Why and how it is Islamic Banking? Yousuf Ibnul Hasan

Before discussing on the present Islamic banking applications, its relations to the Islamic economic system, conventional banking system and it's archived confirm that the Jewish community is the pioneering of introducing the concept of banking and in the institutionalize shape. Then evolved by Christian and develop the modes and methods of banking which in the mid of fifties of the 19th century, banking was adopted by Muslims.

In Islam, the idea of an institution for keeping the wealth for future use appeared after the death of Prophet Mohammed Sallallaho Alaihi Wassalam. It was the era of Hazrat Omer Farooq Razi Allah Anho when the concept of Bait-Al-Maal (house of wealth) was introduced for handling the public and state contributions for the welfare of needful people of the community and their socioeconomic needs and affairs. Before Bait-al-Maal, wealth and its commercial transactions for the trading and business were in practice without institutional form and we cannot find any indications, instructions or guidance in the Holy Quran or in Hadith on an organized system that today banking demand.

The concept of keeping of wealth in the trust by one for another person, without any return was used to be the business practice and the distrust in such transactions was considered as an offence. The practice to be custodian was in practice on the basis of individual reputation, goodwill and trust in his ability to be a safe keeper of valuables. Today this practice of the safekeeping of the wealth and valuables have turned into an institutionalizing form which is called “bank” and the practice of “banking” is seen as “a shop where the money is sold and purchased similar to the trade of a commodity”. Whereas Islam considers money as a medium of exchange and it can only exchange in volume against the single unit. This volume of money is the value of commodity and services. According to the Islamic financial system, money is the exchange force which is used in the trading of commodity and payment for the services with clear participation by applying Ratio instead marking Rate on principles with time value.

To name the present form of banking and banks as "Islamic Banks” is just exploitation in the name of Islam and it is morally, ethically and spiritually unfair to related Islam for commercial gains. This scenario changes if an institute, theoretically and practically guard its system against “Riba” in human activity, in money matters and in commodity trading, only then such institutions can call themselves as Massraf (purpose) instead of banking because Massraf indicate a specific purpose of activities which are under the guidance of Islamic monetary the directive in according to the Holy Quran and Hadith

Keeping the importance of the title “Islamic” has a very significant value for any act or product and calling Islamic Bomb, art; dressings, food or music is totally disgraced to the magnificent system of Islam. Even labelling the Masjid cannot be called the Islamic Masjid. Whereas Masjid is the place of worship for Muslims and also serves as the community centre to look into social, financial, religious affairs as well as gathering of the Muslim community at special occasion and events. It is a house of Almighty Allah to show the faith, unity, and discipline among Muslims and to find and understand the problems and the solution by participating within the community affairs.

One has to keep in mind that Islam is a system that is based on very strong and complete socioeconomic theories and its applications are undoubtedly explained complete guidance in the Holy Quran. Applications to theories are the practices of Prophet Mohammed Sallallaho Alaihi Wassalam. This initial introduction to the subject is to simplify that Islamic Banking that is not the right title and it should be either a “Social Bank” or just name as “Massraf” instead of the Islamic Bank. The banking practice should be undertaken with a clear understanding of the principles of Islamic economics and finance.

In conventional banking, the major difference to the Islamic way of financial services is the application of Rate on the principal amount, out came of this application which is a premium on the principal is the price of the money. By guaranteeing and fixing the premium with the principal in present and payable in the future is just entering in the jurisdiction of Almighty Allah. Human does not have the power to guarantee the single second of life, how the success of such a transaction could be guaranteed with a fixed period. The excess amount taken on the principle through this method is Interest which is one of a category of Riba. To deep-up, the matter one can imagine the activities in banking around the globe are not transparent, even in the Islamic Banks too, Whereas Islam emphasizes that all matters pertaining to the bank and its client must be transparent as both are the partners, which is practically unseen. This practice violates the rule of participation; as a result, there is no right for an institution to call itself Islamic as it deviates the norms of Islamic finance and its principles.

In the pre and post-Islamic era the custody of wealth is seen and the person who acts as custodian used to be known as “Ameen” (trustee) and the wealth and valuables were considered as an Amanat (belongings). The Prophet Mohammad Sallallaho Alaihi Wassalam also entered in a trade transaction with Hazrat Khadija, Razi Allah Tala Anha on profit and & loss basis and in a written agreement with all terms and condition pre-determined. The result of this the transaction, today determined the qualification of a banker as an Amanatdar (Custodian), he or she must have Farasat (Wisdom), he or she must know the technique of Tijarat (trading) and must remain Sadiq (Honest) for all-purpose in his or her dealing. The four qualifications of Amanat, Farasat, Tijarat, and Sadaqat are also applied to the assessment of a qualification of an entrepreneur and banker is a real portrait of entrepreneurship.

