Fundamental Principle of Islamic Finance

The most interesting aspect is that almost all major religions in the world are against charging interest. Christianity and Judaism explicitly prohibit charging interest. Hinduism text is full of references of how evil it is. Till 12th century all across Europe charging interest was banned. Medici family of Italy exploited a loophole in the Bible to create one of the first modern banks (that charged interest) and soon afterward the entire world forgot how evil interests are. The Islamic banking seems to be the people in the world who still haven’t forgotten their religion.

In Islam all assets (money, land, property etc.) are considered a gift of god and so is the time. So interest (riba) is viewed as making profit solely due to passage of time by exploiting the plight of those in need by those in excess. A man should not be able to make money from the mere fact that he/she has and others don’t. This is against the fundamental principle of social, economic and political fairness and hence is against Islam.

To confirm with the Islamic principles of finance, one has to abide by Sharia. However it is an abstract form of law capable of adaptation, development and interpretation. The most acceptable form of Sharia used by the financial world today has evolved from the interpretation of the text of Quran, Sunna, ijma and ijtihad/qiyas by the 4 independent schools Hanafi, Maliki, Shafi and Hanbali. However because of the minor differences in opinions and thoughts most Islamic banks consult from time to time a religious committee of religious scholars which supervise their investment activities and make amends.

Following 3 principles are common between the 4 main schools:
1. Riba/Interest: Under Islam interest is banned. Instead it is replaced by a profit and loss sharing agreement. So in essence there is no guaranteed rate of return and the banker has to share the risk. So in essence a lender of capital should not make money which is calculated on the basis of how long the money was borrowed but on the basis of how useful the money was for the borrower.

2. Gharrar/Gambling: One should not bet on chance, uncertainty or speculation.

3. One should not invest in ventures that can destroy the humanity eg: alcohol.

Note: I am neither a Muslim nor an expert in the ways of Islam. Hence please correct me if you believe my interpretation had overlooked some important aspects.



This is a first part of the series on Islamic finance.

Normal commercial insurance is not Islamic because
a. It is perceived as gambling or a game of chance. The insurance company issues the policy with the hope that it will make money and if the stated even occurs loses money.
b. It invests its surplus money in interest bearing instruments

Because of these reasons the Islamic world had come up with 2 very good insurance instruments.

• Mudharabah Model
• Wakalah Model

The essence of these models is that all the investors pool their money together and promise to pledge each other in case of death or financial distress. In a good year the corpus will have more money than it needs and hence would return them back to the policy holders. Hence creating a cooperative society which shares its risks by hedging them.

This is how the insurance started. A group of workers (esp. lumberjacks) setting aside a small sum to pay for the medical expenses in case of an accident at worksite. Most insurance companies issue policies worth many times more than their net worth. If the various models used by securitization experts can fail, so can the mortality predictions of the actuaries in insurance agencies. Monoline Insurance companies have failed; nobody knows the real net worth of the financial institutions. Hence it’s time for the insurance companies to return to the basics.

I could find a few Malaysian and Middle eastern firms issuing such policies for businesses, however I am yet to find a personal insurance policy in India following these principles. Its probably because of IRDA rules.


Curiosity killed the Cat

A friend of mine was tempted to read the private online chat conversation of her boyfriend. Her reasoning for this digression was that she was on the verge of taking a major relationship decision. She felt it was right to have as much information as possible before she takes a giant leap involving her to quit her job and relocating to a different city.

It was not a question of trust but cold feet. All she wanted was a few more assurances and signs to make her mentally ready for this transition. However in the search for the reassurance she ended up prying into documents she was not supposed to read. She rationalized it by giving a zillion reasons and examples of sharing between couples etc. Further she argued that a lot of people hire Private Investigators who also often breach the privacy and it is socially acceptable (although considered paranoid) to do so.

However there are faults in this theory. Since all these conversations were not intended for her, there is a strong likelihood that she could misinterpret them or be out of contexts. Most human beings esp. men are quite complicated and often tend to hide their true emotions. Sometimes this is because what the society expects them to do but also sometimes because genetically a guy is a social moron.

