Islamic Banking and Finance: Principles
To be consistent with the principles of Islamic law (Shariah) -- or at least an orthodox interpretation of the law -- and guided by Islamic economics, the contemporary movement of Islamic banking and finance prohibits a variety of activities, some not illegal in secular states:
- Paying or charging interest. "All forms of interest are riba and hence prohibited".[19] Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to prevent the use of interest.
- Investing in businesses involved in activities that are forbidden (haraam). These include things such as selling alcohol or pork or producing media such as gossip columns or pornography.[84][85]
- Charging extra for late payment. This applies to murâbaḥah or other fixed payment financing transactions, although some authors believe late fees may be charged if they are donated to charity,[86][87][88] or if the buyer has "deliberately refused" to make a payment.[89]
- Maisir. This is usually translated as "gambling" but used to mean "speculation" in Islamic finance.[82] Involvement in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future is maisir and forbidden in Islamic finance.
- Gharar. Gharar is usually translated as "uncertainty" or "ambiguity". Bans on both maisir and gharar tend to rule out derivatives, options, and futures.[82] Islamic finance supporters (such as Mervyn K. Lewis and Latifa M. Algaoud) believe these involve excessive risk and may foster uncertainty and fraudulent behavior such as are found in derivative instruments used by conventional banking.[90]
- Engaging in transactions lacking "`material finality`. All transactions must be "directly linked to a real underlying economic transaction", which excludes "options and most other derivatives".[85][91]
Money on the most common type of Islamic financing — debt-based contracts — "must be made from a tangible asset that one owns and thus has the right to sell — and in financial transactions, it demands that risk be shared." Money cannot be made from money.[92] Another statement of the Islamic banking theory of finance is: "Money has no intrinsic utility; it is only a medium of exchange."[93][94] Other restrictions include
- Islamic banks are to collect zakat (obligatory religious almsgiving) from customers' accounts — at least according to some sources.[95][96]
- A board of Shariah experts is to supervise and advise each Islamic bank on the propriety of transactions to "ensure that all activities are in line with Islamic principles".[95][96] (Interpretations of Shariah may vary by country. According to Humayon Dar,[97] interpretation of the Shariah is more strict in Turkey or Arab countries than in Malaysia, whose interpretation is, in turn, more strict than the Islamic Republic of Iran. Mohammed Ariff also found less exacting Shariah compliance in Iran where the Islamic government had decreed "that government borrowing on the basis of a fixed rate of return from the nationalized banking system would not amount to interest" and consequently would be permissible."[59] Mahmud el-Gamal found interpretations most strict in Sudan and least in Malaysia.)[98]
- Risk sharing. symmetrical risk and return on distribution to participants so that no one benefits disproportionately from the transaction.[85][91]
In general, Islamic banking and finance has been described as having the "same purpose" as conventional banking but operating in accordance with the rules of shariah law (Institute of Islamic Banking and Insurance),[99] or having the same "basic objective" as other private entities, i.e. "maximization of shareholder wealth" (Mohamed Warsame).[100] In a similar vein, Mahmoud El-Gamal states that Islamic finance "is not constructively built from classical jurisprudence". It follows conventional banking and deviates from it "only insofar as some conventional practices are deemed forbidden under Sharia."[Note 5]
A broader description of its principles is given by the Islamic Research and Training Institute of the Islamic Development Bank,
Some proponents (Nizam Yaquby) believe Islamic banking has more far-reaching purposes than conventional banking, and declare that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony",[105]although others describe these virtues as the natural benefits of the following sharia. (Taqi Usmani describes the virtues as guiding principles in one section of his book on Islamic Banking, and benefits in another.)[106]
