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I had the opportunity to translate technical documents for both conventional and sharia financial products a few years ago, and I find the market fascination of

• superhuzza 8y ago
  Complexity is a feature in modern financial products. It creates a larger knowledge gap between those selling the products and those buying them.
  • barrow-rider 8y ago
    +1 People forget that the "invisible hand of the market" assumes perfect or at least reasonably accurate understanding of the risks, benefits, and outcomes. Take that info away and you inevitably have snake-oil salesmen and the Housing Bubble (a product of modern financial products) See also: "Externalities in Economies with Imperfect Information and Incomplete Markets" by Stiglitz
• candiodari 8y ago
  I must say I once read a prospectus for a sharia financed product. No "interest", only "percentual administrative fees". Wait, what ? Other than that, they're essentially "pulling an uber". They're significantly riskier investment schemes that most institutions have had really bad experiences with a few decades ago. They're ignoring regulations that exist for good reason, and regulators seem to let them for some reason (for now). If you want to do that, great. Risky investments are most often the mispriced ones (cheaper then they ought to be). But please, do it yourself, figure out the risks, and don't let some institution do it for you with the promise of cover or ... or you will regret it.
  • mnrasul 8y ago
    So, I've read some literature, and my understanding is that there are ways to structure it, just that they can be subtle and slightly difficult to understand. Suppose you want to buy a house. The idea is that, you'll agree on a price of the house, which is greater than current market value. Suppose listing price is 100K. You agree on 150K with the lender. Each payment is expected to pay as part of 150K. This however creates two problem. Lender's profitability depends on accurately determining the future price. Either lender or applicant can suffer from imprecise price. An alternative I've seen is, the notion of rent. Suppose, at closing the lender buys the house for you, with the intention that you'll reside there and pay market rent. Suppose the price of house is 100K, and rent is 1000/month. Now suppose, there's no down payment, you'll have to pay above 1000/month to start building equity. After first payment of 1100, you have equity of 100$, while the lender has 99.9K. So, when the 2nd month payment goes, you can get to keep 0.1% of rent as equity OR use that to build more. Over time, you'll eventually pay it off. This part likens it to interest, except because rents are market based, they don't fly with borrowers. So lenders have come up with "Administrative" fees, which I equally think are BS. Hence traditional mortgage still are more accessible. I would love it if there was a rational product out there.
    • nybble41 8y ago
      That "rational product" you're looking for is a traditional loan with interest—which in the end is just a way of renting money. All these other arrangements are just attempts to mimic the utility and function of a loan while avoiding the term "interest" in order to technically comply with the bare letter of various religious restrictions. If you aren't bound by those rules then there is no point in taking on all that extra complexity.
• Salamat 8y ago
  Sustainable investments, ethical investing are mostly similar to sharia financial products https://international-adviser.com/uae-among-true-believers-in-ethical-investing/ https://international-adviser.com/uae-among-true-believers-i...
• projectramo 8y ago
  This is my take: Interest is just another term for the time value of money. The time value of money is a fact of life as long as there are opportunities in the world to invest in something that is productive. Therein lies the problem: you can't explicitly charge interest, but you are still subject to the time value of money. The only option is to describe/disguise the time value of money in terms that don't bring up interest. That is a juggling act because interest is really the simplest (imho) way of understanding it. So you get a lot of obfuscation.
  • lottin 8y ago
    Basically, you're right, but thinking thinking in terms of "money" is missing a more general point. A loan doesn't have to involve money at all. There are various reasons why the price of credit isn't zero. One reason is that most humans have a "preference for the present", i.e. given the choice they would rather have something now that the same thing at some point in the future. As a result, most people are not willing to give something away now, unless they have an expectation that they will get something more valuable in the future. Another reason is that there is always risk involved in lending. The borrower might not be able to fulfil their obligations, whereas the lender might find a better use for whatever it is they're lending. Therefore, it generally is better to keep something, than to lend it at an interest rate of zero.
  • tinus_hn 8y ago
    Interest also pays for the risk of not getting your money back.
• stealthcat 8y ago
  >Even as a muslim myself, I feel like sharia finance is a step backwards. Are you an actual muslim or just by name. Don't invalidate your eemaan by saying Islam is inferior to man-made system. Even if you don't like the mufti and scholars, they've done the ijtihad based on the Quran and Sunnah for the best of muslims, and they are the responsible ones, not you. I don't know your intent but, Be EXTRA careful with your words. Remember hadeeth where at the end of times, people are muslims in the day but kaafirs in the evening. Your choice of words matter.
  • pavel_lishin 8y ago
    > Are you an actual muslim or just by name. Neat, I've never seen a No True Muslim fallacy before.
