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Takaful -Insurance- Part IV (Authenticity, Supervisory Board & Status of Takaful)

2010-01-04T15:50:00.002+02:00

Shari'ah Authenticity

Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

Shari'ah Supervisory Board [Religious Board]

The role of Shari’ah Supervisory Board members is to review the takaful / retakaful operations, supervise its development of Islamic insurance products, and determine the Shari’ah compliance of these products and the investments. The Shari’ah Supervisory Board have to carry their own independent audit and certify that nothing relating to any of the operations involve any element that is prohibited by Shari’ah.

Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Shari’h scholars on the religious boards carry great responsibility, it is important that only high calibre scholars are appointed to the religious boards.

An Islamic financial institution is required to establish operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. The management is also required to periodically report and certify to the religious board that the actual investments and business activities undertaken by the institution conform to forms previously approved by the religious board.

Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that act as an independent Shari’ah Supervisory Board comprising of at least three Shari’ah scholars with specialised knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance and economics.

They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shari’ah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shari’ah principles (a form of post Shari’ah audit). The Shari’ah Supervisory Board is required to issue independently a certificate of Shari’ah compliance.

The day-to-day application of Shari’ah by the Shari’ah Supervisory Boards is two-fold. First, in the increasingly complex and sophisticated world of modern finance they endeavours to answer the question on whether or not proposals for new transactions or products conform to the Shari’ah. Second, they act to a large extent in an investigatory role in reviewing the operations of the financial institution to ensure that they comply with the Shari’ah.

The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shari’ah Supervisory Boards function is to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people.

Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

Status of Takaful

As Islamic finance continues to expand, there is likely to be a huge takeoff of other products such as pensions, education, marriage and health Takaful plans. There is also a huge scope for mortgage Takaful.

Islamic principles strong emphasis in Takaful on the economic, ethical, moral and social dimensions, to enhance equality and fairness for the good of society as a whole should also have appeal for the ethically minded.

[source: Institute of Islamic banking and Insurance (IIBI)]

Takaful -Insurance- Part III (How it Works, Interest & Reinsurance)

2010-01-04T15:42:00.003+02:00

How does Takaful Work

All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund.

The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. As in conventional insurance, the policy (Takaful Contract) specifies the nature of the risk and period of cover.

The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.

Pricing Transactions linked to Interest-rate Benchmark

There are continuing debates on whether the spirit of Shari`ah is being violated by the practice of "benchmarking" linked interest rate benchmark such as London Interbank Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance transactions . At a very fundamental level, the reason for the debates is the lack of understanding to clearly discern the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shari’ah compliant assets as a determinant for returns.

However, benchmarking touches upon the integrity of Islamic Finance as a whole, and the concept of Shari’ah-compliance vs Shari’ah-based approach in particular. There are practical challenges delaying a switch to participation-based structures, such as Musharakah and Mudarabah, that require financiers to participate in the underlying asset in a financing transaction.

Retakaful or Reinsurance

Frequently, the scale of insurance risks underwritten is too great for one insurer to carry safely. In these circumstances, companies use reinsurance to mitigate their own risk exposure. When insurers insure a risk again with another company, it is called reinsurance which allows the insurance industry to spread its losses, lessening the impact of claims on any one company.

There is currently a shortage of retakaful capacity and the lack of companies in the market presents a challenge as well as an opportunity. The challenge is to have a large enough Takaful market to justify ReTakaful business. There is also a global need for strong and credible retakaful operators to assist the growth and expansion of takaful business. Shari’ah scholars have allowed takaful operators to reinsure conventionally when no retakaful alternative is available, although retakaful is strongly preferred.

However, this conventional reinsurance represents a dilemma, as it is contrary to the customer’s preference of seeking cover on Islamic principles. Structurally retakaful operating principles are similar to the takaful operating principles, and the same Shari’ah principles apply.

[source: Institute of Islamic banking and Insurance (IIBI)]

Takaful -Insurance- Part II (Gambling and Insurance, Principles of Takaful & Conventional Insurance)

2010-01-04T01:54:00.003+02:00

Gambling and Insurance

Gambling and insurance are two distinct and different operations. Gambling is speculative in its risk assessment whereas insurance is a pure risk and is non-speculative. In gambling, one may win or lose by creating that risk. In insurance, the risk is already there and one is trying to minimise the financial effects of that risk. Insurance shifts the impact of that risk to someone else and relieves the person of risk. The risk nevertheless still remains.

While gambling promotes dissension, ruin and hatred, insurance based on cooperative principles, enables the insured to lessen the financial impact without which it could drive the individual and his dependents to poverty, thereby weakening their place in the society. There is nothing in Islam that prevents individuals from making a provision for their dependents. Seen collectively for large groups of insured population, insurance strengthens the financial base of the society.

Islamic scholar, Yusuf Ali, in his translation of The Holy Qur’an, comments on Sura (chapter) Al-Baqara, ayat (verse) 219, "Insurance is not gambling, when conducted on business principles. Here the basis for calculation is statistics on a large scale, from which mere chance is eliminated. The insurers charge premium in proportion to the risks, exactly and scientifically calculated".

Basis and Principles of Takaful

Islamic insurance requires each participant to contribute into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims.

The underlying principles of Takaful may be summarised as follows:

Policyholders co-operate among themselves for their common good.
Every policyholder pays a part of the contribution as a donation to help those that need assistance.
Losses are divided and liabilities spread according to the community pooling system.
Uncertainty is eliminated in respect of subscription and compensation.
It does not seek to derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden."

Why No to Conventional Insurance

In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where resources are pooled to help the needy does not necessarily contradict Islamic principles.
Three important differences distinguish conventional insurance from Takaful:

Conventional insurance involves the elements of excessive uncertainty (gharar) in the contract of insurance;
Gambling (maysir) as the consequences of the presence of excessive uncertainty that rely on future outcomes
Interest (riba) in the investment activities of the conventional insurance companies;
Conventional insurance companies are motivated by the desire for profit for the shareholders;
Conventional system of insurance can be subject to exploitation. For example, it is possible to charge high premium (especially in monopolistic situations) with the full benefit of such over-pricing going to the company.

The key difference between Takaful and conventional insurance rests in the way the risk is assessed and handled, as well as how the Takaful fund is managed. Further differences are also present in the relationship between the operator (under conventional insurance using the term: insurer) and the participants (under conventional it is the insured or the assured). Takaful business is also different from the conventional insurance in which the policyholders, rather than the shareholders, solely benefit from the profits generated from the Takaful and Investment assets.

[source: Institute of Islamic banking and Insurance (IIBI)]

Takaful -Insurance- Part I (Definition)

2010-01-04T01:43:00.004+02:00

What is Takaful?

This concept has been practiced in various forms for over 1400 years. It originates from the Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee". The concept is in line with the principles of compensation and shared responsibilities among the community.

Takaful originated within the ancient Arab tribes as a pooled liability that obliged those who committed offences against members of a different tribe to pay compensation to the victims or their heirs. This principle later extended to many walks of life, including sea trade, in which participants contributed to a fund to cover anyone in a group who suffered mishaps on sea voyages.

In modern-day conventional insurance, the insurance vendor (the insurance company) sells policies and invests the proceeds for the profit of its shareholders, who are not necessarily policyholders. There is therefore a clear disjunction between policyholders and shareholders. Payouts to policyholders may vary depending on financial performance, but a minimum positive return is always contractually guaranteed.

Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance.

However, takaful is founded on the cooperative principle and on the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful (Insurance) fund and operations to the policyholders. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.

In takaful, the policyholders are joint investors with the insurance vendor (the takaful operator), who acts as a mudarib – a manager or an entrepreneurial agent for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not legally guaranteed, as any fixed profit guarantee would be akin to receiving interest and offend the prohibition against riba.

For some time conventional insurance was considered to be incompatible with the Shari’ah that prohibit excessive uncertainty in dealings and investment in interest-bearing assets; both are inherent factors in conventional insurance business.

However, takaful complies with the Shari’ah (which outlines the principles of compensation and shared responsibilities among the community) and has been approved by Muslim scholars. There is now general, health and family (life) takaful plans available for the Muslim communities.

Prohibitions of Gharar, Maysir and Riba

Gharar: An insurance contract contains gharar because, when a claim is not made, one party (insurance company) may acquire all the profits (premium) gained whereas the other party (participant) may not obtain any profit whatsoever. Ibn Taimiyah, a leading Muslim scholar, further reasoned "Gharar found in the contract exists because one party acquired profit while the other party did not". The prohibition on gharar would require all investment gains and losses to eventually be apportioned in order to avoid excessive uncertainty with respect to a return on the policyholder's investment.

Maysir: Islamic scholars have stated that maysir (gambling) and gharar are inter-related. Where there are elements of gharar, elements of maysir is usually present. Maysir exists in an insurance contract when; the policy holder contributes a small amount of premium in the hope to gain a larger sum; the policy holder loses the money paid for the premium when the event that has been insured for does not occur; the company will be in deficit if the claims are higher that the amount contributed by the policy holders.

Riba: Conventional endowment insurance policies promising a contractually-guaranteed payment, hence offends the riba prohibition. The element of riba also exists in the profit of investments used for the payment of policyholders’ claims by the conventional insurance companies. This is because most of the insurance funds are invested by them in financial instruments such as bonds and stacks which may contain elements of Riba.

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Investment Products Available In The United Kingdom

2010-01-04T01:38:00.001+02:00

By Professor Rodney Wilson,
University of Durham, United Kingdom

Introduction

London has become the largest international centre for Islamic finance outside the Muslim World, largely as a result of the City's role as a centre for Middle Eastern and Asian banking. Treasury management facilities are provided on behalf of Islamic banks in the Gulf, and Islamic fund management and promotion is becoming more significant. Possibilities for Islamic electronic financial services are opening up, and London is the major centre for information gathering and dissemination on the Islamic banking industry.

