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Camille Paldi, CEO of FAAIF, participates in the 2016 International Symposium on Economics and Social Sciences in Kyoto, Japan.

Posted on 13th July 2016 by Camille Paldi , camille@faaif.com

Camille Paldi, CEO of FAAIF, participates in the 2016 International Symposium on Economics and Social Sciences in Kyoto, Japan.

 

Camille Paldi, CEO of FAAIF or the Franco-American Alliance for Islamic Finance, discussed the modes of Islamic finance plus sukuk, takaful, and Islamic bank deposits at the 2016 International Symposium on Economics and Social Sciences in Kyoto, Japan on July 13, 2016. The conference was organized by the Chiba Institute of Technology (Japan); Kwansei Gakuin University (Japan); Shih Chien University (Taiwan); and Tamkang University (Taiwan). The event took place at the Kyoto International Community House in the historical city of Kyoto, Japan. Camille Paldi has previously been an exchange student through Colgate University at the Kyoto International Center for Languages in Kyoto, Japan and Kansai Gaigokugo Daigaku or Kansai University of Foreign Languages in Osaka, Japan. In addition, Camille Paldi has completed a professional English/Japanese translation internship through the Nambu Foundation at Sendai University in Sendai, Japan. Most recently, Camille Paldi made a presentation about Islamic finance at the 2016 Banking, Economics, Business, and Finance Congress in Sapporo, Japan on June 25, 2016.   Paldi emphasized to her fellow Americans the need for her country to compete in the Islamic finance industry with the rest of the world or face the possibility of declining economic status on the global stage.

 

Paldi discussed musharakah, which is an Islamic joint-venture where two partners come together to form a partnership and agree to share profit in a pre-agreed ratio and share loss according to capital investment. Paldi explained the concept of profit and loss sharing in Islamic finance and how this principle differentiates Islamic finance from conventional finance. For example, if a bank and customer join together to finance a venture, in conventional finance, this is done through the creditor/borrower relationship. The bank finances the borrower through giving the borrower an interest-based loan. It may be unjust for the creditor (Bank) if the venture makes a large profit due to the fact that the creditor (Bank) may receive a low fixed rate of interest. In contrast, if the venture makes a loss, the borrower (client) bears most of the loss and the creditor (Bank) may receive an abnormally high fixed rate of interest. It may be more just for the bank and customer to share in the profit and loss rather than the bank to receive a fixed rate of interest whether or not the venture is in profit or loss.

 

Paldi revealed that in mudharabah, a capital provider (rabbul mal) and entrepreneur or manager (mudarib) join together to form a partnership and the partners share in profit in a pre-agreed ratio, however, the rabbul-mal or capital provider bears all of the loss. Paldi also illustrated the concept of murabahah through discussing how a customer approaches a bank to finance an asset at cost-plus mark-up, which the customer may pay back to the bank in the future in a deferred installments plan. Paldi then captivated the audience with the concept of tawarruq, where the customer then sells the asset obtained through murabahah to an end-buyer for instant cash. Paldi continued on to discuss the concept of salam and parallel salam through which farmers can obtain financing for crops without taking an interest loan. For example, a bank will provide funds to a farmer in advance for future delivery of the crop. This allows the bank to lock in a lower price i.e. the price at the time of future delivery may be higher than the price at the time of finalizing the salam contract. The farmer also receives the financing necessary to grow his/her crops. The crops must be fungible, interchangeable, and readily available in the market as the farmer must replace the crops with the crops readily available in the market in case of crop failure. The bank contracts with an end-buyer, who pays the bank a higher price for delivery of the crop through a parallel salam. Once the bank receives the delivery of the crops from the first farmer, the bank then passes the crops on to the end-buyer at a higher price and the difference between the two prices is the profit for the bank.

 

Next, Paldi explained istisna’a and parallel istisna’a, which is an order to manufacture used to finance construction and infrastructure projects. In this mode of Islamic finance, customer (first contractor) requests to an IFI for finance for a construction project. IFI agrees to pay the first contractor at spot, in lump sum, or in deferred installments for delivery of the construction project in the future. IFI usually locks in a lower price by contracting a price for the project now rather than at the time of the completion of the project. IFI contracts with an end-buyer at spot, in lump sum, or deferred installments at a higher price to deliver the construction project at a future date in a parallel istisna’a. IFI receives the construction project from the first contractor at a lower price. IFI then delivers the construction project to the end buyer at a higher price through a parallel istisna’a. The difference between the two prices of the istisna’a (first contractor-IFI)(lower price) and parallel istisna’a (IFI-end buyer)(higher price) is the profit for the bank.

 

Paldi elaborated on the concept of ijarah or Islamic leasing and explained that ijarah is not that different from conventional leasing. The main difference between Islamic and conventional leasing is that in Ijarah, rent is charged when the asset is made available to the lessee while in conventional leasing, rent is charged once the contract is signed irrespective of whether the asset is actually available for use or not. Furthermore, in contrast to conventional leasing, in ijarah, liability for the leased asset remains with the lessor unless the lessor can prove the negligence of the lessee. In addition, in contrast to conventional leasing, in ijarah, rental payments stop if the asset is destroyed and the lease ends. Also, in ijarah, in the case of lease to own, the lease and sale contracts are separate.

