Lorne Cutler: There's nothing inherently wrong with

Shariah finance

Islamic or shariah-compliant financing is becoming increasing popular,

both in Muslim countries and Western countries with large Muslim
populations. It was therefore quite a surprise to read Dr. Sebastian
Gorka's assertion (Shariah finance: A zero-sum game, Aug. 28) that the
primary reason for Islamic financing is to funnel funds into political and
military Jihad to destroy the West. This is based on Dr. Gorka's view that
Islam doesn't actually prohibit interest, only usury, and as such Islamic
banks have really been established to fund jihad with the prohibition of
interest really being a ruse.

This is equivalent to saying that the real reason for conventional interest-
based banking is to launder money for organized crime. Leading Western
banks such Citibank, HSBC, Deutschebank and ABN-Amro have opened up
Islamic subsidiaries. It is hard to believe that they would knowingly funnel
money to terrorist groups.

At one time, Christianity and Judaism also considered interest as usury

and prohibited it. This was at a time when lending was considered taking
advantage of the poor. The poor would borrow money to pay off debts of
servitude. Any interest added to the burden of the poor was considered
usurious. Gradually, however, capital was required in the creation of real
wealth. Charging interest was no longer taking advantage of the poor but
a critical tool in creating wealth and raising standards of living. While
Christianity and Judaism changed their views regarding interest, Muslim
scholars did not.

Given the aversion in Canada to shariah family law, it is critical we

understand the principles of shariah financing and why conventional
banking is problematic for religious Muslims.

Islamic financing is based on three principles. First, interest is prohibited.

Islam believes that you can't make a profit on something that is not
physical, and since money is only a concept, charging interest is not
allowed whether at usurious rates or not. A bank can earn money,
however, by becoming part of the underlying commercial transaction.

Islamic banks provide funds in one of three ways. If Party A wishes to buy
goods from Party B,

but needs financing, the bank would buy the goods from Party B and
either resell the goods to Party A or lease the goods to Party A. The bank
charges a markup to cover its profit and risk. The third structure involves
the bank going into partnership with Party A. The bank provides the
funding and Party A provides its expertise. Similar to conventional equity
financing, the bank is repaid from the profits generated by the venture.

The second key principle of Islamic banking deals with the types of goods
that can't be financed. Alcohol, pornography, gambling and agriculture/
food processing industries based on pork are prohibited.

Thirdly, an Islamic bank is not allowed to engage in speculative practices

such as derivatives.

While Muslims are required to donate a certain amount to charity or zakat,

this is no different than Jewish tzedakah (charity) to the poor or Christian
tithing. Muslim companies and banks should also give to charity. We call
this corporate social responsibility.

Each Islamic bank has a panel of three Islamic scholars who opine on
whether something is shariah-compliant. These panels can only determine
what constitutes shariah-compliant financing, not whether the structure
complies with the laws of the country, and they have no authority to act
against the country's law.

There are international agreements prohibiting banks from money

laundering and funding terrorist groups. If required, existing international
agreements can be modified to ensure Islamic banks are governed by
these agreements if they aren't already. If certain banks don't abide by
these rules, Western banks will be prohibited from working with them.
Canada's criminal code also makes it an offense to support terrorist
groups. If a religious scholar advising a particular Islamic bank also
preaches jihad, regulations could be established to prevent our banks
from dealing with that bank. Islamic banks would be subject to the same
regulations and supervision as are conventional banks.

Interest is a merely a tool, not a fundamental Canadian or Western value.

If certain groups have problems charging interest, there is nothing
inherently wrong in setting up financial institutions that can provide
funding in a way that does not abrogate religious principles. Our existing
and future banking laws and regulations can protect us against the risk of
a bank engaging in illegal activities.

National Post
lacutler1@hotmail.com
Lorne Cutler is an Ottawa-based independent financial consultant.

Islamic finance links:

www.gifc.blogspot.com
www.globalpro.com.my