London's role in serving the British Muslim community has been disappointing and despite almost two decades of experience of Islamic financing, there are few retail products available. The aim of this article is to ask why this continues to be the case, to review the limited range of products on offer, and to see if there are any more hopeful signs for the future.

Islamic financial services in the UK

The Muslim community in the United Kingdom numbers more than 1.5 million British citizens and permanent residents, with up to another 500,000 temporary residents including students and visitors. The community is ethnically and linguistically diverse however, and geographically scattered, that makes marketing aimed at attracting the attention of the community a major challenge. The community is increasingly affluent, and comprises a growing number of professionals such as doctors, as well as a substantial small business component.

Although casual evidence suggests there is a greater propensity to use cash for transactions than with the population generally, the demand for banking and financial products is not markedly different from the national picture. Some devout Muslims avoid using conventional interest based banks, and others donate interest earnings to charity in an attempt to purify their income. The majority use conventional financing services, largely because they have little alternative, and tend, like the rest of the population, to have greater trust in large retail financial institutions with established brand names. For Islamic financial institutions to gain acceptance within the community there would need to be a substantial educational and marketing promotion.

HSBC Islamic Financing

In many respects the HSBC is the best placed British retail bank to potentially offer Islamic financial services to the local Muslim community, but so far it has been reluctant to take on the promotional and marketing risks. HSBC's advantage is that it already has an Islamic finance unit and extensive experience through its global operations in this type of business. It has a significant presence in many Muslim countries, including Malaysia, Pakistan and Bangladesh, and has become a major force in Middle Eastern banking since its acquisition of the British Bank of the Middle East. Its network includes six branches in Bahrain, six in Lebanon, fifteen in the United Arab Emirates, nine in Egypt, and five in Oman. HSBC also owns a minority stake in the Saudi British Bank that has 80 branches in the kingdom. These networks give the bank unparalleled business knowledge of different Muslim societies.

In the United Kingdom HSBC is the only high street bank to have a dedicated network of branches to serve the South Asian community with staff who speak Urdu and are themselves part of the community. It has teams of specialist business banking managers who profess to understand the needs of small Asian businesses. Its South Asian network has 11 branches in Blackburn, Glasgow, Harrow, Leeds, Leicester, London (2), Manchester, Preston, Walsall and Uxbridge. Islamic products could potentially be offered through all these branches.

It is however easier for HSBC, like other British retail banks, to offer conventional loans and savings products rather than to introduce differentiated products for a potential market of Muslim clients who do business with the bank in any case. The gains from cross selling Islamic products to existing clients are not thought to be great, and the potential to attract new clients limited due to the inertia of most retail account holders. HSBC therefore has concentrated on serving foreign Muslim clients of high net worth through its international operations, and in serving Islamic banks through wholesale business, rather than the domestic market. The HSBC's Amanah Global Equity Fund is marketed to foreign investors, for example, rather than the British Muslim community.

United Bank of Kuwait's Islamic Investment Banking Unit's Manzil Scheme
The most significant Islamic financial product to be launched for the Muslim community in the United Kingdom was the Manzil home purchase plan. Manzil can be translated as home, or in spiritual terms as the house or dwelling of the soul. The original scheme, which was introduced in 1997, provides for murabaha financing through a trading mark-up contract. The Islamic Investment Banking Unit that runs the scheme is a part of the United Bank of Kuwait, which was established in London in 1966 to serve Kuwaiti overseas financial and commercial interests. In August 2000 it was taken over by the Al-Ahli Commercial Bank, which formed a new institution, the Ahli United Bank. This has been registered as an offshore banking unit in Bahrain with its shares listed on the stock exchange in Manama.

Once the client has chosen a suitable property and agreed a price he approaches the bank for Manzil financing. An application form is completed together with a direct debit mandate for the monthly payments if the request for financing is approved by the bank's credit committee. The client must pay 0.1 percent of the purchase price of the property, or a minimum of £176.25 including VAT, so that the bank can commission an independent valuation of the property. The IIBU will also seek references regarding the client's financial position, usually from an employer or accountant and current bank. The client's solicitor will be expected to liase with the IIBU's solicitor who will seek assurances regarding the legal title of the property, which may involve legal searches.

For murabaha to be legitimate under Islamic law, the bank, as financier of the property, must be the first owner. It is therefore the bank, and not the client, who contracts with the vendor and pays the deposit required when contracts are exchanged. The sale price from the IIBU to the client has to allow for administrative expenses, a return to the bank's investors and a profit margin. The client pays the purchase price through fixed monthly payments over a period of up to 15 years.

The Manzil Ijara Home Hire Purchase Plan

The Manzil ijara scheme, which was introduced in March 1999, has proved much more popular than original murabaha house purchase plans. It is the flexibility that seems to appeal to clients, who can repay larger amounts as and when they can afford to do so to reduce their rental payments. They have the right to purchase the entire property from the bank at any time, but few are likely to choose to do so in the first few years, largely because they lack the funds. Those with the necessary funds to purchase a property outright would not have sought a Manzil home purchase arrangement in the first place.

Under the Manzil ijara scheme the property is registered in the bank's name, not just initially, but throughout the period of the lease that may extend to 25 years. The tenant or lessee agrees at the outset to eventually purchase the entire property, but at the original price that the bank paid without any mark-up. The monthly payments by the client comprise three elements. The first represents the repayments of the funds that the bank has used to purchase the property. The second is the rent on the property, which is the source of the bank's profit. The rent is reassessed annually to ensure the bank is making a reasonable return and adjusted downward to reflect payments already made. The third element of the monthly payment, referred to as insurance rent, is to recover the cost of the insurance that the bank has to pay on the property. Over time the monthly payments may increase or reduce or both, depending on the size of the first repayments element that the client decides he can afford. Early repayment could be potentially unprofitable for the bank, unless it can obtain a higher return by reinvesting the funds.

The Success of the Manzil Scheme

Although there has only been limited marketing effort put into the Manzil schemes there are between 50 and 80 potential clients a week who phone to enquire about Manzil house purchase and a further 40 who respond by email to the Web pages. This translated into around 20 applications per week for Manzil house purchases. The majority of applications are for housing purchase in the South East of England, but there is also a steady stream of enquiries from the Midlands and the North. Because of the different conveyancing system under Scottish law, Manzil financing is not available for house purchases north of the border. A down payment of 20 percent of the value of the property is required for all Manzil financing, which is higher than for conventional mortgages, but ensures that the client has a significant equity stake in the property from the outset. The minimum value of the property purchased is £50,000, which is a very modest sum in relation to property values in the South East, but which has applied to some of the inner city properties acquired in the Midlands and the North.

Under the Manzil ijara scheme clients can convert existing interest based mortgages. The banks shariah board's members, Justices Shaikh Muhammed Taqi Usmani and Shaikh Nizam Yaquby, have approved a conversion plan whereby the IIBU purchases the property from a client for a sum sufficient to repay the current loan plus certain costs and expenses, with the bank's payment being repaid over a period of years by the client. The bank's profit is derived from the rent the client pays over under the ijara wa-Iqtina hire purchase scheme.

Fund Management Possibilities

London is the major European centre for fund management, both for funds listed onshore and offshore funds listed in the Channel Islands, Dublin, Luxembourg and other centres. There are seven Islamic funds that are promoted in the Muslim world but managed from London and four that are both promoted and managed from London. All of these are designed for clients in Saudi Arabia and the Gulf, with the prices denominated in dollars and the funds administered from offshore tax havens. The HSBC Amanah Global Equity Fund is typical of these offerings, being listed in Luxembourg and managed to provide exposure to leading companies worldwide with a particular focus on major multinationals whose primary listing is in New York.

There have been mixed fortunes for Islamic funds managed from London with Kleinwort Bensons' Islamic Fund, the first to be established in 1986, being wound up in 1989 because of poor subscriptions. Flemings Oasis Fund was launched with great promise back in 1996, but was liquidated in 2000 following the take-over by Chase of Flemings. The Institutional Investor of Kuwait, which managed the Ibn Majeed Fund that was listed in Dublin, decided to close its London office in 2000 and focus its operations in the Gulf.

The only sterling denominated fund was the Halal Mutual, also listed in Dublin, and managed by the Gulf based Al Tadamon Group. It was designed to provide income from commodity trading rather than equity investment, the price being fixed at £250, but with the income dependent on trading profits, which in practice was always around 3.6 to 3.8 percent gross, a very modest return.

None of these funds is of much interest to the British Muslim community, who as United Kingdom residents have potential tax liabilities on both income and capital gains, and therefore cannot take advantage of offshore funds. For local Muslims what is required is an Islamic fund that can qualify for tax exemptions under the Individual Savings Account (ISA) scheme. This provides for exemption from capital gains and income tax for up to £7,000 invested in any tax year for qualifying funds in a maxi ISA. This has proved popular with ethical and ecological investors, with funds such as the Friends Provident Stewardship and the Jupiter Merlin Ecology qualifying for this status. Similar on-shore funds that complied with the Sharia law could potentially appeal to British Muslim investors if a major fund management group was willing to take the initiative.

Conclusion

Although London has emerged as the major western centre for Islamic finance so far it has failed to serve the United Kingdom Muslim community. The major retail banks and fund management institutions seem reluctant to take the initiative by promoting shariah compliant products for the local market. Whether the new on-line financial services groups such as ii-online.com or ihilal.com break into this market remains to be seen, but this may be one way forward.