Nizam Yaquby, for example, declares that the "guiding principles" for Islamic finance include: "fairness, justice, equality, transparency, and the pursuit of social harmony".[105] Some distinguish between sharia-compliant finance and a more holistic, pure and exacting sharia-based finance.[107][108][109] "Ethical finance" has been called necessary, or at least desirable,[110] for Islamic finance, as has a "gold-based currency".[111] Taqi Usmani declares that Islamic banking would mean less lending because it paid no interest on loans. This should not be thought of as presenting a problem for borrowers finding funds, because — according to Usmani — it is in part to discourage excessive finance that Islam forbids interest.[112] Zubair Hasan argues that the objectives of Islamic finance as envisaged by its pioneers were "promotion of growth with equity ... the alleviation of poverty ... [and] a long run vision to improve the condition of the Muslim communities across the world."[113] Some (such as convert Umar Ibrahim Vadillo) believe the Islamic banking movement has so far failed to follow the principles of shariah law, or at least failed to follow them sufficiently strictly.[Note 7]
On the other hand, Usmani preached that an Islamic economy free of the "imbalances" in society — such as concentration of "wealth in the hands of the few", or monopolies which paralyze or hinder market forces — would follow from obeying "divine injunctions" by banning interest (along with other Islamic efforts).[116] (Later in his book Introduction to Islamic Finance, he argues that Islamic principles should include "the fulfillment of the needs of the society" giving "preference to the products which may help the common people to raise their standard of living", but that few Islamic banks have followed this path.)[117] Another source (Saleh Abdullah Kamel),[Note 8] described the changes anticipated for the Muslim community by following Islamic approach to economics, banking, finance, etc., as a "move towards economic development, creation of the value-added factor, increased exports, fewer imports, job creation, rehabilitation of the incapacitated and training of capable elements".[118]
Criticism
Critic Feisal Khan argues that in many ways Islamic finance has not lived up to its defining characteristics. Risk-sharing is lacking because profit and loss sharing modes are so infrequently used. Underlying material transactions are also missing in such transactions as "tawarruq, commodity murabahas, Malaysian Islamic private debt securities, and Islamic short-sales". Exploitation is involved when high fees are charged for "doing nothing more substantial than mimicking conventional banking /finance products". Haram activities are not avoided when banks (following the customary practice) simply take the word of clients/financees/borrowers that they will not use funds for unIslamic activities.[119]
Scriptural basis
The sharia law that forms the basis of Islamic banking is itself based on the Qur'an (revealed to the Islamic prophet Muhammad) and ahadith (the body of reports of the teachings, deeds, and sayings of the Islamic prophet Muhammad that often explain verses in the Quran).[120] Prohibition of gharar is based on ahadith declaring as forbidden gharar the sale of things like "the birds in the sky or the fish in the water".[121][122][Note 9] Ma Maisir is thought to be banned by verses 2:219, 5:90, and 91 in the Quran.[122]
However, "the Islamic evaluation" of modern banking centers around the definition of interest on loans[127]as riba. Twelve verses in the Qur'an deal with riba, the word appearing eight times in total, three times in verses 2:275, and once in 2:276, 2:278,[128] 3:130,[128] 4:161[128] and 30:39.[129] Riba is mentioned numerous times in ahadith, including Muhammad's Farewell Sermon.
A number of orthodox scholars point to Quranic verses (2:275-2:280) as declaring riba "categorically prohibited" and "unjust" (zulm), and defining it to mean any payment "over and above the principal" of a loan.[130][131] (Although at least one source states "it is commonly argued" that riba is "defined by hadith".)[132]
Some unorthodox (such as Raqiub Zaman) have asked why — if "God Almighty used the terms `doubling` and `quadrupling` (the sum lent)" as riba in verse 3:130, and if "there was no further clarification of this verse in the Quran or by the Prophet" — the Orthodox are so certain that riba is defined as any "addition over and above the principal sum that is lent."