However the question still remains. How does one resist the temptation of going through the stuff that you know is important, is valuable to you yet you should not read. How does one draw a line between honoring the personal privacy of someone you love and satisfying ones curiosity.


Man’s curse

Yesterday, a friend of mine shared his insights.

Human males have the same amount of blood yet have an extra organ to support. Hence if you think too much at the crucial time, one might starve the rest of the body of its much needed blood flow.


Cross Cultural Etiquettes

As Big Bang theory humorously depict, a lot of my Indian friends (including myself) are awkward in the presence of girls. A friend of mine who is unfamiliar with this phenomenon once remarked… You guys are so cold when I first met you. How can you call yourself close friends when you greet me with a distant hi or a formal handshake?

On the other hand an Indian friend of mine was recently offended when someone tried to greet her in the European way.

However these extremes examples apart, what I have observed are that people are much more accommodating while interacting with other cultures. For example parents of one of my friend demand that, at least in the first meeting, their daughter’s friends greet them formally. However a Columbian friend of mine greeted the same parents in a very casual and informal manner and they were cool about it.

This is probably because while interacting with people from other cultures, most people are very accommodating. Unless the person has a predetermined bias, they tend to take time in knowing the person before even forming the first opinion about him/her. Even after that the person is judged not on the basis of his actions but on the basis of their intention. This is a luxury that often people don’t give to someone from their own culture.

However it does not mean that one should not spend time in understanding and learning different cultures. In many high context societies there could be a stark difference between the verbatim and the literal meaning of any word or action. Hence often unknowingly one tends interpret the gestures, facial expressions and actions of others in accordance to the unwritten but widely accepted standards of their own culture. This is very true during courtship and dating where often things go so fast that the poor guy does not even realize what he did before it’s all over.

Sometimes even if you spend a lot of time in understanding and conforming to the etiquettes, your preparation is wasted when you meet someone whose parents are from 2 different cultures or someone who is not well integrated into the culture of region where you first met.


IIM Lucknow

Warning: I usually don’t discuss my personal/professional life here but this is one exception so please bear with me.

After 4 months of staying abroad I return back to my campus. Here is a 8 minute long video which records some of the aspects of everyday life at IIM Lucknow.


IIM Lucknow is one of the hardest MBA schools to get into. There are over a 100 applicants for every student they admit. Even after the tough selection process the students are over the next 24 months grilled and prepared for anything the life throws at them. A student has to compulsorily live in the campus which is 12 km from the nearest city or civilized life and 21km from the city center. The campus is 185 acres large and has all the necessities which are conducive for a good academic life. There are security guards who record who enters and exits the campus and how much time they spend outside. The students who are married have to apply to get permission for bringing their spouses on the campus.

As per the student manual every student is supposed to study for a minimum of 100 hours for every course it takes. With 7 courses spread across 10 weeks this boils down to officially requirement of 70 hours a week of studies. However everyone who has been to the campus knows than in reality one has to work much harder. You could be asked to be in the classroom anytime between 8:30am to 2am even on Sundays. Sleeping over 5 hours a day is a luxury which only the brightest few can afford. The library is open 24X7 and it is not uncommon for students to work the whole night. In fact it is more likely that the students works all night, has breakfast rather than wake up and have his breakfast.

It is questionable whether this much rigor makes students better managers/entrepreneurs; however industry seems to appreciate the quality of teaching so I guess the system works. The school is a public school yet it costs about 1Million INR (14-15,000 euros) and 2 years of full time studies to finish ones education and pay for the food, lodging and boarding. This might look too steep but the school ensures that the students who cannot pay get either a loan or a generous scholarship. It takes pride in the fact that no student, no matter how poor ever had to discontinue the education because of financial reasons. The reason for charging this high fees and having a culture where the student rather than his/her parents pay for the fees is to increase the student’s dedication.

