Islamic Banking

Let us look at the key differences in presentation of financial statements between conventional an Islamic banking.
Statement of Financial Position (Balance Sheet)
In conventional accounting, the balance sheet has these few components, namely assets, liabilities and owners' equity. In Islamic banking, there is one additional component called "equity of unrestricted investment account holders".
In conventional banking, an asset is defined as an item with future economic benefit attached to it regardless whether there is legal control by the reporting bank. For Islamic banking, however, an item can be taken as an asset only when the Islamic bank has legal right to hold, use or dispose of the item.
The other unique feature is the "equity of unrestricted investment account holders". This additional component is to satisfy the set of customers who invest on the basis of mudarabah which calls for any losses to be borne by the investors (the customers themselves). It is therefore, important to disclose sufficient information to demonstrate the measures taken by the bank to ensure that the interests of this set of customers are considered as part of the strategy of the bank. In conventional banking, they will be treated as liabilities instead.
There are 2 forms of mudarabah contracts:-
Mudarabah Mutlaqah - This is the "unrestricted" mudarabah contract whereby the capital provider/owner allows total freedom to the bank to use the capital for its projects without conditions, specifications, restrictions or limits. The bank is free to enter into any trade agreements, whether normal or deferred or leasing basis, using the owners' capital. This form of mudarabah is typically used in replacement of the conventional fixed deposit product for retail customers.
1. Mudarabah Muqqayadah - This is the "restricted" mudarabah contract.
Statement of Changes in Restricted Investments and Their Equivalent
This is the statement to report the use of mudarabah muqqayadah investments whereby the bank is to undertake to use the funds for specific investments. This pool of fund must be separated from other funds as the returns from this fund will be shared among this particular group of investors.
Apart from the returns or losses for the group of restricted investors, the statement should also report profits or losses before deducting the investment manager's share of investment profits/losses. The bank's share of compensation as the investment agent is also known as mudarib.
Statement of Sources and Uses of Zakat and Charity Fund
This is required only when the bank established a zakat and charity fund whereby the bank acts as a fiduciary of that fund. The bank is responsible for collection and distribution of all or part of zakat and charity funds.

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Basic Tips to Understand Economic Crisis

According to Leopoldo Abadía (The NINJA crisis and other misteries, Espasa Calpe, 2009), what basically happened was:
1. 2001.Internet bubble explosion.
2. US Federal Reserve reduces the price of money from 6,5% to 1% in only two years
3. These measures boost a real estate market that was just beginning to take off.
5. For a number of years, interest rates in international financial markets have been exceptionally low
6. So, Banks noticed their business was becoming smaller:They where lending Johnny at a low interest rate, but although they were not paying him nearly nothing for the little money he had in the bank, margins were still decreasing.
7. So, someone in the bank industry in America, thought banks had to skip such situation by doing two things: Give away loans at a higher risk, compensating that with a higher interest rate, and balance the low margins by achieving volume.
They where eager to lend money nearly to everyone, if the interest rate was higher to allow them make money on repayments, and needed hundreds of thousands of people to give away high risk-low interest rate loans.
Understood? Fine.We have almost covered half of the issue.
8. So, they gave away mortgages to NINJAS (No Income, No Job, no Assets), at a higher interest (the risk was also higher), take advantage of the real estate boom , and in a glorious decision, grant the NINJA an amount of money that clearly surpassed the value of the house, because - you know - Johnnies house is going to be valued much higher just in a couple of years, so what is the risk?
9. These mortgages where called subprime (a prime one would be that with no risk of repayment). On top of that, it was almost sure that if Jonny, our NINJA, would eventually loose his job, will find another one no problem.The American economy was going really well. And Johnny was quite happy.He had a loan that paid a brand new house in excess, so he also changed his car and go holidaying with the family.
10. Banks were so happily granting loans, that soon became short of money, so they went out to their foreign colleages to lend some money from them.
So, the money that Jonny got from the bank, might well come from Francois, in the south of France.What Francois still does not understand is that his whole life savings might be at risk. Besides, there is something called the Basilea Rules that basically establish that banks cannot lend money to a total amount below their assets.
11. And they also invented something new: They would get all of their mortgages and loans - the primes, the subprimes and others - and wrap them up in a nice package called MBS (Mortgage backed securities).So, where yesterday the bank had one thousand loose mortgages and loans, today everything was nicely organized in ten boxes with one hundred mortgages and loans each, where you can find the good and the bad, all together.
12. And Johnny´s bank manages to sell those packages at a nice price, so that gets money in and re-balance its accounts.
But the question is...And who bought that? Well, the bank created sister companies called conduits that where basically trusts, thus not having the obligation of consolidating accounts with the mother society. As a result, Johnny,s bank with a brand new shiny face and the trust corporation beginning to have a problem, but...who cares?
13. By the way, conduitsalso get the money to buy those nice packages via loans with other banks.The snow ball effect is beginning to roll.
14. Up to now, and hoping you did not get lost in the article, there is something really important to remember: This edgy situation is only sustainable if NINJAS keep repaying their mortgages, and that the real estate market in the US stills keeping a growing pace...
15. BUT: In the beginning of 2007 prices of north America houses dropped dramatically.Most of the NINJAS realized they where paying for their houses over the real value,and automatically no financial institution wanted to buy more "mortgage packages", and those banks that were ready to sell more, could not find a buyer.
So, Banks have no money now, we have gone into a terrific credit crunch , the real estate industry is in its deepest downturn, and hopefully, three years after that, the sun is again showing behind the mountains.
All the best,
Gabriel Fernandez-Alava.
Besides, there are this Basilea Rules that basically establish that a bank cannot lend money below the value of its assets.

