More Islamic Banking, and Islamic Insurance

The earlier post on Islamic banking has led me (TP) to think some more about the whole system.  In my readings, I have come across some more interesting stuff.  In addition to the principles of "guaranteed custody" and "deferred-payment sale," there also also schemes for business financing through profit and loss-sharing (al-Musyarakah), capital financing (al-Murabahah) and leasing (al-Ijarah) that function under Islamic principles.

What I started thinking about, though, was whether or not the Malaysian government has set up any sort of Islamic money markets to prevent funds from Islamic banks being commingled with funds from non-Islamic banks.  Turns out, such a system does exist.  In Malaysia you can buy an Islamic-based Malaysian Savings Bond in addition to a regular savings bond. In doing so, you are conferring a benevolent loan (al-Qardhul Hasan) to the government for development expenditure.  Not sure how you make money on it, though.  There is also a separate interbank market based on a principle called al-Murdharabah, which is close to the capital financing principle above based on reciprocal investor-entrepreneur relationships.  Islamic bank checks go through an Islamic clearing system.  There are Islamic stock indices and Islamic unit trusts.  In all, the government has recreated almost the entire financial system in parallel, based on Islamic principles.

Something else that had confused me dealt with the concept of insurance.   I had heard that the concept of insurance was counter to Syariah because it involved a form of gambling, which is haram as well.  Turns out, insurance itself as a method for groups planning ahead for misfortune is OK, just not the way that it is normally done in insurance companies.  The way it works is through the concept of al-Takaful, where a group of people reciprocally agree that the collective will pay for a misfortune that may befall any one of them.  Using the al-Murdharabah concept above, they can appoint an entrepreneur to invest their money that they jointly contribute, and they voluntarily agree (Tabarru’) to forgo some portion of the profits from the investment in order to pay for the aforementioned misfortunes.  Very interesting.

Comments 4

  1. fazu April 20, 2005

    Yes it’s all very fascinating. And Malaysia has been particularly inventive when it comes to creating Islamic parallels to the conventional financial markets to the extent of producing what some would call “heterodox” results. Some of the more popular Islamic financing isntruments in Malaysia, for instance the bai’ bithaman ajil (BBA – i.e. rather than I loaning you money to buy a car, let me buy the car and on-sell it to you at a margin for my efforts) are frowned upon in the middle east due to some differences in interpretations. Result: Malaysians seeking to raise funds in the middle east have had to re-tailor their product to suit religious interpretation over there (hence the sukuk issues in 2003). After all, they have the money, no?

  2. Tom April 20, 2005

    I think this sort of stuff is fascinating. I wish there were something expressly political about Islamic banking in Malaysia, because if there were, I would write about it.

  3. fazu April 21, 2005

    Oh, you know what? Maybe there is. I don’t know if you’re familiar with the on-going efforts of the two Malay-based political parties in the country to “out-Islamicise” each other in order to win/retain Malay (read “Muslim”) votes. This competition to appear more Islamic than the other party became particularly acute in the 1990s when the Islamic party managed to win the state of Kelantan in the 1990 general elections. So it’s possible that the efforts made to develop Islamic finance – by accident or by design – may have fit in quite well in the government’s overall efforts to appear more Islamic.
    Having said that though, it should be noted that Islamic finance – banking, capital market and insurance – has sort of taken a life of its own and is currently seen as a niche area in its own right in which Malaysia can compete against other financial markets at the global level, and in this sense, Islamic finance has transcended and gone beyond the “petty” squabbles of local politics.
    Hmmm…but then, maybe that’s not “expressly political” enough… 😉

  4. Tom April 21, 2005

    See, that’s the type of stuff that I’m talking about. I’m familiar with the PAS vs. UMNO business from the 1990s. To hear the government talk about Dato’ Dr. Abdul Halim, though, you’d think that his entire life was dedicated to setting up an Islamic bank in Malaysia.
    I guess that the Islamic banking laws did only get passed in, what, 1993 or so? That would fit in nicely. And of course UMNO would say he spent his whole life trying to set up an Islamic bank…they couldn’t have said, “yeah, we’re just trying to out-Islamicize PAS.”
    It would be neat to compare it to the development of Islamic banking in Indonesia. There are definitely Bank Muamalat and Bank Syariah Mandiri branches in Jakarta. And it looks like Islamic banks there only got set up in 1992, just as Soeharto was trying to outflank Muhammadiyah and Nahdlatul Ulama. Interesting…

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