Mohammed

#Bitcoin #Somalia. BTC address: [email protected]

[Mohammed @MohammedMH2MD]

#Bitcoin operates without administrators or CEOs, allowing anyone to use it without permission. With a capped supply of 21 million and no ability to be altered, it is both secure and unchanging. Understanding this concept showcases true brilliance.

[Bitcoin Archive @BitcoinArchive]

MILTON FRIEDMAN: “Inflation is produced only by too much government spending and too much government creation of money, and nothing else.”

[Robert ₿reedlove @Breedlove22]

#Bitcoin perfects the 3 Ps:

1. Private property (multi key custody makes it the most difficult asset to seize in human history)
2. Price discovery (money supply with zero percent unexpected change affords a noiseless channel for price signals to flow)
3. Political freedom (limitless purchasing power portability for anyone who can memorize 12 words)

[Safdar Alam @SafdarAlam]

Why (Islamic) Banks Lend Instead of Invest: The Economics They Don’t Want You to See

PART 2/4

So, let’s talk about Islamic Banks and Debt

Let’s imagine an Islamic bank, that is quietly going about it’s day, and is presented with an investment opportunity. This opportunity is to invest in property, perhaps a development, and take risk on the outcome, and hope to profit from this venture. It can partner with an experienced developer to reduce risk.

And also let’s imagine the same Islamic bank has received multiple mortgage requests to provide financing to customers to purchase property. Let’s see, in real terms, how an Islamic bank will approach these two differing opportunities for deployment of capital.

The bank has around £1mn to invest and must choose between these two directions. Let’s see how they make their decision.

Basel III

Of course, I had heard of Basel III in my career, but it was one of those things that did not directly impact my work, so I ignored it. I knew it is important for all banks, but things like risk and regulatory requirements was dealt with by different teams. My role was to make money for my bank, and we left these kinds of things alone, to be dealt with by those whose job that was.

Basel III is a global regulatory framework for banks, developed by the Basel Committee on Banking Supervision (BCBS) after the 2008 financial crisis, to strengthen banking sector resilience through higher capital, liquidity, and leverage standards, ensuring banks can better absorb economic shocks and continue financing activity.

This is all fine, but what does it mean in reality, and how does this impact our discussion here today?

In fact, understanding this regulatory framework will be absolutely critical in our drive to understand what banks do, and why they do it. And it will explain why I felt that everything I was doing in Islamic finance was debt.

These regulatory requirements are in place so that banks don’t become insolvent. A bank becoming insolvent is a very different matter to a regular commercial entity becoming insolvent, because people hold their deposits at banks, and people trust banks. And because governments protect deposits held at these banks.

If a bank becomes insolvent, as we have seen since the 2008 crisis, and since, it can spread panic amongst the financial markets and amongst people. The process of a bank run is a very interesting one, along with the mental and emotional reactions from people who hold deposits at any bank, but that is for another day.

These rules are in place so that banks can demonstrate that they can survive adverse market conditions. They should ensure that banks are “resilient” and they can weather negative events.

So, back to our situation, when the Islamic bank assesses the two financing opportunities, their decision will be firmly rooted in understanding the regulatory capital impact of potential financial transactions they undertake.

Let’s consider the direct investment into property of £1mn. This property will become an asset of the bank, and Basel III states that each asset will have a Risk Weighting, that indicates, as the term implies, how risky that asset is for that bank. This means the asset can go down in value, it can become hard to sell that asset (liquidity), or other events could occur that mean the bank can lose some or all of its investment into that asset.

These factors are assessed for any kind of asset on the bank's balance sheet, with property as one key category. Basel regulations assign a range of risk weights to property investments, typically from 70% to 150% depending on the type (lower for secured loans, higher for direct holdings). Many direct property investments fall in the 100%-150% range. For our illustration of buying a property—the most common form here—I'll use 115% as a reasonable midpoint within that band.

So we can calculate the risk weighting of this investment as 115% of £1mn, being £1.15mn. Now, Basel III states that banks must maintain a minimum amount of Regulatory Capital of 8% of Risk Weighted Assets (RWA). There is also a requirement to maintain a Capital Conservation Buffer of 2.5% of these RWA, which adds up to 10.5%.

10.5% of the RWA here (which is £1.15mn) is around £121,000. Does this mean the Islamic bank must now hold this amount of cash? The answer is no, as Basel III specified in form this regulatory capital can take. It can either be Tier 1 Capital (which is the equity of the bank, ie the ordinary shares it has issued, plus some forms of preference shares and also retained earnings from previous years)) or Tier 2 Capital (which is mainly bonds/Sukuk, and other forms of debt assets held by the Islamic bank).

We should note that cash does not count as regulatory capital here, so the bank cannot say that it holds this £121,000 in cash as the required regulatory capital for this asset. It can, however, use that cash to purchase the necessary debt instruments that do qualify.

Or the Islamic bank can point to existing Tier 1 and Tier 2 capital that has not already been allocated as regulatory capital for other assets on its balance sheet. In any case, the Islamic bank must now ensure regulatory capital to the value of £121,000 is allocated specifically to this property investment.

So, in total, the bank has paid £1mn for the property, and allocated £121,000 of regulatory capital to support this investment.

Now let’s look at how the bank will approach providing home loans instead of buying property.

Risk Weighting for Debts as opposed to Investments

Let’s assume the bank wants to provide financing to a customer who wants to purchase the same property of value £1mn. Let’s also assume the bank just provides the whole amount as a loan, ignoring the fact that in reality, a deposit would be required.

When the bank provides this loan, something important takes place. It is Credit Creation. The bank does not need to go and find £1mn in cash to make this loan – it simply creates this £1mn out of thin air and places it into the account of the customer (in reality, it will not do that, but send this £1mn straight to the seller).

