Dogmatism of Islamic Finance: Middle-East standards vs Malaysian-standards

This Vellfire business is made unnecessarily complicated by lack of an initial uninformed choice. Choice was of financing from Rajhi waving the Middle-Eastern corner against Maybank Islamic waving the Malaysian standards. Below are my findings:

1. Standards
Rajhi uses BBA - ie Bank purchases car and sells to customer at upside with staggered financing payments. Pure sale-purchase agreement and opts out of the hire-purchase conditions. The SPA absorbs any of the conditions within the HP Act that does not contravene the Syariah to protect the bank.

Maybank uses the typical Malaysian standard that tacks on Syariah-compliant contracts to existing transaction.

This is where philosophies differ. Whilst Rajhi's standards are stricter and more compliant given the fundamental structure of the transaction, are we to say that the contracts entered with Malaysian islamic banks are not? If so, where? Is it in the intention of the banks as a hillah? If so, who decides on this? Is this allowed on the basis of daruriyyah, which incidentally is difficult to ascertain, just as it is difficult to ascertain hillah on the part of the bank.

I would suggest that the daruriyyah is in the form of having a stronger Islamic bank presence against the conventional bank presence, and to argue one is better than the other is futile and only encourages meaningless cannibalisation of the same niche customer market. In this situation, the preference is with the Middle East standards only if other criteria are evenly matched. To use an inappropriate word in this case, I would suggest that the customer is agnostic in terms of standards as long as there is Syariah compliant acknowledgment by an established and reputable Islamic finance regulator.

2. Customer orientation and protection
The BBA allows banks to set a security deposit if required. I'm not sure of the equivalent in the AITAB but I dont recall of any such conditions. The other departure will be the purchase price with the dealer, where the Bank will pay full amount regardless of booking fee, in which case customer will have to bear ther burden of recovering the booking fee from the dealer later. To note that even in the BBA, a JPJ K3 form allowing repossession is similarly required.

These departures need to be communicated to the customer as well as the dealer upfront, as in this case, I'd need to bear the risk of non-retrieval of the booking fee, especially so when there are certain conditions that I have agreed with Jack how the final product will look like, ie pro-bono accessories of LCD, colour change, and what have yous have been agreed beforehand.

At the same time the rates are 2.48% pa, much higher than what I had asked for at 2.45%. And without ascertaining with me, the loan tenure was set at 9 years when I was actually considering 6 years. Maybank didnt flinch when I asked 2.40% and eventually agreed on 2.42%.


3. Services
This is the weakest area of the lot. After 2 weeks of haggling, I've yet to cross the finish line. With clearer expectations, I would be able to understand these changes but perhaps not at this stage. With 4 people running around and motivation flagging when Saudi dignitaries are expected to visit and all, I need to pull the trigger.

My promise though was this - I'll be back to consider them when the time comes later.

Global financial system reform

1.       The ribawi-based financial system, the lubricant of economic growth in the developed world and therefore a major mechanism and tool to prolong their economic and political hegemony is under surveillance.

2.       Britain, the Great prefixing its moniker long gone, is now slowly trying to fulfill a global leadership vacuum it lost painfully when Blair was playing lapdog to Bush Jr, and clearly by playing the moral high ground in climate change and the global financial revamp issues. In climate change, it is trying to be the middleman between Obama’s US insisting on self-regulation and the rest of the world who insists the world’s largest polluter should have to answer to some form of polluting taxation.

3.       Now, Adair Turner is cranking up the pressure on the global financial system, insisting it has grown too big for its good and too complex to be controlled.

4.       He has his own ideas, but perhaps the is not yet a ready admission that the alternative should really an equity-based financial instrument which curbs excessive growth of financial instruments based on underlying asset values, aka Islamic finance. Asset bubbles and systemic shocks are painful manifestations of the interest-based system, and it’s interesting that Turner even raised the issue that taxation is leaning towards interest by taxing profits after interest.

5.       Jewish interest groups make it impossible to change their forte in interest management, obtaining unpronounceable amounts of profits since before the days of Rothschild’s and such. Ford’s Zionist Protocols could have something on this – but as ever, I am cynical of what could come out of this. Until and unless the D-8 of the OIC, the OIC itself, the rest of the developing world acknowledge that they too can partake in global leadership and compete on equal footing with the great powers, I doubt they could transform themselves into paragons of virtue and goodness. Bubbles have come, and they have gone, and it still remains as it were. Interest groups reign supreme, and the shadow players behind the scenes are the supremos.

6.       There is so much to do to bring back justice to the world.

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The agenda for a global finance revamp 06 Nov 2009

By David Wessel - The Wall Street Journal Asia 

Date Published : 06 Nov 2009

The repair of the global financial-regulatory system is too important to future prosperity to be left to technocrats and bankers. But the substance is so arcane and complicated that few politicians or informed citizens can grasp the issues, let alone choose solutions.

