Truth About Islamic Banking and Takaful
By Shah Nawaz Khan
Several thousand books and articles about Islamic
Banking and quite a few about ‘Takaful’ (Islamic form of Insurance) have
been published during past 30 years. Prior to that the discussion used to
center around legitimacy of banking Interest for Muslims. Whereas the number
of books on Islamic Banking and Insurance is impressive, the quality of
contents is not. Quantity, not quality, is the defining feature of writings on Islamic economics, and more particularly on Islamic banking and Islamic Insurance.
The concept of Islamic economic system as some
zealots of Islamization of economics talk about, appears to be more like
Utopian philosophy inasmuch as they regard alleviation of poverty by fair and
equitable distribution of wealth as an objective of Islamic system! Although
there is great emphasis on charity and helping the needy and payment of Zakat
and distribution of war booty, there are no specific provisions in Holy
Scriptures for distributing of wealth on socialist pattern. The objects
mentioned in Holy Quran for taking care of poor and needy could be and often
achieved by taxes like wealth tax, income tax import duty etc. over and above
Zakat. Much better social security benefits are provided to people in the
capitalistic countries than most of the Islamic or Socialist countries. The
fact is that during the glorious period of Islamic history, the economic
system followed by Muslims was capitalistic.
The research and experiments in Islamic Banking
have been going on since the last five or six decades but Islamic Banking in
practical shape is working since the last 4 decades or so thriving on
misconceptions of Muslims about modern banking and insurance.
Two things that separate Islamic banking from conventional banking are
Interest cannot be employed but the lender can share in the profit and
loss of the venture undertaken by the borrower in proportion to the money
lent. The borrower pays rent under lease agreement. Or the lender purchases the
property or goods for borrower and sells to him at much higher price usually payable in instlments or in lump sum at expiry of agreed term.
All operations and investments by the management must be according
Islamic ethical standards.
But among the proponents of Islamic Banking there appears
to be no consensus about defining
the role of Central Reserves Bank and the regulations for the commercial
banks, mortgages, gold bonds, advent of plastic and paper money under fiat
currency system and dealings with inflation and International Banking. The
efforts to evolve the standard sets of principles, terminology, procedures,
laws and regulations and to educate people are disjointed. Arabic terminology
is used to describe the products and practices. Talk about formation of
Islamic Monetary Fund confines to academic discussion.
During the last century many companies were
established in different Islamic countries for Interest Free Banking. They
would neither pay interest nor earn interest but charge fixed service fee.
They introduced products for sharing profit and losses on investment that bank
made in different business ventures permissible according to Islamic ideals
for doing business. They tried to earn profits on partnerships and
profit-sharing (mudaraba) with businessmen.
In some countries the Islamic banks entered into business
directly, buying and selling commodities, land or real estate.After different methods were tried Murahaba emerged, which is
currently the predominant form of Islamic finance in many countries. In this
mode of finance the bank buys something on the specific request of a client
and sells it to that client at a price higher than the purchase price, to be
paid after a period of time.More
often than not that happens to be more expensive than paying the conventional
interest. Leasing and prepaid orders (salam / istisna) have also been
introduced as profitable employment of the pool of deposits. In way such
practices tantamount to renaming the interest as rent, installments of
purchase price etc.
Sharing Profit and Loss
For business ventures banks grants loan on some
collateral security and agrees to share profit and loss on agreed ratios
redeeming loan in lump sum or in installments. Terms of sharing loss depend on
type of security or guarantee given.
Exploitation in the name of Interest
Free Financial Operations and Products
Installment Plans: There are number of shops from where you can buy electric
appliances and variety of other items even vehicles on installments. Some
leasing companies are also doing this kind of business. Usually the thing you
could buy in RS. 12, 000 cash would be made available to you for RS.1000 per
month payable in 20 monthly installments. That means installments would
accumulate to RS. 20, 000/- without interest.
These businessmen say that they are not charging any
interest and doing the business in legitimate Islamic way. We are not
prohibited to sell an item of RS. 12, 000 for RS. 20, 000/ - and we fix the
monthly installments to cater for our profit and expenses.
Rent on House Building Loans: Similarly the House Building Finance Corporation has
Islamized interest as 'rent' and now acquisition of loan has become more
expensive and wide differences in rent charges exist from place to place and
city to city.
If people in USA and most other countries get loans
for purchases of cars, houses, appliances etc. hardly at 9 % why we Pakistanis
have to pay such heavy rent or exorbitant interest or service charge as high
as 20 % and even 52% pa on credit card purchases. Is this not consumer
State bank of Pakistan is regulating the Islamic
banking operations in a haphazard manner through various regulatory
instruments of law which includes circulars, etc, Tax advisors and experts
opine that alignment with other laws is required for a good framework for the
correct interpretation of Shariah compliant products, which must be consistent
in harmony with other related laws.
Lack of Control on Inflation: The role of Finance Ministry and State Bank of Pakistan
in controlling Inflation has been dismal. In theory, the paper money can have a stable value but, in practice, paper money has always resulted in inflation.
Printing of currency notes without any commodity backing or beyond the reserves required maintaining its stability, causes fall in purchasing power of the money and we have seen the demise of gold and silver dollar as well as India's silver Rupee and other coins in the subcontinent such as paisa, annas, chowanni etc. and now the Rupee is worth less than an Anna of yester years. On the other hand in the old days where there were metal coins the worth of money used to appreciate against consumable items. Now the printing of one Rupee note costs more than its face value and it has been abolished and the RS. 5 note has also gone.
See article Ravages of
Continued on the next page
Shah Nawaz Khan has vast experience in marketing
and supervising life insurance sales force besides underwriting and
advertising and computer operations. He
retired as Executive Director of State Life Insurance Corporation of Pakistan
after serving the insurance industry for 40 years. He is now moderating two
Internet discussion forums.
article - Money, Interest and Riba