In Islamic banking grants loans and advances through different modes, all these modes prevent the borrower from double financing, i.e through equity participation/profit/loss sharing basis. Sanction loans only after studying the project feasibility and its present position by examining the documents.

Anoop Mohanty, dear members,

Please explain, what is the "problem" with multiple financing for same projects. Why not? I'll take 5 financing sources if available or...I prefer non. I do not believe in interest (pay interest, percentage) as it is not a natural thing. Man made, virtual values... but that is a different subject (in a way). If you have money, you spend, if not, not. Major projects? Sure, financing is OK from any source (or multiple) as long as you do not have to pay back "an arm and a leg" for it.

So, please explain why multiple financing represents a problem.

Regards,

Adrian TW

I agree with Adrian. If those who take out the loans pay them back, why does it matter if they take out loans from multiple sources. I would only be concerned if people who take out these loans do so with no intention of paying their creditor.

In the West, many of these loans are "secured" through security devices. For example, a borrower may grant the lender a mortgage of real estate. If the borrower does not pay, then the lender can take the property. The double-financing problem is resolved by recording the mortgage in public office. Sometimes, one does not file a mortgage but only a Notice of Lending. The Notice of Lending does not create a pledge or iien, but it serves as a warning to other parties that the borrower has already secured some funding and you might with to find out the terms of that funding before joining the expedition.

Sometimes, a person takes loan with every intention of repaying it, but becomes financially unable to do so. That's when solutions are needed. When there is a loss, someone is going to absorb it. In the West, we're very big on the concept of first in time, first in right. The first to file his paperwork usually wins. But messes, and surprises, still abound.

Sorry, if I am incorrect in my assumption, but it is important to distinguish between multiple sources of financing, i.e. syndicated loans for a project, versus what I assume Prof. Mohanty is refering to as double financing of the same project, i.e. pledging the same collateral twice.

Syndicated loans are a means of spreading risk around as well as expanding the number of banks or creditors that can take part in a project. Double financing is something different. If the same asset is pledgted twice as the collateral on a loan then it should be very clear which creditor is subordinated in terms of getting re-paid first.

If I understand it correctly, the first round of financing for a project might be undertaken by traditional bank lending, i.e. paying interest on the loan, while the second round of financing could be done under Islamic law by giving the lender an equity stake in the project.

Altough, traditionally this would be done vice versa. Usually early stage investors take an equity stake, and then the commercial bank makes a loan against the equity in the project.

However, as I understand it, there is no one Islamic law when it comes to lending, and that it can be interpreted very differently within in the Muslim world. Some lending conditions being more strict than others based on the interpretation of Islamic law by the lender.

Dear All, I am thankful to u all. My question of double financing is better explained by Prof. Willam. i.e. the first round of financing for a project might be undertaken by traditional bank lending, i.e. paying interest on the loan, while the second round of financing could be done under Islamic law by giving the lender an equity stake in the project...

And if we don't have any standardized scale/ parameter for measurement of credibility, efficiency then it will lead unjust treatment. Like a defaulter will move to every institution for loan and in return the banks with limited deposits will face scarcity of funds for genuine customers. NPA of conventional banking will approach Islamic institutions and exploit the communication gap b/w the two structures.

Multiple financing is all ok means consortium advance ( Group of bankers) giving loan. But in double financing means that the customer is using the same security for taking loan from different institutions. In India we have charge creation process whereby banks protect their interest in any security but same system is there in Islamic institutions. In India we have CIBIL database for keeping track of defaulters. Banks can check the past default history of anybody by paying a fees to this central database. Do we have any such database of defaulters in Interest free regime. If not then how to track a deafulter.

I don't see it would not be halal for sharia-compliant lenders to maintain an online database of information identifying borrowers. Might have a problem with EC citizens and their privacy directive, though I see no difference (from a privacy perspective) between such a database and a registry of pledges. And I'm certainly not qualified to engage in ijtihad, but I don't understand why you haven't implemented such a system already.

but how a Muslim investor can mix Halal with Haram? This is the question, and why we have Islamic finance and banking?

As we do not have database and a registry in Libya this problem will be very clear in our banking system in coming years. I hope one of our people in central bank of Libya join and contribute in the answer. It is really not easy at all and one of the third world banking system basic problem.

It is really a nice question? make any one wondering?

In case of mortgage, several Islamic banks offer the facility of converting conventional mortgage into Islamic. Islamic bank instead of paying the vendor, will pay the conventional bank its dues and then enter into an Islamic mortgage with the customer.

I do not know much about Islamic Banking system. However, in general there are numerous way out to tackle the problem raised here. These are as under:

Engage a credit reference checking agency for the purpose. Also follow the procedure of verification from some lawyer for entitlement of the collateral to be accepted by the bank for such loans and get a certificate that no loan is taken against that asset earlier. Further, what for the credit appraisal team is paid by the bank, they should ensure safety of loans. Moreover, information technology can play a significant role in this regard. Ultimately, ethical behaviour of the borrower and lender are going to curb the evil.