Issues and Relevance of Islamic finance in Britain

2010-01-04T01:17:00.003+02:00

By Iqbal Khan, Managing Director Head of Global Islamic Finance, HSBC Amanah Finance, UK

Introduction

Philosophical Foundation and Core Concepts

Islamic finance is an ethical, indigenous and equitable mode of finance, which derives its principles from the Quran (The revealed book of Muslims) and tradition of the Prophet Muhammad (pbuh). Shariah law (Islamic law), which is based on the Quran and Sunnah, governs Islamic finance.
It is a trend which is broadening the ownership base, creating more stakeholders and thereby bringing the hope of stability to more than 1.3 billion Muslims spread across the world.
Islamic Finance as a concept is based on themes of Community Banking, Ethical and Socially Responsible Investments and Affinity Marketing. These themes themselves are based on core ideas, which include individual responsibility, reliance on market mechanism, commitment to economic and social justice and mandatory care for the environment. These guidelines also include prohibitions from investing in areas such as Defence and Armaments, Casinos, Breweries - areas which are considered to be value destroyers.
In Islamic Finance Scholars say that everything is allowed except that which has been specifically forbidden. In essence the believing Muslims view of economics is based on Man's obligation to organise his affairs in accordance to the will of God as his representative and vice regent on Earth. The goal is not equality but an avoidance of gross inequality along with an injunction that wealth should not become "a commodity between the rich among you". Islamic Finance is firmly embedded in the commercial, real, value-producing economy.

Early Beginning

The desire of enlightened Muslims to seek the moral equivalent of Modern Capitalism goes back to Egypt in the early 1960s. The pioneering effort, in Egypt, took the form of a savings bank based on profit-sharing in the town of Mit Ghamr. The Islamic Development Bank (IDB) was established in l975 by the Organisation of Islamic Conference (OIC), but it was primarily an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB now also extends to private sector corporates for project and trade finance facilities.
In the mid-seventies, Islamic banks came into existence in Saudi Arabia and the United Arab Emirates. Since then, Islamic financial institutions have emerged in a large number of Muslim countries including Kuwait, Bahrain, Qatar, Turkey, Pakistan, Indonesia and a belt of other IDB member countries. These institutions have taken the form of commercial banks, investment banks, investment and finance companies, insurance companies, etc.

Market sizing

Islamic banking today is an industry that is still evolving. The industry manages approximately $180 Billion dollars today, growing at approximately 15% per annum. The growth of Islamic banking is a result of economic growth in the Islamic world, fuelled primarily by oil wealth. This growth created a growing middle-wealth segment and hence made banking a necessary service to the larger segment of the population rather than a service for the few, as had been the case some 10 to 15 years earlier.

Evolution of Islamic Finance

In the 1970s and 1980s, Islamic banking was characterised by a large number of commercial banks serving retail Muslim customers in their respective countries. However, since the late 1980s a shift towards investment banking has taken place. No where is this better witnessed than in Bahrain, which has the largest number of offshore Islamic investment banks in the Muslim world.
In the early years, investments and products used by most Islamic financial institutions were driven by the concept of Mudaraba (referred to as Trust Financing) and focused on short-term investments. During this period, Murabaha (cost-plus finance) emerged as the most widely used instruments by Islamic banks, accounting for over 80 per cent of a portfolio of an Islamic bank.
During the 1990s Islamic financial institutions have become increasingly more innovative, developing more complex instruments and structures to meet the demands of modern day business. The use of instruments such as leasing and construction finance have become far more widespread. Islamic finance tranches have also been structured into big-ticket syndication.
Equities have only recently opened up as an asset class to Islamic investors, following approval from the Islamic Fiqh (Islamic jurisprudence) Academy in Jeddah, one of the major legal bodies in the Muslim world. Islamic investors are now able to invest in equities subject to certain criteria. Over 100 Islamic equity funds have now been launched since 1995 with Assets under management in excess of $7 billion. Some of these funds are being sold in UK and it would be useful to make their ISA compatible.

The Markets and the Players

More than 2/3rd's of Islamic finance business is currently originated in the Middle East. The GCC countries, with the exception of Oman, are all major markets for Islamic finance. Bahrain is regarded as the hub for Islamic finance. Other major non-GCC markets for Islamic finance include Egypt, Malaysia, Turkey, Indonesia, and Pakistan.
Malaysia operates a dual banking system promoted by the government. This allows conventional financial institutions, investment banks, commercial banks and finance companies to launch separate Islamic banking divisions, competing alongside two Islamic banks, Bank Islam Malaysia and Bank Muamalat Malaysia. Bank Negara Malaysia (the central bank) has its own Shariah Advisory Board, which sets the rules for the entire Islamic banking sector, ensuring uniformity of products and services.
Over 150 Islamic financial institutions now operate in over 40 countries around the world, from commercial banks, investment banks, investment companies to leasing, and insurance companies.

The Products and Structures

Islamic banks around the world have devised many financial products based on the risk-sharing, profit-sharing principles of Islamic banking. For day to day banking activities, a number of financial instruments have been developed that satisfy the Islamic doctrine and provide acceptable financial returns for investors. Broadly speaking, the areas in which Islamic banks are most active are in trade and commodity finance, property and leasing. Almost every Islamic bank has a committee of religious advisers whose opinion is sought on the acceptability of new instruments and services and who have to provide a religious opinion of the bank's activities for year-end accounts.

Britain and Islamic finance

Community Banking

Muslims in Britain and throughout the world aspire to carry out their financial matters in accordance with the principles of Islamic law. Muslims are forbidden from obtaining the various conventional banking and insurance products and services in the forms currently offered due to their incompatibility with the principles of Islamic law.
It is estimated by various surveys that over 2 million Muslims are permanently residing in the UK. The community is predominantly composed of people from the Indian sub continent who have settled in Britain during the 1950s. Beside them, there are also Muslims of Middle Eastern and North African origins. Additionally there is a growing population of indigenous Muslims.
The UK Muslim community has now reached the "Second-Generation" stage. The first wave of immigrants having settled down, the second-generation Muslims are now slowly penetrating the different strata of the British society. It is not uncommon to find successful Muslim lawyers, chartered accountants, bankers, businessmen and even Members of Parliament, both at the House of Lords and the House of Commons.
The third generation of Muslims are also emerging from the educational system and is projected to increase the Muslims' presence in all strata of British society, especially, the educated middle class.
The vast majority of Muslims either is living in rented houses or has taken conventional interest-based mortgages. The total number of Muslim households as estimated by the Muslim Council of Britain is around 500,000. Of the 500,000 households, it is estimated by various market researches that approximately 40,000 families seek financing for home purchases each year.
We have regularly received enquiries regarding the availability of Islamic finance products, in particular Islamically compatible finance to purchase both residential and commercial properties. It is believed that a large number of Muslims have abstained from taking the conventional mortgage because of its incompatibility with the Islamic principles. The needs of these Muslims need to be served immediately.
Beside the market represented by Muslims living in Britain, there is potential for overseas investors to be introduced by HSBC. We understand that a considerable number of Muslims living abroad (mainly in the Middle East) had expressed their desire to own properties in Britain (mainly as a holiday residence) but have been reluctant to embark into an interest bearing financing facility. For these investors an Islamic home financing scheme will offer the opportunity to own a property in Britain.

Islamic Home Financing:

Structure

The potential customer, having identified the property, will approach the Bank to finance the purchase of the property. The transaction structure will be as follows:

The customer chooses the property for purchase and agrees the purchase price with the owner of the property ("Seller"). The bank buys the property from the Seller at the agreed price. The customer will be requested to provide a deposit against the purchase price, but the Bank will remain the sole registered owner.
The customer signs a lease agreement with the Bank. The lease will be for a period of up to 25 years with the lease rentals to be reviewed annually to reflect the capital repayment. The terms of the lease agreement will stipulate that in the event of a default the Bank will have the right to repossess and sell the property.
The customer/lessee will give an undertaking that in the event of a default under the lease agreement, the Bank/lessor will have the right to compel the customer to purchase the property for the purchase price (which shall equal the amount of principal outstanding).
There will also be an undertaking whereby the Bank/lessor promises to sell the property to the customer/lessee at the end of the agreed lease period (i.e., when the whole of the principal portion has been repaid). There will also be a provision for certain other specified instances including when the customer desires to sell the property.

The above structure would allow British Muslims to get access to home financing without forcing them to choose between their religion and home ownership. It allows British Muslims to purchase homes without violating Islamic prescriptions on borrowing money on which interest is charged. Further, this initiative will be consistent with the well-established public policy of encouraging home ownership and making Muslim stakeholders in Britain.

Islamic Home Financing: Current Impediments

1. Risk Weighting

A key element, which will impact the pricing, is the FSA's approach to risk weighting for this product. FSA has provisionally ruled that the product is to be 100% risk weighted. This is essentially because the transaction is equivalent to a lease and leases are weighted 100%. This assumes that the house remains the property of the Bank throughout the term of the transaction and is treated as a fixed asset on its balance sheet. If we are obliged to weigh at 100% then pricing will be significantly higher than the conventional mortgage rate. Good Muslims should not be penalised for being good Muslims. The Muslims in the United States have approached the Comptroller of the Currency Administration of National Banks ("OCC") to seek the approval for Islamic home finance based on the above leasing structure. The OCC had in 1997 approved the Islamic home financing based on the above leasing structure and ruled, inter alia, that the banks' risks under the Islamic leasing structure are similar to the risks on traditional mortgage loans (see OCC's Interpretive Letter #806). We hope that a similar approval would be granted in Britain.

2. Taxation

The transfer of ownership from vendor to bank at the commencement of the lease and from bank to customer at the end of the lease, may attract the payment of two sets of stamp duty. The second set would arise at the end of the term of the lease at the rate of stamp duty then applicable. The second set of stamp duty needs to be exempted because the true effect of the transfer is similar to the redemption of a conventional mortgage or charge: when the property finally vests with the customer without any encumbrance. If the second set of stamp duty is not exempted, the uncertain cost of the second stamp duty would make the Islamic home financing unattractive and cost prohibitive.

