Is riba-free banking possible?
Islamic banking has grown reasonably fast in the last decade in Pakistan. People invest religiously trusting the fatwa of the so-called Sharia boards of these banks.
Are these financial instruments really riba-free (interest-free)?
Do these instruments conform to the juristic and ethical frameworks laid down by the Quran, the Holy Prophet (PBUH) and the imams of the leading schools of thought?
If the analysis shows otherwise, then why not do ‘modern’ banking instead of labelling riba-infested products as ‘Islamic’ and selling them as halal and riba-free?
The theoretical problem arises out of our inability to comprehend the meanings of two words ‘riba’ and ‘ba’ah’ used in the Quran to strictly prohibit the former and clearly permit the latter. There are two verses in the Quran which deal with the concepts of riba and ba’ah and adjudicate reasons for their subsequent prohibition and permission.
The Quran clearly refers to the inherent psychological nature of men, which ordinarily thrives on boundless greedy profiteering and moneymaking without personal labour and effort. So the Quran clearly describes in a verse this human weakness and declares that those who approve of riba are “possessed by Satan” (2:275). It is strictly forbidden and instead one should engage in ba’ah which requires personal labour and effort.
The second verse of the Quran explains the economic rationality of riba and declares that it is forbidden because it leads to profiteering and moneymaking in a multiplication mode of economic exchange (3:130) which does not involve labour and effort by the owner of the economic resources.
Therefore, one should engage in socially and ethically permissible economic activity of ba’ah. On the other hand, the practice of riba leads to unprecedented social and economic inequalities which create an unjust society, which the Quran and the Prophet disapprove of in manifest words.
Ba’ah is permitted because it is based on rational, ethical and mutually agreed contracts of economic exchange, sharing risks, benefits and liabilities and profit (land, labour, capital, commodity or intellect). The law of riba and ba’ah applies equally and universally to both tangible and intangible economic resources. In simple terms, riba is an irrational, exaggerated, labour-less and unethical accumulation of wealth in a multiplication mode, while ba’ah is a rational and socially and ethically agreed economic exchange of labour and money.
The actual labour and work done by a person is weightier and considered a sacred trust, for according to a hadith the worker is a friend of God.
Now let us illustrate by an example to show what it means to accomplish a riba-free economic exchange. I own one acre of land and I give it for cultivation to a peasant on mutually agreed terms. A riba-free land-tilling agreement between me and the peasant would be something like this: the owner of the land should provide the water, seed, fertiliser and protection in case of natural calamity hitting the crop and distribute ushr forthwith.
The peasant would cultivate the land with honest labour, take care of the field, protect the crop against dangerous animals, sell it at a fair market price and distribute the profit equally with the owner of the land. This land modaraba and the transaction thereof will be a completely riba-free economic activity. The peasant shall be duly compensated for his labour in case he opts out of the transaction before the maturity of the crop.
Let us now analyse a so-called Islamic financial product offered by Islamic banks in Pakistan. The product is known as ‘car modaraba’. The Islamic financial product is a nomenclature shift from the routine banking sector offering the same product as ‘car-leasing facility’. All terms and conditions of the modaraba contract are analogous to the car-leasing agreement, favouring the Islamic bank rather than the end-user. It is a misnomer to call it modaraba because the Islamic bank is not the first owner (in this case the car maker/manufacturer is the true owner).
The Islamic bank thus does not fulfil the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product which is produced by another party in the first place.Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.
An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation. According to Islamic economic rationality, labour is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination.
The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.
The writer is a social scientist and teaches at the University of Management and Technology, Lahore.
i never believed in islamic banking, its just a different name given to conventional. Islamic banks r never in loss, all their products r designed to make profits for the bank.
i have worked for an islamic bank in UAE & they do business exactly as other conventional banks do.
Interest is called Profit, processing fee is called management charge, late pmt fee, minimum balance fee all are same.
There is no RIBA free banking, it can never be.
Dear Shahzad,
Just to counter your argument with the simplest example. Interpretation of Qura'an would also be very different when you yourself read it and when I read it. There will be a lot of differences in understanding the principle behind each "Masla".
What will you do then?
We need to trust one source and follow it instead of going for those which make our lives much easier.
Everybody!
Just to make a point clearer. Car Financing in Islamic Banks in sorely based on the concept of Ijarah (rent). It means that bank will buy the car from the market, takes on the ownership and then gives the car on rent to the customer. Remember that ownership is with the bank and not with the customer. That is why it is called RENT.
