198. When it comes to credit and debit cards, clients should be aware that some cards may not function in venues selling goods deemed to be haram, such as alcohol or pork.

195. they are supported by five basic pillars: no interest, no uncertain speculation, no financing for the socially harmful. of companies involved with goods or services deemed haram, such as weapons, pork or gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets.p. 188. where ideally the bank should have their own procurement department.p. 185. An interest free banking system is correlated to the will of economy to invest in risk. People just can not derive Islamic Banking with a will to have fix income securities in their portfolio with tagging of “Islamic”.p. 184. In my view all above mentioned apprehensions are minor. The big point is different. The real important point is we can not accomplish truest Islamic Banking System without having a true Islamic Economy and we can not accomplish Islamic Economy without surrendering our Non-Islamic lifestyles and societies.

p. 183. Second – weather Interest is completely weeded out even at the benchmarking level from Islamic Banking System? (LIBOR is a bench mark, used by Islamic banks as pricing mechanixm)

p. 170. The following shows how willing the ifi are to participate in losses or risk of losses> Meanwhile, in many countries, small and medium sized Muslim-owned businesses are offered no Islamic finance facilities at all. When they do finally encounter a financing proposal from an Islamic bank, many of these businessmen quickly become cynical because the financing cost is fixed at the outset of the financing agreement.p. 169. One head of Islamic Trade Finance admitted to me over lunch not long ago that there is no practical difference between the murabahah business that he does now and the conventional letter of credit business that he used to do in his previous job. Just the labels are different.p. 153. After some more research, I found out that some Islamic banks, like the Egyptian-Saudi Islamic Bank, has been discovered to have deposited its "profits" into commercial banks and accumulated interest on it.

p. 166. Murabaha= contractum trinium. Money now for more money later, with good X in between. The net effect is a fixed rate of financial return for the bank, contractually enforceable from the moment that the bank buys good X from B.

P . 165 Some Muslims are of the view that the present practice of Islamic banking relies

on devices similar to the contractum trinius as a means of working around a ban ofriba (usury)

in religious scripture.

p. 137. but why does Islamic Banking holds Commercial Banking as its standard of benevolence?' زبان یا اسلوب بھی ہےاس لنک س تھیسس ڈرافت ک لکھن میں مدد لیجاسکتی ے ے ے' مگر انٹرنیٹ پر سدتیاب اسی لئ مجھ اسمیں مناسب تبدیلی النا ےمناسب ے ہے ہے

ہے۔ضروری http://www.gowister.com/islam-answer-2534.html

ےاسٹیٹ بینک س مطالب ک ایسا نظام الیا جائ جس میں شرعی ایڈوائزر اسالمی ہ ہے ہ ے ۔بینک کا مالزم ن ر ہے ہ

' اس جواز عدم اور جواز کا بینکنگ اسلامیک ہے ضروری نہایت بحث تفصیلی پر حیلوںہے متعلق زیادہ بہت سے

لونز پرسنل کی بینکس اسلامی ہیکہ، ہوا صدر شرح مجھے کر، پڑھ کو بحث کی حیلوںچاہئے بچنا بھی سے ان کو مسلمانوں ہم ہیں۔ ناجائز خدمات معتلق 'سے

Controversies that make Islamic banking really questionable:

p.6. Risk Sharing in sukuk.

p.13. The main criticism such people lodge against Islamic banking is that it is as exploitative as conventional banking and finance.

p.15. No information on share holders, directors owners. There is a definite need to look into the matter with respect to money laundering, even if the investments are genuine, and the returns offered by the Group actually come from the investments made by it in different projects. There are also questions related to corporate governance, as there is no information at all on the so-called founding shareholders and directors of the company.

18. Taqi sahib said that 85% of Sukuk, or Islamic bonds, were un-Islamic.p. 18.Islamic banks started even offering credit cards, Islamic time deposit and guaranteed return accounts, Islamic hedge funds.p. 48. Critics most commonly claim that Islamic banking essentially mimics conventional banking in terms of interest based financial transactions.

p. 96. Fine for late payment. The Islamic Bank also charges fine on any delay in payments which later are, deposited in the charity fund working under the Islamic

p. 102. Islamic banks avoid to their best in loss sharing. For example, read this excerpt: Thirdly the bank, before any Murābaḥah, demands 10% as token money from the customer so that it could cover up any loss in case the customer breaks the contract to buy the agreed thing.

