Islam & Economy

The surplus money that you have should be invested wisely in shares to reap the rewards.


Why should you invest?

Investing means committing funds for financial gains in the future. It is extremely important to save regularly and invest wisely as the short time span in which we are able to earn money needs to provide for our future so that we can achieve our financial goals or retire peacefully. But inflation destroys the value of what we save. A sum of Rs. 10,000.00 saved this year will not have the same purchasing power ten years down the line. Hence we need to preserve the purchasing power of what we save. The only way to hedge inflation in an Islamic manner is to invest in equity shares, gold or real estate and to earn returns from these assets that compensate for the decline in our purchasing power.


Why invest in shares?

Investing in equity shares is like owning part of a business. A profitable business keeps ploughing back profits to earn more profits or rather “compounding profits”. Hence unlike investing in assets like gold, which are not productive, investing in shares, which represent ownership in productive assets (business), hold very high potential.


The “power of compounding” is what makes investing in stocks very attractive. In very simple terms it means that the returns on the principal also earn returns. In other words, Rs 10,000 that earns mere returns of 20% per annum becomes Rs 30,000 in ten years whereas Rs 10,000 compounding at 20% per annum turns out to be Rs 62,000 in ten years! As you stretch the time horizon, your money appreciates further. Compounding at 20% per annum, Rs 10,000 becomes Rs 62,000 in ten years, Rs 1,54,000 in 15 years and Rs 3,83,000 in 20 years. Hence the longer the duration of investment, the better are the returns.


When should you start investing in shares?

The critical point to remember is that the earlier in your life you start investing in shares, the better the returns you can generate. The money that you use to buy shares must necessarily be money that you do not need in the next three to four years. So you can start investing only when you have surplus money (after taking care of personal debts if any). Never borrow to invest in the stock market. The surplus money that you have should be invested wisely in shares to reap the rewards. Of course, investing is risky. Higher returns always come with higher risks. However the risks of investing need not deter one. After all, the rewards outweigh the risks. A ship is safest in the harbour, but it was never built to stay anchored. Similarly, your surplus money is meant to create wealth for you. And it cannot generate wealth for you unless you invest it in shares.

(For more insight, email to: invest@idafa.com)

The rise of Islamic banking is a sign of the maturity of the Muslim community in America.


Islamic banking is emerging as a small, but growing trend among lenders in the United States, as niche players create specialised products and services for Muslims that fall within the tenets of Islamic law, or Shariah.


Shariah prohibits investments in the liquor, wine, casino, pornography, gambling and pork processing industries, and forbids Muslims from accepting or paying interest — a challenge for Western banks that are based on the interest-paying system.


Currently, there are three banks that offer Islamic banking in the U.S., including international giant HSBC , but experts expect that number to rise as the Muslim population grows and the community begins to demand more specialised services.


Despite the difficulties in creating an entirely different finance system, banks such as Ann Arbor, Mich.-based University Bank, a wholly owned subsidiary of holding company University Bancorp (Research), are willing to put in the extra work to create banking alternatives that appeal to the growing market.


While industry experts say it is difficult to determine the exact size of the Islamic market in the U.S. — given the lack of information from the Census Bureau — national data accumulated from government studies and independent religious groups estimate that there are between 5 million to 7 million Muslims living in the U.S. And with the Department of Homeland Secur-ity indicating that there is a rising number of immig-rants from Muslim countries entering the U.S. in recent years, industry experts said its a smart move for banks to start focusing on the growing Muslim community.


University Bank recently formed the University Islamic Financial Corp, a subsidiary that offers Muslims home financing, deposit accounts and Islamic mutual fund shares.


The bank’s deposit accounts allow Muslims to open accounts where any profits are shared with customers rather than paid as interest. Stephen Ranzini, president and chairman of University bank said the company currently has $5.5 million in Islamic-compliant deposits.


And instead of traditional mortgages, the bank essentially sets up a special trust for the property the consumer is trying to buy. The borrower leases the property on a rent-to-own basis — a system called ijara in Islam and agrees to take ownership at the end of the agreement, usually written as a 30-year contract. The bank makes a profit from the rent on the property. If the house is sold before it’s paid off, the customer would pay the rest of the money committed to the trust with proceeds from the house’s sale.


Ranzini said the company is in negotiations with a government-sponsored enterprise to create a secondary market for its Islamic mortgages, which will allow the company to offer another mortgage alternative, called murabaha, nationwide in the near future. Under murabaha, the bank buys the property and sells it to the consumer in monthly instalments at the acquisition price plus an agreed profit rate.


Chicago-based Devon Bank also offers a murabaha mortgage product, and plans to expand its Islamic banking to include compliant money market , appr-oval from federal regulators, said David Loundy, corporate counsel for the bank. While Loundy declined to comment on the bank’s financial assets tied to the Islamic bank, he said its compliant mortgages account for over half of the company’s residential mortgage volume.


“The banking market is being saturated and firms have to figure out ways they can grow,” said Alois Pirker, securities and investments analyst at independent research and consulting firm Celent LLC. “The Islamic community is growing and if a bank can capture that community, there is big potential there.”


Pirker said that regional and community banks that have stronger ties to the Muslims in their community will lead the charge. But larger banks are going to have to start branching out to remain competitive.


International banks have already dipped their toes into Islamic financing abroad and found success. Banks such as Citigroup, HSBC and Deutsche Bank have created Islamic subsidiaries focused on the Middle East and Asia.


Rushdi Siddiqui, global director of Dow Jones Islamic Markets said the boom in oil prices, which meant big profits for many Muslim investors abroad, raised awareness of the Islamic market in recent years. The Institute of Islamic Banking & Insurance, an independent Islamic finance and research group in London, says that more than 250 Islamic banks around the world manage more than $200 billion.


The Dow Jones Islamic Market Index for the U.S., which tracks investments that are in compliance with Islamic laws against investing in prohibited industries, were up 5.06 percent in 2005, as compared to a 3 percent rise in the S&P 500.Banks have been hindered from expanding into Islamic banking, in part, due to a lack of regulatory understanding of the products, experts said.


In a report last year, the Chicago Federal Reserve indicated that “Islamic finance is sometimes better understood by the banks and finance houses that have developed and marketed the Islamic finance products than by the regulators whose approval they need.”


William Rutledge, executive vice-president of the Federal Reserve Bank of New York said in a speech before the Arab Bankers Association of North America that regulators are making a more concerted effort to learn about the risks associated with Islamic banking by participating in Islamic finance conferences and learning from international regulators that are already supervising Islamic banks.


That’s a positive first step towards making Islamic banking more available to Muslims living in the U.S., according to Islamic advocates.


“The rise of Islamic banking is a sign of the maturity of the Muslim community in America,” said Rabiah Ahmed, spokeswoman for the Council of American-Islamic Relations human.

(money.cnn.com/2006/01/17/news)