Also keep in mind that end results of anything do not make them Halal or Haram. It is simply the mechanism and process through which it passes.
I think we need to educate ourselves to the best rather than labeling something wrong based on our isolated research,
Regards
Mujtaba
In fact, when it comes to Europe, the UK and France have already introduced Islamic finance into their financial system and the Kuveyt Türk Participation Bank is vying to gain a stronger footing in Germany with its interest-free banking applications. Jamzidi Khalid, CEO of Deutsche Bank AG International Islamic Banking and the head of Islamic Structuring for Asia ex-Japan, said in a bank press release dated March 1 that the bank hopes to increase its leading niche in the market. “Making our conventional product platform available to clients in a Shariah-compliant format greatly increases our competitive position, while contributing to the market’s broader development. This is particularly true of the Islamic bond market, where we hope to leverage our position as the number one arranger of conventional international bonds in Asia,” he said
.
In Malaysia, Islamic finance already commands 20 percent of the total banking sector, 70-80 percent of the primary debt capital market, more than 60 percent of the total outstanding corporate bonds, 88 percent of the listed stock and 10 percent of the asset management industry. “The expectation is for these market shares to grow further in the next five years,” Abdul Ghani said
riba literally means expolitative profits…n interest rate is the price of money…if i give a service to someone, i need to earn something from it…if i save my money in bank today for eg 100 rupees, its value will be 120 tomorow..interest rate is only going to accomodate for that
Sir, what's wrong with my comments ? Unless it is letters@dawn.com .
NOOOOOOOOOOOOO
Irony is that the so called Anglo-Saxon economy is envy of the world. We all want to go there and enjoy the fruits of riba. Mortgage a house, own a car , borrow to start a business. We will modify riba and make it more mainstream but perhaps that time has not come yet.
RIBA means increase not INTEREST, according to the quran do not eat 200% and 400% RIBA, my question is to you let say if I accept RIBA as Interest what Bank in the world are charging 200% and 400% interest. You can write this long article so why can not you research on the Al-Quran to get your facts right.
I would like to know as to what is the precise definition of "Ribba" .
i liked the article . . .plz write more on the subject
the above article is in the right direction just to understand basics of what is going wrong in the islamic banking. i believe that islamic banking is more about the behaviour and the thinking of the people to think the islamic way to adopt islam as a deen than a religion. unless that happens, i dont think that islamic banking can be implemented. i dont think that there is a mid way or a transformation phase from haram to halal. either you are doing halal or you are doing haram. it cant be said that for avoiding riba, people are trying and we will get there. not acceptable
There are other challenges to the Islamic Banking industry too. Islamic banks are corporations; which in simple terms means that it is an artificial/fictional legal person. In economic terms that would mean that if an Islamic Bank defaults there is no recourse against the individuals/persons who set up, incorporated and "owned" the corporation – the status of the Islamic Bank as a corporation sheilds them from any personal liability/responsibility. However, in Islam there is no such concept of a corporation for commercial enterprise; perhaps, because if would be manifestly unjust for people to aggregate, create a corporation and then deal with individuals protected by legal immunity. Thus, in so far as they operate as corporations Islamic Banks are not "shariah compliant".
i serving pak banking for almost 39 years believe,our economy dose not allow to be interest free,u may close your eyes and give any title to any transaction,actually it is only zakat,and that too if applied properly,can save us from all this so call interest free banking or money dealings,pl do not try to make fools by giving false pictures,this is a crime in our ,Islam,try to come out for a possible systems to avoid interest,correctly,honestly.
Very interesting article however i m not sure if the author actually understand how bank finances such items (property, car). Under non islamic or Islamic banking, if i want to buy a house and i dont have the full amount to pay, the bank will purchase the house from the buyer for me by making a full payment so technically it would be the first owner of the property now since its paid for it in full. It will then sell it to me with a markup or you can call it interest, based on what percentage i do not own but in islamic banking case, i will not be paying interest, infact i will be paying rent on the house. Either way, the bank will own the property, so it will not be a middleman, it will be the owner of the property.
To be honest living in such an interest based economy, anything that can take you away from interest should be appreciated not looked down upon. I dont agree with the fact where he states that because the current islamic banking system is not perfect we should just go back to non-islamic banking system. Riba has been mentioned in Quran more than 8 times and in very strict terms.