bank buys a pre-specified good on behalf of the customer. In contrast to granting a loan, the bank carries risksassociated with ownership for a certain amount of time, this is until the bank sells on the good to the customer. Furthermore, by engaging in the described purchasing transactions the bank provides a service to its customer. Thus, given that all relevant rules of the Sharia have been followed, the bank is allowed to add a mark-up on top of the purchase value of the good.

As already mentioned above, a bank or any kind of lender is not allowed to increase the mark-up or charge any additional fees in case the borrower defers the repayment. A penalty on late payments would make the mark-up time dependent and, therefore, indistinguishable from interest. There are two possibilities for a lender to incentivize a borrower to pay on time.

Firstly, the only universally accepted penalty clause in Islamic finance is to oblige the borrower to donate a certain sum of money to a charity in case of deferred payments. Secondly, some Islamic financial institutions include a charge for late repayment in the initial mark-up and grant a rebate for timely repayment. Many Islamic scholars insist, nevertheless, that such a rebate cannot be promised beforehand because, again, it would make the mark-up openly time dependent.

However, a voluntary rebate out of kindness and generosity is very much appreciated in Islamic society and, thus, cannot be frowned upon. In Islamic finance, uncertainties in regard to the subject of a contract or the price of a good have to be avoided. In contrast to the strict prohibition of riba , a certain degree of gharar in a business transaction can be permissible and might even be inevitable. It does not necessarily mean that a contract is void if one or more of the above listed aspects occur. When constructing a building, for instance, it is obvious that the subject of the contract does not exist yet and, hence, the seller does not possess the subject yet.

Nevertheless, such a construction contract is not per se void because Islamic finance acknowledges the economic necessity darura and the special requirements of construction contracts. However, to keep the risks of gharar within narrow confines certain conditions must be fulfilled. Firstly, the subject of the contract must be clearly and unmistakably defined.

Furthermore, the price for the subject of the contract cannot depend on preconditions which are contingent on future events. For example, it is not permissible to fix the price of the underlying good according to future going prices.

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Lastly, all contracting parties should have full knowledge of the actual state, existence and availability of the subject of the contract. There should be no information asymmetries between the contracting parties, that is, one contracting party should not take advantage of the nescience of another contracting party.

The prohibition of gharar limits the use and engineering of certain investment instruments in Islamic finance including the use of hedging devices.

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The only way to shift debt capital to another person or enterprise is to convey it at par value. Another example of such a limitation due to gharar is short-selling. Since the goods to be sold have to be in the possession of the seller at the time when the contract is concluded, it is not allowed to sell goods short. Maysir describes a situation in which someone attains assets due to pure luck and not because of effort or merit. Besides casino games and lotteries also speculative business dealings, many forms of derivatives and even conventional insurances [56] are not compliant with Sharia law because most Islamic scholars consider these activities as being forms of maysir.

From an Islamic point of view, the key critique on activities being considered as maysir is that the profit of one party comes along with a loss of the counterparty. There is no added value for society and no increase for the general welfare. At the same timean imminent threat that wealth will be distributed improperly prevails. Instead development of the Islamic financial markets is driven by the ability to remove the constraints on the supply side.

The largest school of Shia Islam is the Jafarischool. Some countries follow exclusively one school, in other countries there is more than one school predominant. In Egypt, for example, all four major Sunni schools can be found. See Rohe, pp. Numerous rules of the Quran or the sunna contradict each other. A good example is the attitude of a devout Muslim towards alcohol. A well accepted mechanism to decide which sura should be followed is abrogation that is the later sura overrules the earlier one note that the suras are not arranged in chronological order but in order of length.

First of all, the fatwa committee of the al-Azhar University in Cairo can be considered as such an organization. Scholars of all four major Sunni schools sit in the committee. Thus, fatwas issued from this committee are held in particularly high esteem. See Visser, pp. Shiites, of course, have their own schools of law.

Even within these schools divergent opinions among scholars can be quite prevalent especially if it comes to commercial activities. For a conclusive overview of the most important law schools and the differences between them, see Visser, pp. In pre-Islamic Arabia it was common to double the principal if the borrower could not repay the loan on time. Since it was unrealistic to repay twice the sum if he could not even repay the original amount on time the borrower often ended up being enslaved to the lender.

See also chapter 3. See Mahlknecht, p. Being a conventional bank, investments in shares of HSBC were ironically excluded from the fund. See Wilson, p. The often quoted example of two brothers, one selling haram alcoholic beverages and the other one selling halal fruit juices or soft drinks, illustrates the legitimacy of taking conventional reference rates as benchmark for Islamic transactions.

See for example Deutsche Bank, p. Conservatives are of the opinion that besides of donations to charities the only acceptable penalties for late or non-repayment are non-monetary ones usually amounting to imprisonment. In practice, however, since futures and options are commonly regarded as gharar most hedging activities are off-limits. Nevertheless, there are some current approaches to develop Sharia -compliant hedging devices. Recently, Islamic forms of insurances, called takaful , have been introduced. Takafuls are jointly owned by the insurants themselves.

The insurants put money into a fund that is managed by the insurance company. The fund will be invested in Sharia -compliant assets and businesses. The profits of the fund mostly go to the insurants, while the insurance company collects a fee for its services. BWL - Investition und Finanzierung. Business economics - Supply, Production, Logistics. BWL - Unternehmensethik, Wirtschaftsethik. GRIN Publishing, located in Munich, Germany, has specialized since its foundation in in the publication of academic ebooks and books.

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