That puts a premium on public-spirited insiders who think and speak clearly enough for the rest of us to understand, even if only to disagree with their diagnoses and remedies. It is that talent that makes Adair Turner, chairman of Britain's uber-regulator, the Financial Services Authority, worth listening to.

The U.K. didn't, as Lord Turner puts it, have "a good war." A couple of its big banks and several smaller ones imploded. It had a housing boom and bust. Its people put savings in Icelandic banks that collapsed. Its economic engine, finance, is sputtering. Its recession was deep.

And what had been seen by many in the U.S. as a model -- a central bank that stuck to setting interest rates and a single regulator that oversaw banking, securities markets and insurance -- is discredited. The rising Conservative Party wants to undo the structure built a decade ago by now-Prime Minister Gordon Brown and would fold financial supervision into the Bank of England.

Lord Turner, 54 years old, a Cambridge-educated former Merrill Lynch executive and McKinsey consultant, didn't arrive at the FSA until September 2008, well after FSA mistakes that contributed to the crisis. That liberates him to preach without first confessing sin, and preach he does. In a conversation in the London offices of the Climate Change Commission, which he also chairs, he was animated, even passionate, even though he had flown overnight from Washington. The word, according to Lord Turner:

-- One, finance got too big. "We must be more willing to ask . . . whether the financial system is delivering its vital economic functions as efficiently as possible, or whether parts of it can, and before the crisis did, swell beyond their economically efficient size," he said in a recent speech. He clearly favors the latter view: There was more "clever finance" and more trading than desirable to keep the world economy humming. Hence his willingness to consider a global tax on financial transactions, to the horror of many of his peers and the banking establishment.

-- Two, there was too much debt in the system. "There is a huge bias in the tax system towards debt," he said, largely because companies can deduct interest payments before computing taxable profits. "If we can't change that, then the regulatory approach needs to lean against that." Hence all the talk of reducing the leverage of financial firms. While U.S. and U.K. households and businesses did borrow more during the boom, the big run-up was in borrowing among financial firms matched by a huge increase in trading relative to the value of underlying economic activity, he observes. When bankers bellyache, he refers them to point one above.

-- Three, regulators failed to curb excesses, but politicians hardly encouraged aggressive regulation. The cry for "better regulation" meant less regulation, both in the U.K. and U.S. The diagnosis of Britain's economic woes was that regulation was stifling entrepreneurship, he said. No politician asked the FSA: "Why aren't you doing more to restrain this boom?" Few, if any, politicians can point to a speech made three years ago that asked why regulators weren't restraining lending or regulating with less of a "light touch."

-- Four, erecting a wall between ordinary deposit-taking and lending, on one hand, and trading on the other is impractical and unwise. Economies benefit when banks turn loans into securities or hedge their positions -- to a point. But by forcing banks to hold capital in the trading operations to provide thicker cushions to absorb losses -- he calls it "a bias towards conservatism" in trading beyond what is necessary for ordinary banking -- speculative trading will migrate away from banks toward hedge funds and the like, a change Lord Turner welcomes. That makes banks less risky (with smaller profits in boom times and smaller losses in busts), but he said it requires more oversight of big trading firms which, history proves, can endanger the whole system.

-- Five, for all the angst about the slow pace of postcrisis repair of the financial system, global regulators are making surprising progress toward consensus on a new regulatory regime. "We are attempting in 18 months to do changes far more radical than we did in Basel II that took between 12 and 15 years and dealt with some of the areas which proved to be less important," Lord Turner said, referring to the pact regulators reached in the Basel Committee on Banking Supervision that didn't avoid the crisis. Pushed by the newly empowered Financial Stability Board, the process, he said, "has worked better than I would have expected," he said.

Britain, of course, hasn't the clout to rewrite the rules of banking unilaterally. Lord Turner may not have precisely the same job in a year's time, if the Conservative Party takes power and sticks to its promise to abolish the FSA. But with a trenchant voice, he is helping to set the agenda for the most significant revamp of financial regulation in more than half a century.

Islamic finance faces legal tussle

No bed of roses is cosy, certainly not for implementation of
syariah-based financial system. Let's hope that this serves to inculcate
a greater amount of resolve amongst the practitioners of the system. A
successful implementation of an Islamic-based financial system, and
thereby creating an alternative system to the interest-based,
material-oriented capitalism which overrides ethics and morality in its
decision flow, could signal a viable alternative political and social
order also based on a Syariah orientation.

Any which way, my sparring session with Fadzlan over lunch, gave this
nugget upon reflection of several PAS personalities. If you want to
handle and lead people, see how best you can lead yourself.. Ie your
self-discipline. Do you smoke, do women, treat others kindly, solicit
sex inappropiately, flirt, etc?

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From: http://www2.themalaysianinsider.com/lite/articles.php?id=26195

Legal wrangles to test Islamic banking as boom fades

KUALA LUMPUR, May 12 - A wave of debt defaults is set to hit Islamic
banks as deals sour amid the global slowdown, testing the legal
framework and stability of an industry already facing the biggest slump
in its 30-year history.

