So what’s wrong with Islamic Banking? (1)
A forth night ago, Nigeria's foremost virologist Professor Tam David-West provided an illuminating insight into the concept, mechanics and the merits of Islamic banking. His argument was in synch with what the Central Bank of Nigeria (CBN) Governor's Lamido Sanusi Lamido's position that Islamic banking is legal, constitutional and has lots of advantages over and above other types of banking. Our amiable Minister of Finance Ngozi Okonjo Iweala also asserted that Islamic banking is absolutely legal. The assertions from these respected Nigerians prompted me to closely understudy the operations of Islamic banking, its characteristics and mode of operation.
As an undergraduate, one of my academic pastimes was to take courses in Religious Studies and engage in disputations in a logical and philosophical manner. One of those courses I admired with robust appetite is comparative Religion. This course exposed me to the basic tenets of Hinduism, Judaism, Buddhism, Zoroastrianism, Taoism, Confucianism, African Traditional Religion and the two youngest religions namely Christianity and Islam. One basic lesson I derived is that all religions and creative philosophical schools are saying the same thing in different languages. This is obvious in their basic doctrines and belief systems. My rigorous search made me stumble on some literature on Islamic Banking (IB) and after a thorough perusal, my admiration for Sansui's argument tripled. Even an individual with the resources can run a bank based on his own principles insofar as it is in accordance with the laws of the land. I also discovered that Islamic banking flourishes in Iran, Bangladesh, Pakistan and Saudi Arabia, in Geneva and Islamic trust companies in North America.
Islamic banking, also called participant banking activity is consistent with the principles of Islamic law economics. One of the tenets of Islamic banking is that it prohibits the payment or acceptance of specific interest or fees called the Riba or usury for loans of money. Again, while the western style of banking, with which we are familiar, invests in speculative businesses such as promoting casinos, gambling, prostitution and drug businesses etc, IB abhors such investments that offend common morality. IB also humane and tends not to exploit the poor. It does not thrive on excess compensation without due consideration. In other words, IB does not thrive on surplus value –which the capitalist call profit. It is interest free and kicks against usury. The criticism of usury can be found in Judaism, Islam and other religions. Jesus himself traduced profiteering hence he chased away those engaged in the practice in the temple. Research has also shown that majority of financial institutions that offer Islamic banking services are owned by non-Muslims.
Transactions in IB are called Salam and it is conducted in such a way that if the buyer has paid the purchase price to the seller in full at the time of sale, IB ensures that the buyer does not enter not enter into debt with a second party in order to eliminate the debt with the first party. The idea of Salam is to provide a mechanism that ensures that the seller has the liquidity they expected from entering into the transaction in the first place. If the price were not paid in full, the basic purpose of the transaction would have been defeated. So payment of the full price is key for Salam to exist.
Again, Salam can be effected in those commodities only the quality and quantity of which can be specified exactly and those goods which quality or quantity cannot be determined by specification cannot be sold through the contract of Salam. Salam or Islamic transaction cannot be affected on a particular commodity, in which the delivery is uncertain, only those goods which are certain are transacted upon.
In IB, the quality of the commodity traded upon is fully specified leaving no ambiguity which may lead to a dispute. All the possible details in this respect must be expressly mentioned. If the commodity is quantified in weights according to the usage of its traders, its weight must be determined, and if it is quantified through measures, its exact measure should be known. The exact date and place of delivery must be specified in the contract. The prohibition of interest was a well-established working principle integrated into the Islamic economic system. This interpretation of usury has not been universally accepted or applied in the Islamic world. A school of Islamic thought argues for an interpretative differentiation between usury, or consumptional lending, and interest, or lending for commercial investments and this is where Islamic banking has an edge over our conventional capitalist banking system.
In Islamic literature, interest-free banking seems to be of very recent origin. The earliest references to the re-organisation of banking on the basis of profit sharing rather than interest are found in Anwar Qureshi (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the late forties, followed by a more elaborate exposition by Mawdudi in 1950. All these scholars recognized the need for commercial banks and their perceived "necessary evil," have proposed a banking system based on the concept of Mudarabha - profit and loss sharing as against imposing interest on those who take loans.