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Quantum Economics

A central banking system allowed issuing of capital and underwriting of low interest rate loans to countries around the world is possible in the new economic environment of Market Globalization, Great Capitalization and Rising Productivity when all these new developments are capitalized by the most developed countries by imposing new economic regulations and requirements to the rest of the world to enhance the less developed and developing markets' "security" and make these "markets" play under the same rules, but first, these financial, business and other economic regulations must be implemented by the most developed countries and markets themselves (as explained in Quantum Economics-Philosophy of the Economy's articles). The central bank lending system is to finance not just less developed and developing countries and markets but also any market which present projects complying with the general policies of Global development such as environmental protection, renewable energies, etc.
First, political division in a Cold war World, isolation and political struggles, remoteness and socialization created sometimes great instability and interruptions of international relations to the extend of disrupting paybacks of international loans.
Second, closed and independent market structures such as the Communist of Eastern Block countries and China, or the constantly changing market structures of South America, Asia and Africa shifting left or right provoked constant inflations and other economics turbulences as many of these less developed and undeveloped markets had very diverse system of economics consequently effected the needed "security" for the lending institutions therefore the interest rates were to be set high enough to offset the estimated risk.
Which new economic developments in the world are making low rates lending possible?
Obviously, the ongoing market globalization and rising productivity are setting a prejudice in the ways of global development where new possibilities of central bank financing with "controlled" deficit matrix and "very low" interest rates are possible to be the new economic tools for such global development that could allow "quantum" leaps from underdevelopment onto high tech environmentally friendly development; The new "Quantum Economics-Philosophy of the Economy" is not only "production" related (tighten to) as the Marx's systems are but it (Quantum Economics-Philosophy of the Economy" is related (tighten to) the equity of (limited and controlled deficit) social and infrastructural expenses, the return on the invested capital and the value of intellectual properties.
What is "quantum leap" in "Quantum Economics-Philosophy of the Economy?"
Quantum leap is a possible jump in economic development based on "artificial (externally)" financed projects for practically financing and loan servicing environmentally friendly projects on a Global scale. Quantum leap is financed by a capital issuing central banking system more like the World Bank and IMF on a very low interest rate, because of the enhanced "security" in a new Global marketplace.

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