There was a bit of discussion on the interweb last night about the practice of ‘Islamic Financing’ in Ireland, and how it might be screwing over the rest of the population who get less favourable terms than those who avail of Sharia-compliant financial arrangements.
To cut to the end, at the beginning: that isn’t the case. It’s simply an alternative way of working out financial deals so that they comply with Islamic law, which absolutely forbids interest, or if you want to be traditional about it, usury, as well as a number of different kinds of investment that contravene that religion’s moral code.
I feel this is important to note for two reasons: 1) For the sake of accuracy and truthfulness, and 2) because the principle of freedom of religion is important, even if you happen to believe a particular religion to be wrong or silly.
But to the matter at hand, Revenue explains on its website what is meant by the term ‘Islamic Financing’:
“The term Islamic financing means any financing arrangements which are compliant with the principles of Shari’a law. This law forbids the making or receiving of interest payments.
“Islamic finance arrangements will have a similar objective to other financial transactions, but are often structured in an alternative way (regarding debt). Transactions which are Shari’a compliant may or may not be treated in the same way as mainstream financial transactions which are similar in substance.”
On the face of it, that might seem to suggest the existence of alternative financial options that enable Muslims to simply avoid interest or debt, and indeed, that would be outrageous. But that isn’t how Islamic financing works. Rather, to put it simply, they manage to avoid interest by paying extra elsewhere.
You might call it a gimmick, but the Islamic principle behind it is one that argues that you should not be able to make money from money, and so their alternatives seek to comply with that perspective.
The International Monetary Fund provides some more context in its definition of Islamic finance:
“Islamic Finance refers to the provision of financial services in accordance with Shari’ah Islamic law, principles and rules. Shari’ah does not permit receipt and payment of “riba” (interest), “gharar” (excessive uncertainty), “maysir” (gambling), short sales or financing activities that it considers harmful to society. Instead, the parties must share the risks and rewards of a business transaction and the transaction should have a real economic purpose without undue speculation, and not involve any exploitation of either party.”
The key point to understand is that Islamic finance doesn’t operate on the basis of interest-bearing loans, employing instead asset-based or equity-based financial models. A couple of ways that might work, for your average customer, are as follows:
Murabahah
This phrase refers to a scenario in which the bank or financial institution buys an asset – for example, a car or a home – and then sells it to the customer at a marked-up price for profit. The customer is made aware of that profit at the beginning of the transaction, and then pays it off in installments, thus technically avoiding interest charges, despite the significantly increased price.
Ijara
This is essentially a leasing scenario, in which the bank or financial institution buys an asset and leases it to the customer. The institution remains owner of the asset during this time, but typically, a portion of each monthly payment goes towards ownership, until the customer eventually gains total ownership of the asset in question.
Musharakah
Musharakah sees the customer buy an asset jointly with a bank or financial institution in a partnership contract. Over time, the customer pays the bank for its share, to the point of securing total ownership of the asset.
Ireland is not known for being an Islamic finance hub, but it has in recent years adjusted legislation to make space for Islamic financial practice. To give one example, the Finance Act 2010, while not specifying Islamic finance in particular, provides for the tax treatment of “certain credit sale, deposit and investment transactions (referred to in the legislation as “specified financial transactions”) which achieve the same economic result in substance as comparable conventional products”.
“Although designed to cover certain Shari’a compliant structures, the legislation applies to any financing arrangement falling within the meaning of the term “specified financial transaction” regardless of whether the arrangement is, in fact, Shari’a compliant,” a Revenue document titled, Tax Treatment of Islamic Financial Transactions, reads.
The growing demand for Islamic finance in Ireland is also attested to by the appearance of companies like ‘Halal Home Finance Ireland’ which, according to its website, “is dedicated to pioneering Sharia-compliant home financing solutions that cater to the needs of Ireland’s Muslim community”.
While obviously targeting Ireland’s Muslim population (they have some statistics related to the Muslim population of Ireland drawn from the 2022 census displayed prominently on their homepage), it ought to be noted that technically anyone could avail of Islamic financial services and arrangements, if they felt it was a better way of acquiring an asset. It is not, in this instance, a case of one rule for we, another for thee.
I’ll be honest, the hoops a great many Muslims are willing to jump through in order to live in accordance with their faith impresses me, a devout Catholic. I mean, my understanding of Islamic financing is that historically, far from being advantageous, it likely cost more to engage in it. I don’t see how that couldn’t have been the case, if in order to avoid interest-bearing loans you doubled the number of transactions involved in the purchasing process of an asset for customers, which would have triggered extra stamp duty and likely additional legal and administrative costs.
On halalmortgage.ie, it’s made very clear that the primary advantage of Islamic finance is compliance with religious law.
“Preservation of Religious Integrity”. “Spiritual Fulfillment”. “Ethical Considerations”. “Community Cohesion”. When was the last time you saw reasons like those for engaging with some aspect of Irish commerce? It seems to me that the Muslims of Europe are often a serious people, and they’re likely to see success because of it.