Islamic finance coming to Ireland?

hivizman

I was interested to note that the Finance Bill published yesterday contains a lengthy section that would make it feasible for banks and other organisations to enter into sharia-compliant transactions without suffering tax penalties: see this story in the Irish Times.

This seems to be what triggered the most recent rant on the mpac.ie website, reported in another thread.

Some of my earliest posts in this forum were about Islamic finance, so I'm pleased that there's a chance of some progress in this area in Ireland. Whether there will be much of a domestic market for sharia-compliant finance remains to be seen, though.

dlofnep

What's the difference between Sharia and domestic finance?

irishconvert

dlofnep wrote: »

What's the difference between Sharia and domestic finance?

Not much, you don't pay interest on your mortgage repayments but pay a rent to the bank in addition until you have paid off your mortgage. You end up paying back around the same amount as someone on a non-Sharia mortgage. It's just dressing it up in another way IMO.

dlofnep

irishconvert wrote: »

Not much, you don't pay interest on your mortgage repayments but pay a rent to the bank in addition until you have paid off your mortgage. You end up paying back around the same amount as someone on a non-Sharia mortgage. It's just dressing it up in another way IMO.

Oh ok. Cheers

hivizman

Islam prohibits the paying and receiving of interest. Hence financial transactions that would be structured in conventional finance as interest-bearing deposits or interest-paying loans have to be structured differently to be sharia-compliant.

For example, instead of taking on a mortgage to buy a house, and paying interest, a muslim seeking a sharia-compliant way of financing a house purchase could buy the house in partnership with a bank, leasing the house from the bank. The muslim would pay rent to the bank on the bank's share and at the same time gradually buy the bank's share off the bank. This is technically known as ijara (the lease element) with diminishing musharaka (the partnership element). At present, structuring the transaction in this way leads to multiple payments of stamp duty and there would be no possibility of tax relief on the payments, because they are not legally interest. The Finance Bill proposals would basically make a sharia-compliant transaction such as this the equivalent of a mortgage for tax purposes.

Another type of transaction relates to savings accounts. Because Islamic finance prevents the payment of interest on savings, anyone wanting to earn a return on a deposit with a bank can only do so if the return is expressed as a share of the profits generated by the bank from investing the deposit (this is technically known as mudaraba). However, until now, this has created problems for the bank, because the payment of profit share to depositors is not deductible as interest.

As irishconvert correctly notes, this sort of arrangement tends to produce payments or receipts that are virtually the same as a conventional mortgage or deposit. However, this is just how things have worked out in practice, and those who idealise Islamic finance (not me ) believe that it has the potential to be quite different from conventional finance. I'm rather more cynical, and think that a lot of recent initiatives in global Islamic finance have been just new ways of making bankers, lawyers and accountants rich at the expense of borrowers and lenders.

donaghs

Similarly, charging of interest on loans was also prohibited in the Christian world in the Middle Ages - Usury. Gradually usury was reinterpreted to mean excessive interest, or above a legal limit.

Some commentators have linked this relaxation of lending practices with the economic growth of Europe after the Middle Ages.

I think the current notions of "Islamic Finance" did originate from good intentions, e.g. preventing financial exploitation. But if the borrower is essentially paying back a similar amount of money, it looks like it's just paying lip service to religion/culture.

wes

Well, its good news, if Irish investor have more investment opputunities, and right now every little bit helps.

Coriolanus

So can the payment fluctuate over the period of the loan?

I mean mortgage repayments go up and down, sometimes in the homeowners favour, sometimes to their detriment.

Would the payments under these kind of schemes be similarly fluctuating?

And if not, and it was proving to be beneficial to the buyer that they would not, could anyone opt for a loan of this type? It'd seem to be unfair if not.

hivizman

If the loans are structured on the model commonly used by Islamic banks or Islamic units within conventional banks in the UK and other countries, then the "rent" that the home purchaser pays to the bank on the bank's share of the property is based on an interest base rate (such as London Inter-Bank Offered Rate - LIBOR) plus a margin (e.g. LIBOR + 2%). Hence the "rent" will fluctuate in line with the interest rate being used as a basis for the calculation.

Sharia scholars have stated that, although the calculation makes use of an interest rate, this does not make the payments interest. A common analogy used by scholars is with a halal butcher's shop close to a non-halal butcher - the halal butcher may decide to charge the same price for equivalent cuts of meat as the non-halal butcher, but that doesn't make the meat itself non-halal.

It would be possible to structure a sharia-compliant home purchase plan using a fixed rental rate for the life of the plan, or to base the rent charged on comparable market rent levels, but these approaches don't seem to be popular in practice. On the other hand, shorter-term finance, for example, car purchase, often uses fixed rates.