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post #46 of 64 (permalink) Old 12-13-2016, 11:54 AM Thread Starter
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Re: Interest Free Loans For Muslims

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I have a disorder, I always have to be rude.

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post #47 of 64 (permalink) Old 12-13-2016, 12:06 PM
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Re: Interest Free Loans For Muslims

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But it is a Christian financial model or ideal.

Why can't it be respected by financial institutions? Why can't it be respected by society at large?
What do you mean by "respected by financial institutions"?

They don't stop you from selling everything that you have. You are fee to do that and to give it all to the poor. Who is standing in your way?

Charity is not the only aspect of the Christian financial model.
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post #48 of 64 (permalink) Old 12-13-2016, 12:09 PM Thread Starter
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Re: Interest Free Loans For Muslims

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What do you mean by "respected by financial institutions"?


Okay, "by all Christians who bank at financial institutions, and all Christians who own/operate financial institutions"
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post #49 of 64 (permalink) Old 12-13-2016, 12:09 PM
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Re: Interest Free Loans For Muslims

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I agree that it is still paying interest under another name. The Sharia compliant mortgages are an attempt to meet the intent of the restriction on interest.
Not exactly. It is a very artful attempt to meet the technical words of the restriction while violating its spirit.

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In the long run, it causes me no harm so I don't care if they want to use different language and structure things a bit differently.
I feel the same way. It is definitely NOT a way for Muslims to borrow money to buy a house without paying for the right to use the bank's money. They pay as much or more as someone who takes out a regular interest bearing loan. The parties just call it something different to satisfy the borrower's religious obligations.

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post #50 of 64 (permalink) Old 12-13-2016, 01:02 PM
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Re: Interest Free Loans For Muslims

What's interesting to me about Islamic finance is the similarity to western finance. Both have usury restrictions - that is restrictions on the use of interest. In the US, the usury laws limit interest, and payday loans, with exceptionally high interest rates and rules to appear to be in compliance with the laws are under watch. In Islamic finance the rate must be zero. So really it's just a matter of degree and both systems recognize the potential for abuse inherent in the interest for capital model.

Similarly, companies commonly engage other entities to buy their capital items and lease them back. This shifts numbers on the financial statement from capital to expense. US laws and GAAP limit this as well and force those assets back into capital in certain circumstances.

Similarly, some mortgages in Islamic finance are structured so the bank buys the asset and sells it at a profit. This is exactly the same thing and shifts the major capital outlay to a party with sufficient assets, and allows the customer to pay for the asset or its use over time.

Much ado about nothing.


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post #51 of 64 (permalink) Old 12-13-2016, 11:20 PM
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Re: Interest Free Loans For Muslims

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What do you mean by "respected by financial institutions"?
Okay, "by all Christians who bank at financial institutions, and all Christians who own/operate financial institutions"
You still have not answered the question.

How exactly are Christians at financial institutions supposed to behave to meet your criteria?

Are they supposed to give everything away? Are they supposed to bankrupt the institution to give it all away?

Please explain what you would expect?
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post #52 of 64 (permalink) Old 12-14-2016, 12:55 AM
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Re: Interest Free Loans For Muslims

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The bank does make money on the loan, but it's not structured as interest.

For example, you buy $100,000 house and get a mortgage from the bank. The bank owns the house. You pay the bank $1000/month for 15 years. Each month, part of the $1000 goes towards interest and part towards principal. Over the 15 years, you pay $180,000. At the end of 15 years, you own the house.

In the Muslim version, the bank owns the $100,000 house and sells it to the homeowner for a premium at $180,000. The bank breaks it up into equal payments so that the homeowner pays $1000/month for 15 years. At the end the homeowner has paid $180,000 just like in the traditional mortgage and the bank has made $80,000. But in this case, the $1000/month was all for principal.

It's essentially the same, but the second way can satisfy the religious requirement. You could argue that it's arbitrary and silly, but that can be said about almost all religious customs and requirements--meatless Fridays, disabling oven lights, avoiding interest, etc.

In fact, did you know that McDonald's added Filet-o-Fish to attract Catholic customers? They didn't want Friday sales to go down. I wonder what would happen today if they added a traditionally Muslim dish to their menu like a halal quarter pounder?
I would think there would be a lot of implications to this.

If the shariah-compliant financing was used to buy, for example, rental property, would the shariah compliant buyer be able to take higher depreciation deductions off the building because he bought at an artificially high price?

