Tweet
Since the 2007/8 Global Financial Crisis (GFC), many of the international & domestic "too big to fail" banks have been put in jeopardy resulting in government props (a significant cost to various nations), which has resulted in social & political instability, which have resulted in the necessity for the latest IMF (Basel) interventions.
Because of Oz's regulatory framework (centralised government), Oz's big four survived the GFC with barely a scratch. Because of the strength of the Oz banks and the strength of local regulation, Oz has been exempted from Basel's extremes. Never-the-less the global events of the last nine years has made local & global economists question the whole setup of "the western capitalist model" (read the endemic, unconscionable conduct pf the American financial sectors).
I don't really know how the USA mortgage & property laws work. Are they state or federally regulated?
From the global press, as far as I can deduce, in the USA when someone gets mortgage it is structured pretty much like an Oz mortgage,but with one exception! In Oz the mortgagee is the property owner, imu, in the USA the property owner is the bank.
In Oz the mortgage contract is perpetual and doesn't cease until the debt is paid in full, even when the bank forecloses to guarantee partial payment of the debt.
In contrast, imu, in the USA, because the bank owns the home until it is paid off - if the mortgagee defaults on the loan then the mortgagee forfeits any repayments made and the banks usually dispose of the property for what they could get (in parts of the USA, Oz investors were picking up prestigious properties for less than the price of a second hand car).
The situation in the USA (as I've understood it) caused me to contemplate the application of Sharia law in the Islamic banking system (which in the integrated world economy is now worth several trillion USDs).
As you know, all the Abrahamic religions (Jews, Christians & Muslims) obligate their practitioners to embrace the law of usury.
Also, as you probably know, under Moses' usury law, the law did not apply to those outside of the immediate community. This loop hole allowed the Christian authorities to permit Christians to lend to Jews who would then on-lend to Christians.
This C-J-C arrangement, and its counter part, the J-C-J arrangement, led to extortion, which led to the intervention of the authorities, which led to the redefinition of usury as the imposition of "extraordinary charges" above "fair repayment"- the Canon Law of the Catholic Church still forbids usury but within its definition of "extraordinary charges" and "fair repayment".
To me, the RCC reasoning(which is worth a study) is reminiscent of the debates of the early 1st century Jewish sages, Hillel and Shammai. In their time, the Jewish usury laws, as then implemented, were sending Israel bankrupt.
Shammai's concern was about both explicit & implicit profit in repayment of debts. He would argue that a housewife who loaned a loaf of bread to her neighbour could not receive a loaf of bread as repayment because the price of flour may have fluctuated. In which case either the housewife or her neighbour would have profited or experienced a loss from the transaction. Hillel disagreed, arguing a "a loaf of bread, is a loaf of bread, not the flour from which it is made".
The above background leads me back to my understanding of the modern application of Sharia law in Islamic banking practices (which, imu, under Islamic law apply equally to all people of "the Book" = Muslims, Chriatians & Jews.
I'm guessing, that as a broad principle, Islamic banking practices (prohibition of usury) under Islamic law, applies equally to anyone & everyone (? ).
Imu, as with the Jewish sage Shammai, the Muslim sages were/are concerned about eliminating "profit" from all financial transactions. So, imu, "extortionate charges" = "profit", have to be eliminated from the mortgage repayment calculation.
So how do Islamic banks make a "profit"?
Imu, the guiding principle within Islam is that you can't gain wealth without "personal active work" - which immediately quarantines passive earnings = the profit component of "interest repayments".
In a typical Western banking model, mortgage repayments are calculated as a curious composite of an agreed capital repayment amount, plus accumulated movement in the cost of funds for the loan in a deemed currency + administrative overheads + a profit factor (the later being distributed to shareholders = the providers of the original capital used to support loans). The actual repayments are "smoothed" over the life of the loan to ensure predictability of repayments - periodically either the repayment amount or loan term are adjusted due to monetary fluctuations.
Imu, in the Sharia law banking model, mortgage repayments are additional to an "agreed household rent", which is progressively reduced as the loan is repaid. Loan repayments are recast periodically to reflect monetary fluctuations = the purchasing power of money (Hillel's end product argument). To this is added admin overheads, a facilitation fee (reimbursement for procuring capital) and a "share distribution" of profits in the value of the property.
Imu, under Sharia law should the Mortgage holder have to "foreclose" any profit/loss is distributed to the banker & the borrower (?). Not sure what happens in the case of a loss event. Assuming the mortgagor is considered the property owner, I assume the borrower just walks away...
Islamic Institution of Banking & Finance
http://www.islamic-banking.com/what_is_ibanking.aspx
Because of Oz's regulatory framework (centralised government), Oz's big four survived the GFC with barely a scratch. Because of the strength of the Oz banks and the strength of local regulation, Oz has been exempted from Basel's extremes. Never-the-less the global events of the last nine years has made local & global economists question the whole setup of "the western capitalist model" (read the endemic, unconscionable conduct pf the American financial sectors).
I don't really know how the USA mortgage & property laws work. Are they state or federally regulated?
