One of the most contentious issues that have vexed the minds of Muslims is the concept of interest in the modern-day economy. The Muslim clerics (Ulema) have exhibited an ambivalent stand on major issues concerning Islamic finance, and on most occasions preferred to diplomatically deflect questions relating to it. Islamic finance is one of the greyest areas of both Islamic scholarship and practice, and has attracted a very small pool of talented researchers. This is largely on account of the misplaced notion that discussions on Islamic finance are fraught with serious consequences and implications. People believe there are strong possibilities of one getting trapped in an act of heresy.
The Muslim economic life, along with their political and social norms, is regulated by a code known as sharīʿah, literally, “the path leading to the watering place”. It is a body of Qur’an -based guidance that governs, among other things, a Muslim’s economic and social life, dictating how believers should conduct themselves.
A careful reading of the Qur’an with respect to legal prescriptions leaves no doubt that riba (any addition or interest) is haram (forbidden). Similarly, predetermined interest to depositors is also equally not approved by Islam. In Islam, capital is not capital in the conventional term; it is a potential capital which has to be channelised through businesses to generate additional income. Money cannot grow by itself. It has to be used entrepreneurially so that both the health of the economy and individual well-being are enhanced. The Federal Court of Pakistan, the highest judicial forum of Pakistan, has unequivocally declared the interest in any form, irrespective of the logic we use, as reprehensible.
In Islamic economic theory, money is merely a medium of exchange, not a commodity to be traded. It has no intrinsic value and should therefore not grow over time. Idle cash cannot be a source of guaranteed income. However, capital can earn the returns derived from the productive use of capital. Islam regards Interest, in whatever form - either disguised as “commission,” a fixed or variable add-on - or a discount, as usury and speculation as gambling.
In addition to prohibition of riba, there are several other important provisions which govern financial transactions. These include the prohibition of ‘gharar’ (uncertainty or asymmetrical information), ‘maysir’ (gambling, speculation), activities and transactions involving alcohol and pork-related products, but also armaments, gambling, pornography and other activities deemed socially detrimental, like hoarding.
The basic instruments of Islamic finance include: profit-sharing (mudaraba), cost-plus financing (murabaha), partnership (musharaka), leasing (ijara), and forward sale (bay’salam). These constitute the basic building blocks for developing a wide array of more complex financial instruments.
In its most basic form, Islamic banking covers both savings and credit. Instead of being paid interest, depositors are considered shareholders and receive dividends when the bank turns a profit and lose money when it has a loss. Muslims are not allowed to pay or receive interest because Sharia prohibits them from making a guaranteed profit on capital.
Islamic finance uses a risk-sharing model. A typical risk-sharing arrangement is like equity finance whereby the parties share the risk as well as the reward of a contract. The risk is transferred from the financier or lender to the borrower, where the financier retains both the property rights claim to the principle and interest but also to any collateral.
There are several Muslim scholars who question how “Islamic” this approach is and whether it is an appropriate ethical alternative to mainstream investments. Or is it a creative way of transplanting Islamic finance into conventional finance by tweaking the rules?
Although the accepted position in Islamic countries is very clear, there are still several strands of conflict on the position in secular countries, particularly those which have seen a series of failures of Islamic financial institutions. In these countries, there is still no unanimity on the correct meaning of the term riba.
Some prefer to translate it at as interest. There are others who believe that accepting the term as the modern equivalent of riba, particularly on account of modern finance having been cleansed of the element of usury and its coercive character, would amount to a very superficial interpretation of a term that has multiple layers that colour it. Riba, according to this school, has a sinister connotation and is actually meant to construe the coercive informal finance practices followed and pursued by rapacious moneylenders.
Many pragmatic Muslim bankers and financiers have argued that the Islamic injunction is aimed specifically against usury rather than interest. They say Prophet Muhammad (peace be upon him) was opposed to the loan-sharking techniques employed by money changers in the lawless markets of Makkah before the establishment of Islam. The liberalists also say that there is nothing wrong with charging a reasonable price for the use of funds for a period of time. They argue that the Qur’anic prohibition applies to overcharging and usury, not money-market funds or interbank lending rates.
Islam lays great emphasis on entrepreneurship and believes that investors should become stakeholders in businesses in order to create wealth. It also emphasises that the business ventures must be carried out in true Islamic ethos of honesty, piety and trust. Otherwise, the precious investment of the depositors would be doomed. From my own experience as a conventional banker for almost four decades, I can attest that conventional banking in India is humane and just, and not usurious and exploitative.
