Tuesday October 20, 2009

Is the concept of Islamic banking in line with Islam?


ONE of the most contentious issues regarding Islamic banking and finance is whether the whole concept is in line with Islam.

On one side are sceptics who argue that there is no difference between Islamic banking and conventional banking. To them Islamic banking is simply conventional banking in Islamic garb.

The argument often offered by this group is the practice in Islamic banking of using interest rates in the calculations of the “selling price”.

The only difference with conventional banking is that the rates are not variable whereas in the former the rates are variable. In the final analysis, according to them, transactions in Islamic banking, even though couched in terms that are halal, are essentially “lending contracts” with interest rates still an integral part of them.

Defenders of Islamic banking, on the other hand, say halal transactions can never be considered haram and that Islamic banking contracts are halal even if the determination of the contract price involves interest rate calculations. What is important is the “aqad” or the contractual terms of the transactions.

Islamic jurisprudence

Since those involved in devising the contracts are scholars or experts in Fiqh or Islamic jurisprudence, many of whom are also very pious in their personal life, the contracts are indeed halal in nature. These Islamic banking products include Mudarabah, Musharakah, Al Bai Bitahaman Ajil, Al Istisna and Ijarah contracts.

What irks many of those opposed to Islamic banking is that in numerous cases, the contractual prices of these halal Islamic banking transactions are more expensive than conventional banking contracts.

In a recent case involving a halal housing loan contract, the defaulter ended up with a debt obligation to the bank which was much higher than if he had purchased his house using a conventional loan.

This was because the basis for the calculation of the debt obligation arising from the halal housing loan was the final “selling price” of the house payable over the full period of the loan. In a conventional case, the calculation of the debt obligation would have simply involved the unpaid monthly instalment up to the point of default plus interest.

Critics of Islamic banking are also upset with the scholar-defenders of Islamic banking for what they perceive as attempts by this group to defend and maintain the status quo.

This view is reinforced by the fact that many of these scholars are advisers to conventional banks which have opened “Islamic windows” or Islamic banking divisions. These divisions are, in other words, merely parts of the riba-based conventional banks.

The critics of Islamic banking therefore perceive the scholars to be collaborators of riba-based banks. My personal opinion is that much of the confusion and conflict are unnecessary. For the critics of Islamic banking, their error is in the excessive focus of their criticisms on Islamic banking than on conventional banking. Consequently, the defenders expend much effort in defending Islamic banking rather than attacking riba-based conventional banking.

In other words, instead of being united on the one area they are both in absolute agreement – that riba-based banking is haram, evil and therefore harmful to society and as such must be completely eliminated – they are focusing their efforts on attacking each other.

An analogy

If we study the history of Islam we will find that, just like Islamic banking, syariah divorce lawyers is a new phenomenon. During the time of the Prophet, divorce issues were settled by the parties involved and later on with the intermediation of the Qadhi (or judge).

It was much later when the syariah family legal system and institutions became more developed that the need arose for people who were highly versed with the intricacies of the Islamic family law system.

Nowadays judges in syariah courts prefer to preside over divorce cases where the parties are represented by divorce lawyers to ensure smooth proceedings. But for the parties involved the costs are higher because of the lawyers’ fees.

Clients, especially those who feel that the outcomes of the cases are not in their favour, may feel quite upset with divorce lawyers who are sometimes perceived to be “vultures”, benefitting from other people’s troubles.

But does this mean that divorce lawyers are “unIslamic” or that their profession is not in the Islamic spirit? Most certainly not.

Fulfilling a need

They are there to fulfil a need, which is to alleviate the problems faced by divorcing Muslim couples. For couples that are happily married, the need for divorce lawyers does not arise and therefore little time and attention is given to them.

Similarly, Islamic banks are there to serve Muslims who are in need of financial assistance, either for personal or business objectives. They therefore alleviate the problems of these Muslims.

But for Muslims who prefer to avoid being in debt, Islamic banks are irrelevant. Having said that, there is one issue that must be recognised.

Just as syariah divorce lawyers is not a solution to the problem of increasing number of divorces in our society, Islamic banking is not a solution to the problems associated with the phenomenon of increased indebtedness in our society.

Islamic banking serves simply to alleviate the problems faced by Muslims who are in dire need of financing assistance. The long-term solution for the Muslim ummah remains the same – to eliminate riba-based banking in its entirety.

In actuality, efforts to eliminate riba-based banking system are not merely a long-term solution but also an Islamic obligation of all Muslims, that is, it is a fardhu a’in. This is what all Muslim parties should be focused on.

·Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accountancy, Universiti Malaya.

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