Eleanor Duckwall's Spotlight

August 11, 2008

UK: No interest sharia-compliant MasterCard launched

The announcement of the UK's first sharia-compliant MasterCard in London, the "Islamic financial centre of Europe," accompanied by the pronouncement that the Cordoba Gold MasterCard company will "donate 10% of its profits to registered charities in the UK and abroad" has me a bit confused: If they can't charge nor collect interest, how will the company earn a profit?

The MasterCard works like a pre-paid phone card: There is no debt.

But how can the company earn a profit? Perhaps this is the explanation.

Sharia forbids earning or paying interest on loans. So Sharia finance is about the ways to get around this prohibition. Sharia finance also concerns prohibitions on using money to finance the pork or alcohol industries.

The first is not a problem for dividend or capital gains earnings because they clearly involve risk which is a requirement of Sharia investments. The problem arises with home mortgages and savings accounts.

Home mortgages are handled by having a Sharia bank buy the relevant house and then sell it back, on a monthly payment schedule, to the mortgagee plus a rental fee on the use of the house. The net result is identical to a mortgage loan.

A savings account in a Sharia bank is one where the deposited money is invested in only Sharia investments. The returns are dividends and capital gains which are put in a fund that pays out the regular market savings account interest rate. Again, this is not really very different than a standard bank savings account except for the way the funds are invested (definitely not as secure as a bank savings account and certainly not insured by any government.)

All other Sharia finance is based on equity funds that exclude interest bearing instruments, like bonds, and avoid stocks in inappropriate (pork and alcohol) corporations. (Think socially responsible funds with an Islamic agenda.)

The multiple tools of hedge funds... options, puts, calls and arbitrage contracts are nearly all well suited to Sharia finance (excluding bets on interest rate markets such as Libors.)

The Sharia prohibition on interest was appropriate at the time of Mohammed, as Christianity took the same position. (Jews in both Moslem and Christian societies were relegated to banking.) We now see interest as a rental on money composed of a mix of risk, market pricing (national price index) and the supply of funds.


As Islamic finance becomes more mainstream, so it looks towards conventional finance to adapt structures in order to satisfy the increasing demand for more sophisticated instruments.

Securitisation, for example, removes property- and project-based loans from banks’ balance sheets, and subordinated sukuk issues could better satisfy Islamic banks’ capital requirements ahead of implementation of the Basel II rules on capital adequacy ratios, while also offering higher yields to investors.

Issuing asset-backed rather than asset-based instruments also side-steps the repurchase controversy, whereby a borrower guarantees repayment of securities at face value on maturity or in the event of default. Some interpretations within fiqh (Islamic jurisprudence) say this contravenes the risk- and profit-sharing criteria required for Shar’iah compliance. With asset-backed instruments, the assets are legally isolated by the borrower into a special purpose vehicle, the cash flows and risk profile of which depend on the performance solely of the assets rather than of the borrower, and there is no repurchase undertaking.

Real estate investment trusts in the GCC are expected to reach new record issuance due to the tremendous property boom in Middle East markets, and should be supported by the concentration of high-net-worth individuals and family businesses whose collective wealth is estimated at over $1.3 trillion.

Some consider this policy "nothing but trickery":

Riyadh, Asharq Al-Awsat- Today, many Islamic banking products are based on jurisprudential trickery and crafty methods. When the jurisprudence of trickery flourishes and when jurists master these methods; it stands as evidence of their failure to adhere to Shariah’s provisions and rulings.

In this scenario, jurisprudence and its objectives are replaced by a jurisprudence of appearances and methodology [to achieve ends]. This manifests in many products, most notably credit cards, which can entail much deviousness - from obligatory card fees to be paid by holders to credit cards that combine between loans and sales.

Such practices have been addressed by many researchers and I have previously written an article about this subject. However, the most heinous form of deception is the reverse murabaha* that some banks practice. Reverse murabaha is when a customer wants to invest capital surplus in a bank by buying a commodity from the international market for its actual price then resells it to the bank on a deferred payment basis in accordance with the set time. The bank then sells the commodity in the international market to obtain the capital it will use to finance its clients.

While many clients seek to benefit from fluctuations of the profit margin, mostly using the interest margin as an indicator, they want to make short-term investments like three months, for example. This, in turn, means that murabaha measures need to be repeated for every case when the maturity date is due. Since the bank is the acting agent on the clients behalf when buying a given commodity on credit from the international market, Shariah committees have prohibited banks from selling the commodities to themselves so as to prevent both parties from fabricating claims in the contract and to avoid the overlap of guarantees.

Given the fact that the process of investment is a renewable one and in the interest of facilitating procedures for clients and fulfilling a given bank’s interest in maintaining clients, banks and their affiliated Shariah committees have found a way to get themselves out of this predicament which they have brought upon themselves. This is achieved by stating that clients are capable of authorizing bank employees (in their personal not professional capacity) to sell the commodity to the bank on the client’s behalf.

It is a low ploy that has made the unjust mock the people of Shariah, what idiot would be deceived by such a trick! It is common knowledge that the bank acts as an underwriter for the client and the client submits to the bank’s request to authorize one of its employees whom he/she appoints as an agent based on the client’s trust in the bank, not in the aforesaid employee.

In fact, if the client has the slightest doubt about the bank’s trustworthiness, he/she would not accept this arrangement and the best indicator of that is that clients are not concerned about the agents. There is no doubt that relying on such agency is wrong and it involves a conflict of interests, which is something that is prohibited by the set law. So, do Shariah committees adopt a position that allows for an agent to represent both parties in the contract in the process of trying to facilitate matters instead of resorting to tricky methods?

Such trickery and other deceptive methods have shaken the image of Shariah among the Muslim communities and made it easier to fall for what God has prohibited. Today, Shariah scholars are mocked by their enemies.

What prompts Shariah committees to adopt such vague methods of deception is the outcome of their inflexibility in the face of what God has facilitated and the fact that they place their own constructed restraints on Shariah when there are none. Unfortunately, such practices are a result of fabrications and straying away from ijtihad (interpretation).

* MURABAHA: a financer, such as a bank, buys a commodity and sells it to the purchaser at a higher price.

* Lahem al Nasser is an Islamic banking adviser.

And some see Sharia-compliant fiance funds to be danger to the West. And so do I!

What about the United States?

See also: Civil Liability and Criminal Exposure for U.S. Financial Institutions and Businesses Engaged in Shari'ah-Compliant Finance, June 2008.

The Perils of Shariah-compliant finance

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