The prophet (PBUH) said: “on the night of ascension I came upon people whose stomachs were like houses with snakes visible from outside. I asked Gabriel who they were. He replied that they were people who had received interest”
The prophet (PBUH) said: “Riba has seventy segments, the least serious being equivalent to a man committing adultery with his own mother.”
The prophet (PBUH) said: “ There will certainly come a time when everyone will take Riba and if he does not do so, its dust will reach him”
The prophet (PBUH) said: “ Allah(SWT) would be justified in not allowing four persons to enter paradise or to taste its blessings: he who drinks habitually, he who takes Riba, he who usurps an orphan’s property without rights, and he who is undutiful to his parents.”
Allah's Apostle employed someone as a governor at Khaibar. When the man came to Medina, he brought with him dates called Janib. The Prophet asked him, "Are all the dates of Khaibar of this kind?" The man replied, "(No), we exchange two Sa's of bad dates for one Sa of this kind of dates (i.e. Janib), or exchange three Sa's for two." On that, the Prophet said, "Don't do so, as it is a kind of usury (Riba) but sell the dates of inferior quality for money, and
then buy Janib with the money".
`Abdullah bin Mas`ud (May Allah be pleased with him) reported: "The Messenger of Allah (PBUH) cursed the one who accepts Ar-Riba (the usury) and the one who pays it." (Muslim Hadith no. 1615)
The narration in At-Tirmidhi adds: "And the one who records it, and the two persons who stand witness to it."
The commentary to the above hadith given in Riyadh us Saleheen is as follows:
Both the parties, that is the one who charges interest and the one who pays it, are equally guilty in the matter of usury ( or Riba). This Hadith highlights the intensity of unlawfulness of Ar-Riba, or what has come to be called nowadays interest which can be judged from the fact that not only the person who charges it and the one who pays it are cursed but even those who write the documents and bear witness to the transaction are condemned although the latter two have no active part in the deal. They have been condemned for their mere co-operation in the matter of interest. Thus, we learn that even co-operation in the deal in which interest is involved is an invitation to the Curse and Wrath of Allah. The reason for such severity in the matter of interest is that Islam wants to create a society which is founded on fraternity, sympathy, selflessness and sacrifice. If someone is in need of money, the rich should fulfill his needs for the sake of Allah's Pleasure or give him a loan without interest. As against the Islamic system, this system of interest is based on selfishness, exploitation and suppression. In the interest-ridden societies, the affluent ones are not inclined to co-operate with the needy for the sake of Allah. All they are concerned with is their own interest. Their lust and greed are not reduced in the slightest measure even after draining the last drop of the blood of the poor. This is the reason why Shari`ah has forbidden interest of every kind and regarded it unlawful, no matter whether the loan is for the personal need or commercial requirements.
Some people say that there did not exist any practice of commercial loan in Arabia at that time and people used to borrow money for their personal needs only. On the basis of this plea, they say that the interest which has been forbidden by Islam relates to the latter form. For this reason, they hold that interest lawful which is charged on loan taken for industry and commerce. They contend that since the borrowers in industrial and commercial sectors make huge profits from such loans, how does it become unlawful if they pay the lender a small fixed annual amount against it? In their opinion, it is a right of the lender which should be paid to him on his wealth. But such arguments are totally wrong for two major reasons:
1) First, the assumption that there was no practice of commercial loans in Arabia is altogether baseless. Commercial loan was certainly in vogue in the Arab society and there is no point in debating this fact.
2) Second, nobody can say with certainty that the amount invested by a person in business will yield profit without fail because we see it every day that sometimes huge investments made in business and industry result in colossal loss, but the lending agency does not bother about it at all and it recovers from the borrower every penny of his loan and interest. Is this not the height of tyranny and selfishness? If it is supposed that there is no loss, even then the interest on loan substantially contributes to the increase in prices of goods. Whatever interest an industrialist pays on loan is added to the cost of his goods, which ultimately increases their prices and in turn adversely affects the purchasing capacity of the customers - the masses. This is the reason why Islam has closed this largest source of exploitation, suppression and tyranny by declaring every kind of interest unlawful.
It is very sad indeed that in emulating the western societies, Muslims have also founded their economy on the system of interest. The westernized rulers of the Muslim countries are not making any effort to emancipate their countries from this curse, nor do the people of these countries now have any passion to save themselves from it. In fact, a large majority of them borrow and lend money on interest through the bank without any regard to the Islamic injunctions in this respect.
Given below are some points for the consideration of those Muslims who want to protect their Faith and religion and save themselves from the curse of interest.
The word used for interest in the Qur'an is Ar-Riba which means excess. In Shari`ah, it is the measure of excess in one thing when two things are exchanged in some bargain; or in the case of a loan, an increased amount of the loan at the time of its payment. Ar-Riba is of two kinds:
First, Riba Al-Fadl: To take more in exchange of one commodity in the event of barter of two similar commodities.
Second, Riba An-Nasi'ah: To take a larger return of one thing while two identical things are bartered. But in this case the larger return is effected after a fixed period of time.
In Islamic jurisprudence, assets are of two types. One type is of commodities and the other is of the mode of price for exchanging commodities called Thaman Then every type has a class of varieties. For example, food grains are a type of assets and rice, wheat, etc., are its varieties. Similarly, silver, gold, etc., are varieties of the second type of assets. Coins, currency notes, company shares, etc., can also be considered varieties of this type in contemporary life.
This Hadith has injunctions in respect of both types of assets. Six things mentioned in the Hadith are gold, silver, wheat, barley, dates and salt. Some religious scholars have restricted the matters relating to interest to these six things only and do not regard increase or decrease in other things as usury, while going by analogy the majority of scholars and jurists have included other things also in this list. (For instance, all the food grains whether they are calculated in terms of weight or measure, or which have - like gold and silver - the quality of being Thaman, or according to some scholars and jurists which are capable of being stored).
Thus, to sum up, these two types of assets have four varieties:
1. Commodities which are sold by weight.
2. Commodities which are sold by measure.
3. Commodities which can be stored.
4. Commodities which are used as Thaman in sale and purchase.
In all such matters the position of interest-bearing and interest-free things would be as under:
1. When commodities to be exchanged are of the same `type' and `variety,' any increase or decrease in them will be unlawful, as will be their sale on credit; for example, exchange of wheat with wheat and rice with rice. It is essential that these things are equal in measure and/or weight, and are in actual possession.
2. If two things to be exchanged are of the same `type' but of a different `variety,' any increase or decrease in them is permissible. Their sale on credit is, however, not lawful. For instance, the exchange of one kilogram of silver with two grams of gold, or the barter of one kilo barley with half a kilo wheat, or the exchange of one dinar with four riyals. If such a bargain is on cash basis it will be fair, but any credit in this case is not correct.
3. When the two things to be exchanged are not of the same `type' and are also different in `variety,' then any increase or decrease in them is permissible and their sale on credit is also allowed. For example, exchange of one kilogramme of wheat with a gram of gold, bargain of one kilogramme of dates with ten Tola (about 116 grams) silver. Any increase or decrease in them is permissible, as is their sale on credit.
Thursday, April 23, 2009
Riba: The Personal Dilemma 5 Ways to Deal with it
by Abdul Malik Mujahid
As a Muslim who bows his head to his Creator it is a serious question: How to obey Him? In a world that revolves around interest (Riba). A world that runs on it. Banks, financing, mortgage, all involve interest. There are millions of Muslims and non-Muslims who live without interest. This article discusses practical ways of living a successful life here without compromising success in the hereafter.
1. Interest from Credit and credit cards
Credit cards are the pillar of consumerism. They are also based on a system of interest-buy now, pay later, and the later you pay, the higher the interest.
I suggest that you send your credit card back to the company in two pieces.
If you still owe money, they will continue to send you bills. Plan now to make a final payment soon. Pray that Allah liberates you from this burden.
If you are sure that you must have a credit card, pay the bill in full as soon as you receive it. If you wait for the due date, it is likely that you will forget once in a while and end up paying interest on it. Since interest is forbidden, we must avoid it.
A Muslim forgot to pay his bill on time and ended up with finance charges on the next bill. He called the service representative, saying that he had always paid his bills in full and on time.
This was a mistake and he wanted the finance charges removed. It did not not take long for the service agent to check his record and delete the finance charges.
Another Muslim whose request for the same thing was denied, wrote a letter explaining that he had paid his bills on time in full for the last seven years. An excellent credit history.
He said: If you cannot remove the finance charges which I have incurred this time then maybe I need to take my business somewhere else. He made it clear that his position on interest was not to be compromised. With his letter he enclosed his Mastercard in two pieces. Within three days he received a call from the card issuing company consenting to his position.
They sent him a new card with the same credit line as before. Although the credit card contract obliges you to pay interest, your credit history helps you to take a stand for your belief.
2. Bank Accounts
Banks are the center of the interest-based economy.
Conscientious Muslims opt for a checking account instead of an interest-bearing account. This is also the reason why Islamic organizations and Masjids meet their banking needs through checking accounts. Certainly the bank is benefiting from your money but this is a compromise and you have little choice.
Although there are 50 Islamic banks offering banking services in 23 countries, including a few Western non-Islamic banks which have Islamic windows, none of these banks are available in the United States yet.
It is interesting to note that one in five American families, i.e. 17 million families, do not have a bank account. If they receive a check they cash it through a currency exchange. If they have to pay someone they get a money order from the post office. A majority of people in the world, in fact, live without a bank account.
3. How to deal with the interest you already own
If you have an interest-bearing account which you would like to close now, or the IRS has sent you a check with interest, or you owned a bond and you want to sell it now to get away from interest. I congratulate you on your decision.
Give the amount of interest to any poor person. Do not spend a single penny on yourself.
It is Haram for you but not for the poor and the needy. Some Masjids have a special account to dispose of this money for the poorest of the poor. Although some scholars recommend leaving the interest money in the bank, I would not give the banks one penny. True, it is not my money. But it is not theirs either.
4. How to deal with the interest which you owe
One Muslim was asked to pay interest by the IRS because of some problems on his tax return. His secretary told the auditing agent that her boss neither paid nor took any interest since he was a Muslim. The secretary was a non-Muslim who knew the Islamic position. When the secretary remained undeterred on the issue of interest, the IRS agent asked if she could give any references. She showed him the book which contained the Quranic verse prohibiting interest.
The IRS agent had to consult his supervisor-Guess what? He won. Well, the secretary won since the boss didn't know yet what a fight she-a non-Muslim secretary-was putting up with the IRS, knowing the belief and character of her boss. He did not have to pay interest to the IRS on religious grounds.
A Muslim physician was charged interest on a construction job because he inadvertently delayed payment of the bill for one month. He wrote to apologize for the delay and informed the authorities that Islam did not allow him to pay or receive interest on any transaction.
Not only were the interest charges removed, but an opportunity for Dawa came up. Taking a stand with sincere motives pays in this world and in the world to come.
If you owe interest through a legal contract, get out of the deal by paying off as soon as possible.
Dua, budgeting and planning is important in achieving this goal. There are thousands of Muslims in America who have done this. You are not alone. Allah will give Barakah in this right decision. The hardship you will go through because of this decision will be, Insha Allah, a sort of purification to seek Allah's forgiveness of past mistakes.
5. Buying a house
Owning a house is the American dream.
But the fact is that about one in three families in America, or 28 million families, do not own a house. Buying with financing is an option made easy since everyone does it.
It is not only Haram to buy anything through interest-based financing, it is, in many cases, non-economical and bound to lead to headaches. Hundreds and thousands of people lose their houses every year since they spend before they earn through the financing system. And when you lose in attempting the American dream, you lose big.
You even lose what you had already paid for.
So why not think of not losing on the Day of Judgment by opting for a simple life here.
I know a Muslim sister who, before accepting Islam, used to be a real estate agent and was married to another real estate agent. She not only lost her dream hose but suffered the breakup of her marriage as well. Now a Muslima, she lives in a mobile home in a mountainous countryside. She now deals in interest-free real estate transactions only. She feels that her life is simpler and more comfortable now.
Ask yourself these questions
Non-financing options are difficult but possible. However, do ask yourself some hard questions before you decide to buy a house:
Is it absolutely necessary that you buy a house even though you cannot afford it?
Is it necessary to buy a house which is beyond your means?
Is it wise to pay four times the amount of the actual price of the house just to own it now?
Is it not cheaper and headache-free to live in a rented apartment than to own a house where you do not have to worry about snow shoveling, lawn mowing, repairs, rising property taxes, etc.?
Have you made a budget for yourself?
Are you sure you are going to keep the income which you are counting on to buy the house?
Do you have enough of a financial cushion for any and every emergency?
After this analysis, if your answer is still yes, you must buy a house, then consider some of the interest-free options.
Make a budget which will allow you to save more money. Involve every one in the family in the process of saving money. The more money you can give as down payment, the better your chances of a contract which doesn't involve financing.
Do adequate research before you end up with any real estate agent. Read books about it. Seek friends' assistance who have bought houses without mortgage.
I know people who own good houses in safe neighborhoods for as little as $10,000 and $20,000. They were able to find good deals because of good
research.
As well, their firm anti-interest commitment made them look harder into other options. One of the neighbors told a new homeowner that he wanted to buy the same house for a long time but could not figure out whom to approach. The house had been advertised for six months in a newspaper. Information is certainly power.
HUD homes
Housing and Urban Development (HUD) houses are announced at least twice a month by the federal government for auction. They are good houses, which you can buy at 50 to 60 percent below market price.
In Chicago, where median price of a single family home is $116,000, I know at least six people who have bought their houses in the $10,000 to $30,000 range with three bedrooms and a 2,000 square foot lawn.
If you can save enough money or can get an interest-free loan for two or three years through friends and relatives, you can buy a house for cash. Buying for cash makes your offer more attractive to some sellers. You will be able to get a better deal.
One Muslim I know was able to reduce the asking price by 14 percent because of his cash offer. Since it is a buyer's market, you may be able to get an even better deal. Muslims have developed informal co-ops in which six or seven families help one to buy a house on a cash basis. They develop a personal loan contract among themselves, with witnesses and signatures.
Most of the Masjids and schools in North America are purchased without interest through collective purchasing power and good negotiation. Some Muslims have purchased apartment buildings similarly and in turn have offered them to trusted Muslims and friends on interest-free installments. Many of them, with common consent have turned the basements into a Masjid and school.
You can save the money to afford a higher down payment with a contract to pay off the rest within two or three years without interest.
The Bottom Line
If we consider Allah's Guidance to be essential for success in the Hereafter, then the struggle to stay away from interest despite the prevailing system is our way of achieving Allah's pleasure. I agree that it is difficult. But Allah promises Jannah in the life to come which is everlasting.
The example of this world compared to the world to come, as the Prophet (peace and blessings be upon him) said, is like a drop of water to an ocean.
As a Muslim who bows his head to his Creator it is a serious question: How to obey Him? In a world that revolves around interest (Riba). A world that runs on it. Banks, financing, mortgage, all involve interest. There are millions of Muslims and non-Muslims who live without interest. This article discusses practical ways of living a successful life here without compromising success in the hereafter.
1. Interest from Credit and credit cards
Credit cards are the pillar of consumerism. They are also based on a system of interest-buy now, pay later, and the later you pay, the higher the interest.
I suggest that you send your credit card back to the company in two pieces.
If you still owe money, they will continue to send you bills. Plan now to make a final payment soon. Pray that Allah liberates you from this burden.
If you are sure that you must have a credit card, pay the bill in full as soon as you receive it. If you wait for the due date, it is likely that you will forget once in a while and end up paying interest on it. Since interest is forbidden, we must avoid it.
A Muslim forgot to pay his bill on time and ended up with finance charges on the next bill. He called the service representative, saying that he had always paid his bills in full and on time.
This was a mistake and he wanted the finance charges removed. It did not not take long for the service agent to check his record and delete the finance charges.
Another Muslim whose request for the same thing was denied, wrote a letter explaining that he had paid his bills on time in full for the last seven years. An excellent credit history.
He said: If you cannot remove the finance charges which I have incurred this time then maybe I need to take my business somewhere else. He made it clear that his position on interest was not to be compromised. With his letter he enclosed his Mastercard in two pieces. Within three days he received a call from the card issuing company consenting to his position.
They sent him a new card with the same credit line as before. Although the credit card contract obliges you to pay interest, your credit history helps you to take a stand for your belief.
2. Bank Accounts
Banks are the center of the interest-based economy.
Conscientious Muslims opt for a checking account instead of an interest-bearing account. This is also the reason why Islamic organizations and Masjids meet their banking needs through checking accounts. Certainly the bank is benefiting from your money but this is a compromise and you have little choice.
Although there are 50 Islamic banks offering banking services in 23 countries, including a few Western non-Islamic banks which have Islamic windows, none of these banks are available in the United States yet.
It is interesting to note that one in five American families, i.e. 17 million families, do not have a bank account. If they receive a check they cash it through a currency exchange. If they have to pay someone they get a money order from the post office. A majority of people in the world, in fact, live without a bank account.
3. How to deal with the interest you already own
If you have an interest-bearing account which you would like to close now, or the IRS has sent you a check with interest, or you owned a bond and you want to sell it now to get away from interest. I congratulate you on your decision.
