Forward Planning: Islamic finance helps people get better deal

Ramadan is certainly "Kareem" - very generous - which is what I remember since my childhood and still what I believe today. The people who "have" always opened their homes during the holy month, hosting people at the break of the fast and until late at night for the second meal of the day, the Sohoor.

Besides open homes, people with financial means would give money to the poor and the needy as a sadakah (grant) or a zakat (tax) which is a levy on wealth.

Social responsibilities increase during Ramadan for individuals to care and be good to others, share and be generous, and there's no place for greed. Ramadan, the month of blessing, is celebrated by more than one billion Muslims all over the world.

Overspending

Fasting, prayers and charity distinguish this month from other months with total devotion to god. The message of Ramadan is that we should manage our life differently all year long as we do during this month by showing less interest in the pleasures of life and have better control over our lives.

The practice, of course, differs from what was intended, so some fasting people eat too much when the fast is broken at night, cook too much food - many different dishes - work less, spend too much money and are overall in a bad mood most of the time. By Eid time, at the end of the month, the overspending has made a real dent in the personal finances of many people who then need a few months to recover.

Islamic finance today has come a long way since the 1970s when it started in its existing form, and became very active in the holy month through charitable institutions collecting donations and sending money to the needy all over the world.

Muslims found ways of helping others who are less fortunate thousands of miles away. Instead of overspending or throwing food away, these charitable institutions managed to correct the personal financial behaviour of many donors.

Prominent business figures and rich people donate large sums of money to charity besides what they give directly to the poor as sadakah or zakat. Islamic finance estimated the donations at more than $230 billion by 2001 which is a 40-fold increase since 1982.

The growth of political Islam helped in the growth of Islamic banking, insurance and investments with countries like Malaysia leading the way by using a legislation within an Islamic framework to attain an Islamic financing system matching the existing Western financial systems. Islamic banks, insurance companies, financing companies and investment houses are spread all over the Islamic world and even beyond.

Why "Islamic finance" some may ask. Usury (Riba) in Islam is considered one of the most forbidden acts.

Usury means taking advantage of the borrower's existing financial need to charge unfair interest to be paid some time in the future. So, existing interest rates charged on loans or gained as profit on saving accounts or on money lent are considered usury and forbidden by the religion.

Also, of course, investing in certain areas or funds is not allowed if their nature is against the religion like alcohol, gambling or anything of a similar nature. Different Islamic contracts were created for Islamic financial transactions in banks, investment and insurance companies according to the Sharia law (Islamic law).

Financial transactions are in the following forms - Murabaha which means sharing the profit margin on sold goods between the seller and the buyer which ultimately becomes the financing expenses replacing the charging of interest; Istisna is the financing for making goods or building for the benefit of the client who will take possession of the goods or the property some time in the future against the full price of the cost for making or building, with a profit added to it to be paid to the financiers instead of charging interest.

Life insurance

Mudarabah is another form of transaction where the investor gets into a partnership with the financial institution, the profits from the invested money being shared between the two parties at the end of a certain time cycle.

If the investment results are negative, both parties share the losses and no fixed interest is used in this type of transaction.

Insurance products equivalent to life insurance exist in the form of a Mudaraba Takaful contract where the participants donate shares in the Takaful fund and share the profits or losses with the insurance company, create savings and provide financial protection to families of the participants.

Over the years, Islamic finance has helped many people to better deal with personal financial management and to improve financial situations and conditions. Ramadan Kareem.

The author is a UAE-based insurance consultant and director of Gulf Insurance Consulting