Islamic banking supports (joint venture) or Musharakah – which is an agreement between two or more partners, whereby each partner provides funds to be used in a venture. Profits made are shared between the partners according to the invested capital. In case of loss, each partner loses capital in the same ratio. If the Bank provides capital, the same conditions apply. It is this financial profit and risk-sharing that constitutes the distinctive mark of Islamic banking.
In Musharakah each partner is rewarded according to his/her efforts. Thus a partner who participates actively in the business gets a greater profit share compared to a sleeping (non-working) partner. There is also the principle of Madharaba is that one partner, i.e a financial institution, provides all the capital and the other partner, the entrepreneur, provides no capital. The Mudarabah" is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment idea comes from the first partner who is called "rabb-ul-mal", while the management and work is an exclusive responsibility of the other "mudarib" who contributes no money but only runs the business to make profit.
In this case, the Mudarabah (Profit Sharing) is a contract, with one party providing 100 percent of the capital and the other party providing its specialist knowledge to invest the capital and manage the investment project. Profits generated are shared between the parties according to a pre-agreed ratio. This practice is more compatible with African, who had in the past evolved such institutions.
In IB, a man takes a loan and does business without interest on the loan. It is the profit of the businessman (depending on the amount of money) that is used to compensate the bank for the time value of its money in the form of the profit margin. This profit is fixed and pre-determined depending of course on the business proposal. The bank cannot charge additional profit on late payments. This type of transaction is similar to rent-to-own arrangements for furniture or appliances that are common in North American stores. So what's new about Islamic banking?
IB also provides for a contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit (not interest) over the period of lease.
Critics of Islamic banking believe that non-interest banking brings about indolence on the part of businessmen. This may not be true because it is in the western banking system that there are lots of defaulters leading to the forfeiture of property, protracted legal tussles and even death. Another misconception is that IB is an attempt to Islamize Nigeria, and this is propagated by Christians. In my disputation with a friend I told him “if you are scared stiff that IB will Islamize you, why not bring the Christians together to establish Christian banking? This to my mind will be interesting because even without a Christian bank, most worship centres have been turned into the modern equivalent of Casinos – where pastors spend so much time convincing their congregation on why they should pay tithe rather than teach them salvation? Some Churches of the Pentecostal variety even practice usury, extortion on the devotees while the proprietors turn themselves into Primitive accumulators and empire-builders. This is not to say there are no genuine worshippers of God.
The majority of Islamic banking clients are found in the Gulf States including Bangladesh. For me IB is one sure way of poverty alleviation (not the Magnus Kpakol type of poverty aggravation. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the general population. IB creates employment and it is more in tune with the macroeconomic objectives of most developing nations such namely job creation; wealth creation, and poverty reduction. With Muslims,working within these organizations being employed in the marketing of these services, and having little input into the routine management of the banks.
Everything on earth is subject to abuse. This writer is not contending that Islamic banking is completely insulated from fraud. One Malaysian Bank offering Islamic based investment funds was found to have invested substantial funds in the gaming industry but the managers administering these funds were non Muslim. This is a negation of the basic principles of IB. Compared to the capitalist type of banking, IB is more advantageous. In Nigeria today, I have lost count of the number of collapsed banks. Even the United States of America the generalissimo of Capitalism is no exception. Most of those who are critical of IB have not read even an ounce of literature in Islamic Banking; and a great many of them see the policy as essentially as an attempt for religious dominance. This perception too is pure falsehood.
IT is high time Nigerian learnt to respect and tolerate the views of others based on sound logic not some skewed, warped and ill-digested motives. In IB, loans are extended on a goodwill basis, and the debtor is only required to repay the amount borrowed. It is truly interest-free loan. If Islamic Banking is Sharia or Arabic, why are non-Muslims operating such banks? The Nigerian Constitution allows people to engage in any legal, legitimate economic activity, and I am surprised at the avalanche of criticisms armchair investigators and religious bigots levy against a policy that promises to reduce the misery index of Nigerians.
Idumange John, is a student of the TRUTH
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