The Abrahamic faiths, Christianity, Judaism and Islam, prohibit
collecting interest on money loaned. Interest is the excess amount of
money paid (or paid in kind) on the loaned principal.
This is
considered exploitation. Some Islamic jurists, however, make a
difference between “Interest” and “Riba” (usury).

The main source of profit for the banks is from the interest they
charge and from other ancillary services. The bank relies on their
client to pay back the borrowed money with interest. As a
precautionary measure the bank obtains collateral against the loan.
The primary interest of the bank is to make a profit from the
interest and not from reclaiming collateral.

The borrower believes that by leveraging the commodity/collateral he
will make more money than interest paid to the bank. For example: If
you buy a $100,000 house with a 20% downpayment, and sell the house
after 2 years for $110,000, your profit is 50%. That is, on your
initial downpayment of $20,000. The interest you paid on the borrowed
money was the rent you would have paid if you had lived elsewhere.
The transaction occurs on mutual confidence. The bank being confident
of his client’s ability to make interest and principal payments on
regular basis. The client being confident of making more money on his
product against which he has borrowed money.

Note, the payment of interest from one party to another is unrelated
to the value of the house. You may put down 10% (instead of 20%) in
order to make more profit and the bank will be willing to lend you
more in the hope of receiving more interest. These type of
transactions ultimately create fear, greed and corruption.

In Islamic financing, the purchaser of the house and the “lender”
both become partners in the equity of the house in proportions to
their contributions say, 20% and 80% as in the above example. Here
the “Islamic banker” either rents him the house till the price is
paid off or sells him the house outright with an agreed-upon long
term payment contract.

Can you see the difference in both systems? In the present banking
system one party gains at the expense of the other withoutdue regard
to the price paid for the home. In Islamic finance, the arrangement
is based on equity participation, called murabaha. The focus in this
type of financing is the individual, the product and the society.
Islam has no objection in creating wealth, but must be based on
partnership and fairness. The Islamic Bank providing the equity to
finance the house will share in the loss as well as in the profit as
earlier agreed upon when the product is sold. The whole society
ultimately benefits from such transactions.

The major premise of the present “free market” banking system is to
loan money on interest to any individual able to repay principal and
interest. This is irrespective of whether he makes profit or loss,
and irrespective of whether society is a beneficiary or not. Profit
is the ultimate motive and the individual is the focus rather than
goods or the society. The driving force being profit, the loaner and
loaned has to create a mutual confidence, and once it takes root the
fear, greed and corruption takes off–resulting in the current debacle
of major institutions like Merrill Lynch, Lehman, Fannie Mae, Freddie
Mac, Bear Stearns, WaMu, AIG……and others yet to follow. It seems the
trend will continue in to next year indicates we as a nation are in
serious financial trouble.

In the case of businesses that require capital or that need venture
capital, the Islamic system providing finances is called mudarabha.
Here the bank or the individual provides the financing and the person
receiving the fund provides his entrepreneurial skills. Profit or
loss from the business is shared on an agreed basis.

Arrangements regarding leasing cars are called ijara. This system is
more or less same as the Western banking system and with an option to
buy the leased car is called Ijara Wa Iqtiana. The recent development
of “Bonds” transaction, called suku–based on equity participation–is
gaining popularity in some Middle East countries. As we can see the
process involved requires socially responsible investing in worthy
causes and especially that would benefit the society.

The failures of these major financial institutions have raised a big
question of overhauling of the entire system. The present question
is “what is next” rather than “Who is next?”

“It’s the beginning of the end of the era of infatuation with the
free market,” said Steve Fraser, author of Wall Street: America’s
Dream Palace, and a historian. “It’s the end of the era where Wall
Street carries high degrees of power and prestige. And it’s the end
of the era of conspicuous displays of wealth. We are entering a new
chapter in our history.”

Yet the fears are much more potent. The bailout of $700 billion by
the Congress means personal-debt-ridden Americans will further
struggle under the burden of this added debt. They will be squeezed
more. With personal debt compounding, it will lead to less consumer
spending and even lower growth resulting in to perhaps more prolonged
and deeper recession.

The decline in confidence in the dollar may lead to a run on the
dollar and diversification out of the dollar. This will further
jeopardize the already-devastated US economy; and even the world
economy.

What is the alternative? Islamic finances started coming on its own
in 1970’s and it has established itself as a distinct discipline in
the USA, Europe, and other parts of the world. There are more than
200 Islamic financial institutions worldwide. Notable in USA
are “LARIBA” and “GUIDANCE” that cater for residential homes.

Many Western Banks and investment firms in USA, including Chase
Manhattan, Goldman Sachs, Wellington Global Administrator, and ABC
investment Services Co. have added Islamic finance divisions. The
amount of wealth under Islamic finance sector, the halal banking
system, is said to be over $500 billion–that is, roughly the size of
Wells Fargo Bank, America’s fourth largest bank. And Hussain A.
Hassan, of Deutsche Bank, predicts that Islamic finance will be the
world’s fastest growing banking sector for years, based on what he
calls a modest estimate of 20% annual increase in deposits.

Frank Gaffney wrote an Op Ed in The Washington Times dated September
16, 2008, under the heading ” Wall Street, What Next?” He
says, “Tragically, in the process of leaping out of the scalding
subprime frying pan, Wall Street is heading directly in to a fire
that promises, if anything, to be more devastating than the present
disaster. Incredibly, it bears all the hallmarks of subprime with
respect to a lack of transparency, a systematic failure to disclose
and an utter absence of due diligence, good governance and
accountability. The next “what” is called Sharia-Compliant Finance
(CSF)”
Source: http://groups.yahoo.com/group/wvns/message/9696