By Moin Qazi
One of the most contentious issues that have vexed the minds of Muslims is the concept of interest in the modern-day economy. The Islamic 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 notions 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, are 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 leaves no doubt that riba (any addition or interest) is clearly prohibited. The Torah and the Bible also took the same position. While the early Christian church prohibited charging high interest rates to lend money-Western theologians eventually distinguished interest from usury, and reintroduced it during the Renaissance.
Often interpreted as a prohibition against interest, riba is more broadly defined as a prohibition against unjust enrichment or advantage gained by a lender without taking risk. For example, in a conventional financing, a borrower must pay interest to the lender on the loan even if the borrower’s business is unsuccessful. This structure does not comply with sharia because the lender did not exert to earn the additional funds and is not sharing in the risks of the business. Riba does not prohibit parties from earning a return on their investments but this return must be based on the profitability of the business. Riba also prohibits transactions with guaranteed returns.
According to the Qur’an, ‘The world can survive with justice and unbelief, but not with injustice and belief.’ As a result, the Islamic system emphasizes ethical and equitable modes of financing. Wealth-creation is encouraged, but ‘super-normal’ profits are not.
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. 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. Islamic finance uses a risk-sharing equity model based on physical assets- real exchange of goods or services. Instead of traditional accounts with given interest rates, Islamic banks provide accounts which offer profit/loss. The bank in turn purchases assets with the customer’s money, which generate returns for the bank that are ultimately shared with the customer.
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. Justice, partnership and opposition to excessive risk are the main principles guiding Islamic banks.
The Islamic financial services are similar to any other type of socially responsible or ethical investing. In this case, they tend to fulfill three criteria: no explicit interest; transactions can’t be in areas such as gambling, pork or pornography; and they can’t be deemed to carry high risk. Islam also emphasizes that the business ventures must be carried out in true Islamic ethos of honesty, piety and trust. 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 recent decades an array of clerics, bankers and legal experts have used scholarship and ingenuity to reconcile the core principles of Islam with conventional finance so that that Muslims can enjoy access to the same services and products as the rest of the world. The immediate trigger was the resilience of the nascent Islamic finance industry which successfully weathered the storm that imploded the Western world’s financial system. In short, Islamic finance gives no place for some of the practices that brought the West’s financial system to its knees, But 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? Many banks have shown that, with some creative finesse, a surprising number of Western financial products can be executed in accordance with Islamic law.
However, there is a glaring gap between the idealized version of Islamic finance that the Qur’an points towards – and which its proponents like to wax lyrical about – and the grubbier reality of the modern Islamic finance industry, riddled with messy, imperfect compromises. In fact, cynics conclude that in many respects Islamic finance looks and acts exactly like its conventional counterpart, albeit with creative financial engineering to give the products a pious dressing.
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 color 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 was opposed to the loan-sharking techniques employed by money changers in the lawless markets of Mecca before the establishment of Islam. The liberalists 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.
One unique feature of public banks in India is that they offer soft and subsidized 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 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 demonizing 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 full 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 sharia boards, employing scholars to rule on whether their products and processes do not infringe Islamic principles. The 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. This left unchecked space for them to dabble both with financial and religious wizardry. Unlike secular countries like India, Muslim countries have a national body such as a central bank or capital market regulator that 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 wary of Islamic banking for all kinds of reasons.
Modern day banking has emerged out of the wisdom gleaned over the ages and is a direct weapon for eradicating usurious and unscrupulous moneylenders who have r 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 witch concerns the financial well being of roughly 172 million Muslims — 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”.