Islamic banking and finance: the solution

Banks perform an important function of mobilizing of capital and making the same available to

the would-be entrepreneur or a business Man. the current banking system being is wholly based

on Riba (usury) and as a consequence Muslims feel aversion to this scheme of things. In absence

of any alternative, a lot of wealth remains idle and many an efficient person does not want to set

up his own business, desiring to stay away from the Riba based capital. To cap it all, some

people live under the misconception that the Islam does not provide the solution for the

economic problems of the Man.

A closer look would make it clear that this Riba based economy (Capitalist system) is

based on exploitation and injustice. The interests of the depositor and the bank are safeguarded to

the extent that the depositor gets a fixed meager amount as an interest over his capital. However,

the interest which is paid on the deposits, do not even cover the inflation; while as the business

Man may get a huge profit in a little time. Alternatively in case of a business failure, the whole

burden of loss is shifted on the shoulders of the borrower. Both ways the system is exploitative

and cause of widespread and un-manageable disparity of wealth in this world.

In this Riba based economy, some financial instruments have crept in which are simply

chance games; there is no business at all. The person who indulges in them undertakes some

calculations and on the basis of that analysis indulges in these speculation based financial

instruments like, short selling, futures, options and derivatives etc. There is offer and acceptance,

but nothing is sold or bought. No trade. Simple arithmetic at work. The profit of one is actually

the loss of another. Even the person who indulges in such an activity does not even need to put in

his money, only the margin money is involved to secure the losses when they are entailed. These

instruments do not cause any production, simple computer figures performed at the office and on

the basis of that you can earn or lose and the corresponding effects are inflation. Is it any

economic activity in real sense?

After subprime Mortgage crises that assailed the USA many a banks got bankrupt and

were bailed out with the help of government assistance, which meant the common people were

taxed heavily. But the poor Man who had bought a house was thrown out of it and forced to live

on streets. There was no mercy upon him, but upon the big businessmen and later on the poor

Man was taxed to make up for the loss of the Big business houses.

Consumerism, which is the off shoot of the capitalist economy, is the cause of more

consumption of goods and luxuries, raising the demand for the loans, interest rates rise, more

money is pumped into the system, causing inflation. Ultimately it is the poor Man with fixed

income who gets entangled in this whole web. If we look at the reason for colonizing of the third

world countries in the 17th century, it was nothing but this capitalist Riba based economy. The

capitalists had surplus wealth and they were in the search of markets to invest the same and to

achieve this end, colonized 1/3rd of the civilized world. World wars followed. And then…..

Anyway this system is intrinsically weak and can’t be rectified. The economic model

needs a change.

There is no need to say that the communist economic model is not viable model, as it has

already breathed its last. The world has observed its failure with open eyes.

The only viable solution is the Islamic finance and banking. It is a practicable mid-way

between the two systems: exploitative and the utopian. Islamic economic system is based on just

economic relations. Any activity which may be the cause of injustice is prohibited. Islam

prohibits from dealings that involve Riba. There should be no gambling, uncertainty, no cheating

and a concern for values and a system that would promote social good. The basic premise of the

Islamic finance is the sharing of the profit and loss. The depositor and the borrower are equally

partners in loss or in profit. There are principles which govern this system. So the Muslims

naturally feel an aversion to Riba based capitalist system which does not follow any of these

principles. Yet Muslims need banking services as much as anyone else and is not against

legitimate profit and encourages people to invest and to keep the wealth in circulation rather than

keeping it idle, so that the benefits of wealth accrue to the society as a whole.

There are people who are pessimistic about Islamic banking and regard it as other form of

the interest based banking. They are simply ignorant or are being misled. Islamic banking

operates in accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic rules on

transactions). When the business is carried out in accordance with these principles, the profit out

of it is Halal. Let us consider the example of Halal meat and the Haram. Meat is the same;

however the way of slaughtering makes one Halal and the other haram. Similarly if you do

business in the Riba way that would be impermissible; but if you perform it through Sha’ri’at

way, then it would be a profit which is allowed. In Islamic Banking and finance, for example,

you have to be a partner both in profit and in loss proportionately, but in Riba (interest) you

could be a loser at the cost of another who earns his profit, no matter what happens to that person

who puts in his efforts in the business.

Common instruments used in Islamic banking include profit sharing (Mudharabah),

safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar).

Istisna’a, and then there are Sukuk bonds, through which you can invest in real-estate and can

develop profit earning assets, roads and power plants. These are various financial instruments

available at present and in the coming days more such instruments would come into existence,

our ulema and the economists/financial engineers are working to develop new models for

sha'ri'at compliant instruments. Then another step would be microfinance on sha'ri'at terms that

would help us to reduce poverty.

Ulema, who are aware about the principles of sha'ri'at and what constitutes the Riba, have

analyzed the instruments of Islamic banking and they are satisfied about its being Halal. Those

who can study it should study the process and then he would feel satisfied. There is a sha'ri'at

board overlooking the activities of the bank and see to it that its activities are carried out as per

sha'ri'at. No doubt there might be someone who may be deceiving the people in the name of the

Islamic banking. One has to be careful and look to it as to which ulema are overlooking its

operations.

There are others who think that Islamic finance is more risky. The fact that you are a

partner in loss as well as in profit does not necessarily mean that there would be losses and you

would be partners in the loss. That is not the matter. In fact the sha'ri'at based banking is more

resistant to loss than the conventional banking.

Islamic banking and finance is the solution to our economic problems and unemployment, as it is

in accordance with our ethos, our culture and our principles. And it can provide us with an

atmosphere where in we can put in our best efforts and bring more profits to the society. There

are other blessings of economics based on Islamic principles. There is no huge expansion of

currency i.e. inflation. The output is shared and does not remain confined to a few and then the

disparity in wealth is reduced. The profits percolate to the lower rungs of the society while as in

the conventional banks, the profits only go upwards.

The blessings of the Islamic finance are clearly visible that is why the various instruments of

Islamic finance are being adopted by the west. The day is not far, when Islamic financial

instruments would be adopted worldwide and it would not appear as something alien.

Email: mubashir_07@redifffmail.com