Give the amount of interest to any poor person. Do not spend a single penny on yourself.
It is Haram for you but not for the poor and the needy. Some Masjids have a special account to dispose of this money for the poorest of the poor. Although some scholars recommend leaving the interest money in the bank, I would not give the banks one penny. True, it is not my money. But it is not theirs either.
4. How to deal with the interest which you owe
One Muslim was asked to pay interest by the IRS because of some problems on his tax return. His secretary told the auditing agent that her boss neither paid nor took any interest since he was a Muslim. The secretary was a non-Muslim who knew the Islamic position. When the secretary remained undeterred on the issue of interest, the IRS agent asked if she could give any references. She showed him the book which contained the Quranic verse prohibiting interest.
The IRS agent had to consult his supervisor-Guess what? He won. Well, the secretary won since the boss didn't know yet what a fight she-a non-Muslim secretary-was putting up with the IRS, knowing the belief and character of her boss. He did not have to pay interest to the IRS on religious grounds.
A Muslim physician was charged interest on a construction job because he inadvertently delayed payment of the bill for one month. He wrote to apologize for the delay and informed the authorities that Islam did not allow him to pay or receive interest on any transaction.
Not only were the interest charges removed, but an opportunity for Dawa came up. Taking a stand with sincere motives pays in this world and in the world to come.
If you owe interest through a legal contract, get out of the deal by paying off as soon as possible.
Dua, budgeting and planning is important in achieving this goal. There are thousands of Muslims in America who have done this. You are not alone. Allah will give Barakah in this right decision. The hardship you will go through because of this decision will be, Insha Allah, a sort of purification to seek Allah's forgiveness of past mistakes.
5. Buying a house
Owning a house is the American dream.
But the fact is that about one in three families in America, or 28 million families, do not own a house. Buying with financing is an option made easy since everyone does it.
It is not only Haram to buy anything through interest-based financing, it is, in many cases, non-economical and bound to lead to headaches. Hundreds and thousands of people lose their houses every year since they spend before they earn through the financing system. And when you lose in attempting the American dream, you lose big.
You even lose what you had already paid for.
So why not think of not losing on the Day of Judgment by opting for a simple life here.
I know a Muslim sister who, before accepting Islam, used to be a real estate agent and was married to another real estate agent. She not only lost her dream hose but suffered the breakup of her marriage as well. Now a Muslima, she lives in a mobile home in a mountainous countryside. She now deals in interest-free real estate transactions only. She feels that her life is simpler and more comfortable now.
Ask yourself these questions
Non-financing options are difficult but possible. However, do ask yourself some hard questions before you decide to buy a house:
Is it absolutely necessary that you buy a house even though you cannot afford it?
Is it necessary to buy a house which is beyond your means?
Is it wise to pay four times the amount of the actual price of the house just to own it now?
Is it not cheaper and headache-free to live in a rented apartment than to own a house where you do not have to worry about snow shoveling, lawn mowing, repairs, rising property taxes, etc.?
Have you made a budget for yourself?
Are you sure you are going to keep the income which you are counting on to buy the house?
Do you have enough of a financial cushion for any and every emergency?
After this analysis, if your answer is still yes, you must buy a house, then consider some of the interest-free options.
Make a budget which will allow you to save more money. Involve every one in the family in the process of saving money. The more money you can give as down payment, the better your chances of a contract which doesn't involve financing.
Do adequate research before you end up with any real estate agent. Read books about it. Seek friends' assistance who have bought houses without mortgage.
I know people who own good houses in safe neighborhoods for as little as $10,000 and $20,000. They were able to find good deals because of good
research.
As well, their firm anti-interest commitment made them look harder into other options. One of the neighbors told a new homeowner that he wanted to buy the same house for a long time but could not figure out whom to approach. The house had been advertised for six months in a newspaper. Information is certainly power.
HUD homes
Housing and Urban Development (HUD) houses are announced at least twice a month by the federal government for auction. They are good houses, which you can buy at 50 to 60 percent below market price.
In Chicago, where median price of a single family home is $116,000, I know at least six people who have bought their houses in the $10,000 to $30,000 range with three bedrooms and a 2,000 square foot lawn.
If you can save enough money or can get an interest-free loan for two or three years through friends and relatives, you can buy a house for cash. Buying for cash makes your offer more attractive to some sellers. You will be able to get a better deal.
One Muslim I know was able to reduce the asking price by 14 percent because of his cash offer. Since it is a buyer's market, you may be able to get an even better deal. Muslims have developed informal co-ops in which six or seven families help one to buy a house on a cash basis. They develop a personal loan contract among themselves, with witnesses and signatures.
Most of the Masjids and schools in North America are purchased without interest through collective purchasing power and good negotiation. Some Muslims have purchased apartment buildings similarly and in turn have offered them to trusted Muslims and friends on interest-free installments. Many of them, with common consent have turned the basements into a Masjid and school.
You can save the money to afford a higher down payment with a contract to pay off the rest within two or three years without interest.
The Bottom Line
If we consider Allah's Guidance to be essential for success in the Hereafter, then the struggle to stay away from interest despite the prevailing system is our way of achieving Allah's pleasure. I agree that it is difficult. But Allah promises Jannah in the life to come which is everlasting.
The example of this world compared to the world to come, as the Prophet (peace and blessings be upon him) said, is like a drop of water to an ocean.
Why does Islam Prohibit Riba
Introduction
Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life. History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most significant characteristics for the social, political, economic as well as all realms of human interaction. Exploitation and any source of unjustified enrichment in Islam is prohibited. The Holy Qur’an has emphatically instructed Muslims not to acquire each other’s property wrongfully[1]. Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah(swt).
The goals of socio-economic justice and equitable distribution of income and wealth are integral parts of the moral philosophy of Islam. However, one of the socio-economic reforms made by Islam was the prohibition of riba (interest). About the efficacy and usefulness of the prohibition of interest in Islam, Muslim economists have tried to provide the juridical clarity and support based on reason, as opposed to mere belief. The purpose of this paper is to spell out the meaning of riba or interest, its different kinds, and the social, moral, as well as economic rationale of its prohibition.
Interest
In modern secular economic systems interest plays a very important role. In fact, in the Western world people cannot think of any economic system without interest. From a theoretical standpoint, interest has been a debatable subject among economic and political theorists. Abu Saud defines interest as “ the excess of money paid by the borrower to the lender over and above the principal for the use of the lender’s liquid money over a certain period of time”[2]. Economists have presented different interpretations of interest. Samuelson states that “Interest is the price of rental for the use of money”[3]. Don Patinkin gives the following definition: “Interest is one of the forms of income from property, the other forms being dividends, rent and profit”[4]. However, J.M. Keynes did not define interest but mentioned the rate of interest as “The percentage of excess of a sum of units of money contracted for forward units of time over the spot or cash price of the sum thus contracted for forward delivery”[5].
However, Muslim, socialist and a number of capitalist economists have questioned these explanations on both theoretical and technical grounds. They often stress the point that money capital cannot be treated as capital goods on the same basis as productive factors. It is pertinent to remark here that lending of money for interest was abhorred and, in most cases, prohibited by all the monotheistic religions[6]. An eminent Western economist, Roy Harrod[7], regards the abolition of interest is the only way to avert a collapse of capitalism. Not only this, but he speaks with great admiration for an interest-less society in his work on Economic Dynamics. Harrod clearly recognizes that, “It is not the profit itself, earned by services, by assiduity, by imagination, or by courage, but the continued interest accruing from the accumulation that makes that profit taker eventually appear parasitical…” and he further states that an interest-less society which will be a totally new kind of society” would be the correct and final answer to all that is justly advanced by the critics of capitalism.
Prohibition of riba (interest) in Islam
Riba is prohibited in Islam as it appears explicitly in the Holy Qur’an. There is complete unanimity among all Islamic schools of thought regarding the prohibition of riba. Since the Qur’an is the undisputed source of guidance in Islam for all Muslims, there is unanimous agreement on the fact that Islam has forbidden the practice of riba. The debate on whether interest is riba or not has been settled. The ulama have made crystal clear that interest is riba. The modern banking system is organized on the basis of a fixed payment called interest. That is why the practices of the modern banking system are in conflict with the principles of Islam which strictly prohibit riba. Islam is opposed to exploitation in every form and stands for fair and equitable dealings among all men. To charge interest from someone who is constrained to borrow to meet his essential consumption requirement is considered an exploitative practice in Islam. Charging of interest on loans taken for productive purposes is also prohibited because it is not an equitable form of transaction[8]. Now let’s have a look on the prohibition of interest in the light of the Qur’an and the Sunnah (tradition of Prophet Muhammad (saw)).
Prohibition of riba in the holy quran
In several verses of the Holy Qur’an, Allah(swt) has mentioned the consequences of riba. The Qur’an did not declare the prohibition of riba in the early stage of revelation, rather we find that the complete prohibition of interest came sequentially.
In the Qur’an Allah(swt) says:
“That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied”. (30:39)
“That they took riba (usury), through they were forbidden and that they devoured men’s substance wrongfully – We have prepared for those among men who reject faith a grievous punishment.” (4:161)
“O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper.” (3:140)
“Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: ‘Trade is like usury.’ But Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who repeat (the offence) are companions of the fire, they will abide therein (forever)” (2:275)
“O you who have attained faith! Remain conscious of God, and give up all outstanding gains from Usury, if you are (truly) believers” (2: 278)
Abdullah Yusuf Ali[9] in his commentary on the Holy Qur’an mentioned that usury is condemned and prohibited in the strongest possible terms. There can be no question about the prohibition. Owing to the fact that interest occupies a central position in modern economic life, and specially since interest is the very life blood of the existing financial institutions, a number of Muslim countries have been inclined to interpret it in a manner which is radically different form the understanding of Muslim scholars throughout the last fourteen centuries and is also sharply in conflict with the categorical statements of the Prophet Muhammad(saw).
Prohibition of riba in the hadith [10]
Jabir reported: The Prophet (saw), cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, “they are all alike (in guilt).”
Jabir ibn Abdullah, giving a report on the Prohet’s farewell pilgrimage, said: The Prophet (saw), addressed the people and said, “All the riba al-jahiliyyah is annulled, the first riba htat I annulled is our riba, accruing to al-Abbas ibn Abdul Mutalib (the Prophet’s uncle).”
Abu Hurayrah (ra) narrated that the Prophet (saw), said: “riba has seventy segments, the least serous is equivalent to a man committing incest with his own mother.”
Abu Hurayrah (ra) narrated that the Prophet (saw) said: “”God would not allow four persons to enter paradise or to taste its blessings: he who drinks wine, he who takes riba, he who usurps an orphan’s property without right and he who is undutiful to his parents.”
The meaning of riba
The word riba has been used in the Holy Qur’an on several occasions. So it is necessary to know what it means or what it really stands for. Riba has been extracted from Raba. It means addition, increase[11]. So, riba literally means to increase, to grow to rise, to add, to swell. It is, however, not every increase or growth which has been prohibited by Islam. In the Shari’ah, “riba” technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. In this sense riba has the same meaning as interest in accordance with the consensus of all jurists without any exception[12]. So the Holy Qur’an and the Hadith do not make any such difference between usury and interest. Interest and usury both are taken as synonymous for the Arabic word riba.
Types of riba
Althought the Qur’an did not specify any particular kind of riba, it is generally held that the word al-riba in the Qur’an is that kind of dealing which had been in vogue during the pre-Islamic days[13]. Muslim jurists have classified riba in two types: 1. riba al-nasi’ah, and 2. riba al-fadl.
Riba al- nasi’ah
The term nasi’ah means to postpone or to wait and it refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. Hence it refers to the interest on loans. The prohibition of riba al nasi’ah essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is not permitted by the Shari’ah[14].
Riba al-fadl
Islam, however, wishes to eliminate not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of unjust exchange in business transactions.
Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an addition by the debtor to the creditor in exchange of commodities of the same kind. The following tradition of the Prophet Muhammad (saw) is cited[15] as evidence. It is related that Abu Said al-Khurdi said: “the Prophet Muhammad (saw) has said that gold in return for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, can be traded if and only if they are in the same quantity and that is should be hand to hand. If someone gives more or takes, then he is engaged in riba and accordingly has committed a sin.”
To sum up, riba al-nasi’ah and riba al-fadl are both covered by the verse, “Allah has allowed trade and prohibited riba” (2:275), while riba-al nasi’ah relates to loans and riba al-fadl relates to trade. Although trade is allowed in principle it does not mean that everything in trade is allowed.
[1] Al-Qur’an 2:188, 4:29.
[2] Abu Saud , M., “Money, Interst and Qirad in Islam”, Studies in Islamic Economics, The Islamic Foundation , Leicester,, UK , 1983. p.64
[3] Samuelson, P., Economics, 10th Edition , McGraw Hill, New York, 1976, p.50
[4] Patinkin, D., Studies in Monetary Economics , Harper and Row, New York, 1972, p.118
[5] Keynes, J.M., The General Theory of Employment, Interest and Money, London, 1936, p.22.
[6] Al-Harran, S., Islamic Finance: Partnership Finance, Pelanduk Publications, Kuala Lumpur, Malaysia, 1993, p.6
[7] Harrod, R., Towards a Dynamic Economics, London, 1973, pp58-81.
[8] Ahmed, Z., “Prohibition of Interest in Islam”, Journal of Islamic Banking and Finance, Karachi, Pakistan, Vol.1, No.1, 1984, p.20
[9] Ali, Abdullah Yusuf., The Meaning if the holy Qur’an , Commentary no.324-326, Amana Corporation, Brentwood, Maryland, USA, 1992, p.115.
[10] Capra, M.U., “ The Nature and its Treatment in the Qur’an, Hadith and Fiqh”, in An Introduction to Islamic Finance, Sheikh Gazali Sheikh Abod, Syed Omar Syed Agil and Aidit Hj. Ghazali (eds)., Quil Publishers, Kuala Lumpur, Mala ysia , 1992, pp.380-381
[11] Maudoodi, abul A’la, Sud ‘O’ Adhunik Banking ( Interest and Modern Banking, translated into Bengali from the Origianl Book ‘Sud’ in Urdu), Adhunik Prokashani, Dhaka, Bangladesh, 1987, p.84.
[12] Al –Harran, S., op.cit., p.16
[13] Ahmed, Z., in “ The Theory of Riba”, in An Introduction to Islamic Finance , Sheikh Ghazali, Syed Omar, Adit Ghazali (eds), Quill Publishers, Kuala Lumpur, Malaysia, 1992, p.57.
[14] Chapra, M.U., op-cit, p.35
[15] Al-Harran, S., op-cit, p.18
Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life. History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most significant characteristics for the social, political, economic as well as all realms of human interaction. Exploitation and any source of unjustified enrichment in Islam is prohibited. The Holy Qur’an has emphatically instructed Muslims not to acquire each other’s property wrongfully[1]. Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah(swt).
The goals of socio-economic justice and equitable distribution of income and wealth are integral parts of the moral philosophy of Islam. However, one of the socio-economic reforms made by Islam was the prohibition of riba (interest). About the efficacy and usefulness of the prohibition of interest in Islam, Muslim economists have tried to provide the juridical clarity and support based on reason, as opposed to mere belief. The purpose of this paper is to spell out the meaning of riba or interest, its different kinds, and the social, moral, as well as economic rationale of its prohibition.
Interest
In modern secular economic systems interest plays a very important role. In fact, in the Western world people cannot think of any economic system without interest. From a theoretical standpoint, interest has been a debatable subject among economic and political theorists. Abu Saud defines interest as “ the excess of money paid by the borrower to the lender over and above the principal for the use of the lender’s liquid money over a certain period of time”[2]. Economists have presented different interpretations of interest. Samuelson states that “Interest is the price of rental for the use of money”[3]. Don Patinkin gives the following definition: “Interest is one of the forms of income from property, the other forms being dividends, rent and profit”[4]. However, J.M. Keynes did not define interest but mentioned the rate of interest as “The percentage of excess of a sum of units of money contracted for forward units of time over the spot or cash price of the sum thus contracted for forward delivery”[5].
However, Muslim, socialist and a number of capitalist economists have questioned these explanations on both theoretical and technical grounds. They often stress the point that money capital cannot be treated as capital goods on the same basis as productive factors. It is pertinent to remark here that lending of money for interest was abhorred and, in most cases, prohibited by all the monotheistic religions[6]. An eminent Western economist, Roy Harrod[7], regards the abolition of interest is the only way to avert a collapse of capitalism. Not only this, but he speaks with great admiration for an interest-less society in his work on Economic Dynamics. Harrod clearly recognizes that, “It is not the profit itself, earned by services, by assiduity, by imagination, or by courage, but the continued interest accruing from the accumulation that makes that profit taker eventually appear parasitical…” and he further states that an interest-less society which will be a totally new kind of society” would be the correct and final answer to all that is justly advanced by the critics of capitalism.