So we see one major difference already compared to actually buying property, which is that in order to buy the property, the bank must deliver £1mn in cash to the seller, but to provide a loan, the Islamic bank simply creates this credit out of thin air and says, “Voila, here is the £1mn”.

This credit creation is ,after all, why banks exist, and why they work so hard to obtain a banking license in the first place. The history behind how banks obtained this power, and how governments contracted out the practice of creating money to banks, is something that I recommend every reader to study.

There is possibly no more disturbing and damaging event in our financial history than these events.

Let’s carry on – so the bank magically creates this £1mn, and now the bank has, an asset on it’s balance sheet, a loan of £1mn that is repayable by that customer. This is an asset for which we must calculate the risk weighting as before. Because this is a loan, and not a direct asset like a property, it attracts a much lower risk weighting than the previous asset. These range from 20% to around 40%, and we can use 35% for our purposes here. So the risk weighting attached to this financing is 35% x £1mn which is £350,000. We apply the same regulatory capital requirement as above of 10.5%, which comes out to around £37,000. We note this is quite a lot lower than the equivalent requirement for £121,000 for the property investment. This is expected, because such a loan has lower risk volatility associated with it then the investment.

The property can fall in value, or rise, and it can fail to deliver returns (lease income or rental income) or it can be destroyed (insurance will be in place) and it also needs to be maintained – tax and duty payments, upkeep, repairs, and all the general headaches associated with actually owning property.

With a loan however, all the bank needs to do is to make sure it is repaid. They will have conducted risk assessments on the customer, and also conducted a valuation on the property itself, and the property will act as collateral in case the customer defaults on this loan. The risks associated with this are regular business for any bank.

So, to purchase a property for investment purposes, the Islamic bank needs to allocate £121,000 of regulatory capital, and deal with the real risks of ownership. And to provide a loan of the same amount, the bank needs to allocate £37,000 of regulatory capital, and face only credit risk supported by collateral (the property).

So can we say the Islamic bank can provide loans for around 3 properties compare to buying one property as investment? This would work out t the same ratio of the risk weightings (115% vs 35%).

Well, the answer is no – the answer is not that simple.

Remember, for the investment, the bank had to use real cash of £1mn, but for the loan, it created this £1mn out of thin air, because it is a loan. This is the key distinction that sends out analysis into the stratosphere.

Let me demonstrate.

PART 3/4 to come tomorrow. Stay tuned.

[jack @jack]

our sellers can now receive btc to btc, btc to fiat, fiat to btc, or fiat to fiat.

[Mohammed @MohammedMH2MD]

@ZabAkbar Ameen

[Akbar Zab @ZabAkbar]

Don't fear Palantir.

[Muslim Bitcoiner⚡ @MBitcoiner]

Muslim discourse on Bitcoin should always start with addressing the core problem, and it is that Fiat money is completely and inseparably linked with Riba

We examine this problem in great detail in this essay:

[Mohammed @MohammedMH2MD]

@BitcoinErrorLog How do I get invite code?

[Mohammed @MohammedMH2MD]

@HamzaKeynan Bitcoin mahaystaa?

[Cole 🇿🇦 @ColeTU]

How to run Bitcoin Knots on Start9
(+ Sparrow Wallet connection)

@BitcoinKnots @start9labs

[Bitcoin Magazine @BitcoinMagazine]

The price of homes isn't going up; USD is going down. #Bitcoin

[Saifedean Ammous @saifedean]

The best thing about USG acquiring a strategic bitcoin reserve is that it will now learn the concept of opportunity cost.

Dollars have an opportunity cost of ~0 since USG can print them on demand, so everyone in USG has for decades learned to never worry about costs, and never have to make trade-offs. That's why USG spends trillions of dollars every year on horrific things.

But there are only 21 million bitcoin, nobody can make more, and everything you spend comes at the cost of more bitcoin. Once you start calculating the opportunity cost in terms of bitcoin forgone, and the appreciation of the market value of these bitcoin, the vast majority of USG spending begins to look really stupid.

Most bitcoiners can tell you many stories about how finding bitcoin has helped them eliminate all kind of frivolous and wasteful spending. Now apply that to USG, and you could conservatively estimate that 90% of its spending would not pass the bitcoin opportunity cost test. Everything will be weighed against bitcoin and almost all of it will be found wanting.

Most bitcoiners imagined that bitcoin would destroy the value of the dollar and bankrupt USG. But if bitcoin merely teaches USG to spend responsibly, that on its own could go a very long way toward eliminating most of its evils.

Truly, bitcoin fixes everything.

[Muslim Bitcoiner⚡ @MBitcoiner]

If the shaytan can spend hundreds of years methodically institutionalizing usury and weaving Riba in every part of the monetary system,

Then you can spend a few hours learning how to escape it through Bitcoin and reclaim your financial sovereignty.

[Akbar Zab @ZabAkbar]

The Secrets Of The Federal Reserve.

[Mohammed @MohammedMH2MD]

@MRDAAASH Is it real or AI generated?

[Muslim Bitcoiner⚡ @MBitcoiner]

Bitcoin maximalists are about to get even more toxic

And we are here for it 😁

[Mohammed @MohammedMH2MD]

@AbdallahBotan @Bitcoin Haa , waa lacagta ugu fiican ee hadda aduunka oo dhan haysto, waa lacag adag oo lagu isku haleyn karo. Waxaa qiyaasayaa in aad fahmayso muhiimadda ay lacagi leedahay. Marka hadii aad rabto in aad kawada sheekaysano , diyaar ahey aan wada xiriirno inshallah.