 

Paldi introduced the concept of diminishing musharakah home finance where in which the bank and the customer are co-owners in the property. The customer makes a down-payment while the bank finances the remainder of the house through selling equity units to the customer until the customer purchases all of the equity units and becomes the full owner of the house. The benefit of diminishing musharakah results from how the price of the house in the diminishing musharakah is derived. For instance, Lariba in California, USA utilizes the commodity indexation and mark to market disciplines to set the purchase price of the house in its’ diminishing musharakah program. First, the bank will check for asset pricing bubbles through comparing the price of the house expressed in fiat currency with other existing commodities in the economy in order to determine the fair value of the currency. Then, Lariba uses the mark to market discipline in order to analyze the profitability of the investment. Lariba will examine the prices of similar houses with similar specifications in the same neighborhood where the client would like to purchase a house and calculate the real return on investment. If financing the house is economically prudent, Lariba may then go ahead with financing the house through the diminishing musharakah program for the client. The no-interest banking and finance discipline, in an effort to neutralize the effects of the prevailing fiat currency in the local markets, requires that the financier first apply the Commodity Indexation Discipline to check, in a macroeconomic way, on the existence of a bubble in the business/asset that is being considered for finance. This process is followed by the Mark-to-Market Discipline approach, evaluating the economic prudence by calculating the real return on investing in this item, using its actual real market rental value. In this way, it is affirmed that money is not rented with interest and that the rent is that of the market rent of the facility in the marketplace (The Art of Riba-Free Islamic Banking (2014)).

 

Paldi provided a snapshot of sukuk or the Islamic bond by providing a comparison with the conventional bond. A conventional bond is a contractual debt obligation whereby the issuer is contractually obliged to pay to bondholders, on a certain specified date, interest and principal. Sukuk represent proportionate ownership in the underlying asset of the sukuk transaction and a pro-rata share in the income generated by those assets. The sale of a bond is the sale of debt. The sale of sukuk is the sale of a share of an asset. Bonds represent pure debt obligations from the issuer to the investors or bondholders. Sukuk represent ownership of a well-defined asset. Paldi mentioned that sukuk replicate conventional bonds at the moment in that the principle and fixed distribution payments are guaranteed. The fixed distribution payments in sukuk, however, represent the profit generated from the underlying asset of the sukuk transaction. Paldi noted that the sukuk prospectus is approved by a Shari’ah scholar.

 

Paldi described the takaful or Islamic insurance concept and revealed that it is not very different from conventional insurance except that the use of interest has been minimized, the contract is a donation or tabarru contract rather than a sale-and-exchange contract, the takaful operator invests the pool of donations into Shari’ah compliant investments and distributes a return on investment to the takaful participants, itself, and the shareholders of the takaful company, and the takaful fund returns the unused donations to the takaful participants at the expiry of the insurance policy. Paldi stated that a conventional insurance company speculates on risk by pre-determining profit based on the estimated payout versus the premium. It is in a sense gambling for profit. Furthermore, an accident may occur immediately after the insured makes the first payment requiring a payout or he or she may make all of the payments without any accidents happening, never receiving any compensation back from the insurance company during the duration of the policy. In a conventional insurance contract, the policyholder agrees to pay a certain premium sum in consideration for the guarantee of the insurance company that they will pay a certain sum of compensation in the event of a valid claim. However, the policyholder is not informed of how much compensation the company will pay him or her or how the amount shall be derived. Conventional insurance involves risk transfer from the customer to the insurance company while takaful involves risk-pooling between the takaful participants. The takaful participants pay a premium in the form of a donation or tabarru in a common pool in return to draw upon that pool upon a valid claim. In reality, takaful is not a pure donation contract and resembles a sale-and-exchange contract in that if a donor contributes with an expectation of a counter-value from the donation given, then the whole transaction will be perceived as an exchange rather than a tabarru (donation) contract. In addition, similar to the conventional underwriting process, takaful participants are normally obliged to pay different amounts of contributions depending on the different degrees of risk exposure.

 

Lastly, Paldi discussed Islamic bank deposits. In a bank deposit in an Islamic bank, the bank may act as a mudarib or manager of the customer’s deposit account and invest the customer’s deposits in Shari’ah compliant investment funds. The customer will share in the profit and loss of the investment account with the bank. The bank may act on a restricted or unrestricted mudarabah basis. Islamic finance encourages people to become owners, investors, and business partners and to make money from money-commodity and commodity-commodity transactions rather than money-money transactions. This encourages productive trade and the flow of cash throughout society. Money-money transactions facilitates the exploitation of people in need by money-lenders. Interest finance allows one person to unlawfully acquire the wealth and property of another person.

 

*Camille Paldi, CEO of the Franco-American Alliance for Islamic Finance, is the only US Citizen to have graduated from the Durham University Islamic Finance Program in the UK, which is currently the world’s number one program for Islamic Finance and Banking. In addition, Camille Paldi is the only American to have received comprehensive training in Islamic Banking and Finance in Pakistan, Bahrain, the UAE, Qatar, and Malaysia. Camille Paldi is an honors graduate of Colgate University in New York and the Castilleja School for Girls in Palo Alto, CA. Paldi can be reached at paldi16@gmail.com with a cc to camille@faaif.com and is currently a resident of Dubai, UAE. Camille Paldi has also qualified as a lawyer in the UK, Australia, and the Dubai International Financial Centre Courts (DIFC) of the UAE.  .

 

Posted on 13th July 2016 by Camille Paldi


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