۔125پ۔ and capping on further usage of the car.

Javed Ahmed Ghamidi says that the whole exercise of Islamic banking is not needed if the conventional banks make minor changes of sharing in the loss of borrowers. In a tv interview.

p. 59. Raphaeli’s paper quotes Al-Sarraf as saying that “most of the Islamic banks are guided by well-paid clerics who are employed by the bank, and issue rulings according to the bank’s needs.p. 79. ) In Islamic Banking the volume of Murābaḥah and Ijārah must be abolished, otherwise no Islamic Bank would be justified in calling itself ‘Islamic Bank’; instead these would best be called as ‘Ḥīlah Bank’. (The Unanimous Fatwa 2008)

AMERICAN JOURNAL OF SOCIAL AND MANAGEMENT SCIENCES ISSN Print: 2156-1540, ISSN Online: 2151-1559, doi:10.5251/ajsms.2011.2.1.41.46 © 2011, ScienceHuβ, http://www.scihub.org/AJSMS Controversies that make Islamic banking controversial: An analysis of issues and challenges Muhammad Shaukat Malik, Ali Malik and Waqas Mustafa Department of Accounting, Finance & Economics, University of Hertfordshire Business School, Hatfield AL10 9AB, UK, E: m.a.1.malik@herts.ac.uk Institute of Management Sciences, Bahauddin Zakariya University Multan, Pakistan Corresponding Author Email: shoukatmalik@bzu.edu.pk British Institute of Technology and E-Commerce London, UK, Email: waqas.mustafa@live.co.uk

ABSTRACT Islamic banking has been in practice for long but started receiving due attention and high popularity since last decade. It has received a warm welcome from all over the world and these banks operating on Islamic principles have been able to get a sizeable business not only in Islamic countries but in non-Islamic countries too. Despite exemplary advancements and achievements, there remains number of controversies over various underlying concepts and practices. This paper basically explores and highlights all those

controversies and challenges which are in minds of different school of thoughts and are needed to be addressed and overcome if Islamic banking continues flourishing the way it is at present. The authors have also tried to suggest suitable remedies to overcome these challenges where appropriate.

Keywords: Islamic Banking, Principles of Islamic Banking, Controversies of Islamic Banking, Challenges of Islamic Banking

INTRODUCTION The origin of Shariah (Islamic Law) rulings on how Muslims should conduct their economic and financial affairs are as old as Islamic itself. However, the modern history of Islamic banking can be traced back to 1960s. It was not until last decade that Islamic banking emerged as an established player on financial scene. Middle East and Malaysia remains hub of Islamic finance though most important development is emergence of non-Muslim countries as powerful centres of Islamic banking and finance.

Over the last couple decades or so, Islamic Banking and Finance has grown into a full fledge system and is still growing at an astonishing rate of 15% to 20%, which means it is doubling every 5 years. It can be witnessed by the fact that there are over 475 Islamic Financial Institutions in over 75 countries around the world. Islamic Takaful Industry was worth US$5.3 billion by the end of year 2008, which is expected grow up to US$8.8 billion by the end of the year 2010, an amazing growth

rate of 29% pa (World Takaful Report 2010 - Ernest & Young). Global Islamic Banking and Finance Industry was worth US $822 billion by the end of year 2009 which is expected to grow to US $1.00 trillion in assets by the end of 2010 (The Islamic Fund & Investment Report 2010 - Ernest & Young). This growth rate has clearly outpaced the conventional banking.

Many of the products offered by the Islamic banks are quite similar to that of conventional banking but there are some norms which are exclusive to Islam. Even some principles render certain conventional banking practices and transactions void.

Before the introduction of Islamic Banking, all the Muslim customers had to rely on the conventional banking practices. These banks products were no way near to the principles of Islam as the conventional banking products revolve around the earnings of interest (Riba) which is clearly prohibited in Islam. The globalization and economical demand of countries collaborating with each other to improve the financial structures of the countries had become impossible without accepting the other conventional banking system. These foreign banks therefore were allowed to establish branches in different countries which ended up giving roots to the trend of interest based transactions and easy lending. This had lead Muslim countries to establish and develop the financial institutions

which were in accordance with the Islamic Laws and Shariah Principles. It took a little time to gain recognition and confidence of other Am. J. Soc. Mgmt. Sci., 2011, 2(1): 41-46 42 countries of the world and to give competition to the conventional Banks.

