[Spaceships] Islamic Banking and Financing Spaceships Purchases

[cptbutton]

Originally Posted by David Johnston2

As best as I understand it it would work by making the bank an actual silent partner. They jointly purchase the ship with their client, and as co-owner are entitled to a slice of the proceeds from the ship's operation. This is technically not interest and continues until their partners manage to earn enough to buy them out which won't necessarily be for the same price as the original money the bank put up for the purchase.

By "buy them out" do you mean when the bank's cumulative cut equals the original loan amount plus some additional amount, however determined?

Or do you mean the borrower saves up enough to pay back the original loan plus some additional amount, however determined?

Honest Eneri's Bank and Grill loans Qumel 1,000,000 plutons to buy a merchant starship. In return HEBaG gets 10% of the profit. Lets say the adjustment is 200,000 plutons.

Does Qumel own the ship free and clear once they have made 12 million plutons and paid a cumulative 1,200,000 plutons to HEBaG?

Or does Qumel need to save up 1,200,000 plutons from their 90% and then pay it too HEBaG to be free and clear? On top of the 10% share they have been paying?

[David Johnston2]

Originally Posted by cptbutton

By "buy them out" do you mean when the bank's cumulative cut equals the original loan amount plus some additional amount, however determined?

Or do you mean the borrower saves up enough to pay back the original loan plus some additional amount, however determined?

Not necessarily some additional amount. It would depend on the terms of the contract. If it's a really lenient contract buying out the bank might actually cost less than the original stake based on depreciation of the asset in question. If it's a harsh contract then the bank might be buying wholesale but the client is buying the bank's share retail. But the slice of operational profits that the bank would collect and that would constitute how it was actually making money on the deal would not be repayment on the loan. It would just be the money it was entitled to as silent partner until it was bought out. Which could be never.

I caution that there's a lot of guesswork in my understanding of the real deal, but since this is a fictional setting, I think it's a workable approach.

[Anthony]

Originally Posted by cptbutton

Or does Qumel need to save up 1,200,000 plutons from their 90% and then pay it too HEBaG to be free and clear? On top of the 10% share they have been paying?

If the bank is a silent partner, that 10% means that the bank owns 10% of the ship, and therefore gets 10% of the profits, until they sell the 10% share. It's possible that the contract with the bank permits Qumel to buy that 10% share back at some later point at a fixed value, in which case, when the appropriate time arrives, they have the option of buying their share back (and most likely, this price has nothing to do with what profit you've made in the interim).

[johndallman]

Originally Posted by Refplace

Cownership: Both parties own the ship, the buyer agrees to a minimum percentage of revenue to to the lender. The revenue pays off the loan plus a fee. In the meantime the owner may have a rep aboard and has some control over its use. ...

The actual total cost should work out about the same in settings you have both methods.

There's a problem with that model for spaceships. Unless you have near-instant interstellar communication, you have to send the representative along on the ship's journeys. He's pretty much dedicated to the ship, and needs to be paid and supported out of the ship's income.

By contrast, one representative can handle many businesses if they're all in the same city. That's much less expensive.

[Humabout]

It is worth noting that there is a BIG difference between profit and dividends. A corporation can, say, be very profitible and have its board vote to withhold dividend payments to its shareholders so the corporation can build up capital more quickly. There are lots of reasons to do this that I won't go into, but to say "Bob gets x% of the profits" either refers to dividends (which can be withheld) or the actual profits (specify gross or net!) and is potentially a deep cut into the business' future capabilities (some industries have profit margins at or below 1%).

Now owning shares in a corporation generally proves profitable when you sell those shares. Ideally, they accrue value with time and you selk them for more than you paid for them. Thus, I could see a bank owning 10% share in a corporation, and the private owner having to pay fair market value for those shares when he wants them back. And the bank could then liquidate those shares if it needs the capital contained therein.

I'm not sure how that would apply to non-corporations, though. Having a 10% share of a car is inherently a losing proposition. They devalue tremendously with time, so you could never sell your share for more than you paid for it, and the "borrower" could buy you out for less than you loaned the minute he pulls out of the dealership. The car thing is just an example, but there are other consumer goods that this would also apply to - potentially even spaceships.

[Anthony]

Originally Posted by Humabout

I'm not sure how that would apply to non-corporations, though.

It pretty much doesn't, though it's also possible to have a scheme where the debt holder simply rents his share back to the main user.

[Humabout]

Originally Posted by Anthony

It pretty much doesn't, though it's also possible to have a scheme where the debt holder simply rents his share back to the main user.

I don't see the distinction between that and Rent-to-Own. And if you can't make money on loans, rent to own schemes are really just skirting around the no usury rules on a technicality. Mind you, that is amazingly close to how most anything works in the real world (Me? Cynical? Naaaaw!), but I'm not sure that's what Vicky (OP) is looking for. Maybe we can get clarification from him tomorrow?

[sir_pudding]

Originally Posted by Humabout

I don't see the distinction between that and Rent-to-Own. And if you can't make money on loans, rent to own schemes are really just skirting around the no usury rules on a technicality. Mind you, that is amazingly close to how most anything works in the real world (Me? Cynical? Naaaaw!), but I'm not sure that's what Vicky (OP) is looking for. Maybe we can get clarification from him tomorrow?

Yes, that was the example upthread. Negotiating a price based on ROI isn't interest. So if your car (or spaceship) happens to cost 110% more if you pay it off over 36 months, then that isn't haram, because you aren't explicitly borrowing money at interest in that case. The only real distinction is whether the bank or the borrower owns the vehicle or not.

It won't have much effect on the game mechanics in Spaceships, as abstracted as they are already.

[Anthony]

Originally Posted by Humabout

I don't see the distinction between that and Rent-to-Own.

Well, there may not actually be a 'to-Own' part of it. In any case, is rent to own a problem under Islamic law? My guess is that the big incentive for anti-usury rules is people getting trapped by unsustainable interest payments, and with rent to own you have the option of simply stopping renting (and if the rented asset is lost, you obviously do so) -- this is likely to be expensive, but it's a reasonably fixed cost (this same objective is accomplished by bankruptcy laws).

[sir_pudding]

Originally Posted by Anthony

Is rent to own a problem under Islamic law?

My understanding is that some variation of rent-to-own is the standard form of financing in predominantly Islamic nations.

My guess is that the big incentive for anti-usury rules is people getting trapped by unsustainable interest payments, and with rent to own you have the option of simply stopping renting -- this is likely to be expensive, but it's a reasonably fixed cost (this same objective is accomplished by bankruptcy laws).

I suspect it has more to do with applying a scheme for economic fairness concocted by a 7th century illiterate (or revealed to him by an Angel, which as we know are all incredibly wealthy but always are trying to borrow ten bucks; so they don't really understand money either) to modern financial systems.