Nonetheless, this is a minority view,[130][131] and (according to the orthodox) an "increase over the principal sum" in loans of cash are riba. An increase over the principal sum in financing a purchase of some product or commodity is another matter. These are not riba — according to the orthodox interpretation — at least in some circumstances.[134] (These are sometimes known as "credit sales".) According to noted Islamic scholar Taqi Usmani, this is because in Qur;an ayat 2:275 ("they say, 'Trafficking (trade) is like usury,' [but] God has permitted trafficking and forbidden usury")[135] "trafficking (trade)" refers to credit sales such as Murabaha, the "forbidden usury" refers to charging extra for late payment (late fees), and the "they" refers to non-Muslims who didn't understand why if the first was allowed both were not.[136][Note 10] For this reason (according to Usmani) it is not true that "whenever the price is increased taking the time of payment into consideration, the transaction comes within the ambit of interest".[138] Instead of "principal" and "interest rate", the credit taker is paying "cost" and "profit rate".[134] (Another difference with conventional finance is that there is no penalty for late payment.)[Note 11]
Interest and credit sales
While Usmani and other Islamic Banking pioneers envisioned credit sales like murâbaḥah being a limited part of the Islamic Banking industry and subordinate to profit and loss shring, it has become the "most common" mode of Islamic financing.[134][140][141][142]
The distinction between credit sales and interest has also come under attack from critics such as Khalid Zaheer and Muhammad Akram Khan — criticizing it from opposite points of view. Zaheer considers profit from credit sales to be riba, the same as interest, and notes the lack of enthusiasm of orthodox scholars — such as the Council of Islamic Ideology — for credit sales-based Islamic Banking, which they (the council) call "no more than a second-best solution from the viewpoint of an ideal Islamic system".[143] Khan calls the distinction "frivolous and labored", a way of charging interest using another name, necessary because businesses "cannot survive where cash and credit prices are equal".[144] Others note that in terms of standard accounting practice and truth-in-lending regulations[Note 12] getting 90 days credit on an Rs10000 product and paying an extra Rs500, cost very nearly the same and is considered very nearly the same as paying in cash, using a three-month loan at 20% per annum.
Taqi Usmani, however, explains that this is a "misconception". Paying more for credit when buying a product ("an exchange of commodities for money")[147][148] does not violate sharia law, but exchange of "one unit of money for another of the same denomination" ("an exchange of money for money")[147] and charging for credit is a violation of sharia.[138] The cash loan is different because "money has no intrinsic utility".[138]
Other orthodox supporters (such as Kahf) have defended the sharia compliance of the practice saying that among other things, attaching commodities to money in finance prevents money from being used for speculative purposes.[137] Critics report widespread abuses of "synthetic" Murabaha, which are loans with interest in all but name.[149][150]
Types of Islamic lending
One of the pioneers of Islamic banking, Mohammad Najatullah Siddiqui, suggested a two-tier mudarabah model as the basis of riba-free banking. The bank would act as the capital partner in mudarabah accounts with the depositor on one side and the entrepreneur on the other side.[151] (Another pioneer Taqi Uthmani called mudarabah and another profit-sharing form of finance musharakah, the "real and ideal instruments of financing in Shari‘ah".)[93] This model would be supplemented by a number of fixed-return models—mark-up (Murabaha), leasing (ijara), cash advances for the purchase of agricultural produce (salam) and cash advances for the manufacture of assets (istisna`), etc. In practice, the fixed-return models, in particular, the Murabaha model, became the industry staples, not supplements, as they bear results most similar to the interest-based finance models. Assets managed under these products far exceed those in "profit-loss-sharing modes" such as mudarabah and musharakah. [94]
Time value of money
The time value of money[152] — the idea that there is greater benefit in receiving money now rather than later so that savers/investors/lenders should be compensated for delayed gratification — has been called one of the "most significant" arguments in favor of charging interest on loans.[153] As such, some Islamic finance supporters have opposed the concept, arguing that some consumption — such as eating — can only be done over time, and discounting for time encourages negative outcomes such as unsustainable production like desertification since the desertification comes in the discounted future.[154] However, since Islamic banking also calls for rewarding delayed gratification in the form of "return on investment" on both profit-sharing and credit sales, Islamic scholars and economists have tended to insist that time value of money is a valid concept "provided the rate of discount is the `rate of return` on capital rather than the rate of interest," a position critics find specious.[153][155][156][157]
