Islamic Banking and Finance

Bumpity.

I resurrect the thread just to report I've finally done something about my interest in Islamic Finance. Learn by doing: I've put a little money into a Sharia-compliant mutual fund through my Tax-freeSavings Account - an excellent Canadian device that started in 2009. It's a very low-fee index fund that tracks an index of Islamic-compliant stocks. They're not necessarily from the Islamic world - many, if not most, are Canadian, US or European. All companies are certified by Muslim authorities to meet halal standards: no dealing in pork products, alcohol, gambling, arms, etc. and no significant income derived from interest. Debt must not exceed 30% of capitalization.

I've also gone into a somewhat related sideline. I've been a coin collector of sorts for years and I'm starting a small collection of early / medieval silver coins from Muslim lands. There are many available at pretty low prices. A dealer I've bought other stuff from has some nice ones, starting around the $10 mark. I don't think I'll ever get around to learning Arabic properly, but I do have an excellent book that teaches the reading of Arabic coin inscriptions. If I can do that and learn to calculate using traditional Arabic numerals, that'll be fine. One day, perhaps soon, I might try earning a recognized designation in Islamic Finance.

Islamic Finance is doing well in Canada. Most big banks here now have Islamic products - including some that said a few years ago there was nothing even in the cards. There are credit unions offering either traditional or Musharaka (basically rent-to own) mortgages to Muslims and non-Muslims alike - whatever the customer prefers, regardless of his/her religious affiliation - if any. We have about a million-and-a-half Muslims in Canada now, a fair segment of the population, so...

So far - I've got some fund shares and a start on the coins. Can sukuk (Islamic bonds) be far behind?

 

This is a tricky business. If you set up a rent-to-own real estate contract in the U.S., the IRS will impute part of each payment as interest regardless of what the contract might state. The reason is simple; if the total purchase price is treated as an interest free loan, then the profit from the sale will be taxed at the lower rate for long term capital gain. Everyone would use this device to avoid paying tax on part of the sale at the higher, ordinary income rate.

But income tax is properly imposed on any transaction according to its intrinsic nature and not according to the taxpayers' agreements. As a matter of economics, a multi-year rent to own contract DOES include interest because of the time value of money. Saying otherwise is no more than a tattered fig leaf.

Jewish law has the same problem, btw, which is why I've spent some time thinking about it. The bible can say what it likes; interest is unavoidable despite the many, many rules in Talmud intended to root it out.

 

I understand, Steve. I wonder - does that go both ways? Would the buyer be able to claim a tax deduction for that IRS-imputed interest on his "no interest" loan? ... I think I know the answer....

And yes - there are indeed a lot of fig leaves here. No two ways about that. There are some really interesting concepts though - like sukuk - Islamic bonds. They don't pay interest as such, but what you get is a proportional share of the profits made by the underlying assets. Interesting stuff to learn about, for sure - and a huge market. I'm enjoying the lessons, so far.

 

Sorry, Steve.
Nosborne? What do you think about the buyer's possibility of a tax deduction? My take: odds not very good. Not a problem here in Canada as mortgage interest, imputed or real, is not tax-deductible.

 

Oh, yes, the mirror image is mostly true. Whenever earned interest is imputed to a seller, interest cost is imputed to the buyer. BUT there the symmetry breaks down. All but a very few categories of interest represent taxable income but for individual taxpayers, personal interest is generally NOT deductible. So in the business and investment context, the mirror is complete but not generally for individuals.

 

Incidentally, ANY passive investment income is forbidden by Jewish law as "interest". Likewise, futures contracts are forbidden because of the inevitable difference in price between the present and the future. These restrictions are most inconvenient but there they are; Jewish law could not be clearer. The handiest loophole is that interest is forbidden to be charged (and also forbidden to be paid) between Jews. Interest may be charged and paid where one party is not Jewish.

This reminds me (in a genuine Talmudic-style aside) of another case. Torah forbids the neutering of male livestock. Now, no one who has ever dealt with beef cattle could deny that making a calf into a steer instead of a bull will contribute to a long and healthy life for the cowboy. So what to do? Well...apparently the Jewish owner would arrange (quietly) to have his Canaanite neighbor "steal" the calf but return it as found for a suitable reward. In between time, the Canaanite, doubtless thinking the calf was his as found property, would harvest its"huevos". Alas! Can't undo what the ignorant heathen has done so we will just have to live with it! (grin). The rabbis knew all about this thimblerig of course but what could they do?