This paper addresses the issues that make Islamic banking controversial. It is structured as follows: Following the introduction, section 2.0 provides an introduction of Islamic banking products and of its fundamental principles and governing rules; section 3.0 reviews controversies and challenges involved in Islamic banking, section 4 explores some unresolved Fiqa issue, section 5 presents some present challenges for Islamic banking concepts and finally section 5.0 concludes this paper.

Fundamental Principles of Islamic Banking: Islamic banking is an economic and financial framework which is based upon the principles of Islamic Laws also known as Shariah Laws. It’s a system of banking which is in accordance with the principles of Islamic law and Shariah. Shariah law prohibits the acceptance or giving interest on the money borrowed or lent which is commonly known as Riba. (Iqbal & Molyneux, 2005). Sharia law forbids the paying or receiving of interest, or riba, which is held to break the natural bonds between people, reinforce iniquity, and led to social unrest (Ahmad et.al, 2010). Not all Muslims

agree that the Qur'an explicitly imposes such a prohibition, some arguing that the ban was simply intended to prevent a specific pre-Islamic practice which led to the enslavement of many people, and that other forms of interest are permissible and consistent with Islamic belief (Kuran, 2001). Nonetheless, the prohibition on interest remains the fundamental defining feature of Islamic banking. However, ostensible denial of interest in the Islamic finance sector is underpinned by a range of other tactics which ensure that profit motive is not compromised, and also mean that compliance with the high-minded social ideals said to justify the ban on interest is not a necessary corollary (Lee & Ullah, 2008).

The prevailing interpretation of Islamic Law, financial instruments that are consistent with Sharia should emphasise profit-and-loss sharing (equity), rather than use of debt contracts which are seemingly prohibited if we accept the interpretation of a Qur'anic injunction against interest. Saudi Arabian government is known to borrow money in the form of debt contract from the international capital markets, despite deriving its political legitimacy from a determinacy to uphold Islamic Law (Aggarwal and Yousef, 2000).Furthermore, it is argued that much of the financing offered by Islamic banks actually bear a closer semblance to debt instruments than to profitand-loss sharing. Two instruments of profit-and-loss sharing are Mudarabah and Musharaka, key differences being

that in the former the bank provides all the credit and none of the management, whereas in the latter both aspects are shared and any losses split according to the initial investment. Two instruments widely used but often disputed, which fall under the “markup principle”, are Murabaha and Ijara. Both instruments involve financing the purchase of assets, and are criticised for appearing to involved fixed returns for the bank, which can be seen as being similar to interest (Ali, 2005).

Controversies and challenges involved in Islamic banking: It is undeniable fact that Islamic banking is a phenomenon that has taken the financial world by storm. Its continued growth during the period of universal financial meltdown has attracted even more interest into it. All the major non-Muslim countries of the world are competing against each other to become hub of Islamic finance. However, there is not all well and good. The unprecedented popularity and growth is accompanied by controversies and challenges. A review and evaluation of some of key issues that make Islamic Banking controversial is the theme of this paper.

Fatwa is a religious ruling, issued or given by a scholar on the matters of Islamic laws (Ali, 2005). A Fatwa is required on matters where there is no clear and straightforward guidance from Quran and Sunnah. Fatwa shopping refers to seeking opinion and rulings by Islamic Scholars on matters where there

is ambiguity that a certain product or banking activity is in line with Shariah or not. Fatwa resolves controversies and addresses key challenges faced by Islamic Financial Industry.

At present time there is no ultimate authority or a single organisation that governs the Islamic Financial Industry, nor there is any set of rules and guidelines regarding shariah interpretation. All the Islamic Banks have their own shariah boards which oversee and verify conformity of the bank’s practices with Shariah Law. These Shariah Boards normally consist of a number of shariah scholars who have well equipped with shariah and finance knowledge. However, due to the limited number of scholars who are well versed in both finance and religion, the Shariah boards tend to be overburdened and the approval process becomes difficult and unpredictable. Am. J. Soc. Mgmt. Sci., 2011, 2(1): 41-46 43

From this backdrop, fatwa shopping can be described as the procedure that enables the financial institutions to seek a fatwa on financial product or contracts from the scholars whom they assume will consider such product as Shariah Compliant and later grant them the fatwa (Wilson, 1999). Ahmad et.al.(2010) consider this to be the same as “forum shopping”. In forum shopping the client tries to get their legal case heard in the court thought most like to provide the judgement in their favour without taking into consideration the rule of conflict of

law. According to which the litigation should be heard by the jurisdiction that has the most ties with such litigation.