Prohibition of riba (interest) in Islam
Riba is prohibited in Islam as it appears explicitly in the Holy Qur’an. There is complete unanimity among all Islamic schools of thought regarding the prohibition of riba. Since the Qur’an is the undisputed source of guidance in Islam for all Muslims, there is unanimous agreement on the fact that Islam has forbidden the practice of riba. The debate on whether interest is riba or not has been settled. The ulama have made crystal clear that interest is riba. The modern banking system is organized on the basis of a fixed payment called interest. That is why the practices of the modern banking system are in conflict with the principles of Islam which strictly prohibit riba. Islam is opposed to exploitation in every form and stands for fair and equitable dealings among all men. To charge interest from someone who is constrained to borrow to meet his essential consumption requirement is considered an exploitative practice in Islam. Charging of interest on loans taken for productive purposes is also prohibited because it is not an equitable form of transaction[8]. Now let’s have a look on the prohibition of interest in the light of the Qur’an and the Sunnah (tradition of Prophet Muhammad (saw)).
Prohibition of riba in the holy quran
In several verses of the Holy Qur’an, Allah(swt) has mentioned the consequences of riba. The Qur’an did not declare the prohibition of riba in the early stage of revelation, rather we find that the complete prohibition of interest came sequentially.
In the Qur’an Allah(swt) says:
“That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied”. (30:39)
“That they took riba (usury), through they were forbidden and that they devoured men’s substance wrongfully – We have prepared for those among men who reject faith a grievous punishment.” (4:161)
“O ye who believe! Devour not usury doubled and multiplied; but fear Allah, that ye may (really) prosper.” (3:140)
“Those who devour usury will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: ‘Trade is like usury.’ But Allah hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge). But those who repeat (the offence) are companions of the fire, they will abide therein (forever)” (2:275)
“O you who have attained faith! Remain conscious of God, and give up all outstanding gains from Usury, if you are (truly) believers” (2: 278)
Abdullah Yusuf Ali[9] in his commentary on the Holy Qur’an mentioned that usury is condemned and prohibited in the strongest possible terms. There can be no question about the prohibition. Owing to the fact that interest occupies a central position in modern economic life, and specially since interest is the very life blood of the existing financial institutions, a number of Muslim countries have been inclined to interpret it in a manner which is radically different form the understanding of Muslim scholars throughout the last fourteen centuries and is also sharply in conflict with the categorical statements of the Prophet Muhammad(saw).
Prohibition of riba in the hadith [10]
Jabir reported: The Prophet (saw), cursed the receiver and the payer of interest, the one who records it (the contract) and the two witnesses to the transaction and said, “they are all alike (in guilt).”
Jabir ibn Abdullah, giving a report on the Prohet’s farewell pilgrimage, said: The Prophet (saw), addressed the people and said, “All the riba al-jahiliyyah is annulled, the first riba htat I annulled is our riba, accruing to al-Abbas ibn Abdul Mutalib (the Prophet’s uncle).”
Abu Hurayrah (ra) narrated that the Prophet (saw), said: “riba has seventy segments, the least serous is equivalent to a man committing incest with his own mother.”
Abu Hurayrah (ra) narrated that the Prophet (saw) said: “”God would not allow four persons to enter paradise or to taste its blessings: he who drinks wine, he who takes riba, he who usurps an orphan’s property without right and he who is undutiful to his parents.”
The meaning of riba
The word riba has been used in the Holy Qur’an on several occasions. So it is necessary to know what it means or what it really stands for. Riba has been extracted from Raba. It means addition, increase[11]. So, riba literally means to increase, to grow to rise, to add, to swell. It is, however, not every increase or growth which has been prohibited by Islam. In the Shari’ah, “riba” technically refers to the premium that must be paid by the borrower to the lender along with the principal amount as a condition for the loan or for an extension in its maturity. In this sense riba has the same meaning as interest in accordance with the consensus of all jurists without any exception[12]. So the Holy Qur’an and the Hadith do not make any such difference between usury and interest. Interest and usury both are taken as synonymous for the Arabic word riba.
Types of riba
Althought the Qur’an did not specify any particular kind of riba, it is generally held that the word al-riba in the Qur’an is that kind of dealing which had been in vogue during the pre-Islamic days[13]. Muslim jurists have classified riba in two types: 1. riba al-nasi’ah, and 2. riba al-fadl.
Riba al- nasi’ah
The term nasi’ah means to postpone or to wait and it refers to the time period that is allowed for the borrower to repay the loan in return for the addition of the premium. Hence it refers to the interest on loans. The prohibition of riba al nasi’ah essentially implies that the fixing in advance of a positive return on a loan as a reward for waiting is not permitted by the Shari’ah[14].
Riba al-fadl
Islam, however, wishes to eliminate not merely the exploitation that is intrinsic in the institution of interest, but also that which is inherent in all forms of unjust exchange in business transactions.
Riba al-fadl is the excess over and above the loan paid in kind. It lies in the payment of an addition by the debtor to the creditor in exchange of commodities of the same kind. The following tradition of the Prophet Muhammad (saw) is cited[15] as evidence. It is related that Abu Said al-Khurdi said: “the Prophet Muhammad (saw) has said that gold in return for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt, can be traded if and only if they are in the same quantity and that is should be hand to hand. If someone gives more or takes, then he is engaged in riba and accordingly has committed a sin.”
To sum up, riba al-nasi’ah and riba al-fadl are both covered by the verse, “Allah has allowed trade and prohibited riba” (2:275), while riba-al nasi’ah relates to loans and riba al-fadl relates to trade. Although trade is allowed in principle it does not mean that everything in trade is allowed.
[1] Al-Qur’an 2:188, 4:29.
[2] Abu Saud , M., “Money, Interst and Qirad in Islam”, Studies in Islamic Economics, The Islamic Foundation , Leicester,, UK , 1983. p.64
[3] Samuelson, P., Economics, 10th Edition , McGraw Hill, New York, 1976, p.50
[4] Patinkin, D., Studies in Monetary Economics , Harper and Row, New York, 1972, p.118
[5] Keynes, J.M., The General Theory of Employment, Interest and Money, London, 1936, p.22.
[6] Al-Harran, S., Islamic Finance: Partnership Finance, Pelanduk Publications, Kuala Lumpur, Malaysia, 1993, p.6
[7] Harrod, R., Towards a Dynamic Economics, London, 1973, pp58-81.
[8] Ahmed, Z., “Prohibition of Interest in Islam”, Journal of Islamic Banking and Finance, Karachi, Pakistan, Vol.1, No.1, 1984, p.20
[9] Ali, Abdullah Yusuf., The Meaning if the holy Qur’an , Commentary no.324-326, Amana Corporation, Brentwood, Maryland, USA, 1992, p.115.
[10] Capra, M.U., “ The Nature and its Treatment in the Qur’an, Hadith and Fiqh”, in An Introduction to Islamic Finance, Sheikh Gazali Sheikh Abod, Syed Omar Syed Agil and Aidit Hj. Ghazali (eds)., Quil Publishers, Kuala Lumpur, Mala ysia , 1992, pp.380-381
[11] Maudoodi, abul A’la, Sud ‘O’ Adhunik Banking ( Interest and Modern Banking, translated into Bengali from the Origianl Book ‘Sud’ in Urdu), Adhunik Prokashani, Dhaka, Bangladesh, 1987, p.84.
[12] Al –Harran, S., op.cit., p.16
[13] Ahmed, Z., in “ The Theory of Riba”, in An Introduction to Islamic Finance , Sheikh Ghazali, Syed Omar, Adit Ghazali (eds), Quill Publishers, Kuala Lumpur, Malaysia, 1992, p.57.
[14] Chapra, M.U., op-cit, p.35
[15] Al-Harran, S., op-cit, p.18
Saturday, April 18, 2009
Islamic Equity Funds
Islamic investment equity funds market is one of the fastest growing sectors within the Islamic financial system. Currently there are approximately 100 Islamic equity funds worldwide. The total assets managed through these funds currently exceed US$5 billion and is growing by 12-15% per annum. With the continuous interest in the Islamic financial system, there are positive signs that more funds will be launched. Some western majors have just joined the fray or are thinking of launching similar Islamic equity products.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down.
Most of the funds tend to target high net worth individuals and corporate institutions, minimum investments ranging from US$50,000 to as high as US$1,000,000.
Target markets for Islamic funds vary, some cater for their local markets e.g Malaysia and Gulf based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 90's, we have seen the establishment of credible equity benchmarks by Dow Jones Islamic market index and the FTSE Global Islamic Index Series. The website failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.
Despite these successes, this market has seen a record of poor marketing as emphasis is on products and not on addressing the needs of investors. Over the last few years, quite a number of funds have closed down.
Most of the funds tend to target high net worth individuals and corporate institutions, minimum investments ranging from US$50,000 to as high as US$1,000,000.
Target markets for Islamic funds vary, some cater for their local markets e.g Malaysia and Gulf based investment funds. Others clearly target the Middle East and Gulf regions, neglecting local markets and have been accused of failing to serve Muslim communities.
Since the launch of Islamic equity funds in the early 90's, we have seen the establishment of credible equity benchmarks by Dow Jones Islamic market index and the FTSE Global Islamic Index Series. The website failaka.com monitors the performance of Islamic equity funds and provide a comprehensive list of the Islamic funds worldwide.
Islamic Banking: True Modes of Financing
By Dr. Shahid Hasan Siddiqui, Eminent Pakistani Banker & Economist.
Introduction
Prohibition of interest is ordained in Islam in all forms and intent. This Prohibition is strict, absolute and unambiguous. The Holy Qur'an in verse 278 of Surah Al-Baqarah states:
"O ye who believe! fear Allah and give up what remains of your demand for riba, if ye are indeed believers." and verse 2: 279 says "If you do it not, take notice of war from Allah and His Messenger. But if ye turn back, ye shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly."
It therefore, follows that interest is prohibited as it leads to injustices (zulm) and Islam is against all forms of injustices and exploitations and pleads an economic system, which aims at securing extensive socio-economic justice. The Islamic law of prohibition of riba, which includes interest, was originally not based on economic theory but on Divine Authority which considers the charging of interest as an act of injustice.
There could be no denying of the fact that under the interest-based system of banking or in a system not strictly based on the principles and spirit of Shariah, depositors as well as borrowers are exploited in one form or the other. It is however, significant to note that, as in the case of conventional banking, the depositors are being exploited most under the system and practices enforced by banks and financial institutions operating world-wide under the banner of Islamic banking.
Islamic banking made its debut over a quarter a century ago. At present 200 Islamic banks and financial institutions, operating in 27 Muslim and 16 non-Muslim countries, are managing a portfolio of about $200 billion. It is now the time to pose the following questions:
i) Whether banks operating under the banner of Islamic banking have succeeded in the elimination of injustices of the interest-based system as ordained by Holy Qur'an (2:279)?
ii) Whether banks operating under the banner of Islamic banking have contributed to the attainment of socio-economic justice in line with the objectives of Islamic economic system?
iii) Whether banks operating under the banner of Islamic banking are, for all practical purposes, not following the bench marks of interest-based system under Murabaha, Bai-Mu'ajjal or the like modes of financing?
iv) Whether the net result in modes referred to at (iii) above really differs much from the interest-based loaning?
v) Whether by adopting the modes referred to at (iii) above, banks assume any responsibility for the operational losses of the party availing finances from them?
vi) Whether sharing in the operational losses are not the essence of Islamic system of banking?
vi) Whether large scale financing on a perpetual basis, on modes approved for "Sale transactions", can continue to be made for an indefinite period by Islamic banks which are not trading houses but are financial institutions?
While attempting to firm up views in respect of above questions, it must be kept in view that Islamisation of banking system is a part of overall Islamic value system and is not merely refraining from interest-based transactions. The objective of Islamic banking system is to make a positive contribution to the fulfilment of socio-economic objectives of the society in all spheres, including trade, industry & agriculture etc.
True Modes of Financing
An Islamic bank is a financial institution which identifies itself with the spirit of Shariah, as laid down by the Holy Qur'an and Sunnah, as regards its objectives, principles, practices and operations. An Islamic bank does not normally lend money except interest-free loans which are termed as Qard Hasanah (Benevolent Loans) while loans on service charge, not exceeding the actual administrative cost of such loans, have also been permitted by Muslim Scholars.
To replace interest, the ideal mode of financing under the Islamic banking system is "Financing on Profit & Loss Sharing" (PLS) basis. Qard Hasanah are for the benefit of the individuals and the society at large. To safe-guard the interest of depositors/investors, these type of loans, as a matter of policy, do not constitute a significant source of financing by Islamic banks. However, if in any country, the Islamic System of Zakat is established and the Islamic State treasury starts functioning, the requirements of Qard Hasanah would primarily be met by the treasury.
The bulk of financing by Islamic banks has to be equity oriented. In this mode of financing, the losses are shared by the financier along with the entrepreneur in the ratio of their respective capitals. The profits are, however, shared in an agreed ratio. The rates of returns are thus replaced by ratios.
While designing an alternate to interest-based system, it was realised that large scale resorting to PLS system of Islamic banking could pose serious risks and hazards to Islamic banks due to wide-spread tendency to adopt un-ethical accounting practices to conceal true profits, high rate of illiteracy and host of other reasons.
It was therefore, considered necessary to devise various other modes of financing in addition to Mudaraba & Musharka based on PLS system and of course, Qard-Hasan. These modes being the second line fixed return techniques include the following:
i) Murabaha (Cost-plus sale).
ii) Bay Mu'ajjal (Deferred payment sale).
iii) Bay' Salam (Purchase with deferred delivery).
iv) Bay' Istis'na (Made to order).
v) Ijara (Leasing).
vi) Ju'ala (Loans with a service charge).
It may be mentioned that the above mentioned six modes cannot be expected either to remove the injustices of the interest-based system or to contribute to the achievement of socio-economic objectives which Islam seeks to achieve. The fact however, remains that these modes bear pre-determined fixed rates wherein neither the operational losses are shared by the banks nor the returns charged are dependent on the operational result of the entrepreneur.
It is important to note that Islam wants that in case the entrepreneurs earn profit from the finances provided to them by banks, these must be shared with the banks. The banks, on the other hand, must share their profit with their depositors / investors. A large number of depositors would thus hopefully be able to get significantly higher rates of return from the banks leading to over-all prosperity. It will be only then that justice would be ensured between the parties and the banks would start moving towards the path of making a positive contribution towards the achievement of socio-economic objectives.
Islamic banking is now over 25 years old. It is however, observed that, despite all the good intentions, Islamic banks world-wide have generally sheltered themselves in comfort zone by persisting with the second line fixed return techniques for bulk of their financing operations and that too within the bench-marks of interest-based system.
As the single largest mode of financing adopted by Islamic banks is on the basis of Murahaba, it is now proposed to briefly examine this mode.
Murabaha
Murabaha in ancient Islamic connotations referred to a particular kind of simple sale and had no relevance whatsoever with a transaction of financing. In view of the difficulties and risks visualised in adopting PLS system of Islamic banking on a large scale, in recent times, the Murabaha, for all practical purposes was transformed from the sale transaction to a mode of financing.
In this mode, the bank, at the request of its client, purchases the specified goods from a third party against payment. Immediately on the transfer of ownership of the goods as also obtaining its physical or, in most cases, the constructive possession, the bank sells these goods to the client at cost plus an agreed fixed profit margin. The client then takes physical possession of the goods and undertakes to pay the price to the bank either in instalments or in lump sum, at an agreed later date.
The instances are not lacking where customers of the bank and the seller of the goods are sister concerns. In yet many other cases, the customers of the bank purchase the commodities themselves as agents of the bank and then they repurchase the same commodity from the bank for a cost plus profit to be paid at a mutually agreed later date. In many cases of Murabaha, there is therefore, only a change of name.
It is however, felt that there would be no objection if an Islamic bank, in addition to its normal banking business, separately establishes a Merchant Banking Division wherein various types of goods are purchased and then offered for sale to other prospective buyers at a profit. There are however, serious reservations to the wide spread use of murabaha technique as a mode of finance where the bank purchases the commodity only after the customer has agreed in principle to purchase it from the bank at a profit - mark-up. It must therefore, be appreciated that under Murabaha, a trading transaction is being transformed into a mode of finance just to meet the Shariah requirements.
While referring to alternate modes of financing based on Murabaha and Ijara (Leasing) etc., Justice Taqi Usmani observes that if designed to fulfill the Shariah requirements, these modes can be adopted as transitory measure. He however, cautions that " .... there should be a gap between purchasing the commodity and selling it to the customer and the risk of owning the commodity during the period should be borne with all its basic components and all its essential consequences."
In actual practice, practically there is no gap as in many cases, the bank makes the payment almost simultaneously or even after the goods are delivered at the premises of the client. The bank thus does not in fact assume any risk including even the risk of the goods, during the short period, the bank is supposed to own and possess these goods. The bank however, gets a return at a pre-determined fixed rate, which is not dependent on the operational results of the entrepreneur. This in any case, does not appear to be in conformity with the requirements of Shariah.
Taqi rightly observes: -
a) Islamic banks are using the instrument of Murabaha and Ijarah within the framework of the conventional benchmarks like Libor etc. where the net result does not differ much from interest-based transactions.
b) By not even gradually enhancing the financing on PLS basis, the basic philosophy of Islamic banking seems to be totally neglected by the Islamic banks.
c) The Shariah Scholars have allowed the use of fixed return financing techniques i.e. Murabaha & leasing etc only in those spheres where Musharaka can not work.
d) When the common people realise that the net result in the transaction of the Islamic banks is the same as was in the transactions of conventional banks, they become sceptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non- Muslims who feel that it is nothing but a matter of twisting documents only.