3. Legal Fees

Unlike the conventional mortgage the proposed product would require the appointment of two sets of Solicitors, thereby making the product more expensive. It is suggested that the Law Society should consider giving a general exemption as is done for the mortgage product.

For British Corporates

Britain has always been a major trading partner of the Muslim world. Trade volumes became increasing significant in some parts of the Muslim world in the 1970s following the oil driven economic boom.
The oil boom during this period brought about growth in the domestic economies of the oil producing countries. This brought opportunities for British firms to play a role in building the infrastructure of these countries. Surplus funds from the Muslim world found their way into the safe and stable environments in Britain to be managed by London-based banks.
Similarly, funds have also been channelled into direct investments. Good examples here are Kuwait Investment Office's acquisition of a 20% stake in BP stands out, the acquisition of Lotus the car manufacturers by Proton, the Malaysian car company and purchase of the Hartwell Group by a prominent trading family from Saudi Arabia.
The investment in the London property market by the investors from the Muslim world has historically been very important. Real estate analysts believe that in 1998 alone well over 20% of all such investments came from the Muslim world. In addition, a significant number of Muslim businesses in Britain are also seeking Islamically compatible finance to purchase commercial properties in Britain.
We are witnessing an increasing desire from Muslim investors that these funds be managed and corporate acquisitions be structured under Islamic financial principles. Here UK regulators can play an important role in facilitating the flows of funds and investments into Britain from the Muslim world through the introduction of "Islamic finance friendly" regulation.
UK corporates too, trading with their counterparties in the Muslim world need to be cognisant of the growth of this indigenous and ethical mode of financing and be aware of the characteristics, qualities and benefits of Islamic finance.

For British Exporters

Many of the Muslim countries throughout the world would be classified as developing markets. Consequently, cross-border funding for these countries from western financial markets may be either restricted or limited, thus hindering trade and investment flows between the UK and the Muslim world. Here Islamic financial institutions, who have a greater knowledge and understanding of these markets and consequently the risks, can play key role by providing financing in instances where western commercial financiers would be unwilling to lend.
British exporters and British export credit agencies would benefit tremendously by using this indigenous form of finance to gain access to precious cross-border lines in the 54 Islamic Development Bank Member Countries, These cross-border lines could become a tremendous source of competitive advantage for British exporters.
Today Islamic finance is a trend, which is broadening the ownership base, and creating more stakeholders. It offers a viable financial alternative that may run parallel to conventional finance. Regulators, bankers, asset managers and users of capital in Britain may capitalise on the opportunities afforded by this market and play a proactive role.
London already supports this form of finance by offering products and services through its financial institutions and through leading law firms. The regulatory authorities should come out proactively to introduce regulations which will allow these instruments to be established as an ethical alternative to other instruments which are available in the London financial markets, meeting the needs of Islamic fund providers.
This will require an understanding and appreciation of the roles which these ethical indigenous instruments play in keeping the commercial economy as close as possible to the financial economy. British exporters to the Muslim countries would be in a very favourable position if they could provide not only the exports but also export financing that meets the importers' religious requirements. HSBC is working together with the Export Credits Guarantee Department and other Export Credit Agencies in the EEC to provide Islamically compatible financing and guarantee for exports to Muslim countries. The proactive role of the ECGD is providing Islamically acceptable financing is essential to ensure that British exporters to the Muslim countries have an edge over others. This would lead to more trades between Britain and the Muslim countries, which could lead to a positive contribution to the British economy.

Conclusion

Islamic Finance has mainstream relevance for British Muslims, British Business and British Exporters. It is therefore important that relevant Government Institutions such as ECGD, FSA and DTI should pay attention to this corporate and social responsibility movement, which is becoming increasingly important for both Muslims in Britain and abroad.
Perhaps more important is the demonstration effect which such an effort may have for all of humanity.
Dr. Martin Luther King Jr. described the challenge, which we face:

"Through our scientific genius we have made the world a neighbourhood, now through our moral and spiritual genius we must make of it a brotherhood."

It is in this domain and in bringing the financial economy close to the commercial economy that Islamic Finance can make a real and lasting difference. Britain with its history and culture of trade, commence and community banking is well positioned to benefit from this growing trend of Islamic Finance.

Islamic Banking Part VI ( Status of Islamic Banking)

2009-12-26T16:53:00.001+02:00

Status of Islamic Banking

Islamic banking is no longer a novel experiment. When the concept of Islamic banking with its ethical values was propagated, financial circles the world over treated it as a utopian dream. Having lived for centuries under the ‘valueless’ capitalist economic system, they asked what ethics had to do with finance?

Besides their range of equity, trade-financing and lending operations, Islamic banks also offer a full spectrum of fee-paid retail services that do not involve interest payments, including checking accounts, spot foreign exchange transactions, fund transfers, letters of credit, travellers' checks, safe-deposit boxes, securities safekeeping investment management and advice, and other normal services of modern banking. Islamic banking because of its value-orientated ethos enables it to draw finances from both Muslims and non-Muslims alike.

Islamic banks are evolving financial and investment instruments that are not only profitable but are also ethically motivated. The ever-increasing application and innovation of the methodologies associated with derivative instruments that revolutionized the global financial industry have also led to a global financial crisis because of the excess greed for profit and the immense uncertainty and risk associated with these types of transactions. There are doubts associated with the permissibility of derivative instruments under Islamic finance generally.

Addressing issues to resolve the global financial crisis world leaders called for a set up on the basis of capitalism of entrepreneurship where banks finance economic development in the real economy, as opposed to the set up on the basis of capitalism of speculation whereby banks derive excessive profit from speculative transactions that do not make any contribution to the real economy.

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Banking Part V ( Shariah Authenticity & Religious Board)

2009-12-26T16:45:00.002+02:00

Shariah Authenticity

Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

Shari'ah Supervisory Board [Religious Board]

Islamic financial institutions must adhere to the best practices of corporate governance however they have one extra layer of supervision in the form of religious boards. The religious boards have both supervisory and consultative functions. Since the Shari’h scholars on the religious boards carry great responsibility, it is important that only high calibre scholars are appointed to the religious boards.

An Islamic financial institution is required to establish operating procedures to ensure that no form of investment or business activity is undertaken that has not been approved in advance by the religious board. The management is also required to periodically report and certify to the religious board that the actual investments and business activities undertaken by the institution conform to forms previously approved by the religious board.

Islamic financial institutions that offer products and services conforming to Islamic principles must, therefore, be governed by a religious board that act as an independent Shari’ah Supervisory Board comprising of at least three Shari’ah scholars with specialised knowledge of the Islamic laws for transacting, fiqh al mu`amalat, in addition to knowledge of modern business, finance and economics.

They are responsible primarily to give approval that banking and other financial products and services offered comply with the Shari’ah and subsequent verification that of the operations and activities of the financial institutions have complied with the Shari’ah principles (a form of post Shari’ah audit). The Shari’ah Supervisory Board is required to issue independently a certificate of Shari’ah compliance.

The day-to-day application of Shari’ah by the Shari’ah Supervisory Boards is two-fold. First, in the increasingly complex and sophisticated world of modern finance they endeavours to answer the question on whether or not proposals for new transactions or products conform to the Shari’ah. Second, they act to a large extent in an investigatory role in reviewing the operations of the financial institution to ensure that they comply with the Shari’ah.

The concept of collective decision-making, in other words, decisions made by more than one scholar, is especially important. Shari’ah Supervisory Boards function is to ensure that decisions are not unilateral, and that difficult issues of finance receive adequate consideration by a number of qualified people.

Shaikh Yusuf Talal DeLorenzo, Islamic scholar, position is that unless a financial product or service can be certified as Shari’ah compliant by a competent Shari’ah supervisory board, that product's authenticity is dubious. At that point, it will be the responsibility of the individual investor or consumer to determine on his or her own that the product complies with the principles and precepts of the Shari’ah.

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Banking Part IV ( Pricing Transactions & Ethical Investment)

2009-12-25T13:55:00.002+02:00

Pricing Transactions Linked to Interest rate Benchmark

There are continuing debates on whether the spirit of Shari`ah is being violated by the practice of "benchmarking" linked interest rate benchmark such as London Interbank Offered rate (LIBOR) plus an agreed mark-up in also pricing returns on Islamic finance transactions . At a very fundamental level, the reason for the debates is the lack of understanding to clearly discern the difference between the use of LIBOR as a benchmark for pricing and the use of non-Shari’ah compliant assets as a determinant for returns.

However, benchmarking touches upon the integrity of Islamic Finance as a whole, and the concept of Shari’ah-compliance vs Shari’ah-based approach in particular. There are practical challenges delaying a switch to participation-based structures, such as Musharakah and Mudarabah, that require financiers to participate in the underlying asset in a financing transaction.

Islam's Approach to Ethical Investment

Given that many ethical funds have similar characteristics as Islamic funds, it is important for ethical investors attracted by the appeal of Islamic principles as well as the performance of Islamic investments to understand that there are additional prohibitions that must be applied on the products offered. These restrictions which are essentially self-imposed based on belief and conviction act a moral compass; the monitoring of the prohibitions by a Religious (Shari’ah) Supervisory Board may have prevented Islamic financial institutions to deviate from a faith-based system and absorb the shocks within the conventional financial system.

The important principles for Islamic financial instruments for participation and investments that require strict adherence, while providing good returns, are:

Investments must be free of interest, speculation and gambling, all are considered as forms of exploitation.
Investments are made in permissible activities.
Investments must be separately approved by an independent Shari’ah supervisory board to ensure Shari’ah principles are strictly adhered to and deviations and wayward business practice penalized, for example in Islamic finance requires penalties to be paid to charity.