As the saying goes: “What does not kill you makes you stronger”



The Memories Folder

Was trying to de-clutter my mailbox by removing old mails. I started with visiting my first mail…mail to friends, family and oh yes, a couple of (thankfully) forgotten dates. Memories flooded back so fast and with such intensity I couldn’t imagine. Couple this with the fact that I relied more on mail than chat (still do), so forgotten memories – sweet, spicy and bitter, hit one after the other. I think I experienced what many people describe after an NDE – a complete flashback of my life! It was a wow feeling. I ended up with placing some of the mails into a new folder – Memories.



Here is an extract of an email discussion I recently had:

On corruption, there is a cultural difference between India and the West. Not that the West is corruption-free. But there is zero tolerance, at least in theory. In India, we think bending the rule is not undesirable as long as the ultimate objective is achieved. It starts with the family and right from childhood.

I don’t know why our people don’t understand. Life is so peaceful when your mind is totally free and abhors corruption. It is something akin to when one has conquered material desires. Being self satisfied with what one has is the key.

In my opinion the most dangerous trend in Indian society is that the society no longer perceives bribery as a crime. Not only have those who give bribes but also those who take now proudly advertized this fact. It is not the policing but the social stigma that keeps such vices under control. However when corruption becomes socially acceptable or even desirable that’s when one realize that the society has begin to rot.
All corruption yield is that overpriced sub-standard goods being produced by under-qualified persons who cannot deliver in time. It also frustrates the honest and competent persons away and makes the society worse off.


Direct vs indirect taxes

All the developed countries tax the income (direct taxes), rather than the expenditure (indirect taxes).
Reason: It is easier to introduce tax slabs or progressive taxation rates so that the rich pay a higher proportion of their income as taxes. The poor spend a higher portion of their income on food and basic necessities while the rich are able to save and reinvest bulk of their surplus. Hence by taxing good and services the country ends up taxing poor more than the rich. VAT discourages consumerism, and hence slows down economic growth.

However it’s easier for an underdeveloped/developing society to tax the goods than income. The reason behind that is to be effectively able to collect direct taxes you need a sound financial reporting and auditing else there will be pilferage. What is worse is that there will be a situation like it exists in India where the middle/service class end up paying a much higher percentage of their income as taxes than the rich who through hiding their income or via various tax shelters hardly pay any.

One of the important learning/change in viewpoint that happened after my stay in France is that now I understand how the corruption rots the entire system and makes the society worse off. Sometimes end does not justify the means and corruption is one of the instances.



Why do I blog?

I started blogging way back in 2005 with a simple aim to improve my English. English is not my mother tongue and more often than I was stumbling for the right words. This is probably the reason why almost all the posts are in as good English as possible free from any spelling or grammatical errors.

Like the Maslow’s Hierarchy of needs, over the years, I moved from the need to be able to write correct English, to the need to be able to crystallize one’s thoughts and express my ideas and viewpoints. Now this blog often serves as a vehicle where I can store my opinion. Over the past 5 years I have seen my viewpoints being changed. What is even better is that more often than not the regular reader or someone who stumbles into the website will contribute his view points and either refine or totally change them. So this place has become a kind of a melting pot. As far as possible I try to reference the source and make the facts discussed in the blog to be as accurate as possible. There have been many instances where my view took a complete U-Turn after these researches and comments from the viewers.

E-Nagar is a team blog and every person in the team has a different reason to be here and of course a different viewpoint. We don’t advertize on the blog or derive any revenue from it. On the contrary we pay quite a sum every year for the domain name and the hosting of the website.

A lot of people blog to generate traffic, however I could not get myself into doing that. Also my writing style is not engaging enough that I can retain my viewer’s attention. However I feel that the quality has improved dramatically over the years. I try to have as much variety in the blog as possible and usually restrict the length to 200-400 words so that it is not too long and torturous.

This post is to celebrate over 8000 user comments and nearly 1400 blog posts over nearly 5 years.