Nijatullah Siddiqui says: -
"The payment obligations of the firms operating with murabaha - financed goods and services are independent of the profitability of the enterprise, unlike Profit - Sharing, thus exposing it to the charge of being inequitable, as in the case of debt financing".
While commenting on "Mark-up" system he opines: -
"I would prefer that Bai' Mu'ajjal is removed from the list of permissible methods altogether. Even if we concede its permissibility in legal form, we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to Bai'Mu'ajjal in order to save interest-free banking from being sabotaged from within."
At this point it is important to mention that Maududi observes: -
"Islam says in clear terms that the lender is not justified in earning a fixed rate of profit, irrespective of the operational results of the business."
It therefore, appears that, in most cases, the fixed returns charged by banks on transactions which are financial in nature are not permissible simply by providing them a cover of Murabaha or the like modes which are in fact transactions of sale.
It was over two decades ago that The Council of Islamic Ideology, Pakistan observed: -
" ... ideally the real alternatives to interest under an Islamic economic system are profit / loss-sharing and Qard-Hasan."
While referring to other modes of financing such as Bai-Mu'ajjal, Hire Purchase & Leasing etc. the Council observed: -
"It is, therefore, imperative that the use of these methods should be kept to the minimum extent that may be unavoidably necessary under the given conditions and that their use as general techniques of financing must never be allowed."
The Council in this report cautioned:
"It would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door for dealing on the basis of interest."
"The basis of this technique, though not prohibited according to Hanafi and Hanabali Schools of Fiqh and that too in exceptional circumstances, its wide spread use is not permissible as mark-up does not differ in essence from the interest system."
The Council however, observed: "It is unfortunate that this warning was disregarded and the mark up system was made the pivot of the new arrangements."
The Federal Shariat Court, Pakistan in its Judgement dated November 14, 1991 also referred to the following observations of the Council: -
" The fact of the matter is that "mark-up" is a crude trading practice which has been permitted by certain religious scholars under specified conditions. Its permissibility is questioned by other scholars. In any case, it is a device, which is relevant in the contract of transactions between a seller and buyer of goods. Banks are not trading organizations. They are essentially financial institutions which mobilise funds from the general public and make them available to productive undertakings."
Hasanuzzaman says:
" ..... the ghost of interest is haunting banks to calculate a fixed rate percent per annum in many modes of financing including Murahaba (Bai-Mu'ajjal , Mark-up) etc. The spirit behind all these contracts seems to make a sure earning comparable with prevalent rate of interest and as far as possible, avoid losses which otherwise could occur."
He adds that "they (Second line techniques), have failed to do away with undesirable aspects of interest thereby they have retained what an Islamic bank should eliminate."
The Supreme Court of Pakistan (2000) in its' historic judgement delivered on December 23 1999 i.e. after about sixteen years of the observations, of The Council of Islamic Ideology, referred to above, inter-alia gave the following verdict: -
a) "The major condition for the permissibility of a mark-up transaction is that it should not be charged on lending or advancing money. It must be based on the genuine sale of a commodity with all its substantive consequences."
b) " ...... murabaha or Bia Mu'ajjal is a transaction of sale effected on the basis of deferred payment."
c) "We are conscious of the fact that the transaction of a sale of murabaha based on mark-up, even after fulfilling its necessary conditions is not an ideal mode for the extensive use of Islamic banks, Still, the banks will have to resort to this transaction in certain cases, especially in the initial phase of transformation."
Looking at the Murabaha from yet another angle, it is important to note that Almighty Allah has condemned riba in harshest possible terms perhaps only second to "Shirk". It does not appeal to the mind that by simply assuming some risks by banks in financing through murabaha and the like during "shifting of stocks" from the godown of the seller to the entrepreneur (party availing finance from the bank) which can also be practically avoided and ensuring a fixed return on financing while not sharing in the operational losses of the entrepreneur, which is the essence of Islamic banking, the objectives of the Shariah are met.
It is obvious that the wide spread and persistent use of the second line techniques has neither contributed in removing the injustices of the interest-based system as ordained by Holy Qur'an (2:279) nor in securing the socio-economic justice in the society. If Islamic banks persist with these modes for bulk of their operations, the cause of Islamic banking would never be fulfilled.
It was only in the initial stages of transformation of the conventional banking system into Islamic banking system that the second line fixed return techniques could have been adopted by Islamic banks with a proviso that gradual shift to PLS system will take place. With the passage of time, the second line techniques should have been adopted only where PLS is not possible or feasible including say leasing of machinery or vehicle etc. which are not trading items of the enterprise availing funds from the banks. Unfortunately these modes have been allowed to be perpetuated by Islamic banks. This is injurious to the cause of Islamic banking.
During the last few years, a number of Western bankers, economists and journalists have posed to this writer a rather cynical question about what the real difference between the interest-based system and it's Islamic counterpart, as being practised by Islamic banks actually is. However, even they concede that the PLS system of Islamic banking, if practised in earnest, could ensure socio-economic justice across the globe.
It is therefore, seriously apprehended that if the present sad state of affairs is allowed to continue, even many innocent Muslims may develop doubts about the feasibility, practicability and usefulness of the "Islamic system of banking" notwithstanding that the fault lies with us and not with the system.
The large scale financing by banks on second line techniques is some times advocated on the ground that the size of Islamic banks is too small. The combined assets of 200 Islamic banks and financial institutions are almost 1/3 of the quantum of individual assets of some of the largest conventional banks. Since Islamic banks have to compete with these banks, they generally tend to avoid indulging in risky financing based on PLS. To make the situation worse, some of the Islamic banks find it more feasible to divert part of their funds received from Muslims to multinationals and large corporations of the West.
The Arab world including GCC countries and rich citizens of many others Muslim countries are reported to be maintaining huge deposits with conventional banks operating in the West. The quantum of these deposits is estimated to be more than the total external debt of Muslim countries.
The placement of these funds by Muslims is enabling the imperialistic powers to exploit the Islamic world by simply providing them loans and credits out of these deposits. The placement of funds in this manner by Muslims is clearly not in conformity with the directives of Qur'an and Sunnah.
The Ummah must keep in mind that according to the injunctions of Islam, surplus wealth of Muslims can no be utilised for strengthening the Capitalistic System or for the benefit of non-believers or enemies of Islam. This wealth should therefore, be profitability invested for the common benefit of Ummah, initially in their own country / region. The need of the hour is that a 'Fatwa' is issued on the subject immediately.
If only a portion of these funds is brought back to the respective Islamic countries, the size of many Islamic banks would become large enough to enable them to diversify their financing portfolio including more and more financing on PLS basis with greater sense of confidence.
Financing on PLS Basis
The real alternate to interest on loans in an Islamic framework is financing on PLS basis- a shift from debt based transaction to investment based funding. It is believed that the financing on PLS system of Islamic banking in a conducive environment would not only ensure a healthier financing portfolio and of course higher rates of return to depositors but would also lead to optimum allocation of resources for over-all economic growth and welfare of the society, individually and collectively.
It is however, accepted that the banks allowing financing on PLS basis are exposed to risk of losses as even a profitable company may sustain genuine loss due to various factors even beyond their control. The assuming of this risk is the essence of PLS mode of financing as all business transactions have an inseparable risk factor. It should not therefore, deter banks from making funds available on PLS basis to sound entities in feasible projects in the normal course of business.
In actual practice however, we find that traders and industrialists etc. generally earn substantial profit with the funds of a large number of depositors but they do not share these profits with the banks for onward passing on the share to the depositors. This injustice can be avoided if banks accept deposit on PLS basis according to its true spirit and also allow bulk of financing on the same basis. This will bring prosperity in the society, as a large number of depositors will be receiving higher rates of return on their deposits.
In the Islamic banking system, the concept is that of ratios in which profits and losses are shared instead of fixed, pre-determined interest and mark-up / profit rates. The issue of possible injustice due to inflation and recession, in money lending transactions, was settled by Islam over 1400 years ago, as PLS system absorbs the impact of inflation as regards the sharing of operational results are concerned. A glaring example is that of partnership where there is no dispute between partners due to high inflation or other-wise.
A comparison of the salient features of the financing on PLS Basis and the second line fixed return techniques is given below:-
Financing: PLS Vs Second Line Fixed Return Techniques
S. NO. Financing On PLS Basis Financing On Second Line Techniques
1. Unanimously held as an ideal mode of financing in an Islamic framework. A sale transaction which has ecently been transformed as a second line mode of financing and that too for transitory period. Reservations are expressed by many scholars about these mode.
2. Inequitable distribution of income and wealth will be significantly removed. Inequitable distribution of income and wealth continues like interest-based system.
3. Depositors are likely to get higher returns leading to prosperity. Returns are practically based on the bench marks of the interest based system. Depositors continue to be exploited.
4. Justice between the parties is ensured as the return to the bank on finance is dependent on the operational results of the entrepreneur. Injustice of interest-based system continues as bank is guaranteed a fixed return irrespective of the loss sustained by the entrepreneur. The return to bank is positive and pre-determined in the shape of agreed price.
5. Inflation is likely to be controlled to some extent. Same as under the interest-based system.
6. Progress towards Self-reliance will hopefully be made through enhanced
rate of savings. Same as under the interest-based system.
7. May lead to more efficient and optimum allocation of resources as compared to interest-based system. Same as under the interest-based system.
It is now about the time that the performance of Islamic banks worldwide should be judged from the contribution it is making in achieving the objectives of Shariah in the real sense and not merely by the number of Islamic banks or the quantum of their deposits portfolio.
MODEL ISLAMIC BANK
It is important to appreciate that the requisites for total implementation and success of Islamic banking in a country, include re-shaping the society, re-structuring of the economic system and re-framing of the laws according to the dictates of Islam. The most important and difficult task however, is the reformation of society which has to be undertaken as an on-going process.
We therefore, need to change our priorities and at least as much emphasis should be laid on improving the ethics, honesty and values of the society as is being done for expansion of " riba-free banking". This will then create a conducive environment for more and more financing under profit and loss sharing system of Islamic banking.
Mirakhor observes, "Perhaps the most challenging issue facing the implementation of an Islamic financial system is the development of risk-bearing instruments that can provide the investors with a sufficient degree of liquidity, security and profitability to encourage their holding". Islamic banks also face a challenge of developing innovative services and products for utilising these funds effectively and efficiently for financing under PLS system.
In view of the position explained here-in-above and considering the real difficulties in presently adopting the PLS system of Islamic banking for bulk of the financing for trade, industry and agriculture, it is felt that the need of the hour is to establish Model Islamic banks in all GCC countries as also in other Islamic countries where a large number of interest-free banks have been operating for a number of years.
The Proposed Model Bank would be a commercial bank. While the objective of the Bank would be to earn profit, it would identify itself with the Shariah as regards objectives, principles, practices and operations. The Proposed Bank would undertake all normal banking business as is done by interest-based banks but the Provisions of Shariah would be kept in view at all times.
The proposed Model Bank would accept deposits/investments on PLS basis (other than demand deposits) and would also allow financing only on this basis. The operations of the Bank will be supervised from Shariah point of view by a board of religious scholars.
The proposed Bank would develop risk-bearing but competitive products for deposits / investments wherein depositors / investors are given reasonable assurance of higher returns as also of safety of their funds. This Bank would also develop innovative but competitive products for financing which are not only compatible with Shariah but also cater to the needs of traders and industrialists etc., in the modern complex world which is ever - changing.
The sponsor directors of the Proposed Model Bank should be Muslim Scholars, Jurists, chartered accountants, economists, bankers and investors. All these persons should be men of integrity and of highest reputation. They should also have unshakeable faith and commitment in the Islamic banking system and should have good knowledge of it's principles, products and procedures.
These persons would take up the challenging assignment for the pleasure of Allah and for proving that Islamic banking in its totality is not only workable but would In sha Allah also pay rich dividends in material terms to all those who deal with or work for the Bank.
It is sincerely believed that the proposal of Model Islamic Bank is not only feasible but is the need of the hour. The successful operational results of this Bank would also motivate the existing Islamic banks to enhance their share of financing on PLS basis.
Conclusion
The first full-fledged Islamic Bank was established in Dubai in 1975. In 1995, GCC countries accounted for 15 percent of the paid up capital, 27 percent of the assets, 34 percent of the deposits and 28.8 percent of the net profit of the Islamic banks world-wide. The Islamic banks in GCC countries are therefore, in an ideal position to take a lead to shift the bulk of financing operations to PLS system of Islamic banking.
It is now time that Islamic banks and financial institutions resolve to gradually enhance their share of financing on PLS basis and reduce the share of financing on the basis of Murabaha, Bai Mu'ajjal and the like modes of financing.
If Islamic banks succeed in demonstrating a practical example of socio-economic justice by gradually enhancing their financing on PLS basis and also achieve further satisfactory operational results, there is no reason why more cooperation would not be extended to them by the European, American and other interest-based banks. Some of these conventional banks may even be tempted to adopt PLS system of financing in their subsidiaries & affiliates operating under the banner of Islamic banking.
The dawn of an era of justice can, therefore, be visualised where the fruits of the Islamic system would be available to a large number of people leading to over-all social and economic prosperity.
Introduction
Prohibition of interest is ordained in Islam in all forms and intent. This Prohibition is strict, absolute and unambiguous. The Holy Qur'an in verse 278 of Surah Al-Baqarah states:
"O ye who believe! fear Allah and give up what remains of your demand for riba, if ye are indeed believers." and verse 2: 279 says "If you do it not, take notice of war from Allah and His Messenger. But if ye turn back, ye shall have your capital sums. Deal not unjustly and you shall not be dealt with unjustly."
It therefore, follows that interest is prohibited as it leads to injustices (zulm) and Islam is against all forms of injustices and exploitations and pleads an economic system, which aims at securing extensive socio-economic justice. The Islamic law of prohibition of riba, which includes interest, was originally not based on economic theory but on Divine Authority which considers the charging of interest as an act of injustice.
There could be no denying of the fact that under the interest-based system of banking or in a system not strictly based on the principles and spirit of Shariah, depositors as well as borrowers are exploited in one form or the other. It is however, significant to note that, as in the case of conventional banking, the depositors are being exploited most under the system and practices enforced by banks and financial institutions operating world-wide under the banner of Islamic banking.
Islamic banking made its debut over a quarter a century ago. At present 200 Islamic banks and financial institutions, operating in 27 Muslim and 16 non-Muslim countries, are managing a portfolio of about $200 billion. It is now the time to pose the following questions:
i) Whether banks operating under the banner of Islamic banking have succeeded in the elimination of injustices of the interest-based system as ordained by Holy Qur'an (2:279)?
ii) Whether banks operating under the banner of Islamic banking have contributed to the attainment of socio-economic justice in line with the objectives of Islamic economic system?
iii) Whether banks operating under the banner of Islamic banking are, for all practical purposes, not following the bench marks of interest-based system under Murabaha, Bai-Mu'ajjal or the like modes of financing?
iv) Whether the net result in modes referred to at (iii) above really differs much from the interest-based loaning?
v) Whether by adopting the modes referred to at (iii) above, banks assume any responsibility for the operational losses of the party availing finances from them?
vi) Whether sharing in the operational losses are not the essence of Islamic system of banking?
vi) Whether large scale financing on a perpetual basis, on modes approved for "Sale transactions", can continue to be made for an indefinite period by Islamic banks which are not trading houses but are financial institutions?
While attempting to firm up views in respect of above questions, it must be kept in view that Islamisation of banking system is a part of overall Islamic value system and is not merely refraining from interest-based transactions. The objective of Islamic banking system is to make a positive contribution to the fulfilment of socio-economic objectives of the society in all spheres, including trade, industry & agriculture etc.
True Modes of Financing
An Islamic bank is a financial institution which identifies itself with the spirit of Shariah, as laid down by the Holy Qur'an and Sunnah, as regards its objectives, principles, practices and operations. An Islamic bank does not normally lend money except interest-free loans which are termed as Qard Hasanah (Benevolent Loans) while loans on service charge, not exceeding the actual administrative cost of such loans, have also been permitted by Muslim Scholars.
To replace interest, the ideal mode of financing under the Islamic banking system is "Financing on Profit & Loss Sharing" (PLS) basis. Qard Hasanah are for the benefit of the individuals and the society at large. To safe-guard the interest of depositors/investors, these type of loans, as a matter of policy, do not constitute a significant source of financing by Islamic banks. However, if in any country, the Islamic System of Zakat is established and the Islamic State treasury starts functioning, the requirements of Qard Hasanah would primarily be met by the treasury.
The bulk of financing by Islamic banks has to be equity oriented. In this mode of financing, the losses are shared by the financier along with the entrepreneur in the ratio of their respective capitals. The profits are, however, shared in an agreed ratio. The rates of returns are thus replaced by ratios.
While designing an alternate to interest-based system, it was realised that large scale resorting to PLS system of Islamic banking could pose serious risks and hazards to Islamic banks due to wide-spread tendency to adopt un-ethical accounting practices to conceal true profits, high rate of illiteracy and host of other reasons.
