The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.
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Since most bank accounts, Mutual Funds, and other financial instrumentsoperate under non-Islamic Financial systems, they have some income frominterest despite the invetor (or the fund managers) being keen on notto get any interest.
The reason for interest creeping all over the place is that financialinstitutions will give interest on cash balances, often mandated bylocal law. A Mutual Fund will keep up to 15% of holdings in the formof cash, so as to respond to people requesting liquidation of theirshare in the fund.
Although Islamic Banking, Finance and Investment has been rising steadilyin the second half of the twentieth century, there has been some setbacksand pitfalls, that every Muslim should be aware of.
Whether you are an individual looking to invest in an Islamically-Correct®way or an enterpreneur willing to provide Muslims with an investment opportunity, you have to watch for several things.
The internet has, and will continue to, revolutionize many aspects of oursociety, business and life. One area that the internet has excelled in is financial information and services.
Think about it for a while:
- Information on stocks, quotes, corporate news, mutual funds, graphs, and more are now freely available, and in amazingly high quality on thousands of web sites!! Muslims can (and do) make use of the above information, but it is not customized to the needs of, nor targeted to, Muslims.
- Tens of brokers have opened shop on the web to a global audience (E*Trade, Datek, ...etc.), and many Muslims use them to buy and sell stocks. However, many give interest on cash balances.
- Hundreds of institutions have internet banking (many of them offer their products for worldwide customers such as Security First Network Bank, NetBank, ...etc.), and many Muslims use them. However the question of interest and alternative modes of financing is not addressed.
- Hundreds of lenders offer house loans (mortgage) to the public, including Muslims, but none offer products and services that cater for their needs.
I guess I could give more examples for other areas, such as insurance,business financing, venture capital, leasing, and more, but you getthe general picture.
Now, it is time for credible Muslim financiers to get their act togetherand offer equivalent products and services to the 1.2 billion Muslimsworldwide using the internet as the global distribution channel.
In today's internet enabled market, there is no reason to go for the so calledBig Name "Full Service Brokers". These have been labelled as "Full Price Brokers" and justifiably so, since they tout their "research" and "advice" and make those services justify the high fees and commissions they charge per trade.
These big names include Paine Webber, Merrill Lynch, Charles Schwab, Prudential, Salomon Smith Barney and many more.
So, Muslims are against interest and this leaves a bank Savings Account out of the question as a vehicle for regularly saving a small monthly amount. This is also the "conventional" way to teach kids the basics of investment, and give them a motive to save rather than spend, and watch the money grow because of bank interest.
On the other hand, not everyone can afford the 2,000$ required to start a brokerage account, and the 10-20$ a trade fee is too high if I only want to save 50-100$ per month? Is there a way?
Commercial Insurance has been deemed unacceptable under IslamicSharia law by many scholars. This includes property insurance (house,car), life insurance, and health insurance.
However, many scholars have allowed car and home insurance wheneverthere is no Islamically accepted alternative available, and more sowhen the local law requires one to be insured.
Here are some Fatwas on the ruling on Insurance under Islamic Law: