Author: tompepinsky

In both Indonesia and Malaysia there are tons of banks, both foreign and domestic, from Citibank and HSBC right on down to little community banks.  One significant part of the banking system in both countries which has grown over the past 15 years or so is the Islamic banking system.  Basically, Islamic banking means banking that follows Shariah law (here, it’s spelled Syariah).  The only thing that Shariah has to say about banking is that interest (rifa) is haram (not allowed).  That means that it’s not permissible to lend or borrow money with interest.  Other than that, things are the same.

That seems pretty straightforward.  But as long as I (TP) have known that Islamic banking existed, I have wondered how Islamic banks do business.  Banks make all of their money by lending and collecting interest, and they attract depositors by providing interest on loans.  That’s, like, the definition of a bank.  So how can you be a bank and not deal with interest?  Do they just not make money?  Today I found out.

The secret is the principle of al-Wadiah, or custody.  As a depositor, you give your money to the bank and the bank holds onto it with a guarantee to pay you back that money whenever you ask for it.  Now, the company at its own discretion can issue a dividend to its savings account holders–it disburses some of its profits to those account holders.  It does this about twice a year.  Normally, the amount disbursed is about equivalent to the amount calculated through an application of the prevailing national interest rate.  But it’s not interest, it’s profits.

What if you want a mortgage?  Here, banks use the al-Bai Bithaman Ajil (deferred installment sale) concept.  Instead of the bank giving you money which you pay back with interest, with the house as collateral, the bank buys the house for you, and you pay the bank in installments. The installments are pro-rated so that the bank makes a profit, but again, that’s not interest.  Note that this means that all mortgages are essentially fixed-rate mortgages in Islamic banking.

What if the bank wants to loan money to a business?  In Islamic banking, instead of making a loan paid back with interest, the bank negotiates a proportion of the profits and/or losses to be paid back, and also negotiates the amount of time under which these payments have to be made.  So, you and the bank could decide that the bank gets 30% of the profits and bears 10% of the risk for 15 years, or 70% of the profits gradually declining over 10 years and bearing all the risk, or whatever.  All of that stuff is negotiable.

In essence, all of these stuff can be worked out to be equivalent to the amount of money to be made through an interest system, but interest is not part of the game. You can imagine that there’s a fine art to negotiating loans and deposits in Islamic banking, just like there’s a fine art to determining interest rates on loans and deposits.  But besides that, the banking systems are the same, offering the same products and services in a slightly different manner.  Pretty cool.

So while we were gone in New Zealand, the weather here totally changed.  Since we arrived in Malaysia two months ago, it had hardly rained, maybe one big storm a week, tops.  This seemed funny to us because in Indonesia it was the middle of the wet season and there were ridiculous storms almost daily.  So imagine our surprise when we got back to Malaysia and it was raining.  And it rained the next day, and the next.  I (jm) spent a few free minutes the other day trying to figure out if we were crazy or if something had really changed.

Malaysia has some weird weather phenomena, mainly the two big monsoons and the down time in between.  The word monsoon comes from the Arabic word for season and refers to wind patterns.  For some reason, I had it in my head that monsoons had something to do with rain, and this is not true.  The monsoons were historically very important for trade here.  One originates from the southwest, blowing towards Malaysia for about four months, and this was the wind that the Indian traders used to get here.  The other comes from the northeast, which was how Chinese traders came.  In the month and a half or so of down time in between, the two groups would trade, as everyone was stuck until the winds changed directions.

It’s really cool to think about how these winds get started.  During winter, the giant land mass of Asia cools causing the air above it also to cool and sink.  This high pressure system generates winds that head towards the coast, at which point they change directions and zoom around China, approaching Malaysia from the northeast.  Sorry to any of you who are trained in meterology, that’s about the best that I can explain it. 

It turns out that as of April 1 the inter-monsoon season began.  The northeast monsoon goes from about December through March, then there is a break, then the southwest one starts up in June and runs to October when there is another break until December when the pattern starts over.  It turns out that the breaks are traditionally the wettest months this part of the country.  There are variable breezes at all time, and for some reason conditions favor afternoon thunderstorms.  So it is now a bit cooler that it had been but it rains every afternoon.  Sometimes it rains where we live, sometimes it rains where I work, sometimes it rains in between, sometimes it rains in all three places.  All I know is that the drainage system here is much better than the nonexistant one in Jakarta, and rain makes the haze go away.  Except of course that we live at the top of a giant hill, so home walking uphill into a rushing current of ankle deep water every afternoon gets kind of old quickly.