"The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service," the Vatican's official newspaper Osservatore Romano said in an article its latest March 2009 issue.

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Banking Part III ( Economics Order, Wealth & Profit-and-Loss Sharing)

2009-12-25T13:37:00.004+02:00

Islamic Economics Order

Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:

While permitting the individual the right to seek economic well-being, Islam makes a clear distinction between what is halal (lawful) and what is haram (forbidden or unlawful) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat (a tax on wealth that is distributed to the needy).
While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.
Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.

Wealth and Islam

Islam has a unique dispensation on the theme of wealth, its ownership, distribution and social relationship. Islam enjoins wealth creation not for its own sake.

The theme of Islamic dispensation of wealth is treated as a deeply moral study of self and society. The true nature of wealth in Islam requires social preferences and market exchange mechanisms that are ethicised by human consciousness of the Moral Law. Islam gives precise moral injunctions as to what are, and are not acceptable kinds of wealth. They point out how individual preferences on wealth formation ought to be utilized within the social meaning.

According to Shaikh Yusuf Talal DeLorenzo, well-known and respected Shari’ah advisor and Islamic scholar as well as also author of the three volume “Compendium of Legal Opinions on the Operations of Islamic Banks” the first English reference on the fatwa (religious ruling) issued and published by the Institute, business, in the Qur'anic sense of "profitable trade" or tijarat'un rabihah is business that brings blessings to those who conduct it. Obviously, profits are important as ends, but the means by which those profits are earned are even more important. Indeed, the reason for the emphasis in the Shari’ah on proper transacting is that Islam accords great importance to the economic welfare of society.

Profit-and-Loss Sharing

While Islam employs various practices that do not involve charging or paying interest, the Islamic financial system promotes the concept of participation in a transaction backed by real assets, utilizing the funds at risk on a profit-and- loss-sharing basis. Such participatory modes used by Islamic banks are known as Musharakah and Mudarabah. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.

The concept of profit-and-loss sharing in an enterprise, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management. The Islamic sukuk system is similar to bonds of capitalist system, but in sukuk, money is invested concrete projects and profit share is distributed to clients instead of interest earned.

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Banking Part II ( Permissibility & Interest)

2009-12-25T12:54:00.002+02:00

Rules of Permissibility

Muslims believe that all things have been provided by God, and the benefits derived from them, are essentially for man’s use, and so are permissible except what is expressly prohibited in The Qur’an or Hadith. When guidance is not clearly given in he Qur’an there are several other sources of law. For example, guidance can be sought from Fiqh, which means ‘understanding’ and is the science of jurisprudence: the science of human intelligence, debate and discussion

Prohitbition of Interest

Riba best translated today as the charging of any interest, meaning money earned on the lending out of money itself. The prohibition on paying or receiving fixed interest is based on the Islamic tenet that money is only a medium of exchange, a way of defining the value of a thing; it has no value in itself, and therefore should not be allowed to give rise to more money, via fixed interest payments, simply by being put in a bank or lent to someone else. The human effort, initiative, and risk involved in a productive venture are more important than the money used to finance it.

Money in Islam is not regarded as an asset from which it is ethically permissible to earn a direct return. Money tends to be viewed purely as a medium of exchange. Interest can leads to injustice and exploitation in society; The Qur’an (2:279) characterises it as unfair, as implied by the word zulm (oppression, exploitation, opposite of adl i.e. justice)

There is no real 'lending' in Islam since all 'lenders' obtain ownership interests in the assets that they finance, or earn a profit-share or purely fee-based remuneration. In order for an Islamic bank to earn a return on money lent, it is necessary to obtain an equity, or ownership, interest in a non-monetary asset. This requires the lender to also participate in the sharing of risk.

Individuals and the world as a whole probably know too well the burden of interest and misery and suffering that irresponsible lenders have inflicted on individuals and societies. It has become so completely institutionalised and accepted in modern economies that it is almost impossible to conceive that there are some who completely oppose it and refuse to enter into any transactions that involve interest.
Islam's prohibition of interest and usury was not unprecedented. The early Jewish and Christian traditions also forbade riba. Even the renowned Greek philosopher, Aristotle, condemned acquiring of wealth by the practice of charging interest on money.

“Very much disliked also is the practice of charging interest: and the dislike is fully justified for interest is a yield arising out of money itself, not a product of that for which money was provided. Money was intended to be a means of exchange; interest represents an increase in the money itself. Hence of all ways of getting wealth, this is the most contrary to nature." Aristotle, The Politics, tr. Sinclair, pg. 46, Penguin

“Do not charge your brother interest, whether on money or food or anything else that may earn interest.” (Deuteronomy 23:19)

“If you lend money to My people, to the poor among you, you are not to act as a creditor to him; you shall not charge him interest.” The Holy Bible (American Standard Bible)

[Jesus said], “If you have money, do not lend it at interest, but give [it] to one from whom you will not get it back.” Gospel St Thomas, V95

Other Key Prohibitions

Islam not only prohibits dealing in interest and investment in unlawful activities that Islam deems harmful to society, but also transactions involving excessive uncertainty (gharar) and all forms of gambling (maysir).

[source: Institute of Islamic banking and Insurance (IIBI)]

Islamic Banking Part I ( Definition & Principles)

2009-12-25T12:47:00.003+02:00

The Islamic Financial System

While elimination of "Riba" or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more. At the heart of Islam is a sense of cooperation, to help one another according to principles of goodness and piety (but not to cooperate in evil or malice). In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari'ah or Islamic law to the operations of banks and other financial institutions. To ensure compliance to the Shari'ah, Islamic banks use the services of religious boards comprised of Shari'ah scholars.

Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free. Among the ethical restrictions is the prohibition on alcohol and gambling and the consumption of pork. Islamic funds would never knowingly invest in companies involved in gambling, alcoholic beverages, or porcine food products

Its practitioners and clients need not be Muslim, but they must accept the ethical restrictions underscored by Islamic values.

What is Islamic Banking?

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic rules on transactions). Islamic banking activities must be practiced consistent with the Shari’ah and its practical application through the development of Islamic economics. Many of these principles upon which Islamic banking is based are commonly accepted all over the world, for centuries rather than decades. These principles are not new but arguably, their original state has been altered over the centuries.

The principle source of the Shari’ah is The Qur’an followed by the recorded sayings and actions of Prophet Muhammad (pbuh) – the Hadith. Where solutions to problems cannot be found in these two sources, rulings are made based on the consensus of a community leaned scholars, independent reasoning of an Islamic scholar and custom, so long as such rulings to not deviate from the fundamental teachings in The Qur’an.

It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.

The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisation of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and principles of Islam.

Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organizations have opted for ethical operations.

Islamic Banking Principles

The Shari’ah prohibits the payment of charges for the renting of money (riba, which in the definition of Islamic scholars covers any excess in financial dealings, usury or interest) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haram, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognized as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.

"Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)

[source: Institute of Islamic banking and Insurance (IIBI)]

How Does Bank Employee Enjoy His Free Time? Part I

2009-12-10T10:55:00.043+02:00

It's really creative and funny what a bank employee can create in his free time :)

here is some of that creations...he has nothing to play with but MONEY !!!

Enjoy!

Is it best to shop with cash, credit or debit?

2009-02-22T02:34:00.003+02:00

Life comes with many choices. Fresh or frozen? Blonde or brunette? Creamy or chunky? Republican or Democrat? Paper or plastic?

That last choice covers two completely different situations. Should you choose paper or plastic bags when shopping, and should pay for the items going in whichever type of bag you choose with paper money or a plastic card? And if you choose plastic, should you go with credit or debit? Life is nothing if not a flurry of decisions.

If you're a typical American, you have access to all three of these most commonly accepted forms of payment. But when you're jostled against throngs of other shoppers at the mall, which type is best if one of those shoppers adroitly lifts your wallet without your knowledge? And when all the shopping receipts come in, which type will take the smallest bite from your finances and mental health?

If author Tony Howlett is correct, debating the virtues of one of the three -- paper money -- will be a purely academic exercise. "Cash will die a natural death; we will willingly abandon it for more convenient financial tools," Howlett theorizes [source: Howlett]. For most consumers, this isn't such a bad thing. Plastic forms of payment offer convenience. However, a loss of cash also equals a loss of anonymity, Howlett points out. Purchases made using computerized methods of payment like credit and debit cards are easily tracked. This is good for law enforcement, but bad for criminals, for example.

Howlett, an IT professional, banking consultant and author of Open Source Security Tools, admits his theory is a bit nutty -- he lists it under "Bold Claims" in a presentation based on his book, The Death of Cash [source: Howlett]. However, the numbers support his hypothesis: There were 984 million credit and debit card accounts extant in the United States in 2006 issued by Visa and MasterCard alone [source: Woolsey and Shulz]. That said, it may be a few years before cash dies its natural death. In the meanwhile, read on to find out which is better, cash, credit or debit.

Advantages of Cash, Credit and Debit

Both credit and debit cards are advantageous because they provide proof of ownership -- your name (and sometimes photo) emblazoned right there on the front of the card. But credit cards extend this protection further. Under the Fair Credit Billing Act, the owner of a lost or stolen credit card is responsible for only up to $50 worth of fraudulent purchases. Even more, many credit cards automatically grant you an extended warranty on items you purchase using them.

Debit cards offer similar security through another U.S. law, the Electronic Fund Transfer Act. This law limits a debit card holder's fraud liability to $50 as long as he or she alerts the issuing bank of the fraud within two days of discovery. After the initial two day period, the liability for the cardholder increases to $500 [source: Bankrate]. While most retailers will demand you produce a photo ID when making a credit card purchase, you aren't bound by law to do so; only a card bearing your signature is required by credit card companies to validate the transaction. Since most banks offer debit cards with personal identification numbers (PINs) that only the cardholder knows (or should know), the card should be useless if it's stolen. So, debit cards actually have a leg up over credit cards as far as security goes.