It was therefore, considered necessary to devise various other modes of financing in addition to Mudaraba & Musharka based on PLS system and of course, Qard-Hasan. These modes being the second line fixed return techniques include the following:
i) Murabaha (Cost-plus sale).
ii) Bay Mu'ajjal (Deferred payment sale).
iii) Bay' Salam (Purchase with deferred delivery).
iv) Bay' Istis'na (Made to order).
v) Ijara (Leasing).
vi) Ju'ala (Loans with a service charge).
It may be mentioned that the above mentioned six modes cannot be expected either to remove the injustices of the interest-based system or to contribute to the achievement of socio-economic objectives which Islam seeks to achieve. The fact however, remains that these modes bear pre-determined fixed rates wherein neither the operational losses are shared by the banks nor the returns charged are dependent on the operational result of the entrepreneur.
It is important to note that Islam wants that in case the entrepreneurs earn profit from the finances provided to them by banks, these must be shared with the banks. The banks, on the other hand, must share their profit with their depositors / investors. A large number of depositors would thus hopefully be able to get significantly higher rates of return from the banks leading to over-all prosperity. It will be only then that justice would be ensured between the parties and the banks would start moving towards the path of making a positive contribution towards the achievement of socio-economic objectives.
Islamic banking is now over 25 years old. It is however, observed that, despite all the good intentions, Islamic banks world-wide have generally sheltered themselves in comfort zone by persisting with the second line fixed return techniques for bulk of their financing operations and that too within the bench-marks of interest-based system.
As the single largest mode of financing adopted by Islamic banks is on the basis of Murahaba, it is now proposed to briefly examine this mode.
Murabaha
Murabaha in ancient Islamic connotations referred to a particular kind of simple sale and had no relevance whatsoever with a transaction of financing. In view of the difficulties and risks visualised in adopting PLS system of Islamic banking on a large scale, in recent times, the Murabaha, for all practical purposes was transformed from the sale transaction to a mode of financing.
In this mode, the bank, at the request of its client, purchases the specified goods from a third party against payment. Immediately on the transfer of ownership of the goods as also obtaining its physical or, in most cases, the constructive possession, the bank sells these goods to the client at cost plus an agreed fixed profit margin. The client then takes physical possession of the goods and undertakes to pay the price to the bank either in instalments or in lump sum, at an agreed later date.
The instances are not lacking where customers of the bank and the seller of the goods are sister concerns. In yet many other cases, the customers of the bank purchase the commodities themselves as agents of the bank and then they repurchase the same commodity from the bank for a cost plus profit to be paid at a mutually agreed later date. In many cases of Murabaha, there is therefore, only a change of name.
It is however, felt that there would be no objection if an Islamic bank, in addition to its normal banking business, separately establishes a Merchant Banking Division wherein various types of goods are purchased and then offered for sale to other prospective buyers at a profit. There are however, serious reservations to the wide spread use of murabaha technique as a mode of finance where the bank purchases the commodity only after the customer has agreed in principle to purchase it from the bank at a profit - mark-up. It must therefore, be appreciated that under Murabaha, a trading transaction is being transformed into a mode of finance just to meet the Shariah requirements.
While referring to alternate modes of financing based on Murabaha and Ijara (Leasing) etc., Justice Taqi Usmani observes that if designed to fulfill the Shariah requirements, these modes can be adopted as transitory measure. He however, cautions that " .... there should be a gap between purchasing the commodity and selling it to the customer and the risk of owning the commodity during the period should be borne with all its basic components and all its essential consequences."
In actual practice, practically there is no gap as in many cases, the bank makes the payment almost simultaneously or even after the goods are delivered at the premises of the client. The bank thus does not in fact assume any risk including even the risk of the goods, during the short period, the bank is supposed to own and possess these goods. The bank however, gets a return at a pre-determined fixed rate, which is not dependent on the operational results of the entrepreneur. This in any case, does not appear to be in conformity with the requirements of Shariah.
Taqi rightly observes: -
a) Islamic banks are using the instrument of Murabaha and Ijarah within the framework of the conventional benchmarks like Libor etc. where the net result does not differ much from interest-based transactions.
b) By not even gradually enhancing the financing on PLS basis, the basic philosophy of Islamic banking seems to be totally neglected by the Islamic banks.
c) The Shariah Scholars have allowed the use of fixed return financing techniques i.e. Murabaha & leasing etc only in those spheres where Musharaka can not work.
d) When the common people realise that the net result in the transaction of the Islamic banks is the same as was in the transactions of conventional banks, they become sceptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non- Muslims who feel that it is nothing but a matter of twisting documents only.
Nijatullah Siddiqui says: -
"The payment obligations of the firms operating with murabaha - financed goods and services are independent of the profitability of the enterprise, unlike Profit - Sharing, thus exposing it to the charge of being inequitable, as in the case of debt financing".
While commenting on "Mark-up" system he opines: -
"I would prefer that Bai' Mu'ajjal is removed from the list of permissible methods altogether. Even if we concede its permissibility in legal form, we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to Bai'Mu'ajjal in order to save interest-free banking from being sabotaged from within."
At this point it is important to mention that Maududi observes: -
"Islam says in clear terms that the lender is not justified in earning a fixed rate of profit, irrespective of the operational results of the business."
It therefore, appears that, in most cases, the fixed returns charged by banks on transactions which are financial in nature are not permissible simply by providing them a cover of Murabaha or the like modes which are in fact transactions of sale.
It was over two decades ago that The Council of Islamic Ideology, Pakistan observed: -
" ... ideally the real alternatives to interest under an Islamic economic system are profit / loss-sharing and Qard-Hasan."
While referring to other modes of financing such as Bai-Mu'ajjal, Hire Purchase & Leasing etc. the Council observed: -
"It is, therefore, imperative that the use of these methods should be kept to the minimum extent that may be unavoidably necessary under the given conditions and that their use as general techniques of financing must never be allowed."
The Council in this report cautioned:
"It would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door for dealing on the basis of interest."
"The basis of this technique, though not prohibited according to Hanafi and Hanabali Schools of Fiqh and that too in exceptional circumstances, its wide spread use is not permissible as mark-up does not differ in essence from the interest system."
The Council however, observed: "It is unfortunate that this warning was disregarded and the mark up system was made the pivot of the new arrangements."
The Federal Shariat Court, Pakistan in its Judgement dated November 14, 1991 also referred to the following observations of the Council: -
" The fact of the matter is that "mark-up" is a crude trading practice which has been permitted by certain religious scholars under specified conditions. Its permissibility is questioned by other scholars. In any case, it is a device, which is relevant in the contract of transactions between a seller and buyer of goods. Banks are not trading organizations. They are essentially financial institutions which mobilise funds from the general public and make them available to productive undertakings."
Hasanuzzaman says:
" ..... the ghost of interest is haunting banks to calculate a fixed rate percent per annum in many modes of financing including Murahaba (Bai-Mu'ajjal , Mark-up) etc. The spirit behind all these contracts seems to make a sure earning comparable with prevalent rate of interest and as far as possible, avoid losses which otherwise could occur."
He adds that "they (Second line techniques), have failed to do away with undesirable aspects of interest thereby they have retained what an Islamic bank should eliminate."
The Supreme Court of Pakistan (2000) in its' historic judgement delivered on December 23 1999 i.e. after about sixteen years of the observations, of The Council of Islamic Ideology, referred to above, inter-alia gave the following verdict: -
a) "The major condition for the permissibility of a mark-up transaction is that it should not be charged on lending or advancing money. It must be based on the genuine sale of a commodity with all its substantive consequences."
b) " ...... murabaha or Bia Mu'ajjal is a transaction of sale effected on the basis of deferred payment."
c) "We are conscious of the fact that the transaction of a sale of murabaha based on mark-up, even after fulfilling its necessary conditions is not an ideal mode for the extensive use of Islamic banks, Still, the banks will have to resort to this transaction in certain cases, especially in the initial phase of transformation."
Looking at the Murabaha from yet another angle, it is important to note that Almighty Allah has condemned riba in harshest possible terms perhaps only second to "Shirk". It does not appeal to the mind that by simply assuming some risks by banks in financing through murabaha and the like during "shifting of stocks" from the godown of the seller to the entrepreneur (party availing finance from the bank) which can also be practically avoided and ensuring a fixed return on financing while not sharing in the operational losses of the entrepreneur, which is the essence of Islamic banking, the objectives of the Shariah are met.
It is obvious that the wide spread and persistent use of the second line techniques has neither contributed in removing the injustices of the interest-based system as ordained by Holy Qur'an (2:279) nor in securing the socio-economic justice in the society. If Islamic banks persist with these modes for bulk of their operations, the cause of Islamic banking would never be fulfilled.
It was only in the initial stages of transformation of the conventional banking system into Islamic banking system that the second line fixed return techniques could have been adopted by Islamic banks with a proviso that gradual shift to PLS system will take place. With the passage of time, the second line techniques should have been adopted only where PLS is not possible or feasible including say leasing of machinery or vehicle etc. which are not trading items of the enterprise availing funds from the banks. Unfortunately these modes have been allowed to be perpetuated by Islamic banks. This is injurious to the cause of Islamic banking.
During the last few years, a number of Western bankers, economists and journalists have posed to this writer a rather cynical question about what the real difference between the interest-based system and it's Islamic counterpart, as being practised by Islamic banks actually is. However, even they concede that the PLS system of Islamic banking, if practised in earnest, could ensure socio-economic justice across the globe.
It is therefore, seriously apprehended that if the present sad state of affairs is allowed to continue, even many innocent Muslims may develop doubts about the feasibility, practicability and usefulness of the "Islamic system of banking" notwithstanding that the fault lies with us and not with the system.
The large scale financing by banks on second line techniques is some times advocated on the ground that the size of Islamic banks is too small. The combined assets of 200 Islamic banks and financial institutions are almost 1/3 of the quantum of individual assets of some of the largest conventional banks. Since Islamic banks have to compete with these banks, they generally tend to avoid indulging in risky financing based on PLS. To make the situation worse, some of the Islamic banks find it more feasible to divert part of their funds received from Muslims to multinationals and large corporations of the West.
The Arab world including GCC countries and rich citizens of many others Muslim countries are reported to be maintaining huge deposits with conventional banks operating in the West. The quantum of these deposits is estimated to be more than the total external debt of Muslim countries.
The placement of these funds by Muslims is enabling the imperialistic powers to exploit the Islamic world by simply providing them loans and credits out of these deposits. The placement of funds in this manner by Muslims is clearly not in conformity with the directives of Qur'an and Sunnah.
The Ummah must keep in mind that according to the injunctions of Islam, surplus wealth of Muslims can no be utilised for strengthening the Capitalistic System or for the benefit of non-believers or enemies of Islam. This wealth should therefore, be profitability invested for the common benefit of Ummah, initially in their own country / region. The need of the hour is that a 'Fatwa' is issued on the subject immediately.
If only a portion of these funds is brought back to the respective Islamic countries, the size of many Islamic banks would become large enough to enable them to diversify their financing portfolio including more and more financing on PLS basis with greater sense of confidence.
Financing on PLS Basis
The real alternate to interest on loans in an Islamic framework is financing on PLS basis- a shift from debt based transaction to investment based funding. It is believed that the financing on PLS system of Islamic banking in a conducive environment would not only ensure a healthier financing portfolio and of course higher rates of return to depositors but would also lead to optimum allocation of resources for over-all economic growth and welfare of the society, individually and collectively.
It is however, accepted that the banks allowing financing on PLS basis are exposed to risk of losses as even a profitable company may sustain genuine loss due to various factors even beyond their control. The assuming of this risk is the essence of PLS mode of financing as all business transactions have an inseparable risk factor. It should not therefore, deter banks from making funds available on PLS basis to sound entities in feasible projects in the normal course of business.
In actual practice however, we find that traders and industrialists etc. generally earn substantial profit with the funds of a large number of depositors but they do not share these profits with the banks for onward passing on the share to the depositors. This injustice can be avoided if banks accept deposit on PLS basis according to its true spirit and also allow bulk of financing on the same basis. This will bring prosperity in the society, as a large number of depositors will be receiving higher rates of return on their deposits.
In the Islamic banking system, the concept is that of ratios in which profits and losses are shared instead of fixed, pre-determined interest and mark-up / profit rates. The issue of possible injustice due to inflation and recession, in money lending transactions, was settled by Islam over 1400 years ago, as PLS system absorbs the impact of inflation as regards the sharing of operational results are concerned. A glaring example is that of partnership where there is no dispute between partners due to high inflation or other-wise.
A comparison of the salient features of the financing on PLS Basis and the second line fixed return techniques is given below:-
Financing: PLS Vs Second Line Fixed Return Techniques
S. NO. Financing On PLS Basis Financing On Second Line Techniques
1. Unanimously held as an ideal mode of financing in an Islamic framework. A sale transaction which has ecently been transformed as a second line mode of financing and that too for transitory period. Reservations are expressed by many scholars about these mode.
2. Inequitable distribution of income and wealth will be significantly removed. Inequitable distribution of income and wealth continues like interest-based system.
3. Depositors are likely to get higher returns leading to prosperity. Returns are practically based on the bench marks of the interest based system. Depositors continue to be exploited.
4. Justice between the parties is ensured as the return to the bank on finance is dependent on the operational results of the entrepreneur. Injustice of interest-based system continues as bank is guaranteed a fixed return irrespective of the loss sustained by the entrepreneur. The return to bank is positive and pre-determined in the shape of agreed price.
5. Inflation is likely to be controlled to some extent. Same as under the interest-based system.
6. Progress towards Self-reliance will hopefully be made through enhanced
rate of savings. Same as under the interest-based system.
7. May lead to more efficient and optimum allocation of resources as compared to interest-based system. Same as under the interest-based system.
It is now about the time that the performance of Islamic banks worldwide should be judged from the contribution it is making in achieving the objectives of Shariah in the real sense and not merely by the number of Islamic banks or the quantum of their deposits portfolio.
MODEL ISLAMIC BANK
It is important to appreciate that the requisites for total implementation and success of Islamic banking in a country, include re-shaping the society, re-structuring of the economic system and re-framing of the laws according to the dictates of Islam. The most important and difficult task however, is the reformation of society which has to be undertaken as an on-going process.
We therefore, need to change our priorities and at least as much emphasis should be laid on improving the ethics, honesty and values of the society as is being done for expansion of " riba-free banking". This will then create a conducive environment for more and more financing under profit and loss sharing system of Islamic banking.
Mirakhor observes, "Perhaps the most challenging issue facing the implementation of an Islamic financial system is the development of risk-bearing instruments that can provide the investors with a sufficient degree of liquidity, security and profitability to encourage their holding". Islamic banks also face a challenge of developing innovative services and products for utilising these funds effectively and efficiently for financing under PLS system.
In view of the position explained here-in-above and considering the real difficulties in presently adopting the PLS system of Islamic banking for bulk of the financing for trade, industry and agriculture, it is felt that the need of the hour is to establish Model Islamic banks in all GCC countries as also in other Islamic countries where a large number of interest-free banks have been operating for a number of years.
The Proposed Model Bank would be a commercial bank. While the objective of the Bank would be to earn profit, it would identify itself with the Shariah as regards objectives, principles, practices and operations. The Proposed Bank would undertake all normal banking business as is done by interest-based banks but the Provisions of Shariah would be kept in view at all times.
The proposed Model Bank would accept deposits/investments on PLS basis (other than demand deposits) and would also allow financing only on this basis. The operations of the Bank will be supervised from Shariah point of view by a board of religious scholars.
The proposed Bank would develop risk-bearing but competitive products for deposits / investments wherein depositors / investors are given reasonable assurance of higher returns as also of safety of their funds. This Bank would also develop innovative but competitive products for financing which are not only compatible with Shariah but also cater to the needs of traders and industrialists etc., in the modern complex world which is ever - changing.
The sponsor directors of the Proposed Model Bank should be Muslim Scholars, Jurists, chartered accountants, economists, bankers and investors. All these persons should be men of integrity and of highest reputation. They should also have unshakeable faith and commitment in the Islamic banking system and should have good knowledge of it's principles, products and procedures.
These persons would take up the challenging assignment for the pleasure of Allah and for proving that Islamic banking in its totality is not only workable but would In sha Allah also pay rich dividends in material terms to all those who deal with or work for the Bank.
It is sincerely believed that the proposal of Model Islamic Bank is not only feasible but is the need of the hour. The successful operational results of this Bank would also motivate the existing Islamic banks to enhance their share of financing on PLS basis.
Conclusion
The first full-fledged Islamic Bank was established in Dubai in 1975. In 1995, GCC countries accounted for 15 percent of the paid up capital, 27 percent of the assets, 34 percent of the deposits and 28.8 percent of the net profit of the Islamic banks world-wide. The Islamic banks in GCC countries are therefore, in an ideal position to take a lead to shift the bulk of financing operations to PLS system of Islamic banking.
It is now time that Islamic banks and financial institutions resolve to gradually enhance their share of financing on PLS basis and reduce the share of financing on the basis of Murabaha, Bai Mu'ajjal and the like modes of financing.
If Islamic banks succeed in demonstrating a practical example of socio-economic justice by gradually enhancing their financing on PLS basis and also achieve further satisfactory operational results, there is no reason why more cooperation would not be extended to them by the European, American and other interest-based banks. Some of these conventional banks may even be tempted to adopt PLS system of financing in their subsidiaries & affiliates operating under the banner of Islamic banking.