Is the bank liable for up-front short-term capital gains taxes because they essentially "flipped" a house to the shariah-compliant buyer? (Bank bought at $100k, sold--on paper--at $180k?)

Does the shariah-compliant buyer have a greater amount of asset protection in states that protect personal dwellings because his house has an artificailly higher value at purchase?

Does the shariah-compliant buyer still have to pay the full deal amount if he sells the house before the 15-year payment plan is up?(i.e., he paid $180k --to be done over installments over 15 years---for a $100k house. If his job moves him next year and he sells the house at $120, does he give the bank the $120K sale plus still have to pay $60K to the bank to satisfy the $180 artificial deal? Or is he let off the hook via and early pay-off mechanism?)
The corrollary to that is, if there IS consideration for early pay-off of the installments, then doesn't the shariah buyer have an artificial advantage when flipping houses? For example, the shariah guy buys a $100k house for $180k over an installment plan, but instead flips it for $200k in 13 months (long term capital gains). A conventional buyer makes a profit of $200k- $100k original price = $100k to pay capital gains taxes on. The shariah guy's profit ON PAPER is $200k-$180k = $20k to pay capital gains taxes on, but if the bank lets him off the hook for most of the $80k premium he paid via a pre-payment mechanism, his REAL profit would be $200k-$100k = $100k just like the conventional guy. Does the tax code have a mechanism to recapture the taxes of the $80k premium he was let off the hook for? Is it treated differently than the capital gains of the conventional guy?

Lots of questions here. I am not the tax/finance expert to answer them, though. Looks like opportunities for confusion and inequity to me.
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post #53 of 64 (permalink) Old 12-14-2016, 01:58 AM
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Interest Free Loans For Muslims

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Originally Posted by Wolfman1968 View Post
I would think there would be a lot of implications to this.



If the shariah-compliant financing was used to buy, for example, rental property, would the shariah compliant buyer be able to take higher depreciation deductions off the building because he bought at an artificially high price?



Is the bank liable for up-front short-term capital gains taxes because they essentially "flipped" a house to the shariah-compliant buyer? (Bank bought at $100k, sold--on paper--at $180k?)



Does the shariah-compliant buyer have a greater amount of asset protection in states that protect personal dwellings because his house has an artificailly higher value at purchase?



Does the shariah-compliant buyer still have to pay the full deal amount if he sells the house before the 15-year payment plan is up?(i.e., he paid $180k --to be done over installments over 15 years---for a $100k house. If his job moves him next year and he sells the house at $120, does he give the bank the $120K sale plus still have to pay $60K to the bank to satisfy the $180 artificial deal? Or is he let off the hook via and early pay-off mechanism?)

The corrollary to that is, if there IS consideration for early pay-off of the installments, then doesn't the shariah buyer have an artificial advantage when flipping houses? For example, the shariah guy buys a $100k house for $180k over an installment plan, but instead flips it for $200k in 13 months (long term capital gains). A conventional buyer makes a profit of $200k- $100k original price = $100k to pay capital gains taxes on. The shariah guy's profit ON PAPER is $200k-$180k = $20k to pay capital gains taxes on, but if the bank lets him off the hook for most of the $80k premium he paid via a pre-payment mechanism, his REAL profit would be $200k-$100k = $100k just like the conventional guy. Does the tax code have a mechanism to recapture the taxes of the $80k premium he was let off the hook for? Is it treated differently than the capital gains of the conventional guy?



Lots of questions here. I am not the tax/finance expert to answer them, though. Looks like opportunities for confusion and inequity to me.


I only read a bit of this but can answer what I read. Thee is no artificial pricing. A mortgage financed over 20 years in a traditional mortgage results in a particular cash flow. The cash flow is the same in both cases. In the Islamic finance model the differential (similar to a retailers markup) is likely not tax deductible as interest which is favorable but the increased basis likely results in higher initial write off and depreciation. I suspect the loss of interest deductibility would be a net negative but it wound depend on the legal structure and filing status

Any taxable difference to the bank would be factored into the sales price and would be a wash.

I don't know what you're referring to about states protection of dwelling but I assume the buyer in any type of financing would take out replacement value insurance which payout would be determined based on the claims adjuster which wouldn't be influenced by the financing.