Cash and debit cards hold another advantage over credit cards; they lack the fees associated with credit cards. Credit card companies make their money by charging interest on balances each month, which can be significant, since Americans that use credit cards carry an average of $16,635 in debt, not including home mortgages [source: U.S. News and World Report]. Cash, if withdrawn from the bank where the account is held, is issued both fee- and interest-free. Debit cards can also come without fees. Most banks offer some kind of fee-free debit card account, but beware: Banks have come to make money from the debit cards' popularity with consumers by charging overdraft fees. These fees average almost $35, and pull an annual windfall of $17.5 billion for the banking industry [source: Lorek].

Overall, debit cards tend to emerge as the clear winner among this triumvirate of payment methods. They provide the security of a credit card and the fee-free benefit of cash -- if you pay close attention to your account. Being attentive to your account can keep you from the pains of overdrawing and its associated fees, and help alert you to any fraud.

The advantages of using cash, credit or debit are largely context-specific. Depending on the type of shopper and how security-conscious you are, each form has its merits.

If you're a shopaholic who wants to become more frugal, cash is the way to go. Studies of consumer psychology suggest that people who use cash are less likely to spend it frivolously or impulsively. This is due to the "pain of paying," based on the transparency cash provides [source: APA]. When you pay for an item using cash, you literally watch your money part from you. With credit or debit cards, the transaction is less transparent and the pain of paying is put off until a later date, generally when the credit card bill arrives or the bank account is balanced. By then, however, the purchase has long since been made.

Cash's fatal flaw is that it's easily compromised. Any cash found in a wallet that's stolen is gone for good -- there are few ways your local police force can link you to lost cash. This isn't the case with debit cards and credit cards; from a security standpoint, both forms of plastic beat cash.

[source: howstuffworks]

The Differences Between Secured and Unsecured Credit Cards

2009-02-19T17:23:00.001+02:00

When most people think of credit cards, they are thinking of an unsecured credit card. An unsecured credit card is a card that is issued to you based solely on your consumer credit score and repayment ability. A secured credit card requires that you deposit funds into an account held by the credit card’s issuing bank as a guarantee of payment. Your credit limit is generally a percentage of your account balance. Most credit card offers are for unsecured credit cards, but there are many companies that deal almost exclusively with consumers that are looking for a bad credit credit card or a no credit credit card. For many of these consumers, because it may be difficult to obtain an unsecured credit card for bad credit, a secured credit card may be the only way they can rebuild a satisfactory credit score after a period of financial hardship. Be wary of secured credit card offers. Many of them seem appealing, especially when you see an ad online that offers and online credit card application and instant online credit card approval.

This type of credit card application tends to appeal to our need for instant gratification but neglects to address the reality of owning the card. Many secured credit cards have fees that are significantly higher than unsecured credit cards. These fees may include an application fee, a yearly membership fee, and some sort of maintenance fee. Additionally, any penalties that are permissible may be quite a bit higher than those for an unsecured credit card. Whenever possible, opt for the unsecured credit card so that you are more likely to get lower rates and fees and so that you will not have to tie up funds in an account sponsored by the credit card issuer. If this is not an option, be sure to find the card with the lowest credit card interest rate, few or no fees, and interest bearing security account options.

from http://www.ezinearticles.com

Credit Card Applications

2008-02-02T18:13:00.000+02:00

Before we get into shopping for a card, let's go over some important terms you'll encounter in credit-card brochures or discussions with potential lenders:
· Annual fee - A flat, yearly charge similar to a membership fee
· Many companies offer "no annual fee" cards today, and lenders who do charge annual fees are often willing to waive them to keep your business.
· Finance charge - The dollar amount you pay to use credit
· Besides interest costs, this may include other charges such as cash-advance fees, which are charged against your card when you borrow cash from the lender. (You generally pay higher interest on cash advances than on purchases -- check your latest bill to find out what you're paying for this service!)
· Grace period - A time period, usually about 25 days, during which you can pay your credit-card bill without paying a finance charge
· Under almost all credit-card plans, the grace period only applies if you pay your balance in full each month. It does not apply if you carry a balance forward. Also, the grace period does not apply to cash advances.
· Annual percentage rate (APR) - The yearly percentage rate of the finance charge
· Interest rates on credit-card plans change over time. Some of these adjustments are tied to changes in other interest rates, such as the prime rate or the Treasury Bill rate, and are called variable-rate plans. Others are not explicitly tied to changes in other interest rates and are called fixed-rate plans.
· Fixed rate - A fixed annual percentage rate of the finance charge
· Variable rate - Prime rate (which varies) plus an added percentage (For example, your rate may be PR + 3.9 percent.)
· Introductory rate - A temporary, lower APR that usually lasts for about six months before converting to the normal fixed or variable rate (This is a hot topic -- more about it later.)
Experts say that if you're smart, you'll do the same kind of comparison shopping for a credit card that you do when you're looking for a mortgage or a car loan. This is a good idea because the choices you make can save you money. The process is not a simple one -- here are some tips that should help you get started:
1. Do some research - There are plenty of places, both online and offline, where you can read about credit-card offerings and even get credit-card ratings, but since rates and plans change so often, it's a good idea to call the institutions you're interested in to confirm the information and to see if there are other plans that might work for you.
A reliable and non-commercial resource is the Federal Reserve Board. Also, the non-profit consumer credit organization U.S. Citizens for Fair Credit Card Terms offers credit-card ratings from its research (and so do a lot of commercial organizations -- many of whom are also credit-card issuers).
2. Make a list - Make a list of credit-card features that fit your financial needs and rank the features according to how you plan to use the card and pay your monthly bill.
3. Review the plans - Review all of the information you've gathered on different plans. Pay special attention to the APR - - you want a low rate, but not necessarily the lowest. This is because, depending on your lifestyle and payment habits, you might benefit more from a card that offers cash rebates, discounts or frequent-flier miles.
4. Check out credit unions - Look into the possibility of joining a credit union. Credit unions are non-profit, and they have lower overhead so they can charge lower interest rates. Credit unions are newer to the credit industry so they are eager to generate credit-card loans. However, you'll probably be required to open a share account or savings account to join.
Credit unions typically are limited to a particular employer and its employees, but that's changing. Due to industry consolidations, credit unions are rapidly expanding their fields of membership. To find out which credit union you may be eligible to join, contact the Credit Union National Association (CUNA).
5. Compare plans - If you already have a credit card, be sure that you're making a good move before you swap cards. If you are a current cardholder and have a good credit rating, see if the institution that issued your card will lower your current rate. Don't be afraid to negotiate!
These are steps to take when deciding on a credit card. But your actual breadth of options depends in great part on your credit history.

Credit Card Safety

2008-02-02T18:06:00.000+02:00

Although the numbers are increasing, consumers are still not using their credit cards on the Internet nearly as much as e-tailers (electronic retailers) would like. That's why many cyber-merchants continue to offer a toll-free order number so that shoppers have the choice of calling their order in. Cyber-shopping may be convenient -- and some people do all of their shopping online -- but credit-card fraud is always a threat, both on the Internet and out in the real world. Hackers have found ways to steal credit-card numbers from Web sites.
To illustrate the importance of tight security, a network TV reporter, tipped off about loose security on an Internet Web-hosting site, was able to gain access to about 1,500 customer records, which included everything from credit-card numbers and payment records to comments about particular customers.
These are the kinds of stories that deflate consumer confidence. Some e-tailers blame consumer reluctance on the inability in cyberspace to make the kind of personal contact that a shopper gets when he looks into the eyes of a store merchant. Experts say that this kind of comfort level will be boosted when online payment methods and security measures are standardized -- much as they are in the retail and mail-order industries.
While Internet companies have taken responsibility for security breaches and resulting losses to credit-card users, there remains the growing problem of identity thieves who use stolen credit cards to make purchases on the Internet. And while unfair or fraudulent practices by credit-card companies are not commonplace, they do happen. The good news is that consumers are protected by law -- in case of credit-card fraud online or off, you are only liable for a maximum of $50 of the amount stolen.
And fortunately, the Federal Trade Commission (FTC) and the media are watching closely. In 1994, the FTC ordered TransUnion credit-reporting bureau to stop selling "sensitive" consumer data -- data on 160 million Americans -- to junk-mail producers. The FTC charged that TransUnion violated the Fair Credit Reporting Act by selling consumer information to target marketers who lack any of the allowable purposes listed under the act. TransUnion denies that it sold information that could affect customers' appealed the FTC's ruling, but lost.
If the mailing-list issue bothers you -- and it bothers most of us -- pay attention when you're completing that credit-card application. Some application forms now provide a box that you can check to allow or disallow the selling of your information to mailing lists. You can also protect yourself by taking your name off the credit bureaus' mailing lists.
One way to do this is to visit The Consumer Credit Reporting Industry Opt-Out Prescreen Web site. On this site you can fill out a form and opt-out of recieving pre-approved credit or insurance offers in the mail. You can also call 888-5-OPT-OUT (888-567-8688). Alternatively, you can write to the major credit card bureaus and request that your named be removed from their mailing lists.
When you write to these companies, include your complete name, name variations and mailing address, Social Security number and signature and state clearly that you want your name removed from their mailing lists. You can write any of these major reporting bure aus and they will contact the other major bureaus with your request:
· Experian Consumer Opt Out, 701 Experian Parkway, Allen, Texas, 75013
· Equifax Inc. Options, P.O. Box 740123, Atlanta, Georgia, 30374-0123
· Trans Union Marketing List Opt Out, P.O. Box 97328, Jackson, MS 39288-7328
The Direct Marketing Association (DMA) tracks consumers who prefer not to receive solicitations by mail or phone. Check their Consumer Assistance site for more information. There are a lot of simple steps you can take to protect yourself and your credit card -- starting with making sure you sign it as soon as it arrives in the mail.
These tips are important and universal:
· Sign your card -- as soon as you receive it! (Obviously, this is only as effective as the clerk who's checking it.)
· When you use your card at an ATM, enter your PIN in such a way that no one can easily memorize your keystrokes.
· Don't leave your receipt behind at the ATM.
Your PIN and account number from a discarded receipt could make you vulnerable to credit-card fraud. Also, don't throw out your credit-card statement, receipts or carbons without first shredding them!
· Never give your credit-card number over the telephone unless you initiated the call.Even when you place the call to a legitimate merchant (such as a mail-order company), never give your card number out over a cordless phone. Radio scanners that eavesdrop on these conversations are available for a few hundred dollars at any electronics store, and your voice can be received by one from a far greater distance than the maximum useful range of your cordless phone. One common scam is when someone calls you "back" right after you place an order, claims to be from the merchant and tells you that there was a problem with your card number -- would you mind giving it to them again? The best thing to do is ask for a contact name and call the merchant back at the number you used originally.
· Ignore any credit-card offer that requires you to spend money up-front or fails to disclose the identity of the card issuer.
· Make certain you get your card back after you make a purchase (one habit to observe is to leave your wallet open in your hand until you have the card back). Also, make sure that you personally rip up any voided or cancelled sales slips.
· Always keep a list of your credit cards, credit-card numbers and toll-free numbers in case your card is stolen or lost.
· Check your monthly statement to make certain all charges are your own, and immediately notify the card issuer of any errors or unauthorized charges. (More on this later!)
Now, you get a credit-card application and there's all this small print. Want to know what it's really saying?

