Islamic Investing Q&A -- Being Muslim not a prerequisite to participate. A specialized form of SRI

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.

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?

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.

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.

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.

A question for OP or anyone:

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"?

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.

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:

http://www.university-bank.com/IslamicBanking/homefinance.html

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

The big question I have is, Why would anyone loan you money at 0% indefinitely? Why wouldnt they just keep the money themselves. What do they get out of loaning you the money? Look at why most CC companies in the US are from Kansas. Because there used to be laws there to limit interest rates to like 8%. Then bond rates rose to 10% and no banks would lend anyone money at 8%. So no one could buy anything. Then Kansas governor said we need to remove this limit. So now banks there can charge 30% interest. Maybe if the banks were islamic we wouldnt have this problem.

I am a Muslim.

It's impossible to live in modern society without being tied to interest in some way. If you invest in a company, they most likely have issued bonds, paying interest. Thus, as a part owner via the stock you hold, you are paying interest. Even the Amana funds invest in companies that issue bonds though they don't invest directly in bonds. The Muslim concept of Haraam (Link) states that if something that is forbidden is otherwise necessary (eating pork to avoid starvation for example), there is no sin in doing so. As a Muslim, you would do well to minimize interest, but I don't think it's possible to avoid it.

simplemoney is a troll and purposely posts misinformation in this forum

I'm sorry, but I don't understand the idea of using loopholes to get around silly man-made rules. You want to invest, then fine--do it. What's your motivation? If it's to cheat someone, it's wrong. If it's to plan for your future while your investment appreciates at a reasonable rate, there's nothing wrong with it.

Rathipon said: 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.

FYI, to the best of my knowledge, this is not a normal precondition for an Orthodox Jew to take a loan from a bank. Orthodox Judaism is highly splintered and I suspect you were dealing with some unique interpretation held by a tiny minority of even the Orthodox (which itself is a tiny minority of Jews). This is in contrast, by the way, to the Islamic traditions described in this thread, which I believe are far more common within the Muslim faith.

Just want to say that I am super happy to see a thread about "Islamic Finance" and some of the suggestions that were made.

To keep this at a finance theme instead of a religious theme...I tend to look at the Shariah rules not any diffrently than you would look at any other terms and conditions with any type of offer. Basically what it breaks down to is that you accept it or you dont. There are tons of threads devoted to finding the best terms to maximize an App o Rama so maybe we can just think of it like that... Best way to Maximize return and follow the Islamic "Terms and Conditions" per say. Just look at it like a stipulation and not a religious mandate (if you arent muslim).

Although it is pretty much impossible to completely avoid intrest in this society I have personally been successfull in securing 0% on a vehicle and also my home furnishings. All the major cards I use are also 0% or I just pay it off before intrest is charged.

I personally have problems with so called islamic finance that actually borrows the money from the bank and then charges you a higher rate on top of the intrest they are paying back on your behalf. 2 wrongs dont make a right!

I found this site which might be helpful: Muslim-Investor.com
"Our Mission is to provide Muslims world wide with useful and practical information about investment, banking, finance, and insurance consistent with their values and beliefs.

We want to help Muslims help themselves, help each other and help others by growing their wealth, and serving their financial needs in an Islamically Correct® way."

I had no idea about interest and the Muslim faith. My question is how do Muslims go to college and grad school? Seems to me that you would definitely need to borrow money with interest or not go to school, or pay for it all at once. Since higher education isn't something that is absolutely necessary I don't think Haraam applies. I am just curious, not thread crapping. Anyone have insight into this?

SleepyNyte said: I had no idea about interest and the Muslim faith. My question is how do Muslims go to college and grad school? Seems to me that you would definitely need to borrow money with interest or not go to school, or pay for it all at once. Since higher education isn't something that is absolutely necessary I don't think Haraam applies. I am just curious, not thread crapping. Anyone have insight into this?

It really depends on the person. The parents of some can pay for it outright, others have financial aid and grants and some take the loans and pay them off before they have to pay interest on them. Some are able to borrow from others without paying interest. Still others, out of necessity, take the loans + interest and pay them off as quickly as they can.

As you can see from this thread, some Muslims are resigned to the notion that mingling with interest is inevitable and the point is to simply minimize it, while others avoid it like the plague.

Others have opined about how many of the traditionally interest-based financial products are essentially still the same when given a make-over and presented to the Muslim crowd. I tend to agree. It's not the ideal, but certainly a step in the right direction and a "lesser of two evils" so to speak.

Actually I worked and paid my way thru my undergrad and now am working on a masters and CPCU on my employers $$$$$

Muslim or not I know lots of people who have not taken student loans to pay for higher education. Besides there are always grants too...