The dawn of an era of justice can, therefore, be visualised where the fruits of the Islamic system would be available to a large number of people leading to over-all social and economic prosperity.
The Role of Central Banks in Islamic Banking
Dr. Iraj Toutounchian
Prof. C. G. Harcourt:
"...ideologies…affect the topics discussed, the manner of discussion, the factors included or left out or inadequately stressed in arguments, comments, and models and attitudes shown, sympathetic or hostile,…to past and contemporary economists' works and views. "
Based upon above statement it can be argued that there are a lot of differences between Islamic banking and conventional banking systems both at micro and macro levels. These differences are in approach, in concepts, and in the resulting behaviour.
My presentation is based upon the following primary and secondary assertions, which are the result of 27 papers and 3 books. The last book: "Comparative Money and Banking in Capitalistic and Islamic Systems", in 856 pages, has been recognized in February 2002 in Iran as "The Economic Book of The Year". These assertions and the final conclusion may seem rather unorthodox, but they are the product of their own logical reasoning. The essence of my paper is thus nothing but one of the logical consequences, among others, of the following assertions everybody is able to derive.
Primary assertions are those, which can directly be used to reach the final conclusion of this paper. Secondary assertions are key issues to be used, one way or another, to lead one to the problems in implementing Islamic Banking. These two types of assertions, however, constitute separable sets.
Based upon the fact that the primary function of banks is to deal with "money", one cannot speak about " banking" without referring to money. Hence, it seems a "must" to understand money first. Otherwise many Miss-interpretations may arise as the result.
Interest and profit, although being clear concepts, have been subjected to many misunderstandings. To be sure, let me make them clear at the outset. Interest and profit are rewards to money and capital investment, respectively. In other words, capital investment produces profits and money produces interest. Furthermore, it has constantly and mistakenly written and quoted by some writers that the price of money is 1 (unity). One is the exchange rate of money with itself; but the price of money is interest (rate).
Some of my findings about the nature and role of profits closely correspond to those of Prof. Adrian Wood in his seminal book " A Theory of Profits ". With the abolishment of interest (as it has in Islamic school of economic thought), the LM curve loses its total validity and becomes redundant and useless.
All in all, interest is a normative concept (basically discussed in schools of economic thoughts), which can neither be proved nor refuted by use of scientific tools of analysis. It is a value judgement. In evaluating an economic system, economists are supposed to take it for granted.
Assertions:
1. In economics we are basically dealing with two inter-related concepts; one is legal (or conventional) concept and the other is real concept. To distinguish one from another, one does not need to focus on the physical features of each one. All contractual agreements like marriage, ownership, organizational hierarchy, money, interest, and the like fall into the first category; while human beings, commodities, buildings, amenity, and the like are included in the second category. Each one of these two concepts is able to produce the other or be transformed into itself. Let us call these two properties " Completeness" and " Reflexivity", respectively. Hence, money itself being a legal concept is capable to producing another legal concept (actually its derivative) called "interest" or to produce real concept like capital equipment.
2. Money as a potential capital is a legal (conventional) concept capable of being transformed into actual capital. A simple example would be Mudarabah contract, among others, in which as soon as one person's money is legally combined with another person's labour force, the nature and the function of money is changed into capital. Given that in an Islamic framework there is no reward to money lending (i.e. interest being zero) yet capital (i.e. money's transformed version) is eligible for part of the profit earned.
3. Various modes of contract available to Islamic banks are the major source of transforming money deposits of individuals and firms into capital (or asset). Any type of financing under any modes of contract by these banks will essentially increase the value of the asset of the economy. However, some modes of contract like Musharakah and instalment sales (originated by firms) increase the productive capacity of the economy. Any positive change in the firm's asset values (rather than their capital values which is by itself a vague concept responsible for some obscurities) can be called " investment". Following this practice it is easy to calculate, rather than to estimate, the amount of investment, which has taken place in an economy during one specific year with relatively high precision. This can be done by reading the asset values off the current balance sheets, firms submit to tax authorities. By putting asset values, instead of capital, into the production function, not only it becomes more precise, but also meaningful. Firms' rate of profit is, hence, logically defined as the ratio of profit to their assets. Since the value of firms' assets is normally greater than their value of capital, therefore, the rate of profit defined as the ratio of profit to the value of capital, underestimates the true rate of profit.
4. Based upon J. M. Keynes' criticism on the classical economists inability to recognize speculative demand for money in the presence of interest (rate), it can easily be shown that interest is both necessary and sufficient condition for speculation. In other words, there is a two-way relationship between interest and speculation. It is probably for this reason that he has also recognized commodities rates of interest in addition to money rate of interest that he was much concerned about. That is, whenever a commodity is speculated upon a specific rate of interest would emerge. With the abolishment of interest, speculative motive of the demand for money, logically derived from interest, would disappear. Speculation, which necessarily entails artificial risk in any market, be it in money, bond, gold, commodities and the like, is not permissible in an Islamic setting. All of these can safely be taken under the heading of "gambling".
A corollary to the above assertion is that with the disappearance of bond market stocks are expected to be exchanged in an Islamic stock market based upon their book values. In terms of Tobin's Q this quotient is supposed to be close to unity (one). It is because in a world with perfect markets, economic value (EV) and replacement cost (RC), will coincide. This brings the quotient to unity. An implication of this is that in a world with perfect markets valuing the firm would be easy; i.e. we could read the economic value of the firm off the current balance sheet. Risk is essentially interwoven with investment. It can be considered "natural" and hence permissible in Islam. However, impermissibility of artificial risk may be grounded upon the fact that any income received by speculator will eventually bring about excess demand for goods and services (without the speculator having any share in productive activities). This excess demand, in turn, becomes the main source of inflation.
Let me conclude discussing about this assertion by citing two statements correctly made by Prof. Gardner Ackley:
a) "Speculation - if mistaken - tends ultimately to be self -correcting in any commodity market. "
b) " ...the real cause of unemployment is speculative demand for money".
5. The natural consequence of elimination of interest, as said earlier, is the elimination of money market. Hence, the major motive to use money is for transaction purposes, which underlies the structure of ordinary demand and supply schedules for goods and services. Furthermore, based upon the logical statement that "the speculative motive is derived from money's use as an asset, as a store of value", money can no longer possess the "store of value function" in an Islamic framework.
In the absence of interest, money market and speculation, and all monetary policy tools used in conventional banking, would lose their validity in Islamic banking. Let us call the policy followed in this new setting "Financial Policy". The unique and powerful tool of financial policy is to determine the share of profit relative to that of capital for all investment projects submitted to Islamic banks. This is probably the most important role a central bank can play in an Islamic banking. There are many factors underlying the determination of this share, especially in the face of natural risk.
This share if effectively used would make bank's sources of finance properly channelled into asset building processes without worrying about money whirlpool to emerge. To determine equilibrium in this market the relative profit rate of the Islamic bank (call it financier) to that of the investor (call it the financee) can be constructed. This rate is especially useful in cases where different risks are involved. To prepare a list of different risks involved in various investment projects is another important task of a central bank.
6. Western economists have always and justifiably been worried about unnecessary expansion of money supply the volume of which is hard to control by central banks. This is due to the fact that considerable portion of it (very difficult to determine if not impossible due to uncertainties involved in interest rates) goes to money whirlpool. This is probably the reason Prof. Milton Friedman in his paper addressing the problem of stabilization policy has advocated the Required Reserve Ratio (RRR) to be raised to one hundred percent. It is clear that such a banking, if possible, would lose its own entity and merely becomes safe-deposit office. If Islamic banks are prohibited to lend on interest nonetheless different modes of contract, as mentioned earlier, are available to them to finance specific needs of both firms and individuals upon their proper requests. If constant and effective supervision is conducted on a random basis by the central bank the chances are very slim a money market, which could be outlawed, to be developed. So the kernel of Islamic banking is Profit and Loss Sharing (PLS). By preparing accurate information and making them available to the general public, central bank in Islamic banking system would be able to provide symmetric information and prevent moral hazard, to a great extent.
7. Money's inability to be a tradable entity and its production and volume being closely watched by the central bank (which is apart of the public sector), seems appropriate to be classified as "Impure Public Good" in an Islamic state. For the sake of brevity some properties of (impure) public goods which also applies to money, in this setting, will be outlined as follows:
a) Non-existence of money market.
b) Elimination of speculation.
c) Demand for it can be constructed by vertical summation of individual demands.
d) Externality of money can be derived from its capability of becoming actual capital; hence, government's (i.e. central bank's) intervention. Furthermore, it benefits each person simultaneously and is thus equally available to each person. Simultaneous benefit is not a "must" for a "thing" to be public. A good example is highway. Highways do not generate simultaneous benefit to all individuals; they are equally available to all individuals. Non-exclusion principle also applies here. Additional individuals looking for money may be added at zero marginal cost.
e) Indivisibility of money refers to its purchasing power and not its physical character.
f) Its velocity is greater than unity implying that one is not supposed to "capture" it as opposed to the case of private good whose velocity is unity implying that it can be "captured".
A caveat is in order here. Money has two distinct attributes; one at micro and the other at a macro level. At the micro level, it is part of the asset of an individual possessing it. But at macro level it cannot be added to the assets of the economy. To count money as wealth (or asset) of a nation will lead one to commit both fallacy of composition and double counting problem. This property of money may be the only one that makes it distinct from other "public goods". This could probably be the consequence of money being the medium of exchange.
8. Removal of interest and all its derivatives (i.e. lending on interest, money market and speculation) from an economy will lead Islamic banks to finance investment projects through PLS. The criteria to be used by such banks are both profitability and feasibility of the projects. Hence, projects compete with each other on the bases of their Internal Rates of Return (IRR). However, the criterion used by a potential investor is IRR of a specific project. The role of the central bank in determining arrays of IRRs for different sectors and various activities is highly valuable in channelling resources into proper projects.
Ranking IRRs in descending order, an investor would first choose the project with the highest IRR. However, the rule, which seems appropriate in choosing the amount to be invested, is "cut-off rate". The maximum amount one investor is willing to invest in a project is determined by the IRR of the next project whose value is almost equivalent to the chosen project, without it being "the opportunity cost" of capital.
Cut-off rate, seems to me, has long been mistakenly interpreted as opportunity cost. In investment decision making most of the times we are ~ dealing with the cut-off rate concept (even in an interest based economic system) but very rarely with opportunity cost. In capitalistic system, rate of interest is justifiably used as the opportunity cost of capital. It is well justified that interest rate is essentially determined independently from the rate of return in the real sector of the economy. However in the absence of interest, projects compete with each other to obtain finance from Islamic bank on the basis of their IRR because there is no other alternative. Comparison among various IRRs brings about the role of cut-off rate without anyone of them becoming opportunity cost of another project. Cut-off rate functions as a signal to show an investor up to what point he should invest and where to stop and select another project. Interdependencies among various investment projects produce cut-off rate the special character and function of which differ from those of interest rate.
The reason, seems to the author, that we often fail to distinguish between these two concepts is the interdependence condition. Furthermore, choosing one, IRR of one project as the opportunity cost of another project in the same activity (on the basis of the principle of next best alternative) will lead one to a whole range of so-called opportunity cost list, none of which have possibly the same value. Hence, different cost calculations in the same activity. Whereas cut-off rates could be numerous for many producers in the same activity without making them run into any problem.
In the absence of interest rate there is nothing to compare IRR of an investment project with. Therefore, we can conclude that in an Islamic economy opportunity cost of capital is zero. The foregoing statements were justified on the basis of economic logic; accountants do not seem to have any reason to believe otherwise. One final remark can be added to above statements. Opportunity cost of capital can also be used as the cut-off rate but the reverse is not true.
After their feasibility and profitability have been confirmed by Islamic bank's qualified personnel, projects become eligible to obtain finance; furthermore, the projects themselves become collateral for finance. Central bank's role in providing guidelines about both of these two aspects will certainly be appreciated by Islamic banks.
As long as there are unemployed factors of production suitable to be utilized in investment, projects have to be financed by Islamic banks no matter how much money is required to finance them. This gives appropriate apparatus to materialize the assertion made by S. M. Bagher Sadr when he says; "Tools of production are treated servants in Islam and man the master". It is the right of labour, in Islam, not to be kept unemployed.
In the final analysis, every piece of bank note coming out of an Islamic bank in response to financing an investment project can be called Certificate of Asset Building (C.A.B.). These C.A.B.'s are appropriate both to production and household sectors.
9. In dealing with various modes of contract, Islamic banks finance profitable and appropriate projects. Appropriateness of projects are expected to be determined by the central bank; however, to determine which projects are more profitable to finance is the task of each individual Islamic bank. Central bank's task is to instruct Islamic banks to give priority to those projects, which are more compatible with the country's economic plan (be it either explicit and written or unwritten and implicit).
Islamic modes of contract can be classified into two broad categories:
1. Those with variable return and (2) with fixed return. Musharakah and Mudarabah contracts fall into the first classification and Instalment Sales, Hire-Purchase, Joalah, and the like into the second one. Musharakah (i.e., PLS) has well and rightly been recognized as the core of Islamic banking. In Mudarabah contract labour has no responsibility as to any loss that may occur provided that it had done its best. The second class of contracts may be defined as auxiliary contracts, which could be used in conjunction with and after the first category has been utilized. Risk is involved with the first type but the second is risk less which is more appealing to Islamic banks. To reduce or even to eliminate the burden of risk from the shoulders of investors it requires another paper, which IS beyond the scope of this presentation.
However, to make sure that the guideline controlling the complementarity of the second type contracts has properly been observed, the Islamic central bank is supposed to keep close eye on the contracts signed by each individual Islamic bank. I skip going into the mechanism of how the burden of risk can be lessened or even eliminated; to determine the degree of risk in different sectors and regions throughout the country. This is another crucial task of an Islamic central bank. This will facilitate the task of Islamic banks in determining the relative share of their own profit vis-à-vis that of the investor. This task not only is beyond the capabilities of an individual Islamic bank, but also provides a uniform procedure for all Islamic banks for various sectors, locating in different regions of the country.
10. Whether an Islamic bank uses the variable or fixed- rate-of-return contract, accountants are very keen about costs that are supposed to be deducted from, total revenue. Accountants who are responsible to approve and submit both balance sheets and profit and loss statements to tax authorities do not accept anything under the heading of cost from neither of the two types of contracts provided that they have been financed by Islamic banks. It is a fact that economists use these two valuable documents for economic analysis and their own interpretations without being able to adjust them on the basis of their own interpretation of cost. Nevertheless, neither of the two professions (accounting and economics) can deny that the Islamic banks' share of profit paid by investors (i.e. financees) is in fact sort of dividend which is essentially determined after all costs have been subtracted from revenue and hence can no longer be considered cost.
To sum up the role of a central bank in an Islamic state, we come up with six different crucial functions to be performed at different levels of rigorousness:
a) Active participation in the process of preparing economic development plan.
b) Informing individual Islamic banks about the priorities of investment projects as outlined in the country's economic development plan at different regions and various sectors.
c) Calculating and submitting to Islamic banks the profit shares of banks relative to those of capital for different projects at various regions and sectors.
d) Calculating and submitting to Islamic banks the value of risk involved in different projects, different regions, and various sectors of the country.
e) Constant inspection and supervision to make sure that projects have properly been financed relative to the priorities and the value of risks.
Note: To do all above functions effectively an Islamic central bank is supposed to be well equipped with highly qualified personnel in portfolio and risk management and project appraisal. This is also a must for each individual Islamic bank.
f) After making sure that Islamic banks have concisely followed the central bank's instructions they can safely be allowed to gradually reduce RRR down to zero.
Let me admit that monitoring cost in Islamic banking compared to the conventional banking is relatively high. However, potential benefits as to its effects on reducing unemployment and keeping prices constant over-shadow the cost. Most important, distribution of income and wealth is expected to be more equitable than otherwise. Such a scheme of distribution guarantees sustained economic development. The role of an Islamic central bank in a uniform distribution of information and prevention of moral hazard cannot be overstated.
Whether it is the Islamic banking or the realization of Keynes' expectation to reach full employment, it is yet to be seen. In closing my presentation, I would like to cite what Keynes has to say about this whole issue: "If I am right in supposing it to be comparatively easy to make capital goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism."
Nonetheless it seems that these two models, in the final analysis, converge. He, in this respect, admits that "...it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of the capital at which there is full employment."
Prof. C. G. Harcourt:
"...ideologies…affect the topics discussed, the manner of discussion, the factors included or left out or inadequately stressed in arguments, comments, and models and attitudes shown, sympathetic or hostile,…to past and contemporary economists' works and views. "
Based upon above statement it can be argued that there are a lot of differences between Islamic banking and conventional banking systems both at micro and macro levels. These differences are in approach, in concepts, and in the resulting behaviour.
My presentation is based upon the following primary and secondary assertions, which are the result of 27 papers and 3 books. The last book: "Comparative Money and Banking in Capitalistic and Islamic Systems", in 856 pages, has been recognized in February 2002 in Iran as "The Economic Book of The Year". These assertions and the final conclusion may seem rather unorthodox, but they are the product of their own logical reasoning. The essence of my paper is thus nothing but one of the logical consequences, among others, of the following assertions everybody is able to derive.