Smart Cards

2008-02-02T18:01:00.000+02:00

The "smart" credit card is an innovative application that involves all aspects of cryptography (secret codes), not just the authentication we described in the last section. A smart card has a microprocessor built into the card itself. Cryptography is essential to the functioning of these cards in several ways:
· The user must corroborate his identity to the card each time a transaction is made, in much the same way that a PIN is used with an ATM.
· The card and the card reader execute a sequence of encrypted sign/countersign-like exchanges to verify that each is dealing with a legitimate counterpart.
· Once this has been established, the transaction itself is carried out in encrypted form to prevent anyone, including the cardholder or the merchant whose card reader is involved, from "eavesdropping" on the exchange and later impersonating either party to defraud the system.
This elaborate protocol is conducted in such a way that it is invisible to the user, except for the necessity of entering a PIN to begin the transaction.
Smart cards first saw general use in France in 1984. They are now hot commodities that are expected to replace the simple plastic cards most of us use now. Visa and MasterCard are leading the way in the United States with their smart card technologies.
The chips in these cards are capable of many kinds of transactions. For example, you could make purchases from your credit account, debit account or from a stored account value that's reloadable. The enhanced memory and processing capacity of the smart card is many times that of traditional magnetic-stripe cards and can accommodate several different applications on a single card. It can also hold identification information, keep track of your participation in an affinity (loyalty) program or provide access to your office. This means no more shuffling through cards in your wallet to find the right one -- the smart card will be the only one you need!
Experts say that internationally accepted smart cards will be increasingly available over the next several years. Many parts of the world already use them, but their reach is limited. The smart card will eventually be available to anyone who wants one, but for now, it's available mostly to those participating in special programs.

The Stripe on a Credit Card

2008-02-02T17:37:00.000+02:00

The stripe on the back of a credit card is a magnetic stripe, often called a magstripe. The magstripe is made up of tiny iron-based magnetic particles in a plastic-like film. Each particle is really a tiny bar magnet about 20-millionths of an inch long.

Illustration by Rosaleah Rautert

Your card has a magstripe on the back and a place for your all-important signature.

The magstripe can be "written" because the tiny bar magnets can be magnetized in either a north or south pole direction. The magstripe on the back of the card is very similar to a piece of cassette tape (see How Cassette Tapes Work for details).
A magstripe reader (you may have seen one hooked to someone's PC at a bazaar or fair) can understand the information on the three-track stripe. If the ATM isn't accepting your card, your problem is probably either:

· A dirty or scratched magstripe
· An erased magstripe (The most common causes for erased magstripes are exposure to magnets, like the small ones used to hold notes and pictures on the refrigerator, and exposure to a store's electronic article surveillance (EAS) tag demagnetizer.)
There are three tracks on the magstripe. Each track is about one-tenth of an inch wide. The ISO/IEC standard 7811, which is used by banks, specifies:
· Track one is 210 bits per inch (bpi), and holds 79 6-bit plus parity bit read-only characters.
· Track two is 75 bpi, and holds 40 4-bit plus parity bit characters.
· Track three is 210 bpi, and holds 107 4-bit plus parity bit characters.
Your credit card typically uses only tracks one and two. Track three is a read/write track (which includes an encrypted PIN, country code, currency units and amount authorized), but its usage is not standardized among banks.
The information on track one is contained in two formats: A, which is reserved for proprietary use of the card issuer, and B, which includes the following:
· Start sentinel - one character
· Format code="B" - one character (alpha only)
· Primary account number - up to 19 characters
· Separator - one character
· Country code - three characters
· Name - two to 26 characters
· Separator - one character
· Expiration date or separator - four characters or one character
· Discretionary data - enough characters to fill out maximum record length (79 characters total)
· End sentinel - one character
· Longitudinal redundancy check (LRC) - one character
LRC is a form of computed check character.
The format for track two, developed by the banking industry, is as follows:
· Start sentinel - one character
· Primary account number - up to 19 characters
· Separator - one character
· Country code - three characters
· Expiration date or separator - four characters or one character
· Discretionary data - enough characters to fill out maximum record length (40 characters total)
· LRC - one character
For mo re information on track format, see ISO Magnetic Stripe Card Standards.
There are three basic methods for determining whether your credit card will pay for what you're charging:
· Merchants with few transactions each month do voice authentication using a touch-tone phone.
· Electronic data capture (EDC) magstripe-card swipe terminals are becoming more common -- so is swiping your own card at the checkout.
· Virtual terminals on the Internet
This is how it works: After you or the cashier swipes your credit card through a reader, the EDC software at the point-of-sale (POS) terminal dials a stored telephone number (using a modem) to call an acquirer. An acquirer is an organization that collects credit-authentication requests from merchants and provides the merchants with a payment guarantee.
When the acquirer company gets the credit-card authentication request, it checks the transaction for validity and the record on the magstripe for:
· Merchant ID
· Valid card number
· Expiration date
· Credit-card limit
· Card usage

Single dial-up transactions are processed at 1,200 to 2,400 bits per second (bps), while direct Internet attachment uses much higher speeds via this protocol. In this system, the cardholder enters a personal identification number (PIN) using a keypad.
The PIN is not on the card -- it is encrypted (hidden in code) in a database. (For example, before you get cash from an ATM, the ATM encrypts the PIN and sends it to the database to see if there is a match.) The PIN can be either in the bank's computers in an encrypted form (as a cipher) or encrypted on the card itself. The transformation used in this type of cryptography is called one-way. This means that it's easy to compute a cipher given the bank's key and the customer's PIN, but not computationally feasible to obtain the plain-text PIN from the cipher, even if the key is known. This feature was designed to protect the cardholder from being impersonated by someone who has access to the bank's computer files.
Likewise, the communications between the ATM and the bank's central computer are encrypted to prevent would-be thieves from tapping into the phone lines, recording the signals sent to the ATM to authorize the dispensing of cash and then feeding the same signals to the ATM to trick it into unauthorized dispensing of cash.
If this isn't enough protection to ease your mind, there are now cards that utilize even more security measures than your conventional credit card: Smart Cards.

What Credit Card Numbers Mean

2008-02-02T17:27:00.000+02:00

Although phone companies, gas companies and department stores have their own numbering systems, ANSI Standard X4.13-1983 is the system used by most national credit-card systems.

Illustration by Rosaleah Rautert

The front of your credit card has a lot of numbers -- here's an example of what they might mean.

Here are what some of the numbers stand for:

· The first digit in your credit-card number signifies the system:
· 3 - travel/entertainment cards (such as American Express and Diners Club)
· 4 - Visa
· 5 - MasterCard
· 6 - Discover Card
· The structure of the card number varies by system. For example, American Express card numbers start with 37; Carte Blanche and Diners Club with 38.
· American Express - Digits three and four are type and currency, digits five through 11 are the account number, digits 12 through 14 are the card number within the account and digit 15 is a check digit.
· Visa - Digits two through six are the bank number, digits seven through 12 or seven through 15 are the account number and digit 13 or 16 is a check digit.
· MasterCard - Digits two and three, two through four, two through five or two through six are the bank number (depending on whether digit two is a 1, 2, 3 or other). The digits after the bank number up through digit 15 are the account number, and digit 16 is a check digit.

