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How Islamic Finance Works

March 24th, 2010 at 07:54am Under Economy Report

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Such systems are a small but growing part of banking, including in the West. Lenders charge fees instead of interest and often share in risk; bondholders have no guarantee of repayment.

This is the VOA Special English Economics Report.

Dubai’s recent debt problems have brought attention to the growth of Islamic finance. A government-owned group of companies, Dubai World, has been seeking to restructure twenty-six billion dollars of debt. About six billion of it is in Islamic bonds, including a three and a half billion dollar bond set for repayment on Monday.

The biggest difference between Western and Islamic finance involves beliefs about charging interest on borrowed money. In Islam, the basic idea is that you should not make money from money itself.

Instead of interest, lenders charge fees. Ghiyath Nakshbendi at American University in Washington is an expert on Islamic financing.

GHIYATH NAKSHBENDI: “The bank will estimate its costs based on its fixed costs, variable costs, the cost of their employees, the rent and so on and so forth. And from that they estimate how much they are going to charge.”

But he points out that this system can make Islamic financing costly. The costs of the system are shared by the borrowers. The fewer the borrowers, the more each has to pay.

In many cases, Islamic financing requires the lender and borrower to share profits and losses. Ghiyath Nakshbendi explains what that means with Islamic bonds, called sukuk.

GHIYATH NAKSHBENDI: “When we talk about sukuk, we don’t guarantee a certain return.”

He says the bondholders are buying a share of a business or property. If business is good, then they could get back more than they expected. But if it fails, then there is no guarantee of repayment. Islamic bonds can be structured in different ways, but a major idea is shared profit and loss.

Professor Nakshbendi says Islamic lending practices are also supposed to be socially responsible.

In world banking, the total share of Islamic finance is less than one percent. But it is growing at a rate of fifteen to twenty percent a year. There is growing interest in Islamic banking in the West. London is becoming a center of Islamic finance. And France recently proposed changes in finance laws to protect Islamic bondholders.

Estimates differ, but as much as one and a half trillion dollars may be managed under Islamic rules.

Last year, the International Monetary Fund studied the financial security of Islamic banks. It found that their lack of complex products like futures and derivatives limits the ability to spread risk.

Professor Nakshbendi notes that Islamic finance does not appeal only to Muslims.

GHIYATH NAKSHENDI: “In Malaysia, the majority of customers in Islamic banks are non-Muslims.”

And that’s the VOA Special English Economics Report, written by Mario Ritter. Our reports are online at voaspecialenglish.com. I’m Steve Ember.

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Teaching Young People About Personal Finance

September 19th, 2009 at 03:35am Under Economy Report

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This is the VOA Special English Economics Report.

April is National Financial Literacy Month in the United States. As the country faces a deep recession, Americans are paying closer attention to personal finance. Some critics partly blame the crisis on Americans’ low savings rate and high personal debt.

But efforts to increase financial knowledge have grown in the last ten years. Government, community and business leaders have pushed for teaching young people about the importance of saving, budgets and the true cost of credit.

The Jump$tart Coalition for Personal Financial Literacy is based in Washington, D.C. It is an organization of about one hundred eighty groups, government agencies and businesses. Its goal is to provide financial knowledge to children and young adults before they get into debt.

Jump$tart’s Executive Director Laura Levine says many young people misuse credit cards without meaning to. She says they often start by making the lowest payment required. Over time, their credit limit is increased, but they do not pay off their debt. Laura Levine says young people can take on more debt than they can deal with.

The government says forty-five percent of college students have credit card debt. The average amount owed is more than three thousand dollars.

High credit limits are especially dangerous for college students. John Ninfo is a bankruptcy judge in Rochester, New York. He started the Credit Abuse Resistance Education Program.

It provides resources on its Web site for parents, teachers and students about financial issues. Judge Ninfo says he often sees people in their late twenties seeking bankruptcy protection in court. He says the combination of credit card debt and big student loans is burying young people in debt and driving many of them to bankruptcy.

The results of bad credit can be serious. Seventy percent of employers look at the credit histories of job candidates. In some fields, like law enforcement, bad credit means you cannot get a job.

Former President George Bush formed the President’s Advisory Council on Financial Literacy last year. That group has called for students at all grade levels to receive financial education. Currently, only seventeen states require personal finance to be taught at least as part of other courses.

And that’s the VOA Special English Economics Report, written by Mario Ritter. Transcripts and archives are at voaspecialenglish.com. I’m Steve Ember.

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