Thus Islam does have the monetary activities of deposits, but institutions for financial activities are not seen until the beginning of the 19th century. Even Al-Quran and Hadith never classified such institutionalize financial activities. Whereas the excess payment or receiving over to principal amount is prohibited at various occasions and treated as Haram (illegal) in a specific condition when a rate is applied on the principal amount and fixed in a guarantee at present to be paid in the future. The KIBOR, LIBOR or amortization do not suit to financial transaction and such terms are appropriate for lending and borrowing system only because finance is an equity and not the labiality and it is taken under equity participation or venture financing and the ending of the financial transaction is either through buy and sale of equity ratio or diminishing method of transfer of ownership. In practical, the financing develop net worth, increase capital base, develop ownership and increase circulation of wealth

To earn a profit, financier uses various methods and the four methods are common in this practice:

 1  The owner uses his funds and responsible for any addition or the decline in the volume.

2   Add a second person in a transaction with funds on profit and & loss basis.

3   Investing fund with others without active participation in profit and loss sharing.

4   Financing transaction on terms with a pre-determined share in the ratio on net profitability.

In the historical perspective of so-called Islamic Banking, Dr. Ahmad El Naggar an economist who is the pioneer in the formation of the first social banking institution, the Mit Ghamr Savings Bank in Egypt in 1962. Whereas in 1965 Mr. Mangi from Pakistan and a close associate of Dr. El Naggar introduces the first Interest-Free Cooperative Bank by establishing its first branch at Sadder Cooperative Market in Karachi which remains in operation till 1974 and with the nationalization of the banking industry in Pakistan, it merged with Allied Bank of Pakistan. Sadly its head office is now seen as the branch of ABL a Riba based banking institution.   

The banking movement never started in the name of Islam. It was stated as social banking on the guidance on the perimeters of the socioeconomic system that develops a financial system parallel to the strong landing system. The two banking institution in the sixties of the 19th century had the capital, contributed by the individuals and none of the commercial banks participated in capitalization. Whereas today the majority of the Islamic banks, functioning are capitalized by the interest-bearing funds, except the three banks. The first bank with clean capital was established in Dubai, UAE in 1974 by His Excellency Dr. Saeed Luta as Dubai Islamic Bank. The second in 1978 was The Dar-Al-Maal Al Islami, a pan-Islamic financial group, known as DMI Group at Geneva in Switzerland which was established in 1978 under the dynamic initiative taken by His Royal Highness Prince Muhammad Al Faysal Al Saud on the advice of Late Mr. Muazzam Ali from Pakistan with a fully paid-up capital of US $1 Billion. In the year 1980, the third bank was established by His Excellency Sheikh Saleh Abdul Kamel and Mr. Abdullah Al Saudi, a Libyan banker by the name Al Baraka Group and offered banking and Takaful services with the capital of US 1 billion. The three banks started their operation on the pattern of Modaraba concept and later adopted conventional banking techniques.        

The riba-free banking system is workable effectively, but the passion of banker in operating under socioeconomic needs on commercial viability lacks. The myth created as an authority on banking and finance by religious supervisors due to their position as Mufti saw complete ignorant of financial and banking techniques. The central banks are leased bother on such issues and still announce the fixation of Rate of Interest in their monetary policies which is enough to disregard its own authority as a regulator to the Islamic banking and finance. Islamic banking as on today is not an Islamic way nor is it banking, but a system that has more vagueness rather be in transparent. Those banks who claim their the system as purely on the Islamic financial system, their operations are based only on paper transactions and use Arabic terms to different products which are not even understood to a normal user of banking and by adding a word Islam or Islamic to the name of the organization it is giving an imitation affection for the religion, but practically the entire system does not transcend from words and figures, written down on a paper. The opening of an Islamic window in conventional banking which is seen in Riba practices in their system is just like a place of worship in the gambling house.

The situation that is avoided purposely is how the interest-earning funds could be the capital of the Riba free finance house? How the banking system could serve the purpose of socioeconomic growth rather increasing just economic activities? The question is just what Prophet Muhammad Sallallahu Alaihi Wassalam said: Action is judged by the intentions. ([email protected])