The global economic downturn that punctured Islamic banking's growth
bubble is also expected to bring many shariah financing structures under
the legal microscope for the first time in centres such as Dubai,
Bahrain and Malaysia.

But the expected increase in commercial disputes raises questions about
whether conventional legal systems can deal with the highly specialised
niche industry which has evolved into a US$1 trillion (RM3.52 trillion)
industry handling government and corporate debt.

It could also test the foundations of the Islamic banking system, which
the Asian Development Bank estimates is growing by 10-15 per cent a
year, but which some bankers and lawyers say stills lack a strong
cohesive regulatory and legal framework.

Judges will have to weigh conventional law and sharia (Islamic law) used
in contracts, and legal uncertainty over key contract provisions could
hurt the industry's ability to bounce back when the global economy
recovers.

"The industry will be watching to ensure any legal disputes are settled
in a transparent manner which gives certainty to the contract terms
entered into," said Davide Barzilai, a London-based Islamic finance
lawyer with Norton Rose.

"If there a string of cases which result in contracts being overturned
by the court for breach of sharia alone, then this could have a material
impact on the growth of the industry."

Fuelled by a recent rush of oil money, Islamic bankers innovated on the
basic financing model, taking it beyond sale and profit-sharing
contracts to more complex derivatives which are harder for courts to
deal with.

Islam's rules on transparency kept shariah banks from subprime mortgage
loans that mauled Western banks, but their vast exposure to the property
sector, especially in the Gulf, is taking a toll as global real estate
markets slide.

Gulf Arab companies deemed most vulnerable to the downturn include large
United Arab Emirates (UAE) real estate developers, such as Dubai-listed
Islamic mortgage firms Amlak and Tamweel.

CRUNCH TIME?

Defaults and litigation are expected to jump as the ailing world
economy, tough financial markets and stalled projects make it harder for
firms to repay banks and asset values plummet.

Over half of the residential and commercial property projects due for
completion in Dubai between 2009 and 2012 have been cancelled or
suspended, Jones Lang LaSalle said in March.

But Islamic banking's legal framework is as fragmented as other aspects
of the industry, with little case law to guide judges. Many judges are
also unskilled in shariah, and the relationship between Islamic and
secular law is unclear.

"It's a contest between shariah law and common law," said Islamic
banking lawyer Mohamad Illiayas.

"Cases have gone to court where there is a problem of conflicts and
inconsistencies but the English courts have always ruled in favour of
common law."

He cited a 2004 case involving Shamil Bank of Bahrain where an English
court refused to apply shariah law to a murabaha contract (a popular
contract of sale). The court said two systems of law cannot govern one
contract.

In Malaysia, home to the world's top Islamic bond market, only a handful
of cases have come before the high courts in almost three decades, with
most involving basic home loan cases.

Judges' expertise has been in focus after some courts questioned the
validity of the bai bithaman ajil contract, a type of deferred payment
sale, sowing confusion in the industry.

The contract was recently declared valid by an appellate court, but
Malaysian authorities now plan to force judges to refer to national
shariah advisers when handling Islamic finance cases.

"Looking purely at the formal qualifications and experience of judges,
it would be hard to expect them to be fully aware of all the relevant
intricacies of Islamic finance," said Megat Hizaini Hassan, an Islamic
finance lawyer with Zaid Ibrahim.

In the Gulf Arab region, law firms have started to build up Islamic
finance expertise but their skills is almost exclusively limited to
consulting banks on deal structures and drafting contracts, and most
have yet to see a court room from inside.

Islamic finance disputes can be referred to arbitration by specialists
but many Malaysian cases still go court. In Bahrain, such cases have
mostly gone to dispute resolution committees staffed by judges and
specialised central bank officials.

But arbitration is not problem-free, either.

"We will still have to resort to common law at one stage or the other,"
said Illiayas. "Even after the arbitration award is given, if you want
to enforce that award you still have to go to court." - Reuters

turmoil, tsunami and armageddon? - causes

Well - I could spend some time to really understand and try to predict the right way of overcoming this, but the sheer complexity of the whole issue means it'll take time to comprehend, let alone undertake the necessary structural changes.

For a start, this is a brilliant encapsulation of the effects of greed, not a technical description of the mechanics of the failure, that I presume will be well covered in other areas - but also fittingly describes the failure of ribaa'...

http://timesbusiness.typepad.com/money_weblog/2008/10/10-people-who-p.html#more
Minsky:Dr. Michael Hudson - global research dot ca wrote:"A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.This was the flip side of the magic of compound interest – the belief that people can get rich by "putting money to work." Money doesn’t really work, of course. When lent out, it extracts interest from the "real" production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments – purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of "pension-fund capitalism," a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the "real" economy in which families and companies produce and consume.Mr. Paulson’s bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less "solvable" and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Mr. Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to "work" under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy’s debt overhead. Negative equity leads to bankruptcy and foreclosures."He also states:The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest 10 percent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of "market forces". Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy ­ a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the "magic of compound interest" in a nutshell. No "real" economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back."
We all should be organizing to take our democracies back.