Banks perform the important function of mobilizing of capital and making the same available to entrepreneurs or businessmen. The current banking system is wholly based on Riba (usury) and as a consequence Muslims feel averse to the scheme of things that follow. In the absence of alternative, lot of wealth remains idle and many efficient persons do not want to invest and prefer to stay away from the Riba based capital. Some people have this misconception that Islam does not provide the solution for the economic problems of the man that he faces today.
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 a businessman may get huge profit in less 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 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 indulges in these speculative financial instruments like, short selling, futures, options and derivatives, etc. There is offer and acceptance, but nothing is sold or bought; no trade. It is 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. Is it any economic activity in real sense?
After subprime mortgage crises that assailed USA, many a banks got bankrupt and were bailed out with the help of government assistance, which meant the common people were taxed heavily. A poor man who had bought a house was thrown out of it and forced to live on streets. There was no mercy shown to him. However, the big businessmen did not suffer. Still later, it was the poor man who was taxed to make up for the loss of big business houses.
Consumerism, which is the off shoot of the capitalist economy, is the excessive consumption of goods and luxuries, which raise the demand for the loans and interest rates. More money is pumped into the system, causing inflation. Ultimately it is the poor man with fixed income who gets entangled in this web. If we look at the reason for colonizing now 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 they colonized one-third of the civilized world. It culminated in catastrophic World Wars. 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 practical and 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. 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. This allows the benefits of wealth accrue to the society as a whole.
There are people who are pessimistic about Islamic banking and think of it as another form of interest based banking. Such people 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. 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. There 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 feel satisfied. No doubt there may be people who deceive others in the name of the Islamic banking. One has to be careful.
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. Inflation is checked. 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 with the conventional banks, the profits only go upwards.
The advantages of Islamic finance are clearly visible and that is why various instruments of Islamic finance are being adopted by different countries. Day is not far when Islamic financial instruments would be adopted worldwide.
Author is from Bijbehara and can be mailed at email@example.com