Regarding early layoff, my understanding is that this can not be restricted under Islamic finance. So the cash flow should be identical (less loan cost differential) in an early layoff situation. Unless the Islamic financing contract requires payment of the full contract price regardless of early payoff which would svck for the Islamic finance guy. So the possibility exists that the Islamic finance hit is stuck with payment in full for the loan term interest equivalent represented by the increased sales price.






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post #54 of 64 (permalink) Old 12-15-2016, 02:13 PM
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Re: Interest Free Loans For Muslims

AFAIK, US tax law will likely treat the Sharia compliant arrangement as a loan with interest. Because it is just a formality to allow both parties to claim no one is charging interest when everyone knows that in substance that is exactly what they are doing. So there will be no difference in payment streams whether the borrower holds to maturity or prepays early, and the tax consequences will be exactly the same. It is a fig leaf to deal with a religious technicality.

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post #55 of 64 (permalink) Old 12-15-2016, 09:24 PM
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Re: Interest Free Loans For Muslims

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Originally Posted by Wolfman1968 View Post
I would think there would be a lot of implications to this.

If the shariah-compliant financing was used to buy, for example, rental property, would the shariah compliant buyer be able to take higher depreciation deductions off the building because he bought at an artificially high price?
The fees for sharia compliant loan are applied in much the same way that interest is.. .meaning that each month the fee is part of the payment. The IRS allows this fee to be taken as a interest deduction just like anyone would on a normal interest bearing mortgage.

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Originally Posted by Wolfman1968 View Post
Is the bank liable for up-front short-term capital gains taxes because they essentially "flipped" a house to the shariah-compliant buyer? (Bank bought at $100k, sold--on paper--at $180k?)
The lender has no capital gain. They buy the property for $x and sell it for $x. The amount that is added are added as fees. So they are taxable to the bank at income at the time a monthly payment is made to the lender.
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Does the shariah-compliant buyer have a greater amount of asset protection in states that protect personal dwellings because his house has an artificailly higher value at purchase?
No, because the actual value of the property is not inflated. Again, the fee is paid on a monthly basis just as interest is paid. The lender Ďearnsí the fee in the same way they earn the interest on a normal loan. If the property burns down in a fire, the insurance would not have to pay more to rebuild the property than it would with an interest baring loan.
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Originally Posted by Wolfman1968 View Post
Does the shariah-compliant buyer still have to pay the full deal amount if he sells the house before the 15-year payment plan is up?(i.e., he paid $180k --to be done over installments over 15 years---for a $100k house. If his job moves him next year and he sells the house at $120, does he give the bank the $120K sale plus still have to pay $60K to the bank to satisfy the $180 artificial deal? Or is he let off the hook via and early pay-off mechanism?)
No, the sharia-compliant buyer does not have pay the entire fee if the house is sold. They also do not have to pay the entire fee if they pay of what amounts to the principle of the loan.
In practice, a sharia-compliant loan is not very much different from an interest baring loan.. they just play gymnastics with the vocabulary.
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Originally Posted by Wolfman1968 View Post
The corrollary to that is, if there IS consideration for early pay-off of the installments, then doesn't the shariah buyer have an artificial advantage when flipping houses? For example, the shariah guy buys a $100k house for $180k over an installment plan, but instead flips it for $200k in 13 months (long term capital gains). A conventional buyer makes a profit of $200k- $100k original price = $100k to pay capital gains taxes on. The shariah guy's profit ON PAPER is $200k-$180k = $20k to pay capital gains taxes on, but if the bank lets him off the hook for most of the $80k premium he paid via a pre-payment mechanism, his REAL profit would be $200k-$100k = $100k just like the conventional guy. Does the tax code have a mechanism to recapture the taxes of the $80k premium he was let off the hook for? Is it treated differently than the capital gains of the conventional guy?

Lots of questions here. I am not the tax/finance expert to answer them, though. Looks like opportunities for confusion and inequity to me.
There are sites that discuss all of this. Itís not that big a deal.

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post #56 of 64 (permalink) Old 12-17-2016, 05:15 AM Thread Starter
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Re: Interest Free Loans For Muslims

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It is a fig leaf to deal with a religious technicality.
Yeah, good way of putting it.

I was stunned to find out that you can walk into a bank; and ask them to "comply" with your religion vis-a-vis financing and loans, lol.

Since banks are federally regulated; doesn't this skirt the edges of mingling church and state?

