1492505228240 - Fancy a world with no interest payments?

Fancy a world with no interest payments?

Sonny-Bill Williams’ opposition to having the BNZ logo on his rugby jersey has sparked interest in Islamic beliefs around banking.

Muslims do not believe in interest payments, which they say are usurious.

But that has left some people wondering – how does their banking system work? What is a world without interest really like?

Why would you put your money in a bank account, if you weren’t earning interest?

Some might say that savings accounts aren’t paying a lot of interest in the rest of the world at the moment, as it is.

READ MORE: Sharia finance a growing market but NZ banks not acting yet

But in theory, most banks will pay interest on money that is deposited with them in a savings account or term deposit. This is what incentivises people to hand their cash over instead of storing it in a safe or under the bed. That allows the bank to lend it out to other people, and make money out of the deal.

If you bank with a provider using Islamic systems, it works a little differently, but you still get paid for your deposits.

Banking expert Claire Matthews said banks would invest saved money in things that generated income and then share the profits.

That might mean investing in businesses, and feeding dividends and returns back, or just sharing the profits made on the bank’s own loans.

She said it was riskier than the banking practises of the Western world.  If there are no returns to share, savers get nothing.

“It’s more like a managed fund than a bank account.”

Does that mean Islamic home loans are heaps cheaper, if there’s no interest?

To those of us paying off large mortgages, the idea of not paying interest sounds pretty appealing. The bad news is that there is no such thing as a free home loan.

“You go to the bank and say this is the house I want to buy,” Matthews says. “The bank then buys it and sells it to you and you pay it off.  They might buy it for $1 million and sell it to you for $1.2m. The $200,000 is their earnings for taking the risk you might not make the repayments.”

She said the extra that was paid usually would not change irrespective of how long it took someone to pay off the mortgage – so there is no benefit to paying off the loan more quickly.

What about credit cards? Some of us are paying 20 per cent a month…

There are Islamic credit cards available, which charge a fixed fee rather than a percetnage-based interest payment.

What’s happening in New Zealand?

None of the mainstream providers offer an Islamic finance option in New Zealand. Amanah is the only KiwiSaver option, which does not invest in any interest-bearing products and avoids putting money into weapons, pornography, alcohol and gambling.

Is it fairer?

Whichever way you look at it, you’re going to end up paying for your banking services.

Matthews said a general public dislike of banks meant people were more likely to think a different way was fairer but it was not necessarily true.

“People see interest as magical, that they are getting money for nothing but it’s not like that at all.  Banks take on a lot of risk.”

 

 

 

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