Let’s switch to Islamic Banking
September 30, 2009
Devan Tisdale, 14, Heidelberg (Germany); Khoo Su Ting, 16, Kuala Lumpur-News Straits Times
To many, Islamic financing is a foreign idea. Many others may not have heard of it all. Such was the case with Su Ting and I until we interviewed David Vicary Abdullah, chairman, global Islamic finance group, Deloitte Consulting Malaysia Sdn.Bhd.
What seemed alien to us at first, became interesting when we had an expert explain the subject to us. Islamic banking isn’t that hard to understand after all!
Did you know that Islamic banking isn’t only for Muslims? One of the questions most frequently asked of David is: “Are non-Muslims forbidden to use Islamic banks?” David’s answer to that is “… emphatically NO!”
He said: “Over half of the bonds held in Islamic financing are held by non-Muslims who have taken an interest in Islamic banking.”
And its popularity is growing.
David added: “Although 20 per cent of the world’s population is Muslim, only one per cent of the financial market is Islamic. There is amazing potential for growth.”
The difference between Islamic and conventional financing is that in Islamic banking, you share risks with the bank, explained David. “Interest or ‘riba’ is forbidden.”
So what do banks do to attract customers since they are not allowed to pay interest? According to David, Islamic banks practice a thing called “profit ratio”. If you deposit money with them, they will invest your money.
Let’s say you deposit RM10 in a conventional bank with 10 per cent interest. The bank will use this money to make a profit but you will only get the agreed amount of interest, regardless of the profit made by the bank. At the end of the month, you will have RM11.
In Islamic banking, when you deposit RM10, the profit ratio is 50:50. For example, the bank uses your RM10 to buy 10 water bottles, each of which it sells for RM2. At the end of the month the bank will split the RM10 of profit with you 50:50, giving you RM10 plus your profit of RM5, which brings you a total of RM15 at the end of the month.
“Unfortunately, this is a double-edged sword. If the bank loses money, you will also. More often than not, though, clients reap a healthy profit. This is fairer to both sides rather than conventional banks, as they have to pay interest even when they are losing money. Sooner or later, they might just go bankrupt,” David added.
David went on to explain that Islamic banking is fairly similar to its conventional counterpart, except that it conforms to the Syariah (Islamic law), meaning that they cannot deal with or invest in gambling, alcohol, or speculation.
“The fact that speculation is forbidden is actually the reason why Islamic banks are doing so well in spite of the economy. Since they cannot speculate, they have no bad assets and so have emerged from the collapse relatively unscathed.”
Children are also able to participate in Islamic banking. If you are rational and old enough to make decisions, you too can participate in Islamic banking.
“Children should learn financial literacy,” says David.
“People are interested in something that profits them. The idea of risk and profit sharing is very straightforward and fair, with both partners sharing the gains and losses. The chance for profit is also much greater than in conventional banking, even if there is some risk involved.”
We kids are hardly what you would call an expert on finance, but we believe that there is great merit and potential in the Islamic financing system. It has the potential to dominate the financial world, but only time will tell.