Primary assertions are those, which can directly be used to reach the final conclusion of this paper. Secondary assertions are key issues to be used, one way or another, to lead one to the problems in implementing Islamic Banking. These two types of assertions, however, constitute separable sets.
Based upon the fact that the primary function of banks is to deal with "money", one cannot speak about " banking" without referring to money. Hence, it seems a "must" to understand money first. Otherwise many Miss-interpretations may arise as the result.
Interest and profit, although being clear concepts, have been subjected to many misunderstandings. To be sure, let me make them clear at the outset. Interest and profit are rewards to money and capital investment, respectively. In other words, capital investment produces profits and money produces interest. Furthermore, it has constantly and mistakenly written and quoted by some writers that the price of money is 1 (unity). One is the exchange rate of money with itself; but the price of money is interest (rate).
Some of my findings about the nature and role of profits closely correspond to those of Prof. Adrian Wood in his seminal book " A Theory of Profits ". With the abolishment of interest (as it has in Islamic school of economic thought), the LM curve loses its total validity and becomes redundant and useless.
All in all, interest is a normative concept (basically discussed in schools of economic thoughts), which can neither be proved nor refuted by use of scientific tools of analysis. It is a value judgement. In evaluating an economic system, economists are supposed to take it for granted.
Assertions:
1. In economics we are basically dealing with two inter-related concepts; one is legal (or conventional) concept and the other is real concept. To distinguish one from another, one does not need to focus on the physical features of each one. All contractual agreements like marriage, ownership, organizational hierarchy, money, interest, and the like fall into the first category; while human beings, commodities, buildings, amenity, and the like are included in the second category. Each one of these two concepts is able to produce the other or be transformed into itself. Let us call these two properties " Completeness" and " Reflexivity", respectively. Hence, money itself being a legal concept is capable to producing another legal concept (actually its derivative) called "interest" or to produce real concept like capital equipment.
2. Money as a potential capital is a legal (conventional) concept capable of being transformed into actual capital. A simple example would be Mudarabah contract, among others, in which as soon as one person's money is legally combined with another person's labour force, the nature and the function of money is changed into capital. Given that in an Islamic framework there is no reward to money lending (i.e. interest being zero) yet capital (i.e. money's transformed version) is eligible for part of the profit earned.
3. Various modes of contract available to Islamic banks are the major source of transforming money deposits of individuals and firms into capital (or asset). Any type of financing under any modes of contract by these banks will essentially increase the value of the asset of the economy. However, some modes of contract like Musharakah and instalment sales (originated by firms) increase the productive capacity of the economy. Any positive change in the firm's asset values (rather than their capital values which is by itself a vague concept responsible for some obscurities) can be called " investment". Following this practice it is easy to calculate, rather than to estimate, the amount of investment, which has taken place in an economy during one specific year with relatively high precision. This can be done by reading the asset values off the current balance sheets, firms submit to tax authorities. By putting asset values, instead of capital, into the production function, not only it becomes more precise, but also meaningful. Firms' rate of profit is, hence, logically defined as the ratio of profit to their assets. Since the value of firms' assets is normally greater than their value of capital, therefore, the rate of profit defined as the ratio of profit to the value of capital, underestimates the true rate of profit.
4. Based upon J. M. Keynes' criticism on the classical economists inability to recognize speculative demand for money in the presence of interest (rate), it can easily be shown that interest is both necessary and sufficient condition for speculation. In other words, there is a two-way relationship between interest and speculation. It is probably for this reason that he has also recognized commodities rates of interest in addition to money rate of interest that he was much concerned about. That is, whenever a commodity is speculated upon a specific rate of interest would emerge. With the abolishment of interest, speculative motive of the demand for money, logically derived from interest, would disappear. Speculation, which necessarily entails artificial risk in any market, be it in money, bond, gold, commodities and the like, is not permissible in an Islamic setting. All of these can safely be taken under the heading of "gambling".
A corollary to the above assertion is that with the disappearance of bond market stocks are expected to be exchanged in an Islamic stock market based upon their book values. In terms of Tobin's Q this quotient is supposed to be close to unity (one). It is because in a world with perfect markets, economic value (EV) and replacement cost (RC), will coincide. This brings the quotient to unity. An implication of this is that in a world with perfect markets valuing the firm would be easy; i.e. we could read the economic value of the firm off the current balance sheet. Risk is essentially interwoven with investment. It can be considered "natural" and hence permissible in Islam. However, impermissibility of artificial risk may be grounded upon the fact that any income received by speculator will eventually bring about excess demand for goods and services (without the speculator having any share in productive activities). This excess demand, in turn, becomes the main source of inflation.
Let me conclude discussing about this assertion by citing two statements correctly made by Prof. Gardner Ackley:
a) "Speculation - if mistaken - tends ultimately to be self -correcting in any commodity market. "
b) " ...the real cause of unemployment is speculative demand for money".
5. The natural consequence of elimination of interest, as said earlier, is the elimination of money market. Hence, the major motive to use money is for transaction purposes, which underlies the structure of ordinary demand and supply schedules for goods and services. Furthermore, based upon the logical statement that "the speculative motive is derived from money's use as an asset, as a store of value", money can no longer possess the "store of value function" in an Islamic framework.
In the absence of interest, money market and speculation, and all monetary policy tools used in conventional banking, would lose their validity in Islamic banking. Let us call the policy followed in this new setting "Financial Policy". The unique and powerful tool of financial policy is to determine the share of profit relative to that of capital for all investment projects submitted to Islamic banks. This is probably the most important role a central bank can play in an Islamic banking. There are many factors underlying the determination of this share, especially in the face of natural risk.
This share if effectively used would make bank's sources of finance properly channelled into asset building processes without worrying about money whirlpool to emerge. To determine equilibrium in this market the relative profit rate of the Islamic bank (call it financier) to that of the investor (call it the financee) can be constructed. This rate is especially useful in cases where different risks are involved. To prepare a list of different risks involved in various investment projects is another important task of a central bank.
6. Western economists have always and justifiably been worried about unnecessary expansion of money supply the volume of which is hard to control by central banks. This is due to the fact that considerable portion of it (very difficult to determine if not impossible due to uncertainties involved in interest rates) goes to money whirlpool. This is probably the reason Prof. Milton Friedman in his paper addressing the problem of stabilization policy has advocated the Required Reserve Ratio (RRR) to be raised to one hundred percent. It is clear that such a banking, if possible, would lose its own entity and merely becomes safe-deposit office. If Islamic banks are prohibited to lend on interest nonetheless different modes of contract, as mentioned earlier, are available to them to finance specific needs of both firms and individuals upon their proper requests. If constant and effective supervision is conducted on a random basis by the central bank the chances are very slim a money market, which could be outlawed, to be developed. So the kernel of Islamic banking is Profit and Loss Sharing (PLS). By preparing accurate information and making them available to the general public, central bank in Islamic banking system would be able to provide symmetric information and prevent moral hazard, to a great extent.
7. Money's inability to be a tradable entity and its production and volume being closely watched by the central bank (which is apart of the public sector), seems appropriate to be classified as "Impure Public Good" in an Islamic state. For the sake of brevity some properties of (impure) public goods which also applies to money, in this setting, will be outlined as follows:
a) Non-existence of money market.
b) Elimination of speculation.
c) Demand for it can be constructed by vertical summation of individual demands.
d) Externality of money can be derived from its capability of becoming actual capital; hence, government's (i.e. central bank's) intervention. Furthermore, it benefits each person simultaneously and is thus equally available to each person. Simultaneous benefit is not a "must" for a "thing" to be public. A good example is highway. Highways do not generate simultaneous benefit to all individuals; they are equally available to all individuals. Non-exclusion principle also applies here. Additional individuals looking for money may be added at zero marginal cost.
e) Indivisibility of money refers to its purchasing power and not its physical character.
f) Its velocity is greater than unity implying that one is not supposed to "capture" it as opposed to the case of private good whose velocity is unity implying that it can be "captured".
A caveat is in order here. Money has two distinct attributes; one at micro and the other at a macro level. At the micro level, it is part of the asset of an individual possessing it. But at macro level it cannot be added to the assets of the economy. To count money as wealth (or asset) of a nation will lead one to commit both fallacy of composition and double counting problem. This property of money may be the only one that makes it distinct from other "public goods". This could probably be the consequence of money being the medium of exchange.
8. Removal of interest and all its derivatives (i.e. lending on interest, money market and speculation) from an economy will lead Islamic banks to finance investment projects through PLS. The criteria to be used by such banks are both profitability and feasibility of the projects. Hence, projects compete with each other on the bases of their Internal Rates of Return (IRR). However, the criterion used by a potential investor is IRR of a specific project. The role of the central bank in determining arrays of IRRs for different sectors and various activities is highly valuable in channelling resources into proper projects.
Ranking IRRs in descending order, an investor would first choose the project with the highest IRR. However, the rule, which seems appropriate in choosing the amount to be invested, is "cut-off rate". The maximum amount one investor is willing to invest in a project is determined by the IRR of the next project whose value is almost equivalent to the chosen project, without it being "the opportunity cost" of capital.
Cut-off rate, seems to me, has long been mistakenly interpreted as opportunity cost. In investment decision making most of the times we are ~ dealing with the cut-off rate concept (even in an interest based economic system) but very rarely with opportunity cost. In capitalistic system, rate of interest is justifiably used as the opportunity cost of capital. It is well justified that interest rate is essentially determined independently from the rate of return in the real sector of the economy. However in the absence of interest, projects compete with each other to obtain finance from Islamic bank on the basis of their IRR because there is no other alternative. Comparison among various IRRs brings about the role of cut-off rate without anyone of them becoming opportunity cost of another project. Cut-off rate functions as a signal to show an investor up to what point he should invest and where to stop and select another project. Interdependencies among various investment projects produce cut-off rate the special character and function of which differ from those of interest rate.
The reason, seems to the author, that we often fail to distinguish between these two concepts is the interdependence condition. Furthermore, choosing one, IRR of one project as the opportunity cost of another project in the same activity (on the basis of the principle of next best alternative) will lead one to a whole range of so-called opportunity cost list, none of which have possibly the same value. Hence, different cost calculations in the same activity. Whereas cut-off rates could be numerous for many producers in the same activity without making them run into any problem.
In the absence of interest rate there is nothing to compare IRR of an investment project with. Therefore, we can conclude that in an Islamic economy opportunity cost of capital is zero. The foregoing statements were justified on the basis of economic logic; accountants do not seem to have any reason to believe otherwise. One final remark can be added to above statements. Opportunity cost of capital can also be used as the cut-off rate but the reverse is not true.
After their feasibility and profitability have been confirmed by Islamic bank's qualified personnel, projects become eligible to obtain finance; furthermore, the projects themselves become collateral for finance. Central bank's role in providing guidelines about both of these two aspects will certainly be appreciated by Islamic banks.
As long as there are unemployed factors of production suitable to be utilized in investment, projects have to be financed by Islamic banks no matter how much money is required to finance them. This gives appropriate apparatus to materialize the assertion made by S. M. Bagher Sadr when he says; "Tools of production are treated servants in Islam and man the master". It is the right of labour, in Islam, not to be kept unemployed.
In the final analysis, every piece of bank note coming out of an Islamic bank in response to financing an investment project can be called Certificate of Asset Building (C.A.B.). These C.A.B.'s are appropriate both to production and household sectors.
9. In dealing with various modes of contract, Islamic banks finance profitable and appropriate projects. Appropriateness of projects are expected to be determined by the central bank; however, to determine which projects are more profitable to finance is the task of each individual Islamic bank. Central bank's task is to instruct Islamic banks to give priority to those projects, which are more compatible with the country's economic plan (be it either explicit and written or unwritten and implicit).
Islamic modes of contract can be classified into two broad categories:
1. Those with variable return and (2) with fixed return. Musharakah and Mudarabah contracts fall into the first classification and Instalment Sales, Hire-Purchase, Joalah, and the like into the second one. Musharakah (i.e., PLS) has well and rightly been recognized as the core of Islamic banking. In Mudarabah contract labour has no responsibility as to any loss that may occur provided that it had done its best. The second class of contracts may be defined as auxiliary contracts, which could be used in conjunction with and after the first category has been utilized. Risk is involved with the first type but the second is risk less which is more appealing to Islamic banks. To reduce or even to eliminate the burden of risk from the shoulders of investors it requires another paper, which IS beyond the scope of this presentation.
However, to make sure that the guideline controlling the complementarity of the second type contracts has properly been observed, the Islamic central bank is supposed to keep close eye on the contracts signed by each individual Islamic bank. I skip going into the mechanism of how the burden of risk can be lessened or even eliminated; to determine the degree of risk in different sectors and regions throughout the country. This is another crucial task of an Islamic central bank. This will facilitate the task of Islamic banks in determining the relative share of their own profit vis-à-vis that of the investor. This task not only is beyond the capabilities of an individual Islamic bank, but also provides a uniform procedure for all Islamic banks for various sectors, locating in different regions of the country.
10. Whether an Islamic bank uses the variable or fixed- rate-of-return contract, accountants are very keen about costs that are supposed to be deducted from, total revenue. Accountants who are responsible to approve and submit both balance sheets and profit and loss statements to tax authorities do not accept anything under the heading of cost from neither of the two types of contracts provided that they have been financed by Islamic banks. It is a fact that economists use these two valuable documents for economic analysis and their own interpretations without being able to adjust them on the basis of their own interpretation of cost. Nevertheless, neither of the two professions (accounting and economics) can deny that the Islamic banks' share of profit paid by investors (i.e. financees) is in fact sort of dividend which is essentially determined after all costs have been subtracted from revenue and hence can no longer be considered cost.
To sum up the role of a central bank in an Islamic state, we come up with six different crucial functions to be performed at different levels of rigorousness:
a) Active participation in the process of preparing economic development plan.
b) Informing individual Islamic banks about the priorities of investment projects as outlined in the country's economic development plan at different regions and various sectors.
c) Calculating and submitting to Islamic banks the profit shares of banks relative to those of capital for different projects at various regions and sectors.
d) Calculating and submitting to Islamic banks the value of risk involved in different projects, different regions, and various sectors of the country.
e) Constant inspection and supervision to make sure that projects have properly been financed relative to the priorities and the value of risks.
Note: To do all above functions effectively an Islamic central bank is supposed to be well equipped with highly qualified personnel in portfolio and risk management and project appraisal. This is also a must for each individual Islamic bank.
f) After making sure that Islamic banks have concisely followed the central bank's instructions they can safely be allowed to gradually reduce RRR down to zero.
Let me admit that monitoring cost in Islamic banking compared to the conventional banking is relatively high. However, potential benefits as to its effects on reducing unemployment and keeping prices constant over-shadow the cost. Most important, distribution of income and wealth is expected to be more equitable than otherwise. Such a scheme of distribution guarantees sustained economic development. The role of an Islamic central bank in a uniform distribution of information and prevention of moral hazard cannot be overstated.
Whether it is the Islamic banking or the realization of Keynes' expectation to reach full employment, it is yet to be seen. In closing my presentation, I would like to cite what Keynes has to say about this whole issue: "If I am right in supposing it to be comparatively easy to make capital goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism."
Nonetheless it seems that these two models, in the final analysis, converge. He, in this respect, admits that "...it is to our best advantage to reduce the rate of interest to that point relatively to the schedule of the marginal efficiency of the capital at which there is full employment."
Wednesday, April 15, 2009
What is Islamic Banking
Islamic banks appeared on the world scene as active players over two decades ago. But "many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades".
The basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest):
"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.
"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.
"Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)
It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.
The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam.
Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.
Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:
1.
While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
2.
While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
3.
While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.
4.
While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.
5.
Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.
The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.
It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.
The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management.
Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.
The basic principle of Islamic banking is the prohibition of Riba- (Usury - or interest):
"While a basic tenant of Islamic banking - the outlawing of riba, a term that encompasses not only the concept of usury, but also that of interest - has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.
"The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. Usury was prohibited in both the Old and New Testaments of the Bible, while Shakespeare and many other writers, particularly those writing in the 19th century, have attacked the barbarity of the practice. Much of the morality championed by Victorian writers such as Dickens - ranging from the equitable distribution of wealth through to man's fundamental right to work - is clearly present in modern Islamic society.
"Although the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century." (Islamic Finance: A Euromoney Publication, 1997)
It is evident that Islamic finance was practiced predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities. In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is claimed that many concepts, techniques, and instruments of Islamic finance were later adopted by European financiers and businessmen.
The revival of Islamic banking coincided with the world-wide celebration of the advent of the 15th Century of Islamic calendar (Hijra) in 1976. At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalization of the oil prices, which had hitherto been under the control of foreign oil Corporations. These events led Muslims' to strive to model their lives in accordance with the ethics and philosophy of Islam.
Disenchantment with the value neutral capitalist and socialist financial systems led not only Muslims but also others to look for ethical values in their financial dealings and in the West some financial organisations have opted for ethical operations.
Islam not only prohibits dealing in interest but also in liquor, pork, gambling, pornography and anything else, which the Shariah (Islamic Law) deems Haram (unlawful). Islamic banking is an instrument for the development of an Islamic economic order. Some of the salient features of this order may be summed up as:
1.