Fatwa shopping is a threat to Islamic Finance Industry because it works against the harmonisation of fatwas. Such harmonization is required in order to minimize complexities and execution difficulties and to decrease the cost of structuring Islamic financial products thus providing more people with access to such products (Lawai, 1994). Furthermore, fatwa shopping increases the inconsistency between Islamic financial products, leading consumers and investors to be uncertain regarding the Shariah compliance of the offered products and gradually leading them to lose faith in Islamic finance as a whole.

Perhaps relating to the issue of fatwa, there is issue of different interpretation of existing shariah rulings. The existence of various sects in Islam and the fact that each sect has its own authority or body which provides guidance and interpretation on shariah issues makes things more complicated. There is, therefore, always a possibility that interpretations and clarification on a certain shariah issues given by one sect’s committee will differ from other sect’s committee. These committees at times give conflicting rulings. A product allowed by one committee can be rejected by the other committee in the same command or jurisdiction. Differences do also arise

and exist between the countries and regions. For instance, Islamic financial restrictions are much more liberal in Malaysia compared to Middle East where the financial regulations have been applied more strictly. (SunGard 2008).

There are bodies and organisations including Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) which are trying to resolve the lack of Islamic Standardisation. However, without a consensus of religious experts, there cannot be binding and universal set of Islamic banking rules. In fact, there is a proposal to setup a Supreme Shariah Board. Indonesia serves a good example where a national shariah board issues rulings that are mandatory for all shariah boards in the country.

Another problem faced by the Islamic Banking is the short coming of qualified professionals at all levels who have the knowledge of both conventional banking & Islamic laws. A person with the knowledge of conventional banking can easily understand the Islamic products. One cannot successfully develop and market the product without knowing the rules unique to Islam.

According to a survey by the Khaleej Times (2008), the number of shariah scholars is very low. It would be around the range of 250 – 300 which is quite less than what it should be. Out of these numbers, around 15 – 20 are most sought (Bokhari,

2008). It is widely criticised that these scholars are making millions of dollars every year. These scholars are serving not only more than one shariah boards but also providing the advisory services to direct competitors. To deal with this issue in Malaysia in 2005, scholars were restricted giving services to more than one board or committee.

According to Iqbal & Molynenx(2006), the rapid growth of Islamic banking has meant that the industry has not been able to produce enough experts needed to support this growth. At present, many professionals interested in working in this industry have not had enough time to gain the required experience to enable them to competently manage or advice on Islamic financial transactions. The shortage of Islamic finance experts is affecting, at different levels, the growth of the industry.

One of the main pillars of Islamic Finance is the concept of profit and loss sharing. In Islamic Banking, all the financing activities must be and have always been backed by tangible assets. On the other hand, in conventional banking, the financing activities are carried out back to back without being backed by any assets (Ali, 2005).

In general, Islamic assets are of long-term in nature and relatively illiquid. At present, this does not present a problem as the majority of the Muslim countries are flush with cash.

However, under normal market conditions, the mismatch between the duration of assets which are long-term and illiquid and the liabilities which are short-term can present Am. J. Soc. Mgmt. Sci., 2011, 2(1): 41-46 44 serious challenges as was evident from the liquidity squeeze that faces western banks and has resulted in serious failings and near global financial meltdown (Akhtar et. al., 2009).

This liquidity risk is especially serious for the Islamic finance industry as the Shariah compliant repo market is virtually non-existent and Islamic banks may face numerous restrictions when tapping interbank instruments. In addition, this challenge causes banks to run an overly liquid balance sheet, thereby sacrificing profitability and ultimately destroying shareholder value. Sheikh (2006) suggested in his article that Islamic banks often face two types of liquidity problems. Some have excess liquidity which they don’t have any clue where to park for short periods as the investment opportunities are few. This result in high cost of carry in the form of foregone opportunities on excessive liquidity funds. On the other hand, there are banks that run into liquidity shortage when depositors withdraw money and do not have access to funds for short periods.

Shariah Auditing is another challenge facing the Islamic finance industry. This subject is still largely underdeveloped and its importance is not fully recognized by industry players whether

Islamic banks, Islamic finance professionals or Islamic investors (SunGard, 2009).

