I thought it was about time that FWF has it's own Islamic Investing thread. I was looking to ask the FWF crowd to see if they can help come up with investment strategies for those of us that are Muslim. This should be challenging for the regulars
Q: What is Islamic Finance? How is it different from the traditional Finance we are familiar with?
A: There are two key differences: 1. The first and most famous (and on which we will focus the bulk of our attention) is the no-interest rule. That is, you can not earn interest on a loan nor be required to pay interest on loans. 2. The second difference is that money is to be invested only in worthy causes. This is largely equivalent to the western concept of socially responsible investing. - Finance Professor, Islamic Investing
With this info, you can rule out some strategies: 1. App-O-Rama and investing into high-yield savings account.
Some suggestions to start: 1. Use the 0% for life BT cards towards stocks/mutual funds. Investments over a long period of time on average return 8% or more. * Edit for Clarification: The money should be invested into well researched mutual funds or low-risk stocks.
Thread Rule This thread is NOT about religious discussion (Islam vs Christianity vs Judaism vs Atheist) but about FINANCE. If you'd like to talk about religion try BeliefNet.
I understand that this particular topic does not apply to many FWF members but I hope many members can benefit from it's existence.
If I can help clarify any concepts, please ask. Thanks for helping.
is a balance transfer fee equivalent to interest or is that okay?
and what happens when the market tanks and has not recovered when the promotional period expires and the rate jumps from 0% APR to 20+% and you can't pay it off right away? (this is an issue for anyone who invests with short term borrowed funds in non-secured investments
theman2 said:is a balance transfer fee equivalent to interest or is that okay?
and what happens when the market tanks and has not recovered when the promotional period expires and the rate jumps from 0% APR to 20+% and you can't pay it off right away? (this is an issue for anyone who invests with short term borrowed funds in non-secured investments
I'm still looking for clarification but the way that I see it is that the Balance Transfer Fee is a service fee that the Bank charges. As for the short term investment on the BT, I tend to avoid it because of the high risk unless I'm sure that I can line up another CC w/ 0% BT to transfer it to. Usually, I recommend 0% for life cards.
DickWhitcomb said:Usually, I recommend 0% for life cards.
Don't all 0% for life cards require a purchase that is charged interest at normal interest rates? -
And that's a kicker for some Muslims as well. For me, I usually make small incremental charges to ensure that I pay the finance charge (50 cents usually) so I would pay $6 in interest per year. It's not the ideal solution but I try to keep the interest to a minimum. It's definitely tough to find a loan/credit card that can do better than this.
Good thread......not to threadcrap but dosent religion(may be other) say earth is flat, its the centre of universe............ the list goes on. My point is we must do whats right and not blindly follow the words. FW Rule 1. Taking 0% money and investing it with any risk is foolishness.
I find the idea of taking other people's money, not paying interest on it, and using it to speculate in the stock market to be a little uncomfortable. For example, I could never take $100,000 from someone and but it on black at a casino. If it pays out, I've got myself $100,000. But if it doesn't and I default on the loan, someone else suffers the loss.
I second amanx and amagx mutuals, they have been performing fairly well over the last couple years. But then again so has the market. Nevertheless, amagx is in the #1 out of 1402 mutuals for 3 yr timeline( link )
I have a similar problem. Most non Muslims, have 6 months worth of emergency money (15-50k) sitting in some fixed interest bearing accout, cd, savings account etc accuring 5% or so. Its hard to find a non interest bearing but not too risky place to stick that emergecny money. So instead most muslims have it sitting in their checking account doing absolutely nothing.
pruks said:Good thread......not to threadcrap but dosent religion(may be other) say earth is flat, its the centre of universe............ the list goes on. My point is we must do whats right and not blindly follow the words. FW Rule 1. Taking 0% money and investing it with any risk is foolishness.
I know what your referring to but the verse that most people refer too can be mis-interpreted. Please refer to this article if your interested in more info: Quran on Round Earth
Nonetheless, we are getting off the topic.
As to your rule #1, I always believe that you should research your investments. I think I should clarify that the 0% money should be placed into well researched or low risk investments for those not familar with the market.
Some suggestions to start: 1. Use the 0% for life BT cards towards stocks/mutual funds. Investments over a long period of time on average return 8% or more.
It seems a bit idealistic to expect to borrow money without paying any finance cost at all -- how would you make it worth it to the lender? Still, it's better than the millions of Americans happily paying 15+%APR interest on their CCS, and sending in the minimum payment every month.
OTOH.. If your beliefs don't allow you to accept interest payments, then mutual funds/stocks seem dubious to me also.
I wonder by what criteria it is possibly considered wrong to earn interest on money lent in exchange for a promise to be repaid, or money deposited in the bank, which is actually always yours (never "lent" in the sense that you have transferred ownership of the cash) but OKAY to earn on money lent in exchange for a promise of a share of the profit, as you do when you take stock in a company, or when you take mutual fund shares..?
Essentially, someone will be earning interest on the money, if not the investor, then the broker or fund management company will earn on uninvested cash, if not the broker, then the broker's bank, unless they store everything in a vault, investor doesn't have much a choice there... sure they can avoid profiting themselves, but it sure doesn't seem efficient.
If the profit is more than what you lent, especially if the total cash you receive over your term of ownership of the stock exceed the amount you paid for the shares, than you have essentially earned interest, although the interest payments will instead be called "dividends" or "shares bought back" for more than you paid, and your "principal" will be referred to as your "cost basis".
