Friday, November 30

Accounting owes a lot to Religion

A slightly older news report but then, quite a nice explanation of what we are seeing here in the UK. But let me explain a point which seems to be exercising many people.

Islamic Finance or sharia based investments / accounting is no different from our GAAP based investments or accounting. People do not realise but we have very many different ways of valuation, accounting and investments. For example, the current internationally accepted GAAP principles have a very strong Christian flavour to it. Did you know that? Double Entry book-keeping has been ascribed to as putting in a structure so that the monies due to the church are properly regulated. The Father of Modern Western Accounting, Luca Pacioli, was very heavily involved with the Vatican and was a Fransiscan Monk to boot.

There are other ways of accounting for investments and trading, you have very many types in India (the Hindu ones - Gladwin, 1796 F. Gladwin, A compendious system of Bengal revenue accounts (2nd ed) (1796) Calcutta and Michael & Nandy, 1992 E.S. Michael and S.M. Nandy, Emerging evidence of early Indian accounting, Abacus 28 (1992) (1)., which were even earlier than the Italian method and were based around early Hindu religious principles! ), then you have the ones in China and Japan which related to Confucianism , etc. etc. We also have had Muslim Accounting. So please dont think that Islamic Finance or accounting has suddenly emerged on the scene. It is a different value system, that's all.

The financial needs of Britain's 1.6m Muslims have been given a boost after
the Government announced that it is looking to launch Islamic-compliant

Products that meet Muslim religious requirements include those that do not
pay or receive interest, and that only invest in suitable companies or
prohibit dealing with industries such as gambling or alcohol.

Many Islamic financial products already exist, including Islamic bank
accounts, mortgages and Child Trust Funds (CTFs). But this is the first time
that the Government has considered offering Shariah-compliant investment
certificates or "sukuk".

Sukuk, which are often referred to as Islamic bonds, make similar types of
payments to investors as conventional bonds but the payments are not

The precise way a sukuk works depends on the type of contract used, but one
common way is to use a lease - or Ijara - contract.

In this instance, the money from investors is used to buy an asset, which
must be compatible with Shariah law.

Once the asset is purchased, it can be leased to generate a rental income,
which is paid to investors. At the maturity of the sukuk, the underlying
assets are sold, allowing investors to get back their original investment.

Mr Abdul Rahman Al Baker, executive director, financial institutions
supervision, at the Central Bank of Bahrain, said: "As an ethical form of
finance, Islamic finance epitomizes the creation of value, productivity and
development, as opposed to pure profit making.

"In the area of personal finance, loans taken on Shariah-compliant basis are
more likely be used to purchase an asset, such as a house or car, rather
than for non-productive consumer spending, such as financing a holiday."

The Government sees Islamic finance as a high-growth area. The global market
for Islamic financial products is currently worth £40 billion and could
reach as much as £250 billion in the years to come.

Kitty Ussher, the Government's economic secretary, said: "This is the first
time that a G7 country has considered issuing sukuk and so we want to make
sure that we get it right.

"The potential benefits are enormous and it would be great news for the City
of London, sending a very strong signal that if you want to issue sukuk you
should come here to do it."

The ban on interest under Shariah law means that Muslims cannot put money
into a traditional current account.

As an alternative, Lloyds TSB offers an Islamic Account which does not pay
any credit interest or offer an overdraft facility – although it does
provide a debit card.

The funds within Lloyds TSB Islamic current accounts are held in accordance
with Islamic law and are not invested in industries which are forbidden
under Islam.

Catherine McGrath, Lloyds TSB director of transaction banking, said:
"Britain is home to a large and fast growing Muslim community, but many have
found that their financial needs have been left wanting.

"We have brought Islamic banking into the mainstream and we are giving the
Muslim community access to financial services that meet their needs without
compromising their religion."

Lloyds TSB also offers an Islamic mortgage known as Islamic Home Finance.
But instead of lending money for a property, the bank buys the home on
behalf of the customer, contributing up to 90 per cent of the purchase
price. The customer provides the remaining percentage upfront and then pays
the outstanding sum over an agreed term, together with a rental payment.

Shariah law also dictates that Muslims cannot invest money in companies that
are involved in areas such as tobacco or alcohol, which can limit the choice
of CTFs for Muslim families.

CTFs are available to all children born on or after September 1, 2002.
Parents of these children are given £250 in vouchers to open accounts,
although those from less well-off homes receive £500.

A second payment of £250 or £500 is sent out when children reach the age of
seven, and Gordon Brown has raised the prospect of a third payment during
secondary school years. Parents, grandparents, relatives and friends can
then top up the government vouchers with up to £1,200 per child per year.

To cater to the Muslim market, The Children's Mutual offers the the Shariah
Baby Bond as a stakeholder CTF, with charges capped at 1.5 per cent a year.

This ethical fund invests in the shares of companies around the world that
are not involved in activities banned under Shariah law.

David White, chief executive of The Children's Mutual, said: "It is vital
for families to act now so that their child isn't allocated an account that
is not Shariah compliant.

"The CTF allows families to start saving for their children's futures in a
way they prefer."


* Products that meet Muslim religious requirements do not pay or
receive interest, and only invest in certain companies or prohibit dealings
in industries such as gambling

* Sukuk, which are often referred to as Islamic bonds, make similar
types of payments to investors as conventional bonds but these are not

* The precise way a sukuk works depends on the type of contract used,
but a common way is to use a lease - or Ijara - contract

* Consumers can now find financial products compliant with Shariah law
ranging from current accounts and mortgages to Child Trust Funds (CTFS)

Case study: Sitting pretty with shariah-compliant account
By Michelle de Klerk

When Sana Ayub-Shah, 26, and her husband Sajib Shah, 30 - pictured above-
from Ilford, Essex, found out they could open Islamic current accounts
through their bank, Lloyd's TSB, they jumped at the opportunity of having
the "peace of mind" that their money would be handled in a Shariah-compliant

The couple have held the accounts since their wedding in April this year.
Mrs Shah, an investment banker, said she had been very satisfied with the
product and would advocate its use to other Muslim families.

She said having an Islamic bank account meant their money was being handled
in a way that did not breach their beliefs: "It offers features, like no
interest received, that allow me to follow my religion through my bank

The couple also have money invested in Premium Bonds, but would be willing
to move their money across if further Islamic product options came on to the

Mrs Shah said the couple was more than happy to forgo the small amounts of
interest paid on normal bank accounts in favour of being "better Muslims" by
holding an Islamic account. Mr Shah, a manager in the National Health
Service, has also recently set up an online T-shirt company at and would be
investigating the Islamic business account options available.

All this to be taken with a grain of piquant salt!!!

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