All the institutions involved in the Islamic Financial Industry are required to conduct Shariah Audit at least once a year according to their by-laws and AAOIFI standards. However as the subject is still not fully developed, the problem arises when trying to see what Shariah Auditing entails.

According to Aioanei (2007), among the most crucial challenges before an Islamic bank is to create confidence in its depositors as well as all the other operators in the market about the harmony of its operations with the shariah. For this purpose two important steps need to be taken. The first step is to get clearance from a shariah board about the shariah compatibility of all its products. The second step is to provide an assurance that all its transactions are actually in conformity with the verdicts of the shariah board.

Where conventionally structured products are relatively straightforward, similar Islamic financial products tend to be more complex. Shariah compliance often leads to additional requirements in the structuring process which in turn leads to higher transactions costs. However, a combination of ingenuity and persistence has enabled the industry to conquer many inherent obstacles. This has created an industry that is growing

steadily and products that are in constant evolution (Akhtar et.al, 2009).

Nevertheless, the industry is still facing a shortage in short-term investment products. In the GCC and Europe, the commodity murabaha financing (also known as tawarruq) is the most widely used short term financing instrument. Some Islamic banks have tried to structure alternative products, but they were faced by their inability to generate assets caused by credit ratings and liquidity issues relating to their balance sheet.

The market has recently seen some Islamic structured products which artificially incorporate more than one Shariah compliant mechanism into one single Islamic product in order to replicate the economic effect of a conventionally structured product. For example, the market has seen a swap mechanism which was incorporated into an Islamic structured product in order for the Islamic investor to swap its return deriving from a Shariah compliant underlying investment by a return deriving from an investment which is not Shariah compliant (Obaidullah, 2008). From the face of it, the underlying transaction of these Islamic products are Shariah compliant when taken separately, but when looking at their economic effect one can see that they are not Shariah compliant. These so-called Islamic products are Shariah compliant in their form but not in their spirit. Such products should be severely reprehended by the scholars and

industry practitioners in order for the market to evolve in the right direction at all times. Such direction should be guided by the spirit of Islam and the values behind Islamic finance (Usmani, 2008). “Maxim number of Majalat Al Ahakam Al Adliah, which is the first written codification of the fiqh al muamalat considers that meaning should be given to the purposes and spirit of the text and not for its wordings.” Prior to 2008, the sukuk market had been experiencing explosive growth. In fact, in 2007, the global market for sukuk had more than doubled and was on track to continue posting impressive growth. Am. J. Soc. Mgmt. Sci., 2011, 2(1): 41-46 45 However, this growth has noticeably slowed since the beginning of the year especially when it comes to the US dollar denominated sukuk and the primary market sukuk.

There are two main concerns over Sukuk, which are:

i) Pricing: The first concern is over pricing, as with Mudarabah sukuk, the returns are “Profit Share” and with Ijarah Sukuk, they are “Rent”, the benchmarks used, whether LIBOR or SAIBOR, are interest rate proxies. These are used so that the returns to sukuk investors are competitive with those on comparable conventional bonds and bills, but this is driven by market considerations and not by shariah (Siddiqui, 2006).

ii) Risk Sharing: The second concern is that the returns to Islamic investors are supposed to be justified by risk-sharing, the notion of taking on each other’s burden. With sukuk, however, the main risk for the investors is of default, and in such circumstances the investors can be expected to instigate legal proceedings against the issuer to try to reclaim as much of their investment as possible. Most sukuk are rated, and the rating reflects the probability of default risk, which in turn is reflected in the pricing. For sovereign sukuk, for example, Pakistan has to pay a higher return than Qatar or Malaysia, reflecting country risk perceptions, yet it is the government of Pakistan that can least afford the debt servicing (Siddiqui, 2006). According to Usmani (2008), who considered that, most of the Sukuk in the market are not shariah Compliant. According to him, the investors expect to get the nominal value of their capital returned on maturity, avoiding exposure to market risk. In the case of mudarabah and musharakah sukuk, he believed that the amount the investor gets returned on maturity should reflect the terminal market value of the asset backing the sukuk and not simply its initial nominal value. The asset used as backing for the sukuk should have real financial significance and not simply be used as a legal proxy to justify sukuk trading. There are a

number of crucial issues still remain unresolved. In case it is found that the prevalent fiqhi opinion cannot be changed, it will be necessary for the jurists and financial experts to join hands to find practical shariah compatible solutions for the problems faced by Islamic financial institutions. In the absence of such solutions, the risks faced by Islamic banks may be higher and the need for capital greater. Capital standards which are significantly higher than those for conventional banks may reduce the profitability of these banks and make them less competitive.

