Islamic Finance Project Databank  The influx of "petro-dollars" and a "general re-Islamisation" following the Yom Kippur War and oil crisis encouraged the development of the Islamic banking sector,  and since it has spread globally. Usmani among others for not progressing from "debt based contracts", such as murabaha, to the more "genuine" profit and loss sharing mode, but instead moving in the opposite direction, "competing to present themselves with all of the same characteristics of the conventional, interest-based marketplace". The market for Islamic Sukuk bonds in that year was made up of 2, sukuk issues,  and had become strong enough that several non-Muslim majority states — UK, Hong Kong,  and Luxemburg  — issued sukuk. Principles[ edit ] To be consistent with the principles of Islamic law Shariah -- or at least an orthodox interpretation of the law -- and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some not illegal in secular states:
The financial implications are set out Religion and economics can islamic banking Table D. The cash flows are identical to that of the variable rate repayment mortgage. Unlike the murabaha mortgage, the diminishing musharaka poses no problems if the customer wishes to buy out the bank early.
At any stage, the customer only needs to pay the amount shown on the table as the original cost of the part of the property owned by the bank. Replication of interest only mortgage This is achieved by giving the customer complete flexibility regarding when he buys out the bank, provided that he does so by the termination date of the contract.
Legal and tax issues There are three main issues. Does Islamic finance require the use of Shariah law for the contracts? Islamic finance contracts made between a UK Islamic bank and a UK customer are always made under English law or Scottish law respectively.
Similarly Islamic finance contracts within the USA would normally be made under the law of the state where the property was located, e. Tax relief for interest expense Some countries give individuals a tax deduction for interest paid on a loan taken out to buy their private residence.
Even though the UK no longer gives such a deduction, the UK does give a deduction for interest paid on a loan to purchase commercial premises or property purchased to rent to others. For the diminishing musharaka contract, one would expect the rent paid by the customer to be deductible if loan interest would be deductible, but the tax law of the relevant country would need to be considered carefully.
However the murabaha contract presents greater problems. That means there is no tax deductible finance cost. Real estate transfer taxes Most countries have some kind of tax charged on the sale of real estate. This results in an overall SDLT cost much higher than with a conventional mortgage. Concluding comments As explained above, the pricing for Islamic property finance is based upon prevailing market interest rates for conventional finance.
In practice, Islamic property finance is usually more expensive than conventional property finance, even though both are based upon the same market price for money. There are two basic reasons for this: Islamic banks are typically much smaller than conventional banks.
Accordingly they lack the economies of scale that allow the conventional bank to reduce their non-interest costs such as staff and technology costs to the bare minimum. Islamic finance typically has more transactions than conventional finance to achieve the same goal.
This can be seen from the above examples. It also has other costs, for example the costs of the Shariah supervisory board. All of these extra costs have to be passed on to the customers of Islamic banks.
As mentioned above, this paper is devoted entirely to Islamic property finance contracts that replicate conventional mortgage contracts. That is consistent with market practice, as the Islamic finance market mostly consists of replicating conventional contracts.
It is possible to devise other Shariah compliant contracts that do not replicate conventional finance, but they form a small part of the market and are beyond the scope of this paper as they would unduly complicate it. The Disqus comments facility below allows you to comment on this page.
Please respect others when commenting. Even if you are not registered on any of these, you can still post a comment.25 March Most non-Muslims know very little about Islamic finance. There have been several press stories recently implying that the UK Government is giving some kind of unfair benefit to Muslims by changing UK tax law to facilitate Islamic finance.
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Capitalism. International Economics. Islam. Economics. Finance. Religion. Can Islamic Finance replace Western Capitalism? Update Cancel.
Answer Wiki. 6 Answers.
Bilal Abdul Kader, As finance researcher & an avid banking researcher, Islamic economics are essentially the same as capitalist economics, with.
The Sources of Islamic Economics. we can say that the Islamic Economic system is based upon the notion of justice It is through justice that the existence of the rules governing the economic behavior of the individual and economic institutions in Islam can be understood.
The True Religion. Did God Become Man. The True Message of . "Gulf Islamic Investment is an established company with more than a decade of operating history advising leading Middle Eastern and global investors across multiple assets classes.