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WOCCU CUs come closest to meeting Islamic Sharia compliance
MADISON, Wis. (1/11/08)--Credit unions come the closest among Western financial institutions to meeting Islamic Shari'a compliance for financial services, indicates a new technical report from the World Council of Credit Unions (WOCCU).
World Council of Credit Unions' new report shows challenges from Islamic law in establishing credit unions in Afghanistan. Here, members meet at Balkh Investment and Finance Cooperative in Mazr-i-Sharif. (Photo provided by the World Council of Credit Unions)
Interest paid to depositors on savings by western banks is considered a loan with interest and is not allowed under Islamic financial principles. However, financial cooperatives' mutual ownership and equal distribution of dividends may mitigate some of the law's restrictions and make credit unions attractive to Islamic savers and borrowers in developing countries and in the U.S., says the report. The report, "Supporting Credit Union Development in Afghanistan: An Overview of Issues Important to the Development of Shari'a-Compliant Cooperative Finance," outlines the challenges WOCCU confronts in establishing credit unions in the war-torn Islamic country. Robert Wieland, the author and researcher with Main Street Economics, looks at ways Islamic jurisprudence evaluates financial services and concludes credit unions may have the best chance to meet the needs of Muslim borrowers in the terms of their religion. Under Islamic law's Shari'a compliance, lenders may not charge riba (translated as "interest" or "usury") on money lent, nor pay interest on deposits held without truly sharing in gharar ("risk" or "uncertainty"), writes Wieland. Shari'a refers to financial transactions allowed by the Koran. Credit unions' mutuality, which distributes dividends, aligns more closely with Islamic law, Weiland said. "A truly mutualist institution would minimize the costs of achieving Shari'a compliance for its beneficiaries and, to the extent that profits were generated, these would accrue fully to the member-participants. This reading of Islamic jurisprudence should interest supporters of credit unions," he said. The report also discusses the types of financial products--including savings, investments and loans--and the way they may be developed for Shari'a compliance. Among the Koran's strategies for conducting financial business without violating the laws is a characteristic of generosity and forgiveness without penalty for loans and investments that go bad. Western financial practices run afoul of those laws in most cases. Complimentary copies of the 21-page report, funded by WOCCU's U.S. Agency for International Development Cooperative Development Program are available on WOCCU's website or through e'mailing research@woccu.org.
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