One unique feature of public banks in India is that they offer soft and subsidised loans to the poor, self-employed and farmers. Similarly, in case of defaulters, if a bank is convinced that the default is not willful and deliberate, and is on account of genuine circumstances, the loan is restructured or waived and the loss is absorbed by the banks. Every year, thousands of crores of rupees are being written off by banks. Where recoveries have to be enforced, it is done in a dignified manner and after following proper legal procedures.
Similarly, the operations of banks are monitored very stringently by the Reserve Bank of India (RBI) and the interest of depositors - particularly the small depositors are well protected.
In short, banks in India are playing a developmental role besides providing banking services. Instead of demonising banks without any evidence, the Shariah experts should build awareness of the status of public banks in India.
One serious complaint against the prevalent model of Islamic banking is that interest is being charged in the garb of service fee. In fact, loans from Islamic banks are much costlier than those from conventional financial institutions, particularly public banks. The defenders of the conventional banking, particularly the model followed by public and development banks, argue that they are far different from money-lending and various unethical practices of private sharks.
One issue that must engage us is that if Islamic banking is a viable alternative for us, how we can justify the collapse of so many Islamic financial institutions in India in recent times. We know fully well that small investors have been duped in the past in a big way by hustlers claiming to offer Islamic financial services. The protagonists of Islamic banking must offer a satisfactory explanation. The real problem is that we are not prepared for a reasoned debate and the issue acquires emotional overtones whenever it comes up for discussion. Confusion continues to prevail with sharp division of opinion. As a result, the common Muslim is in a fix as to what is the right course of action for him because of lack of clarity on the issue.
Islamic banks have traditionally established Shariah boards, employing scholars to rule on whether their products and processes do not infringe Islamic principles. A scholar needs to have expertise both in religion and finance – a strange combination. There is a severe dearth of this expertise. In India, most Islamic banks collapsed because managements hired dubious and pliant scholars to endorse equally dubious products. In Muslim countries a national body, such as a central bank or capital market regulator appoints and oversees a Sharia board that is independent from financial institutions.
The situation in India is much different. We do not live in an Islamic state. The spate of failures of Islamic banks in India has caused untold suffering to small depositors. There is no alternative except to transact with conventional banks. There are few reliable and authentic Islamic financial institutions but they have a very limited outreach. Moreover, the common Muslims themselves are increasingly becoming wary of Islamic banking for various reasons.
Modern day banking has emerged out of the wisdom gleaned over the ages and is a direct weapon for eradicating usurious and unscrupulous money-lenders who have turned borrowers into slaves and stripped them of all their self-dignity. It will be grossly unfair to equate modern banking with money-lending. In fact, money lenders are treated as outcasts in the formal financial system. They have no presence in the universe of civilized finance. It will be foolish on our part if we try to get them into the whole debate. They are a totally alien species.
Development banking is very professionally operated, and in developing economies, interest rates are subsidized to enable individuals and institutions to set up their own livelihood businesses. The giant leaps in all spheres of life have been powered by financial institutions who have promoted healthcare, education, entrepreneurship, self-employment and a host of services that have profoundly influenced human life.
An enlightened discussion is all the more important on account of the complex perplexities that confront the contemporary society. If puritans feel conventional banks can’t fulfill the religious requirements, an alternative choice has to be offered to common Muslims. It will help to crystallize the true perspective for all the stakeholders: the flag bearers of sharia, proponents of Islamic finance, academics, jurists and the global banking community. It is an issue wich concerns the financial well-being of roughly 172 million Misaims - nearly 14 per cent of the country’s population.
The great philosopher poet Sir Muhammad Iqbal argues in his magnum opus, The Reconstruction of Religious Thought in Islam: “The claim of the present generation of Muslim liberals to re-interpret the foundational legal principles in the light of their own experience and altered conditions of modern life is, in my opinion, perfectly justified….. Each generation, guided but unhampered by the work of its predecessors, should be permitted to solve its own problems.”
In Iqbal’s view, “the ultimate spiritual basis of all life, as conceived by Islam, is eternal” and that a “society based on such a conception of reality must reconcile, in its life, the categories of permanence and change”.
[Moin Qazi is the author of the bestselling book, Village Diary of a Heretic Banker .He has worked in the development finance sector for almost four decades .He can be reached at firstname.lastname@example.org]