What is the exact principal that causes it to be bad to pay or receive interest, but not bad to get dividends?
What does it mean to pay interest? Even 0% cards will charge a fee for financing, usually referred to as a "balance transfer fee", and possibly a monthly "minimum finance charge".
If you signup for a bank account or CC and receive a signup-bonus/promotional offer, would muslim teachings say it's wrong because that's "interest income"?
An observation I have to arrive at is... just because the financial institutions don't call it interest, doesn't mean it's not interest. Otherwise it would be trivial to find alternatives... many Credit Unions don't report "interest payments" -- instead what they call "dividends", though it is interest income for tax purposes.
On the other hand, just because the bank calls something interest doesn't mean it's interest either. Is there any distinction between interest paid by the government and interest paid by an individual, or interest built into a contract?
For example, is it against muslim teachings to buy a zero-coupon bond at an original issue discount, or at any discount, for that matter?
In that case, the bond doesn't have "interest payments" per se, it's just that the bond cost you less to buy than you will be able to redeem it for.
Also, if you're buying the bond from someone other than the issuer, you're not really "lending" anyone money, are you? Someone else lended the money, you are buying from the lender a right to receive the eventual payment.
Maybe your investment profit is only from the fact that the second seller was selling it at a discount.
We know that when you deposit money in a bank(savings, checking), they loan out some of that money as loans that other people have to pay interest on. Even if you aren't directly making money yourself as shown on your paper bank statements, such as the case with most checking accounts, the bank is making money from your deposit and using that to maintain your account/keep computers running/pay office staff, etc.
So in a way they are using your money to generate interest and using that interest to pay for your account upkeep so you don't have to pay for it in the form of a service fee. So the depositor is indirectly party to a contract that is making interest on a loan, and that interest is indirectly financing their account upkeep at the bank.
Isn't this breaking the no-interest rule?
In addition, you don't know what the bank is investing a portion of your money in, it could be a "non-worthy" cause. This assumes that a portion of each bank deposit contributes an equal percentage to all the banks investments/loans. I guess you could tell yourself that your money is part of the "reserve" percentage the bank keeps on hand, but I think you would just be fooling yourself with this faulty logic.
I just thought this might have been overlooked, or maybe I'm just overthinking the depth of the "permitted islamic investing rules"?
Dracolith said:What is the exact principal that causes it to be bad to pay or receive interest, but not bad to get dividends?There is a big difference between an equity investment (ie: buying common stock in companies) and a debt investment (loaning money). In one case, you get scheduled payments of interest and return of principal. In the other case, you own a portion of a company. You get a distribution of profits when they declare a dividend and usually voting rights. The stock's value is based on the value of the company and can be realized by being sold. These are significantly different.
Cumulative preferred stock blurs the debt/equity line as the dividends will be paid in a later year if not now, assuming that the company is a going concern.
Great topic. Interest is actually not permitted in any of the 3 major monotheistic faiths. (of course, that's subject to interpretation. Some say it only applies to usury, which is unfairly high interest rates, whereas others who'd like to label themselves as 'orthodox' shun interest altogether)
University Islamic Bank in Michigan has a savings account and CD's set up that fund their "Shariah Compliant" home-purchasing products. In turn, the profits are shared with the depositors. The "interest rate", consequently, is not fixed but rather is based on the profit.
Islamic bonds, spearheaded by Malaysia, are becoming quite popular. Several large banks are also attempting to cater to the Muslim home-buying crowd. Instead of paying interest on the mortgage amount, the individual buying the home pays the purchase price of the home (the principal) over time plus a "rent" (the interest) on the portion of the home that they do not yet own.
I represented an orthodox jew at a RE closing in Brooklyn once where there were some similar (silly) restrictions. In order to make the mortgage kosher, the bank apparently devised an ingenious device that takes advantage of a religious loophole. At the closing, the bank, which specialized in loaning money to orthodox jews, includes among the otherwise standard loan documents, a document that makes you a 'partner' in the bank, albeit, not one entitled to actually share in any real profits of the bank. Thus, rather than a loan, the transaction is interpreted as a business relationship. Apparently, getting screwed by a partner is not against the religion.
thats a good one, basically all thats happening is putting lipstick on a pig. Its the same end result, just using different terminology.
if you are willing to use "loopholes" and "workarounds" in terminology to partake in gains and actually be able to borrow and make money on deposits, and you are OK if its called something else, then follow Dracoliths excellent suggetion and simply put your deposits in a CREDIT UNION where you are a MEMBER , and gains are called DIVIDENDS instead of interest...
Dracolith said: An observation I have to arrive at is... just because the financial institutions don't call it interest, doesn't mean it's not interest. Otherwise it would be trivial to find alternatives... many Credit Unions don't report "interest payments" -- instead what they call "dividends", though it is interest income for tax purposes. .and a bank signup bonus is called "interest" even though it isnt.
I found the link to the Muslim-accepted lender mentioned earlier very interesting:
apparently they structure a home purchase as a lease, with payments composed of "rent" and an additional payment on account. Once the additional payments = the original purchase price, you get the home. It also says that if property values DECLINE by more than the amount of extra payments on account, trust suffers the loss, rather than the homebuyer.
Being creative FWF'ers, I think we can come up with some creative ways to exploit this
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