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Rabu, 25 November 2009

A Secular approach to Finance

Issues of Faith in these times tend to get dismissed as awkward moments and are something to be avoided.
This conflict of Spirituality can lead to misunderstandings when the person concerned has a different ‘moral compass’ which sets out the course to be steered when faced with differing values and philosophies.
With the emerging economies in the East and a diverse secular community in this country, it is important there is an understanding of the underlying principles when relating to other Faiths.
Business leaders will talk of Corporate Mission statements of Corporate Culture/values, these are in fact a manifestation of the individual’s faith and their education (in it’s broadest sense) and are based on an infrastructure of Spiritual values.
What is important in business dealings be they transactional or relational is not to get bogged down in the Foundations of Dogma but recognising the respective differences of Islam and Christianity and embracing them rather than confronting them, after all they have at the root similar principles.

We are not talking aggressive secularism but more cultural inclusionism and bridging the gap between Mecca, Jerusalem and Rome.
Some 25% of the world is now Muslim, with demand for Islamic Financial Services in the UK and Europe being fuelled by the growing number of middle-class Muslims in the West.
So, in particular, are there any facets of Islam that we can draw on as common ground and learn to accommodate in our business dealings

Islamic Finance
Islamic banking models are not fundamentally different from Western Models being supported by asset and business ownership; there is a heavy reliance on understanding the general and specific business environments in which they operate. The ‘Business Partnership’ that most western Bankers promote.
Islamic principles insist ons account monitoring to ensure the strict observance of Shari’a law in business activities.
Riba, or interest, is prohibited in Islamic law. Any risk-free or guaranteed interest on a loan is considered to be usury, so there dependence on asset backed investment effectively precludes interest

Banks and Customers do therefore not enjoy interest (Riba) but rather participate in the yield resulting from the use of funds. The Islamic Funder invests in business projects and then profits are shared in a pre determined ratio. There is thus a partnership between the Islamic financial provider and its depositors on one side, and between the Islamic financial provider and its investment clients on the other side.
If we take interest out of the equation, the nearest I can get to this in modern times is that it strikes a chord with Western Accountancy concepts of matching costs and revenues, albeit taking it to the new level of (literally) ownership.
Some of this strikes a note also with the ‘rules of tracing’ so much beloved of Insolvency lawyers.
Very Early western principles of Banking along co operative lines and respect for the borrower were very much in this mentality, but somewhere alomg the way the two models diversified and the business partnership ethos came away from these first principles.

This is very deep here as there are similarity between this and the ‘no man’s an island’ concept and the notion that the consequences of our action has a direct effect on others.
Sharia finance differs from western concepts of finance in that it is based on sharing the yield of the project and takes a more Holistic view of the ‘lending’ proposition.

Some Western banks have taken this principle and adopted there products to suit . HSBC has innovated Amanah, an Islam-compliant services which includes a current account and home financing facilities. Lloyds TSB operates a similar set of services.
Islamic Banks have been largely protected by the ‘Credit Crunch ‘ as they have not lent to the sub prime market and therefore there asset backed security is much more solid. We would not have had a Northern Rock, Lehmans.AIG or ant other big recent corporate collapse if Islamic principles had been followed, so there is a lesson to be learnt.
The funding of house purchasing in Islamic terms is also quite different from the traditional western model
Islamic Insurance (Takaful)
The western notion of Insurance is compensation for losses and includes elements of risk and uncertainty which implicitly involves ‘gambling’, a notion that does not sit comfortably with Sharia law

Takaful employs the risk model of law of large numbers, i.e what is uncertain to one individual will be less uncertain with respect to a very large number of similar individuals
Islam compliant Insurance needs to involve the notion of Partnership and the pooling of resources to help the needy
Insurance products, to remain attractive should therefore consider a departure from traditional (Western) underwriting principles and incorporate one or all of the following concepts

1 refund 50% of all premiums at the end of the year if there are no claims
2 as above but instead of refunding directly the money, radically reduce the following years premium by 50% of the first year
3 In the event of a claim, asking for a 50% contribution from the Insured

(point three would be to damage only, not Third Party personal injury)

There also need to be a principle governing the taking of a deposit, (refundable) front as surety for the 50% and splitting any ‘interest’ earned on this money equally at the end if no claims (or if any surplus left after claims)
Underwriters would have to adopt Islamic Banking rules and concentrate on project yields rather than charge Interest

The operation of the Takaful (Islamic) insurance market, would suggest there is no problem with setting up an insurance policy in any of the 3 ways suggested.. What has been found to work better is rather than just give away rate reductions or no claims 'bonuses', you can try to lock the client into a renewal and a good/ nil claims experience bonus so they only get the rebate if they renew the contract.

All 3 of the options are acceptable terms as part of an insurance policy because they all relate to money being made to work on a particular scheme or plan without interest. However, the insurance company needs to be 'Takaful' compliant so that pure interest is avoided (investment income) and profits from premiums collected (less claims) are shared with the policyholder (after reserves and other financial allocations have been made).

On the concept of up front deposit interest, there should be no problem dividing the profit element if there is a clean or good claims record. But the funds should avoid attracting pure interest whilst held on deposit. In practice, many commercial insurers in the middle east still invest premiums in the normal way but they do not pass on or share any pure interest/ investment income onto policyholders but only the pure 'profit' element left (ie., once the Premium LESS Claims calculations have been done).


It is worth looking at some of the Islamic websites on this, a good one being the Islamic Bank of Britain website which explains things in a simple uncomplicated way. A lot of Takaful insurance companies have committees devoted to establishing what is ethical underwriting and profit taking compliant with Sharia Law and what is not. In the main banks in UK are way ahead on Islamic Finance issues but there is not any Islamic or Takaful ('cooperative') insurance companies in the UK although some of the banks seem to be offering personal lines insurance over the internet from their website.
In a way this business model has come full circle as it is very similar to how Insurance companies used to operate on the old ‘Mutual Companies model’

One thing is drawn from all this is that in some ways these principles have been embodied in Lending and Insurance criteria in UK/US banking for some time and ally closely with the Christian Paternalist ethics beloved of so many Economists. The issue has been that in the drive to find more innovative and complicated lending and Insurance products, sight has been lost of some fundamental principles which Sharia law continues to embody.
As with most walks of life, there is not so much difference between the two cultures, merely a difference in interpretation of fundamental and common values, With the recent collapse of western style banking there are lessons to be learnt from Eastern principles and above all respect for lenders and borrowers alike is probably a principle that should be brought to the forefront of any lending proposition .
Recent Cataclysmic events could have been avoided if the avariciousness of western lenders had been curbed

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