Introduction to How Credit Cards Work

2008-02-02T17:23:00.000+02:00

Have you ever stood behind someone in line at the store and watched him shuffle through a stack of what must be at least 10 credit cards? Consumers with this many cards are still in the minority, but experts say that the majority of U.S. citizens have at least one credit card -- and usually two or three. It's true that credit cards have become important sources of identification -- if you want to rent a car, for example, you really need a major credit card. And used wisely, a credit card can provide convenience and allow you to make purchases with nearly a month to pay for them before finance charges kick in.
That sounds good, in theory. But in reality, many consumers are unable to take advantage of these benefits because they carry a balance on their credit card from month to month, paying finance charges that can go up to a whopping 23 percent. Many find it hard to resist using the old "plastic" for impulse purchases or buying things they really can't afford. The numbers are striking: In 1999, American consumers charged about $1.2 trillion on their general-purpose credit cards.
In this article we'll look at the credit card -- how it works both financially and technically -- and we'll offer tips on how to shop for a credit card. (Experts say this should be a project on the scale of shopping for a car loan or mortgage!) We'll also describe the different credit-card plans available, talk about your credit history and how that might affect your card options, and discuss how to avoid credit-card fraud -- both online and in the real world.
Let's start at the beginning. A credit card is a thin plastic card, usually 3-1/8 inches by 2-1/8 inches in size, that contains identification information such as a signature or picture, and authorizes the person named on it to charge purchases or services to his account -- charges for which he will be billed periodically. Today, the information on the card is read by automated teller machines (ATMs), store readers, and bank and Internet computers.
According to Encyclopedia Britannica, the use of credit cards originated in the United States during the 1920s, when individual companies, such as hotel chains and oil companies, began issuing them to customers for purchases made at those businesses. This use increased significantly after World War II.
The first universal credit card -- one that could be used at a variety of stores and businesses -- was introduced by Diners Club, Inc., in 1950. With this system, the credit-card company charged cardholders an annual fee and billed them on a monthly or yearly basis. Another major universal card -- "Don't leave home without it!" -- was established in 1958 by the American Express company.
Later came the bank credit-card system. Under this plan, the bank credits the account of the merchant as sales slips are received (this means merchants are paid quickly -- something they love!) and assembles charges to be billed to the cardholder at the end of the billing period. The cardholder, in turn, pays the bank either the entire balance or in monthly installments with interest (sometimes called carrying charges).
The first national bank plan was BankAmericard, which was started on a statewide basis in 1959 by the Bank of America in California. This system was licensed in other states starting in 1966, and was renamed Visa in 1976.
Other major bank cards followed, including MasterCard, formerly Master Charge. In order to offer expanded services, such as meals and lodging, many smaller banks that earlier offered credit cards on a local or regional basis formed relationships with large national or international banks

Robotic ..... I Love this field

2008-01-27T06:26:00.002+02:00

"How old are you?" she wanted to know.
"Thirty-two," I said.
"Then you don't remember a world without robots. To you, a robot is a robot. Gears and metal; electricity and positrons. Mind and iron! Human-made! If necessary, human-destroyed! But you haven't worked with them, so you don't know them. They're a cleaner better breed than we are."

-from I, Robot by Isaac Asimov

Robot, which is derived from a Czech word meaning "menial labor," got its modern meaning from a 1920 play, R.U.R. (Rossum's Universal Robots), by Czech playwright Karel Capek (1890-1938). The robots in Capek's play develop emotions and overthrow their human masters. A sinister "power struggle" with robots has long been a popular theme in science fiction --- for a change of pace, try Isaac Asimov's "I Robot" stories in which he consciously strove to depict robots as a benefit to society.
Today, robots are used in many ways, from lawn mowing to auto manufacturing. Scientists see practical uses for robots in performing socially undesirable, hazardous or even "impossible" tasks --- trash collection, toxic waste clean-up, desert and space exploration, and more. AI researchers are also interested in robots as a way to understand human (and not just human) intelligence in its primary function -- interacting with the real world.

Good Places to Start
Robotics. An In Depth report from CBC.ca News (July 2007). Features include:
What is a robot? No simple definition, experts say (July 16, 2007).
Timeline: Evolving Robots - from fantasy to fact.
Photo Gallery: Robots - from fiction to fact.
Warning! Robots ahead- Are we ready to trust autonomous machines in our daily lives? By Paul Jay (July 16, 2007).
Dream machines - Surveying pop culture’s robotic fixation. By Martin Morrow (July 16, 2007).
Starter bots - Are kids' home-built robots laying the foundation for inspired inventions? By Denise Deveau (July 19, 2007).
A Robot in Every Home - The leader of the PC revolution predicts that the next hot field will be robotics. By Bill Gates. Scientific American (January 2007). "[T]he emergence of the robotics industry, which is developing in much the same way that the computer business did 30 years ago. ... Meanwhile some of the world's best minds are trying to solve the toughest problems of robotics, such as visual recognition, navigation and machine learning. And they are succeeding. ... I can envision a future in which robotic devices will become a nearly ubiquitous part of our day-to-day lives. I believe that technologies such as distributed computing, voice and visual recognition, and wireless broadband connectivity will open the door to a new generation of autonomous devices that enable computers to perform tasks in the physical world on our behalf. We may be on the verge of a new era, when the PC will get up off the desktop and allow us to see, hear, touch and manipulate objects in places where we are not physically present. ... Because the new machines will be so specialized and ubiquitous--and look so little like the two-legged automatons of science fiction--we probably will not even call them robots."
Robot Pals. Scientific American Frontiers (April 13, 2005). Alan Alda [host]: "The problem with most robots is that they tend to be, well, robotic. They know nothing they aren't programmed to know, and can do nothing they aren't programmed to do. But for many applications where robots could be useful, they need to be more like humans, able to respond as a cooperative partner rather than a mindless machine. In this program, we'll meet some robots that are learning to figure out for themselves what their human companions have in mind."

Speculation vs investment

2008-01-27T03:59:00.001+02:00

It is very important that the individual wanting to trade foreign exchange be aware of the very marked difference between speculation and investment. Forex trading is by nature a speculative occupation. Foreign exchange markets are amongst the most volatile markets in the world. When traded on a margined basis they effectively become the most volatile in the world. Day trading in foreign exchange can be extremely profitable and high-risk profile traders can generate huge percentage returns even overnight. Day trading is however a mentally and psychologically challenging activity and is by no means meant for everyone. Day trading is essentially speculation and day traders essentially only do that: day trading. Most people who trade foreign exchange are not professional day traders however.Often the contractors of foreign exchange brokerage services are professionals in some capacity or other. These people do not day trade but take the occasional position from time to time. This is also speculation and should not be confused with making an investment.The conclusion here is that the nature of foreign exchange trading not lend itself as much to investment as it does to speculation and hedging (hedging may be performed in forward instruments). It is possible in a sense to make an investment in foreign exchange over a long-term period but this necessitates a large account value and low leveraging.

Main forex markets

2008-01-27T03:58:00.000+02:00

Foreign exchange is traded essentially in two distinctive ways. Over an organized exchange and 'over the counter'. Exchange traded foreign exchange represents a very small portion of the total foreign exchange market the great majority of foreign exchange deals being traded between banks and other market participants 'over the counter'.1. Exchange traded currenciesIn the case of an organized exchange like the Chicago Mercantile exchange (CME) in the US, standardized currency contract sizes that represent a certain monetary value are traded in the International money market (IMM). A central clearing house organizes matching of transactions between counter-parties. There are various disadvantages to trading currency futures as outlined in the chapter Advantages of trading FX.2. Forex marketIn comparison the over the counter market is traded around the world by a multitude of participants and price quality, reputation and trading conditions determine who a participant wishes to trade with. It is probably the most competitive market in the world and brokers like ACM must insure they live up to the highest standards of service and be compliant with market standards and practices if they want to acquire new customers and retain their existing ones. In 1998 a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about USD 1.49 trillion per day. In comparison, currency futures turnover was estimated at USD 12 billion.Among the various financial centers around the world, the largest amount of foreign exchange trading takes place in the United Kingdom, even though that nation's currency, the British pound is less widely traded in the market than several others. As shown in the graph underneath, the United Kingdom accounts for about 32 percent of the global total; the United States ranks a distant second with about 18 percent, and Japan is third with 8 percent.

Advantages of trading forex

2008-01-27T03:57:00.000+02:00

Although the forex market is by far the largest and most liquid in the world, day traders have up to now focused on seeking profits in mainly stock and futures markets. This is mainly due to the restrictive nature of bank-offered forex trading services.Advanced Currency Markets (ACM) offers both online and traditional phone forex trading services to the small investor with minimum account opening values starting at 5000 USD.There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. Below are listed those main advantages.1. Bid/Ask Spread ratesSpread rates have tightened dramatically in the last years. Most online forex brokers offer a spread of 5 pips on EURUSD which is the most widely traded and liquid currency pair. ACM offers a 3 pip spread on EURUSD. In stock trading, only liquid stocks offer tight spreads. Those spreads often represent on average between 0.04% and 0.06% of the value of the stock. In comparison ACM offers a 3 pip spread on all major currencies, this equates to approximately between 0.02% and 0.03% on the underlying dollar value.Exact percentages at current rates (May 2002)EURUSD 3 pips 0.03%GBPUSD 3 pips 0.03%USDJPY 3 pips 0.023%USDCHF 3 pips 0.018%In the futures market spreads can vary anywhere between 5 and 9 pips and can become even larger under illiquid market conditions (which tends to happen substantially more often in futures currencies).2. CommissionsACM offers foreign exchange trading commission free. This is in sharp contrast to (once again) what stock and futures brokers offer. A stock trade can cost anywhere between USD 5 and 30 per trade with online brokers and typically up to USD 150 with full service brokers. Futures brokers can charge commissions anywhere between USD 10 and 30 on a round turn basis.3. Margins requirementsACM offers a foreign exchange trading with a 1% margin. In layman's terms that means a trader can control a position of a value of USD 1'000'000 with a mere USD 10'000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.4. 24 hour marketForeign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.5. No Limit up / limit downFutures markets contain certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating existing positions if they so desire. This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway, the following day the futures market may undergo what is called a 'gap' or in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.6. Sell before you buyEquity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading when you're selling one currency, you're necessarily buying another.