As I mentioned, the reason I began researching islamic finance a few years ago was for the simple reason In wanted to open my opportunities among 1/4 of the world’s population. In my research I found the Christianity also forbids usury, what we commonly call interest today. Yes, the ban is so widely ignored that the topic does not even show up in the West. In Islam, the debate is fully engaged.
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There is a reason religion makes the ban, and that is usury does damage. The flip side is avoiding usury promotes the good. I think that needs to be demonstrated, hence the course studying the topic.
Now, with what little I really know about Shariah finance, I managed to put together my first “shariah compliant “ deal. Many small businesses, even well -established ones, are struggling.
I am consulting with a home furnishings business whose product is very high end. In their 75 plus year history they never extended a lease option, since their wealthy customers have always simply paid cash for this product.
Now the average price point is $4000. This younger generation is consumeristic, not materialistic. They do not think in terms of a lifelong use of a fine home furnishing, with a view to passing it on to another generation. For them they may want a $10,000 item for their home today, they want it now and do not want it for a long term. Therefore, a lease makes sense for this emerging market.
So, the 3rd generation owners of this business are working up a lease facility to offer their high end product to this particular market. And as you know, a western lease is unacceptable in Shariah law. Given that the Seattle area, where I live, has many young wealthy muslims, I proposed the following parallel lease program, the ijara. To wit:
As part of the leasing program, you should have a Shariah-compliant program to make news, enhance the image and grow the biz among Moslems.
Elements:
1. Think essentially rental, not lease, with some twists. A fixed term is set.
2. If loss occurs while on lease, negligence is lessee problem, act of God is lessor problem. In any event:
a. lease payments stop
b. loss is YOUR BUSINESS not lessees,
i so insurance is at lessors expense, not lessee
ii to maintain Shariah compliant, insurance must be what is called takaful.***
3. lease payments only start upon placement of the item.
4. Lessor must own the item, since in essence lessee is just renting it.
5. There can be a buyout at the end, but it must not be conditional (two contracts in one is forbidden). The buyout price must be market value, no discount or premium.
6. There can be no late fees, or such, just repo on noncompliance.
7. The profits taken must be for rent, not in interest. There can be no interest.
8. The rug must have residual value after the term of the lease.
9. The rental payments are fixed, they cannot be changed (say if interest rates go up).
***Takaful: a mutual aid society, for profit. Like a co-op, profits a distributed to members. Lessor could buy this insurance as a member of a takaful group, and pass the fee on to the lessee.
To this the young owner replied, no, too complicated.
The next customer to enter his business was wearing a hijab. She took notes with her iPhone and said she’d be back with her husband. That evening he saw Costco offers whole halal lamb, $3.19 per pound. Hmmmmmm....
He has agreed to offer Shariah compliant leasing. So now I need to sit with some Moslem finance people in Seattle and work out the details. If the experiment in introducing leasing where there was once none proves profitable, and the Ijara variant proves profitable as well, then would not every small business in USA desire to offer a lease, a shariah-compliant version?
Anyway, so many opportunities, so little time.
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