A Critique of Islamic Banking System

In the name of God, The Most Gracious, The Dispenser of Grace

I recently attended a session on Islamic Banking. The event started with a speech by a renowned shariah scholar. He told the audience that Allah Almighty has forbidden Riba (Usuary) in Quran while allowed trade. He then explained how they started a bank with the intention of freeing the society form the evils of Interest based banking system using trade contracts.

Later on, CEO of the same Islamic Bank discussed the business side of the things and explained how from very humble beginnings their bank has now become the 4th largest bank of the country with more than a trillion-rupee worth of funds and 26 Billion rupee PAT. He encouraged the young accounting professionals to join Islamic finance sector to avoid the evils of Riba based banking. At the end of his presentation, he asked the audience for questions. I raised my hand.

I was attending this session for a reason. Sometime back my friend wanted to purchase furniture for his home from a company which had been advertising that the customers can use markup free loan facility from few banks for a period of upto 6 months to buy its products. He decided to avail this loan from an Islamic bank to keep it Shriah compliant but got the shock of his life when the bank told him that his invoice will be raised by 30% because of the inclusion of their profit margin. The transaction will then be converted into a contract of Credit sale with the amount to be returned in 6 monthly installments.

I asked the CEO, how can an Islamic bank charge 30% profit from a person who doesn’t have the financial means to make the whole payment in one go? Isn’t it exploitation of the financially weak by the powerful; the very same thing for which Riba or Usuary is condemned? His answer baffled me “we are charging the same rate as the Market. For the needy, we have a charity department.” They call it Trading. I left the session right after.

Ever since I have been thinking is Murabaha or Asset based financing done by Islamic banks Trading or are Muslims getting deceived by a clever play of words by a troika of Religious, Capitalist & Political elite?

For the sake of understanding, here are some important terms and definitions:

Riba: It is an Arabic word that can be roughly translated as "usury", or unjust, exploitative gains made in trade or business under Islamic law.

????????? or Trading: It is an economic activity and is a source of earning profit by selling and purchasing

Financing: It is the process of providing funds for business activities, making purchases, or investing

Murabaha: An Islamic financing structure in which the seller and buyer agree to the cost and markup of an asset. The markup takes the place of interest.

Its best to start with Surah Al Baqarah Verse 275 of Quran “Those who gorge themselves on usury behave but as he might behave whom Satan has confounded with his touch; for they say, "Buying and selling is but a kind of usury" - the while God has made buying and selling lawful and usury unlawful. Hence, whoever becomes aware of his Sustainer's admonition, and thereupon desists [from usury], may keep his past gains, and it will be for God to judge him; but as for those who return to it - they are destined for the fire, therein to abide!

?To understand the meaning of above verse, we must understand the difference between Trading & Usuary. Let’s start with trading, it is the transfer of goods and services from one person or entity to another most often in return for money. Usuary on the other hand is the practice of making unethical or immoral monetary loans that unfairly enrich the lender. Another definition of Usuary is "When money is lent on a contract to receive not only the principal sum again, but also an increase by way of compensation for the use, the increase is called?interest?by those who?think?it lawful, and?usury?by those who do not." (William Blackstone's?Commentaries on the Laws of England). Hence, all three terms Riba, Usuary & Interest have roughly the same meaning. The question becomes a Moral one. CEO in his answer admitted that they charge the same market rate as others. Thus, Interest is concealed in their financing structure. The difference would be that the structure of their agreement is made like a Credit sale or rent to own agreement.

Let’s look at how this transaction usually takes place. It starts when a person in need of financing approaches the bank to borrow money. The bank drafts a sales contract on Cost plus basis. The profit is calculated on the same market rate as conventional banks are charging. A brilliant solution wherein the bank gets the market rate of financing but in Halal manner. This is exactly where they are misleading themselves as well as their adherents. The borrower didn’t have the means to pay for the provision of desired goods or service in one go and was desperate or greedy enough to get his object of desire even after paying a huge additional cost. This is nothing but exploitation and how does it make our economy Riba free? ?

Exploitation is the reason that people who indulge in Usuary get abased before God. Allah Almighty says in Surah Ar – Rum Verse 39 “And [remember:] whatever you may give out in usury so that it might increase through [other] people's possessions will bring [you] no increase in the sight of God - whereas all that you give out in charity, seeking God's countenance, (will be blessed by Him:] for it is they, they (who thus seek His countenance] that shall have their recompense multiplied!” ?

Islamic financing requires the sharing of profit and loss rather than selling contracts that comply with Islamic laws but conceal interest as is the case with Murabaha or Qardul Hasana accounts (Saving Accounts).

Riba literally means excess or addition. Allah says in surah Al – Baqarah verse 276 that “God deprives usurious gains of all blessing, whereas He blesses charitable deeds with manifold increase. And God does not love anyone who is stubbornly ingrate and persists in sinful ways.”

Instead of finding ways to circumvent Riba based financing models, we should follow what Allah Almighty tells us in Surah Al Hadeed verse 11 “Who is it that will offer up unto God a goodly loan, which He will amply repay? For, such [as do so] shall have a noble reward”. Qard e Hasana (Goodly Loan) is at the foundation of lending in Islam.

Allah Almighty and His prophet (PBUH) has declared a war against people who engage in Usuary as is said in verse 279 of Surah Al Baqarah “for if you do it not, then know that you are at war with God and His Apostle. But if you repent, then you shall be entitled to [the return of] your principal:[267] you will do no wrong, and neither will you be wronged”.

The recompense of the people who make war on God and His apostle is described in verse 33 of Surah Al Maaidah “It is but a just recompense for those who make war on God and His apostle,and endeavour to spread corruption on earth, that they are being slain in great numbers, or crucified in great numbers, or have, in result of their perverseness, their hands and feet cut off in great numbers, or are being [entirely] banished from [the face of] the earth: such is their ignominy in this world. But in the life to come [yet more] awesome suffering awaits them”.

I would like to end by saying that Murabaha is not a form of trading but a banking product to deceive Muslims into an interest-based debt trap. Its use as an Islamic mode of financing must be stopped forthwith or at least banks should be barred from using Islam for selling this product. Usuary or Riba is at the core of an unjust economic system wherein the powerful grows strong at the expense of the weak. The admission by the highest ranked official of the Islamic bank that this product conceals the same rate of interest which the other banks use makes it abundantly clear that these products will never help in bringing social equity as was achieved by the last Prophet Muhammad (PBUH) and his companions. We must stop using the lame argument that how will an Islamic bank earn as it can do so by focusing on its core role of offering safe deposit keeping service and stop competing with Usury based banking in terms of profitability by lending. ?

May Allah Almighty guide us to the right path.

Talha Ahmad Iftikhar

March 13, 2022