I'm thinking out loud holding, I'm not asking/expecting you to answer the questions.
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post #57 of 64 (permalink) Old 12-17-2016, 05:23 AM Thread Starter
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Re: Interest Free Loans For Muslims

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You still have not answered the question.

How exactly are Christians at financial institutions supposed to behave to meet your criteria?

Are they supposed to give everything away? Are they supposed to bankrupt the institution to give it all away?

Please explain what you would expect?


The short version?

Don't expect secular institutions to accommodate your religious preferences.

No nativities at schools. No bible study clubs as an after school activity.

Many years ago, where I live, the window fenestrations in a newly constructed public building were PROTESTED because (as with all intersecting perpendicular lines) the outline of a cross was formed!!!lol!! Think lower-case "t".

We've come to accept and adapt to the requirement: keep your religion to yourself, it's not welcome in the public, secular sphere.

Right?
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post #58 of 64 (permalink) Old 12-17-2016, 08:33 AM
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Re: Interest Free Loans For Muslims

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The short version?

Don't expect secular institutions to accommodate your religious preferences.

No nativities at schools. No bible study clubs as an after school activity.

Many years ago, where I live, the window fenestrations in a newly constructed public building were PROTESTED because (as with all intersecting perpendicular lines) the outline of a cross was formed!!!lol!! Think lower-case "t".

We've come to accept and adapt to the requirement: keep your religion to yourself, it's not welcome in the public, secular sphere.

Right?
Public schools are run and funded by the government. So they struggle with the idea of freedom of religion and not appearing to give support to any one religion.

Lending institutions are private entities. As long as they do not discriminate based on religion, they are ok.

The reason lending institutions have implementing Sharia compliant mortgages and loans is that there is money to be made doing it. A lending institution who does not offer this cuts themselves out of a sizable market. They are in business to make money. So they are going to find a way to attract those who will only consider Sharia compliant mortgages/loans. It's pretty simple.
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post #59 of 64 (permalink) Old 12-17-2016, 08:52 AM Thread Starter
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Re: Interest Free Loans For Muslims

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Public schools are run and funded by the government. So they struggle with the idea of freedom of religion and not appearing to give support to any one religion.

Lending institutions are private entities. As long as they do not discriminate based on religion, they are ok.

The reason lending institutions have implementing Sharia compliant mortgages and loans is that there is money to be made doing it. A lending institution who does not offer this cuts themselves out of a sizable market. They are in business to make money. So they are going to find a way to attract those who will only consider Sharia compliant mortgages/loans. It's pretty simple.


Sure, I agree, keep all and every religion out of school. With the exception of history classes; where religion is basically inseparable from a serious study of human history.

Banks and government are linked; even if the bank is private.

The marriage of governments and banks ? for better or for worse

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Each nationís banking system needs to be understood as a mutually profitable deal between the politicians who control the government and the bankers who get government charters for their banks.
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The governments of modern states absolutely need banks, not least to lend money to the government itself.

Arnold Kling, Banks and Government | Library of Economics and Liberty


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The political process is far from neutral with respect to banking
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For a banking system to operate effectively, minority shareholders and depositors need the government to pass and enforce laws against tunneling [self-dealing by bank managers and majority stockholders], ensure that banks fulfill their contractual obligations, and create accounting standards and regulatory and supervisory agencies to facilitate evaluation of the bank by outsiders who are thinking of investing in bank stock or depositing their funds there. Similarly, the bank needs the courts and police to enforce loan and other counterparty contracts: without them, for example, collateral cannot be repossessed.


I understand banks/businesses are in business to make money.


What astonished me is the blatant request for banking practices based on religious tenets.

My absurd example from the NT earlier, was to illustrate [clumsily I'm sure], that religious beliefs shouldn't be considered when it comes to secular banks.

But, that said and conceded; this shariya banking precedent SHOULD open the door for those of other faiths to pressure banks to cater to preferences based on religion.

It's kind of a "toe in the door", if you will.


However, I have a deep instinct that if a Christian group approached a secular bank and insisted that loan practices respect and conform to Christian doctrine; the ACLU would have steam coming out of their ears.
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post #60 of 64 (permalink) Old 12-17-2016, 08:03 PM
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Re: Interest Free Loans For Muslims

Is it that no lender is, as far as I know, required to issue Sharia compliant financing?

Anything on what market share this makes up in the USA?

My wife texted asking me if I was sitting down, and I knew what was coming next.

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