While permitting the individual the right to seek his economic well-being, Islam makes a clear distinction between what is Halal (lawful) and what is haram (forbidden) in pursuit of such economic activity. In broad terms, Islam forbids all forms of economic activity, which are morally or socially injurious.
2.
While acknowledging the individual's right to ownership of wealth legitimately acquired, Islam makes it obligatory on the individual to spend his wealth judiciously and not to hoard it, keep it idle or to squander it.
3.
While allowing an individual to retain any surplus wealth, Islam seeks to reduce the margin of the surplus for the well-being of the community as a whole, in particular the destitute and deprived sections of society by participation in the process of Zakat.
4.
While making allowance for the ways of human nature and yet not yielding to the consequences of its worst propensities, Islam seeks to prevent the accumulation of wealth in a few hands to the detriment of society as a whole, by its laws of inheritance.
5.
Viewed as a whole, the economic system envisaged by Islam aims at social justice without inhibiting individual enterprise beyond the point where it becomes not only collectively injurious but also individually self-destructive.
The Islamic financial system employs the concept of participation in the enterprise, utilizing the funds at risk on a profit-and- loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.
It is possible, that investment in Islamic financial institutions can provide potential profit in proportion to the risk assumed to satisfy the differing demands of participants in the contemporary environment and within the guidelines of the Shariah.
The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre. This concept therefore encourages better resource management.
Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.
Tuesday, April 14, 2009
Monday, April 13, 2009
Citation Style 2
Chicago-Style Citation Quick Guide
The Chicago Manual of Style presents two basic documentation systems, the humanities style (notes and bibliography) and the author-date system. Choosing between the two often depends on subject matter and nature of sources cited, as each system is favored by different groups of scholars.
The humanities style is preferred by many in literature, history, and the arts. This style presents bibliographic information in notes and, often, a bibliography. It accommodates a variety of sources, including esoteric ones less appropriate to the author-date system.
The more concise author-date system has long been used by those in the physical, natural, and social sciences. In this system, sources are briefly cited in the text, usually in parentheses, by author’s last name and date of publication. The short citations are amplified in a list of references, where full bibliographic information is provided.
Below are some common examples of materials cited in both styles. Each example is given first in humanities style (a note [N], followed by a bibliographic entry [B]) and then in author-date style (an in-text citation [T], followed by a reference-list entry [R]). For numerous specific examples, see chapters 16 and 17 of The Chicago Manual of Style, 15th edition.
Online sources that are analogous to print sources (such as articles published in online journals, magazines, or newspapers) should be cited similarly to their print counterparts but with the addition of a URL. Some publishers or disciplines may also require an access date. For online or other electronic sources that do not have a direct print counterpart (such as an institutional Web site or a Weblog), give as much information as you can in addition to the URL. The following examples include some of the most common types of electronic sources.
Book
One author
- N:
- 1. Wendy Doniger, Splitting the Difference (Chicago: University of Chicago Press, 1999), 65.
- B:
- Doniger, Wendy. Splitting the Difference. Chicago: University of Chicago Press, 1999.
- T:
- (Doniger 1999, 65)
- R:
- Doniger, Wendy. 1999. Splitting the difference. Chicago: University of Chicago Press.
Two authors
- N:
- 6. Guy Cowlishaw and Robin Dunbar, Primate Conservation Biology (Chicago: University of Chicago Press, 2000), 104–7.
- B:
- Cowlishaw, Guy, and Robin Dunbar. Primate Conservation Biology. Chicago: University of Chicago Press, 2000.
- T:
- (Cowlishaw and Dunbar 2000, 104–7)
- R:
- Cowlishaw, Guy, and Robin Dunbar. 2000. Primate conservation biology. Chicago: University of Chicago Press.
Four or more authors
- N:
- 13. Edward O. Laumann et al., The Social Organization of Sexuality: Sexual Practices in the United States (Chicago: University of Chicago Press, 1994), 262.
- B:
- Laumann, Edward O., John H. Gagnon, Robert T. Michael, and Stuart Michaels. The Social Organization of Sexuality: Sexual Practices in the United States. Chicago: University of Chicago Press, 1994.
- T:
- (Laumann et al. 1994, 262)
- R:
- Laumann, Edward O., John H. Gagnon, Robert T. Michael, and Stuart Michaels. 1994. The social organization of sexuality: Sexual practices in the United States. Chicago: University of Chicago Press.
Editor, translator, or compiler instead of author
- N:
- 4. Richmond Lattimore, trans., The Iliad of Homer (Chicago: University of Chicago Press, 1951), 91–92.
- B:
- Lattimore, Richmond, trans. The Iliad of Homer. Chicago: University of Chicago Press, 1951.
- T:
- (Lattimore 1951, 91–92)
- R:
- Lattimore, Richmond, trans. 1951. The Iliad of Homer. Chicago: University of Chicago Press.
Editor, translator, or compiler in addition to author
- N:
- 16. Yves Bonnefoy, New and Selected Poems, ed. John Naughton and Anthony Rudolf (Chicago: University of Chicago Press, 1995), 22.
- B:
- Bonnefoy, Yves. New and Selected Poems. Edited by John Naughton and Anthony Rudolf. Chicago: University of Chicago Press, 1995.
- T:
- (Bonnefoy 1995, 22)
- R:
- Bonnefoy, Yves. 1995. New and selected poems. Ed. John Naughton and Anthony Rudolf. Chicago: University of Chicago Press.
Chapter or other part of a book
- N:
- 5. Andrew Wiese, “‘The House I Live In’: Race, Class, and African American Suburban Dreams in the Postwar United States,” in The New Suburban History, ed. Kevin M. Kruse and Thomas J. Sugrue (Chicago: University of Chicago Press, 2006), 101–2.
- B:
- Wiese, Andrew. “‘The House I Live In’: Race, Class, and African American Suburban Dreams in the Postwar United States.” In The New Suburban History, edited by Kevin M. Kruse and Thomas J. Sugrue, 99–119. Chicago: University of Chicago Press, 2006.
- T:
- (Wiese 2006, 101–2)
- R:
- Wiese, Andrew. 2006. “The house I live in”: Race, class, and African American suburban dreams in the postwar United States. In The new suburban history, ed. Kevin M. Kruse and Thomas J. Sugrue, 99–119. Chicago: University of Chicago Press.
Chapter of an edited volume originally published elsewhere (as in primary sources)
- N:
- 8. Quintus Tullius Cicero. “Handbook on Canvassing for the Consulship,” in Rome: Late Republic and Principate, ed. Walter Emil Kaegi Jr. and Peter White, vol. 2 of University of Chicago Readings in Western Civilization, ed. John Boyer and Julius Kirshner (Chicago: University of Chicago Press, 1986), 35.
- B:
- Cicero, Quintus Tullius. “Handbook on Canvassing for the Consulship.” In Rome: Late Republic and Principate, edited by Walter Emil Kaegi Jr. and Peter White. Vol. 2 of University of Chicago Readings in Western Civilization, edited by John Boyer and Julius Kirshner, 33–46. Chicago: University of Chicago Press, 1986. Originally published in Evelyn S. Shuckburgh, trans., The Letters of Cicero, vol. 1 (London: George Bell & Sons, 1908).
- T:
- (Cicero 1986, 35)
- R:
- Cicero, Quintus Tullius. 1986. Handbook on canvassing for the consulship. In Rome: Late republic and principate, edited by Walter Emil Kaegi Jr. and Peter White. Vol. 2 of University of Chicago readings in western civilization, ed. John Boyer and Julius Kirshner, 33–46. Chicago: University of Chicago Press. Originally published in Evelyn S. Shuckburgh, trans., The letters of Cicero, vol. 1 (London: George Bell & Sons, 1908).
Preface, foreword, introduction, or similar part of a book
- N:
- 17. James Rieger, introduction to Frankenstein; or, The Modern Prometheus, by Mary Wollstonecraft Shelley (Chicago: University of Chicago Press, 1982), xx–xxi.
- B:
- Rieger, James. Introduction to Frankenstein; or, The Modern Prometheus, by Mary Wollstonecraft Shelley, xi–xxxvii. Chicago: University of Chicago Press, 1982.
- T:
- (Rieger 1982, xx–xxi)
- R:
- Rieger, James. 1982. Introduction to Frankenstein; or, The modern Prometheus, by Mary Wollstonecraft Shelley, xi–xxxvii. Chicago: University of Chicago Press.
Book published electronically
If a book is available in more than one format, you should cite the version you consulted, but you may also list the other formats, as in the second example below. If an access date is required by your publisher or discipline, include it parenthetically at the end of the citation, as in the first example below.
- N:
- 2. Philip B. Kurland and Ralph Lerner, eds., The Founders’ Constitution (Chicago: University of Chicago Press, 1987), http://press-pubs.uchicago.edu/founders/ (accessed June 27, 2006).
- B:
- Kurland, Philip B., and Ralph Lerner, eds. The Founders’ Constitution. Chicago: University of Chicago Press, 1987. http://press-pubs.uchicago.edu/founders/. Also available in print form and as a CD-ROM.
- T:
- (Kurland and Lerner 1987)
- R:
- Kurland, Philip B., and Ralph Lerner, eds. 1987. The founders’ Constitution. Chicago: University of Chicago Press. http://press-pubs.uchicago.edu/founders/.
Journal article
Article in a print journal
- N:
- 8. John Maynard Smith, “The Origin of Altruism,” Nature 393 (1998): 639.
- B:
- Smith, John Maynard. “The Origin of Altruism.” Nature 393 (1998): 639–40.
- T:
- (Smith 1998, 639)
- R:
- Smith, John Maynard. 1998. The origin of altruism. Nature 393: 639–40.
Article in an online journal
If an access date is required by your publisher or discipline, include it parenthetically at the end of the citation, as in the fourth example below.
- N:
- 33. Mark A. Hlatky et al., "Quality-of-Life and Depressive Symptoms in Postmenopausal Women after Receiving Hormone Therapy: Results from the Heart and Estrogen/Progestin Replacement Study (HERS) Trial," Journal of the American Medical Association 287, no. 5 (2002), http://jama.ama-assn.org/issues/v287n5/rfull/joc10108.html#aainfo.
- B:
- Hlatky, Mark A., Derek Boothroyd, Eric Vittinghoff, Penny Sharp, and Mary A. Whooley. "Quality-of-Life and Depressive Symptoms in Postmenopausal Women after Receiving Hormone Therapy: Results from the Heart and Estrogen/Progestin Replacement Study (HERS) Trial." Journal of the American Medical Association 287, no. 5 (February 6, 2002), http://jama.ama-assn.org/issues/v287n5/rfull/joc10108.html#aainfo.
- T:
- (Hlatky et al. 2002)
- R:
- Hlatky, Mark A., Derek Boothroyd, Eric Vittinghoff, Penny Sharp, and Mary A. Whooley. 2002. Quality-of-life and depressive symptoms in postmenopausal women after receiving hormone therapy: Results from the Heart and Estrogen/Progestin Replacement Study (HERS) trial. Journal of the American Medical Association 287, no. 5 (February 6), http://jama.ama-assn.org/issues/v287n5/rfull/joc10108.html#aainfo (accessed January 7, 2004).
Popular magazine article
- N:
- 29. Steve Martin, “Sports-Interview Shocker,” New Yorker, May 6, 2002, 84.
- B:
- Martin, Steve. “Sports-Interview Shocker.” New Yorker, May 6, 2002.
- T:
- (Martin 2002, 84)
- R:
- Martin, Steve. 2002. Sports-interview shocker. New Yorker, May 6.
Newspaper article
Newspaper articles may be cited in running text (“As William Niederkorn noted in a New York Times article on June 20, 2002, . . . ”) instead of in a note or an in-text citation, and they are commonly omitted from a bibliography or reference list as well. The following examples show the more formal versions of the citations.
- N:
- 10. William S. Niederkorn, “A Scholar Recants on His ‘Shakespeare’ Discovery,” New York Times, June 20, 2002, Arts section, Midwest edition.
- B:
- Niederkorn, William S. “A Scholar Recants on His ‘Shakespeare’ Discovery.” New York Times, June 20, 2002, Arts section, Midwest edition.
- T:
- (Niederkorn 2002)
- R:
- Niederkorn, William S. 2002. A scholar recants on his “Shakespeare” discovery. New York Times, June 20, Arts section, Midwest edition.
Book review
- N:
- 1. James Gorman, “Endangered Species,” review of The Last American Man, by Elizabeth Gilbert, New York Times Book Review, June 2, 2002, 16.
- B:
- Gorman, James. “Endangered Species.” Review of The Last American Man, by Elizabeth Gilbert. New York Times Book Review, June 2, 2002.
- T:
- (Gorman 2002, 16)
- R:
- Gorman, James. 2002. Endangered species. Review of The last American man, by Elizabeth Gilbert. New York Times Book Review, June 2.
Thesis or dissertation
- N:
- 22. M. Amundin, “Click Repetition Rate Patterns in Communicative Sounds from the Harbour Porpoise, Phocoena phocoena” (PhD diss., Stockholm University, 1991), 22–29, 35.
- B:
- Amundin, M. “Click Repetition Rate Patterns in Communicative Sounds from the Harbour Porpoise, Phocoena phocoena.” PhD diss., Stockholm University, 1991.
- T:
- (Amundin 1991, 22–29, 35)
- R:
- Amundin, M. 1991. Click repetition rate patterns in communicative sounds from the harbour porpoise, Phocoena phocoena. PhD diss., Stockholm University.
Paper presented at a meeting or conference
- N:
- 13. Brian Doyle, “Howling Like Dogs: Metaphorical Language in Psalm 59” (paper presented at the annual international meeting for the Society of Biblical Literature, Berlin, Germany, June 19–22, 2002).
- B:
- Doyle, Brian. “Howling Like Dogs: Metaphorical Language in Psalm 59.” Paper presented at the annual international meeting for the Society of Biblical Literature, Berlin, Germany, June 19–22, 2002.
- T:
- (Doyle 2002)
- R:
- Doyle, Brian. 2002. Howling like dogs: Metaphorical language in Psalm 59. Paper presented at the annual international meeting for the Society of Biblical Literature, June 19–22, in Berlin, Germany.
Web site
Web sites may be cited in running text (“On its Web site, the Evanston Public Library Board of Trustees states . . .”) instead of in an in-text citation, and they are commonly omitted from a bibliography or reference list as well. The following examples show the more formal versions of the citations. If an access date is required by your publisher or discipline, include it parenthetically at the end of the citation, as in the second example below.
- N:
- 11. Evanston Public Library Board of Trustees, “Evanston Public Library Strategic Plan, 2000–2010: A Decade of Outreach,” Evanston Public Library, http://www.epl.org/library/strategic-plan-00.html.
- B:
- Evanston Public Library Board of Trustees. “Evanston Public Library Strategic Plan, 2000–2010: A Decade of Outreach.” Evanston Public Library. http://www.epl.org/library/strategic-plan-00.html (accessed June 1, 2005).
- T:
- (Evanston Public Library Board of Trustees)
- R:
- Evanston Public Library Board of Trustees. Evanston Public Library strategic plan, 2000–2010: A decade of outreach. Evanston Public Library. http://www.epl.org/library/strategic-plan-00.html.
Weblog entry or comment
Weblog entries or comments may be cited in running text (“In a comment posted to the Becker-Posner Blog on March 6, 2006, Peter Pearson noted . . .”) instead of in a note or an in-text citation, and they are commonly omitted from a bibliography or reference list as well. The following examples show the more formal versions of the citations. If an access date is required by your publisher or discipline, include it parenthetically at the end of the citation, as in the first example below.
- N:
- 8. Peter Pearson, comment on “The New American Dilemma: Illegal Immigration,” The Becker-Posner Blog, comment posted March 6, 2006, http://www.becker-posner-blog.com/archives/2006/03/the_new_america.html#c080052 (accessed March 28, 2006).
- B:
- Becker-Posner Blog, The. http://www.becker-posner-blog.com/.
- T:
- (Peter Pearson, The Becker-Posner Blog, comment posted March 6, 2006)
- R:
- Becker-Posner blog, The. http://www.becker-posner-blog.com/.
E-mail message
E-mail messages may be cited in running text (“In an e-mail message to the author on October 31, 2005, John Doe revealed . . .”) instead of in a note or an in-text citation, and they are rarely listed in a bibliography or reference list. The following example shows the more formal version of a note.
- N:
- 2. John Doe, e-mail message to author, October 31, 2005.
Item in online database
Journal articles published in online databases should be cited as shown above, under “Article in an online journal.” If an access date is required by your publisher or discipline, include it parenthetically at the end of the citation, as in the first example below.
- N:
- 7. Pliny the Elder, The Natural History, ed. John Bostock and H. T. Riley, in the Perseus Digital Library, http://www.perseus.tufts.edu/cgi-bin/ptext?lookup=Plin.+Nat.+1.dedication (accessed November 17, 2005).
- B:
- Perseus Digital Library. http://www.perseus.tufts.edu/.
- T:
- (Pliny the Elder, Perseus Digital Library)
- R:
- Perseus Digital Library. http://www.perseus.tufts.edu/.
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Cara Aman Transfer Uang