From the global press, as far as I can deduce, in the USA when someone gets mortgage it is structured pretty much like an Oz mortgage,but with one exception! In Oz the mortgagee is the property owner, imu, in the USA the property owner is the bank.
In Oz the mortgage contract is perpetual and doesn't cease until the debt is paid in full, even when the bank forecloses to guarantee partial payment of the debt.
In contrast, imu, in the USA, because the bank owns the home until it is paid off - if the mortgagee defaults on the loan then the mortgagee forfeits any repayments made and the banks usually dispose of the property for what they could get (in parts of the USA, Oz investors were picking up prestigious properties for less than the price of a second hand car).
The situation in the USA (as I've understood it) caused me to contemplate the application of Sharia law in the Islamic banking system (which in the integrated world economy is now worth several trillion USDs).
As you know, all the Abrahamic religions (Jews, Christians & Muslims) obligate their practitioners to embrace the law of usury.
Also, as you probably know, under Moses' usury law, the law did not apply to those outside of the immediate community. This loop hole allowed the Christian authorities to permit Christians to lend to Jews who would then on-lend to Christians.
This C-J-C arrangement, and its counter part, the J-C-J arrangement, led to extortion, which led to the intervention of the authorities, which led to the redefinition of usury as the imposition of "extraordinary charges" above "fair repayment"- the Canon Law of the Catholic Church still forbids usury but within its definition of "extraordinary charges" and "fair repayment".
To me, the RCC reasoning(which is worth a study) is reminiscent of the debates of the early 1st century Jewish sages, Hillel and Shammai. In their time, the Jewish usury laws, as then implemented, were sending Israel bankrupt.
Shammai's concern was about both explicit & implicit profit in repayment of debts. He would argue that a housewife who loaned a loaf of bread to her neighbour could not receive a loaf of bread as repayment because the price of flour may have fluctuated. In which case either the housewife or her neighbour would have profited or experienced a loss from the transaction. Hillel disagreed, arguing a "a loaf of bread, is a loaf of bread, not the flour from which it is made".
The above background leads me back to my understanding of the modern application of Sharia law in Islamic banking practices (which, imu, under Islamic law apply equally to all people of "the Book" = Muslims, Chriatians & Jews.
I'm guessing, that as a broad principle, Islamic banking practices (prohibition of usury) under Islamic law, applies equally to anyone & everyone (? ).
Imu, as with the Jewish sage Shammai, the Muslim sages were/are concerned about eliminating "profit" from all financial transactions. So, imu, "extortionate charges" = "profit", have to be eliminated from the mortgage repayment calculation.
So how do Islamic banks make a "profit"?
Imu, the guiding principle within Islam is that you can't gain wealth without "personal active work" - which immediately quarantines passive earnings = the profit component of "interest repayments".
In a typical Western banking model, mortgage repayments are calculated as a curious composite of an agreed capital repayment amount, plus accumulated movement in the cost of funds for the loan in a deemed currency + administrative overheads + a profit factor (the later being distributed to shareholders = the providers of the original capital used to support loans). The actual repayments are "smoothed" over the life of the loan to ensure predictability of repayments - periodically either the repayment amount or loan term are adjusted due to monetary fluctuations.
Imu, in the Sharia law banking model, mortgage repayments are additional to an "agreed household rent", which is progressively reduced as the loan is repaid. Loan repayments are recast periodically to reflect monetary fluctuations = the purchasing power of money (Hillel's end product argument). To this is added admin overheads, a facilitation fee (reimbursement for procuring capital) and a "share distribution" of profits in the value of the property.
Imu, under Sharia law should the Mortgage holder have to "foreclose" any profit/loss is distributed to the banker & the borrower (?). Not sure what happens in the case of a loss event. Assuming the mortgagor is considered the property owner, I assume the borrower just walks away...
*********************
The bank failures in the U.S. during the 1980s [and more recently] revived interest in equity-based [banking]proposals and the separation of the payment of deposits from the portfolio activities of banks. The proposals made were strikingly similar to the Islamic systems now being implemented, at least on the deposit side. But the Islamic system goes further, requiring that loans made by banks should also be equity-based...
...slamic economics is a complete system of social and economic justice. It deals with property rights, the incentive system, the allocation of resources, economic freedom and decision-making and the proper role of government...
...[An] Islamic principle is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks...
Basis of Islamic Banking
... under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit...
"
...slamic economics is a complete system of social and economic justice. It deals with property rights, the incentive system, the allocation of resources, economic freedom and decision-making and the proper role of government...
...[An] Islamic principle is that there should be no reward without risk-bearing. This principle is applicable to both labour and capital. As no payment is allowed to labour unless it is applied to work, so no reward for capital should be allowed unless it is exposed to business risks...
Basis of Islamic Banking
... under an Islamic banking system, the cost of capital is not analogous to a zero interest rate, as some people wrongly assume it to be. The only difference between Islamic banking and interest-based banking in this respect is that the cost of capital in interest-based banking is a predetermined fixed rate, while in Islamic banking; it is expressed as a ratio of profit...
"
Islamic Institution of Banking & Finance
http://www.islamic-banking.com/what_is_ibanking.aspx
Comment