Other Challenges: The size and the phenomenal growth of Islamic Banking have started to attract the attention of international players and many new entrants alike. Therefore many conventional banks are now offering Islamic products and services through “Islamic Windows” typically a self-contained subsidiary. New start up Islamic Financial Institutions has been prepared to offer more competitive products and services to build market share. As customers’ financial sophistication and financial awareness increase, so do their expectations of high quality service. Today people are costumed to being able to rapidly obtain finance approvals. This adds to challenge Islamic Banks. Not only do manual processes increase errors, rework and customer complaints, they also adversely affect a bank’s ability to

maintain competitive pricing for its products and services for its customers. The need for transparency and accountability in the global financial markets has led to a wide range of new regulations. For Islamic Banks, in addition to meeting international regulations such as IAS 39 and Basel II, additional regulations such as those defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) must also be met (Khan and Bhatti, 2008). Equally, every Bank must be able to meet local regulatory reporting and operational requirements. This can be a challenge in itself, especially in nonIslamic countries where central Banks and other regulatory bodies may impose requirements which conflict with Shariah standards and principles. Islamic banking industry need to review to carter the demand of more sophisticated products and services which is likely to grow rapidly. It should be innovating rather than replicate the conventional banking products to meet the growing needs of its customers. (Iqbal et al., 2010). Am. J. Soc. Mgmt. Sci., 2011, 2(1): 41-46 46

CONCLUSION Islamic banking and finance now is the strong industry in the Islamic and Western markets, but will continue to face struggles in the process. Due to the religious underpinning, the Islamic finance industry faces a set of unique challenges. The above points are only a handful. As more experts join in the ranks, the industry players should

carefully consider the challenges and develop processes to consciously improve every aspect of industry. Unlike conventional finance, the success of Islamic finance depends on both satisfying faith and economics. As such, industry stakeholders are invited to share their knowledge between each other and to have a better communication with the scholars and finance experts. In addition, it is crucial to remember at all times that the purpose of Islamic Finance practioners is not to “replicate” in an Islamic way, the conventional finance products but to create new financial products which appeal to Islamic Banks and investors, even if this means slower growth.

REFERENCES: Ali, (2005). Islamic Banking, Journal of Islamic Banking and Finance, 4, 1, 31-56. Ahmad A., Rehman K., & Saif M.I., (2010), Islamic Banking Experinec of Pakistan: Comparison Between Islamic and Conventional Banks. International Journal of Business and Management, 5,2,137-143. Aggarwal, R. K. and Yousef, T., (2000), Islamic Banks and Investment Financing, Journal of Money, Credit and Banking, 32, 1, 31-43. Aktar. W, Akhtar. N & Jaffri K.A., (2009), Islamic MicroFinance and Poverty Alleviation: A Case Of Pakistan. Proceedings 2nd CBRC. Lahore. Pakistan. Aioanei. S., (2007), European Challenges for Islamic Banks. The Romanian Journal. 10.25. 7-20. Hassan, Z., (1995), Economic Development in Islamic Perspective: Concepts, Objectives

and Some Issues, Journal of Islamic Economics, 1, 6, 80-111. Lawai H., (1994), Key Features in Islamic Banking. Journal of Islamic Banking and Finance. 11.4.7-13. Iqbal, M. & Molyneux P.,(2005), Thirty Years of Islamic Banking: History, Performance and Prospects. Islamic Economic 19, 1, 37-39. Iqbal, Z., A. Mirakhor, N. Krichenne and H. Askari (2010), The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future, Wiley Finance. KhaleeJ Times., (2008), Islamic Banks Enjoys Double Digit Growth. Khan, M.M. and Bhatti, M. I., (2008). Development in Islamic Banking: A Financial Risk-Allocation Approach, Journal of Risk Finance, 9, 1, 40-51. Kuran, T. (2001), Speculations on Islamic Financial Alternatives: A Response to Bill Maurer, Anthropology Today, 17, 3. Lee Kun-ho & Ullah S. (2008), Inter-bank Cooperation between Islamic and Conventional-The case of Pakistan. International Review of Business Research Papers, 4,4, 9, 1-26. Meraj, A., (2010), Islamic Banking Challenges and Growth, available at www.thebanker.com ObaidUllah M., (2008). Islamic Finance for Micro & Medium Enterprises. Center for Islamic Banking, Finance and Management, University Brunei Darussalam. Roy, D. A. (1991), Islamic Banking, Middle Eastern Studies, 27, 3. Sheikh S.A., (2007), Critical Analysis of Current Islamic Banking System. www.accountancy.com.pk SunGard., (2008). Islamic Banking and Finance-Growth and Challeges Ahead.

