Lorne Cutler : There Is Nothing Inherently Wrong With Shariah Finance

Lorne Cutler: There's nothing inherently wrong with Shariah finance Islamic or shariah-compliant financing is becoming increasing popular, both in Muslim countries and Western countries with large Muslim populations. It was therefore quite a surprise to read Dr. Sebastian Gorka's assertion (Shariah finance: A zero-sum game, Aug. 28) that the primary reason for Islamic financing is to funnel funds into political and military Jihad to destroy the West. This is based on Dr. Gorka's view that Islam doesn't actually prohibit interest, only usury, and as such Islamic banks have really been established to fund jihad with the prohibition of interest really being a ruse. This is equivalent to saying that the real reason for conventional interestbased banking is to launder money for organized crime. Leading Western banks such Citibank, HSBC, Deutschebank and ABN-Amro have opened up Islamic subsidiaries. It is hard to believe that they would knowingly funnel money to terrorist groups. At one time, Christianity and Judaism also considered interest as usury and prohibited it. This was at a time when lending was considered taking advantage of the poor. The poor would borrow money to pay off debts of servitude. Any interest added to the burden of the poor was considered usurious. Gradually, however, capital was required in the creation of real wealth. Charging interest was no longer taking advantage of the poor but a critical tool in creating wealth and raising standards of living. While Christianity and Judaism changed their views regarding interest, Muslim scholars did not. Given the aversion in Canada to shariah family law, it is critical we understand the principles of shariah financing and why conventional banking is problematic for religious Muslims. Islamic financing is based on three principles. First, interest is prohibited. Islam believes that you can't make a profit on something that is not physical, and since money is only a concept, charging interest is not allowed whether at usurious rates or not. A bank can earn money, however, by becoming part of the underlying commercial transaction. Islamic banks provide funds in one of three ways. If Party A wishes to buy goods from Party B, but needs financing, the bank would buy the goods from Party B and either resell the goods to Party A or lease the goods to Party A. The bank charges a markup to cover its profit and risk. The third structure involves the bank going into partnership with Party A. The bank provides the funding and Party A provides its expertise. Similar to conventional equity

financing, the bank is repaid from the profits generated by the venture. The second key principle of Islamic banking deals with the types of goods that can't be financed. Alcohol, pornography, gambling and agriculture/ food processing industries based on pork are prohibited. Thirdly, an Islamic bank is not allowed to engage in speculative practices such as derivatives. While Muslims are required to donate a certain amount to charity or zakat, this is no different than Jewish tzedakah (charity) to the poor or Christian tithing. Muslim companies and banks should also give to charity. We call this corporate social responsibility. Each Islamic bank has a panel of three Islamic scholars who opine on whether something is shariah-compliant. These panels can only determine what constitutes shariah-compliant financing, not whether the structure complies with the laws of the country, and they have no authority to act against the country's law. There are international agreements prohibiting banks from money laundering and funding terrorist groups. If required, existing international agreements can be modified to ensure Islamic banks are governed by these agreements if they aren't already. If certain banks don't abide by these rules, Western banks will be prohibited from working with them. Canada's criminal code also makes it an offense to support terrorist groups. If a religious scholar advising a particular Islamic bank also preaches jihad, regulations could be established to prevent our banks from dealing with that bank. Islamic banks would be subject to the same regulations and supervision as are conventional banks. Interest is a merely a tool, not a fundamental Canadian or Western value. If certain groups have problems charging interest, there is nothing inherently wrong in setting up financial institutions that can provide funding in a way that does not abrogate religious principles. Our existing and future banking laws and regulations can protect us against the risk of a bank engaging in illegal activities. National Post [email protected] Lorne Cutler is an Ottawa-based independent financial consultant. Islamic finance links:

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