Islamic banks in name only
The headline of Frank Kane’s comment article The West’s bankers may learn from their Islamic brothers (March 7) should read The Islamic brothers may have learned from the West’s bankers. There is no such thing as Sharia-compliant banking available here. Kane should have read the part of Sharia – financial interest and the products that derive from it – more carefully.
If he goes to an Islamic bank to apply for a loan for a car, they will tell him that they will buy it and he will pay them in monthly installments over a certain period of time – of course, at the end, much more than the original price. The difference is interest, but with another name. In case the bank doesn’t have the money available but wants to make the deal with him, they will borrow from another bank. And the other bank from another bank – and all this borrowing for free? All banks worldwide use the same source and routing, whether so-called Islamic or Western.
If you give something an Arabic name, this doesn’t make it Islamic. That is the reason why a Koran-versed Muslim doesn’t use this system. Replacing the existing financial system is an absolute requirement, but not by replacing it with the same under a different cover.
Dr Sharif Mohammed, UAE (writer)
A RESPONSE
I was rather surprised to read Dr.Sharif Mohammed’s little thought of criticism of Islamic banking, particularly in a context where even the West is coming to appreciate Islamic Banking as a viable alternative to conventional banking in the wake of the recent financial crisis that needless to say has had global repercussions.
Firstly, it must be pointed out that Dr.Sharif is talking about just one product of Islamic banking, Murabaha or cost plus mark-up which is used for personal financing and is conveniently ignoring the other instruments and products such as Mudarabah or Musharakah based on Profit Sharing and Equity Partnership arrangements and Sukuk or Islamic Bonds based on Halal-income yielding tangible physical assets. He has also misunderstood the mechanism by which funds are mobilized in Islamic banks, assuming that banks obtain their monies for free by simple deposit placements by their Muslim clients without a commitment to pay them a profit in case such banks realise a profit.
With regard to Murabaha, it is often argued that the mark-up it involves is interest charged under another name. This of course is a misunderstanding.
For one thing, Murabaha is a trading arrangement where a client approaches an Islamic Financial Institution (IFI) to purchase an article or good. The IFI concerned would purchase the good and then sell it back to the client for which he would pay in installments with a mark-up that has been mutually agreed by the parties. Here, one pays a fixed sum as mutually agreed between the parties which will constitute the profit of the financial institution. This is purely a trading arrangement that does not involve the payment of interest and is no different from other kinds of lawful trading activities. As we know that the Qur’an clearly distinguishes trade from interest, terming the former lawful and the latter prohibited.
An important feature of the Murabaha transaction, it must be pointed out, is that it involves two sales contracts, namely, the one through which the bank acquires the goods and the other through which it sells to the client which should for all purposes be considered distinct and separate transactions. Such a transaction necessarily involves the client requesting the bank to purchase the commodity specified by him and at the same time undertaking to purchase such commodity if the bank acquires the same. The client though duty bound to honour such promise to purchase is not legally bound by it. Thus there is always the risk of the client going back on his promise, in which case the bank risks the loss of the sum it has spent on such good, though it could always dispose of it to another party as at such stage it still remains the legal owner of it.
There are other salient features besides. For instance, in the case of conventional financing, delayed payment results in an accumulation of interest so that the client would have to pay much more than he had bargained for to the bank which would take it as its profit. In the case of an IFI, on the other hand, late payment would simply result in the client being told to pay a reasonable penalty fee to a charity fund whose proceeds will go for the benefit of the larger society and not of a single bank or financial institution. This provision has been made not to bring additional profits to the IFI, but rather to discourage the unhealthy practice of defaulting on the timely payment of dues.
Besides, In the event of a client defaulting in the settlement of his dues owing to a genuine reason, the IFI is obliged to give him a reasonable grace period to pay his dues and it is only after failure to pay the debt after a reasonable time has elapsed that it could proceed with recovering its dues from the security made available to it. Any excess amount received from the proceeds of the sale over and above the due amount must be returned to the client.
At the same time, however, one may argue that those who resort to Murabaha by charging a mark-up may be following the letter of the law, but not its spirit, which is the negation of interest in whichever form it operates, since ultimately, the customer gets the same deal as he would get from a conventional provider as far as paying an additional sum to the provider of such a service is concerned. Furthermore it is a well known fact that the mark-up is often structured in such a manner as to reflect the prevailing interest rates of the conventional finance providers.
An argument that has been marshaled to counter this view is that Islam is concerned not so much with the substance than with the form in which a transaction is executed on the basis of analogical deductions drawn for instance from the case of Halal meat which does not differ from Haram meat except for the process, in this case the manner of slaughter prescribed in Islam to make animal meat lawful.
Apologists for Murabaha also argue that if such mark-up were lower than the prevailing interest rates, the conventional sector would deem it a threat to their operations and could exert pressure on the central banks of their respective countries to clamp down on the Islamic Finance industry, a threat which remains greater in countries where Muslims are in a minority or where the Shari’ah is not given its due place in society.
However, we must also point out that most scholars including Taqi Usmani are agreed that Murabaha should be deemed only as a transitional product and should be gradually phased out of the portfolio of IFIs with time. Although Murabaha formed the bulk of the portfolio of most IFIs and still does to a significant extent, we see a gradual shift away from Murabaha to Mudarabaha and Musharaka on the part of some major IFI’s such as for instance Dubai Islamic Bank.
The fact however is that financing and particularly personal financing forms an important aspect of modern-day economic life and has become virtually indispensable in catering to the many and complex needs of modern society. As such, it is proposed that IFI’s offer products based on equity partnership where they would come in as the financier of a particular project for which the client requires monies on a profit-sharing basis or else engage in merchant banking where they would purchase various types of goods based on market demand and sell these to buyers at a profit.
Dr.Sharif also seems to be unaware of the mechanism by which IFI’s mobilize monies which are used to fund products such as Murabaha. He assumes that they are obtained by deposits placed by good Muslims who do not expect anything in return. On the contrary, IFI’s mobilize such funds based on the principle of Mudarabah, accepting these deposits in the capacity of Mudarib or Fund Manager where it undertakes to pay depositors (in other words the investors) a share of the profits it makes, the proportion of which is mutually determined beforehand between the IFI and the investor-depositors .
Finally, it must be stated here that IFI’s simply cannot afford to look upon their client base as a ‘captive market’ born out of adherence to the Islamic prohibition of interest. Such an attitude will only deprive the industry of much of its vitality. The Islamic option must be one made out of real choice, not just religious compulsion. As such it is imperative that IFIs offer better and more innovative products that should drive the industry to new heights.
Asiff Hussein
Editor – Islamic Finance Today
0 Comments:
Post a Comment