www.sungard.com Sheikh S.A., (2010), An alternative Approch to practic Islamic Corporate Finance. www.accountancy.com.pk Siddiqui, M.N., (2006), Islamic Banking and Finance in theory and practice: A Survey of state of the Art, Jeddah Journal of Islamic Economics Studies, Islamic Research and Training Institute, Islamic Development bank, 13, 2, 29-42. The Islamic Funds & Investments Report (2010), by Earnest & Young, available at http://www.ey.com/Publication/vwLUAssets/Islamic_Fi nancial_Investment_Report/$FILE/IFIR%202010%20fi nalv3.pdf Usmani, T., (2008), Isalmic Finance: Musharakah & Mudarbah, Journal Of Islamic Banking and Finance, 25,3, 41-53. Wilson. R., (1999), Challenges and Opportunities for Islamic Banking and Finance in the West: The U.K experinec. Islamic Economic Studies, 7, 1&2, 16-32. World Takaful Report (2010), by Earnest & Young, available at http://www.ey.com/Publication/vwLUAssets/EY_WTR_ 2010/$FILE/EY_WTR_2010.pdf

http://www.scihub.org/AJSMS/PDF/2011/1/AJSMS-2-1-41-46.pdf

Greetings to you 

I am highly interested in Islamic economics and finance 

But one of our prominent scholars in banking has faced me with four fundamental questions that made me hopeless about Islamic banking. I do not know how to answer him, if you be kind and answer his questions it would be very kind of you 

First, the most important contracts in Islamic banking are Musharakah contracts, but they are not suitable for banks, which

are intermediary entity not investment institutions? 

Second, the risk sharing which the pillar of Islamic banking, is only an illusion, because depositors of banks are not risk lovers.

If they were, they would refer to stock markets not banks? 

Third, what Islam rejects, is market interest rate not natural interest rates. Islamic economists have mistaken these two with each other. The important thing in economics, is natural interest

rate, which is Islamic? 

Fourth, he repeats all the criticism of timur kuran to Islamic economists, but I have no answer?  

Please answer me, or give inform me about books or papers that I can find my answers in or give the email of the people that can

be of help to me  

Many thanks to you

 Please read my.book The Art of Islamic Banking and Finance published by Wiley in Jan 2010. You can read aboy it on Amazon.com.It anders these very questions.

Was salam.

Dr. Yahia Abdul Rahman LARIBA.COM ANDWHITTIERBANK.com- show quoted text --- Salaams, I haven't dealt with La Riba bank, but I know  scholars and CPAs who say La Riba bank contracts are not Sharia compliant. Could you provide the details of your contracts so that we have a good understanding? I am considering buying property with my wife and exploring halal options for financing in the market. 

Thanks. Ahmad

 What is the natural interest rate? who said it is islamic and why? Best Regards   Khaled 

Though I am not a proponent of any form of interest, but it is just to clarify the concept: "in the standard economic growth theory, natural (or biological) rate of interest is said to be equal to the growth rate of labor in the economy". 

THE NATURAL RATE OF INTEREST So named by Swedish economist Knut Wicksell, the natural rate of interest is the rate that reflects the underlying real factors. In macroeconomic terms as applied to a wholly private economy, it is the rate that governs the allocation of resources between current consumption and investment for the future. By keeping saving and investment in balance, the natural rate guides the economy along a sustainable growth path. That is, governed by the natural rate, unconsumed current output (real saving) is used for augmenting the economy's productive capacity in ways that are consistent with people's willingness to postpone consumption. The above is a copy and paste from the following webpage: http://mises.org/daily/2513#1  : [INAYAH GROUP-3379] Four fundamental criticisms against Islamic bankingOther recipients: nidal-isla...@googlegroups.com

My dear respected brother, my purpose of introducing you to the book had nothing to do with LARIBA. I wanted to simply expose you to knowledge in response to your four very good questions and statements which are asked by many God loving brothers and sisters like you. The problem we have had over the years in or communities is that we do not read and rely more on hersey and words of mouth. That is why the first words from Allah ee: READ!!