    • carlmr 8y ago
      Never heard of Sunnis, Shiites, Allevites, Ahmadiyya? There are probably others I'm forgetting.
      • pavel_lishin 8y ago
        You know what, I honestly hadn't really thought about schisms and Scotsman fallacy being as equivalent before. I've been slightly enlightened.
  • otras 8y ago
    I’m not a Muslim, and this comment is very interesting. Do you mind explaining what you mean?
    • jimison 8y ago
      OP (Mengkudulangsat ) expressed problems with sharia finance in terms of investing fundamentals (risk, complexity, etc.). stealthcat objected to OP raising these points and appealed to authority (variously, Islamic leaders/theologians, foundational religious texts, and God). stealthcat questioned OP's intentions and religious commitment, implying he might not be a Real Muslim(TM) and exhorting him to defend orthodox teachings. To stealthcat, I would challenge him to consider that many religions are plagued by convoluted rules, to which people come up with hokey workarounds. Orthodox Jews have sabbat elevators; Amish use pay telephones; Sikhs have kirpans (knives) that are impossible to unholster. projectramo's comment about sharia finance obfuscating the principle of interest seems very on-point here.
• tareqak 8y ago
  I agree that your experience is exactly what sounds like: taking a conventional financial instrument, replacing all mention of the word “interest” with something way more complicated, and adding rules that seem difficult to always stay on the right side of. That happens to be exactly what Tarek El Diwany (mentioned in the second last paragraph of article) is saying. Shariah banks have to operate in a world that has completely accepted conventional banking. As a result, it is in a constant state of playing catch up in terms of fitting in (e.g. having to implement a software interface in which you reject some central tenets of the interface). I don’t know the answer one way or another. What I do know is that conventional banking remains imperfect in spite of it being totally dominant: the boom-and-bust economic cycles have grown more catastrophic, and we are still grappling with accurately adding phenomena like health and pollution into our financial models. I applaud you for trying to understand how conventional and sharia financial products fit together. I don’t find your reaction offensive: it just means we aren’t done trying find a good solution that makes both technical and moral sense. There’s a really long Wikipedia article here about profit-loss sharing, which central concept of how sharia banking is meant to work: https://en.wikipedia.org/wiki/Profit_and_loss_sharing https://en.wikipedia.org/wiki/Profit_and_loss_sharing N.B. I apologize for any typos since I typed/tapped this out on my phone.
  • malloryerik 8y ago
    >> the boom-and-bust economic cycles have grown more catastrophic While agreeing with your post more generally, this one statement seems a bit off the mark. Shouldn't the Great Recession should fairly be compared with Great Depression? So far, at least, the Great Depression was far more catastrophic, as was for that matter the Long Depression starting in 1873. All three of these were real financial sector collapses, not simple recessions. Independent central banking seems to have done great good, generally, despite of course being imperfect.
    • tareqak 8y ago
      That's a fair point. I was including the smaller recessions as well: there is a boom and a bust within a ten year span. That the IMF changed the definition of a global recession is a little weird, but they know better than I do. From wikipedia: According to the International Monetary Fund (IMF), "Global recessions seem to occur over a cycle lasting between eight and 10 years."[48] The IMF takes many factors into account when defining a global recession. Until April 2009, IMF several times communicated to the press, that a global annual real GDP growth of 3.0 percent or less in their view was "...equivalent to a global recession."[49][50] By this measure, six periods since 1970 qualify: 1974–1975,[51] 1980–1983,[51] 1990–1993,[51][52] 1998,[51][52] 2001–2002,[51][52] and 2008–2009.[53] During what IMF in April 2002 termed the past three global recessions of the last three decades, global per capita output growth was zero or negative, and IMF argued—at that time—that because of the opposite being found for 2001, the economic state in this year by itself did not qualify as a global recession.[48] In April 2009, IMF had changed their Global recession definition to: A decline in annual per‑capita real World GDP (purchasing power parity weighted), backed up by a decline or worsening for one or more of the seven other global macroeconomic indicators: Industrial production, trade, capital flows, oil consumption, unemployment rate, per‑capita investment, and per‑capita consumption.[54][55] By this new definition, a total of four global recessions took place since World War II: 1975, 1982, 1991 and 2009. All of them only lasted one year, although the third would have lasted three years (1991–93) if IMF as criteria had used the normal exchange rate weighted per‑capita real World GDP rather than the purchase power parity weighted per‑capita real World GDP.[54][55] [0] https://en.wikipedia.org/wiki/Recession#Global https://en.wikipedia.org/wiki/Recession#Global