Early payment of debt
The opposite of credit sales (i.e. the opposite of charging more in exchange for giving the buyer time to pay) is reduced charges for early payment. This is considered haram by the four Sunni schools of jurisprudence ( Hanafi, Maliki, Shafi'e Hambali ) , but not by all jurists according to Ridha Saadullah. He notes that such reductions have been permitted by some companions of the Profhet and some of their followers. This position has been advanced by Ibn Taymiyyah and Ibn al-Qayyim, and it has, more recently, been adopted by the Islamic Fiqh Academy of the OIC. The Academy decided that `reduction of a deferred debt in order to accelerate its repayment, whether at the request of the debtor or the creditor is permissible under Shariah. It does not constitute forbidden riba if it is not agreed upon in advance and as long as the creditor-debtor relationship remains bilateral. ...[158][159]
Islamic laws on trading
As noted above, the primary focus of Islamic banking is on financing without interest to avoid riba,[33] while trade is not an issue (per the Quranic statement that "God has permitted trafficking [trade] and forbidden riba [usury]".[135] However trade transactions that involve gambling (maisir), or excessive risk (bayu al-gharar) are not permitted. Among the financial instruments and activities common in conventional finance that are considered forbidden (or at least Islamically problematic) by many Islamic scholars and Muslims are:
- margin trading: This uses borrowed money to buy shares of stock or other financial instruments. It both involves forbidden interest on the borrowed money,[160] and much greater risk than non-margin investing because losses can be greater than the amount borrowed;[161]
- short selling: borrowing/renting shares of stock or some other instrument and selling it on the hope that it can be later repurchased at a lower price for a profit. It is traditionally thought to violate the hadith stating “Do not sell which you do not possess,” and has been declared impermissible by numerous sources (Raj Bhala,[162] IslamQA,[163] Taqi Usmani,[116] Humayon Dar.[164]
- day trading: very short term buying and selling of financial instruments) has been called unIslamic because the short period of "ownership" means day traders do not truly own what they trade, and furthermore pay interest.[165] Among the sources calling it unIslamic include Yusuf Talal DeLorenzo,[166] and Focus Business Services of the UAE.[165]
- derivatives: contracts that derive their value from the performance of an underlying asset; (The "notional value" of the world's over-the-counter derivatives at the end of 2007 was $596 trillion and the gross market value of all outstanding derivatives was $14.5 trillion.)[167] Options, futures and "other derivatives" are "generally" not used in Islamic finance "because of the prohibition against maisir",[168] Sources stating that most derivative or some kinds of derivative are banned by Islamic scholars include Juan Sole and Andreas Jobst,[169] P.S.Mills and J.R.Presley,[170][171] Taqi Usmani,[172] Investopedia.[173] The most commonly used[174] derivative are:
- forwards: customized contracts to buy or sell an asset at a specified price on a future date. unlike futures contracts forward contracts are not traded on any exchanges;
- futures: a legal agreement to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future;
- options: contracts offering the buyer the right, but not the obligation, to buy (call) or sell (put) security or another financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date);
- swaps: contracts through which two parties exchange financial instruments to transfer risk.
On the other hand, at least one Islamic scholar (Mohammed Hashim Kamali) finds “nothing inherently objectionable" in selling and using options, which like other kinds of trade is mubah (permissible) in fiqh, and "simply an extension of the basic liberty that the Quran has granted”.[175] And both Islamic finance practitioners and critics find benefit in at least some uses of derivatives and short selling — managing risk in times of financial trouble,[176] improving market efficiency and employee productivity.[177]
At least some in the Islamic finance industry use derivatives and make short sales, and permissibility of this is a subject of "heated debate".[178] Global standards for trading Islamic profit-rate and currency swap derivatives were set in 2010 with the "Hedging Master Agreement"[179][180][181] (see below). A "shariah-certified" short-sale had been created by some Shariah-compliant hedge funds.[171][182]However both have been criticized as unIslamic.[171][182]
(Source: https://en.wikipedia.org/wiki/Islamic_banking_and_finance)
Comments
Post a Comment