a comment by Jalang dembo on Islamic finance

Demba Jalang said...
Thank you Brother Suntu for an illuminating insight into Islamic Finance.One important thing that help insulate many Islamic Finance Institutions from the current financial crisis is the way debt is treated in Conventional (some may call it Western) Finance. Debt instruments are packaged in various fancy ways and traded in the market in Conventional Finance. To secure the "supposed" underlying value of such fictitious assets, holders resort to buying insurance and thus sell those policies in the market again. In short, these instruments do not have any asset of real value or fundamental backup. At a point the market basically strive on a bubble and burst situation. More crudely, greed mainly drives the market. From the Islamic Finance point of view, trading in debt/debt instruments is forbidden. Any dealing in liquid assets have to be backed by real assets driving the fundamentals on economic activity. There is no shortcut and no one get short-charged.Another basic difference between Islamic Finance and Conventional Finance in all spheres of operation (be it banking, insurance, etc.) is the role the institution play in carrying its Corporate Social Responsibility (CSR). Yes, in a Conventional Finance sense, the Institution call build hospitals, roads and provide other charitable services, but in Islamic Finance, CSR is not only about that. An Islamic Finance Institution take care of their owners' and customers' interest as a guidance consul. For instance, in an insurance operation, there are both shareholders' funds and policyholders' funds. At the end of a review period, say Financial year for the company, after meeting claims, administrative expenses, reserves etc, both parties (shareholders and policyholders are entitle to any surplus funds and may be shared or retained in the company according to reset rules and guidelines. The is missing in a Conventional Insurance setup.A close study of the setup under the two models in finance (Islamic and Conventional) will show that there are clear differences between these institutional, not by only nomenclature.
25 October 2008 22:38