I do not know where you live but Please get a copy of the book and read chapters 9 & 10 so that you can judge for yourself. Please also note that I am not trying to sell you the book. Masha Allahu it is almost out of print with over 7500 choirs sold.

Please remember us in your duaa. May Allah bless you and your dear family.

I shall also be happy to address your questions and explain. My number is + 626 818 0855.

Wassalam

Dr. Yahia Abdul Rahman 

Salam brother >  > What is the natural interest rate? who said it is islamic and why?>> B...

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AssalamuAlaikum,

With regard to the Four Fundamental questions:

1. Yes, I would say the most equitible forms of contracts would be Musharakah and Mudharabah, which falls under the category of pure Islamic finance, due to the nature of risk sharing and real factors of production being utilized by such contracts. 

Yes, these contracts are not suitable for banks as their very nature is to minimize risks in the form of collateral or security in order to safe guard the bank from having an imbalance in the deposit to loan/financing ratio. This is mainly due to the Banks' (irrelevant if Islamic financial Institution or not) based under a fractional reserve fiat based monetary system, since all central banks are operate in such a manner.

Therefore, I would say investment Banks/private equity firms would come close to Musharakah and Mudharabah, however not in a pure sense. Bank as in general are concerned about many types risks, for instance commercial displacement risk, for which such risks cannot be minimized as the very nature of Musharakah and Mudharabah are to take such risks. Therefore, a Bank would be reluctant to expose itself from such risks as it would want to be competitive in the market, mainly in the Islamic Banking as it is still growing.

2. Yes, risk sharing is a core part of Islamic finance. And again your correct about depositors being hesitant about taking risks. I would say, sadly, still everyone wants

a guarantee to their money, which they deposit in the Bank, be it even the so called profit rate given by IFI's.  

 This is mainly due to the larger part of the mass being unaware of the true nature of Islamic finance and being governed by a secular economic system, soon after fall of the Islamic Golden era. Therefore it is the responsibility of the Islamic Banks to educate people of how Islamic finance should take place. 

Therefore, this is still to be seen. Islamic Banks need to change the perception of conventional secular economics to Islamic economics, which is a more a just and equitable system. This can only be done through collaborative effort from Muslim states (governments), scholars, banking practitioners, universities, media and eventually the public.

3.   I would say Islam rejects Riba (any form that is in excess with out any due effort), which is in the form of real interest rate. Nominal interest rate would be closest to the natural interest rate.

However the notion behind the natural interest rate is still not purely Islamic, since, monetary policy of an economy is still subject to a fiat based interest rate monetary system, for which loans are created for current and future investment and consumption decisions, thereby, distorting the natural rate of interest, for which inflation further distorts and complicates the interest rate determined in an economy. 

Therefore, how can we determine rate, which is Islamic? 

well to answer that we need to determine a rate of return (natural rate)  in an economy that is driven and sustained from real economic growth, i.e physical movement of trade which would determine the optimal and market equilibrium rate. 

Sadly, this is very difficult and cumbersome to determine as the world economy is driven by debt and not real growth of factors of production. This needs to be addressed and researched further, in order to obtain a more Islamic economic system, which would be beneficial  for the Ummah. 

4. I'm not sure how to answer this, but stating these criticism to Islamic economists will not solve the problems. As in we as a Muslim community would have to work together, towards a common goal to minimize and eventually replace such conventions. 

I hope this answers your questions. 

Regards,

Aashiq Salahudeen

Dear Dr. Al Masri, 

I have already answered what I meant about the natural interest rate. Thanks to Dr. Nidal’s efforts in interpreting my reply.BTW, I am not hiding my identity. My name is Muhannad Al Hanbali a Palestinian – American working and living in the US. 

Dear Sirs/Madams,

برکاتہ و اللہ رحمت و علیکم السالمEven though brains much more knowledgeable than myself have very ably answered the questions posed herein, I would just like to point out some basic fallacies contained in the objections cited by the learned Economist.

1) The argument presupposes that conventional system of banking and the role assigned to banks(financial inter mediation) is the only possible system which is perfect and cannot be challenged or changed. It is neither. It is a man made system which on the one hand plays on the fear in the minds of small savers that their savings will be lost if they are exposed to business risks and on the other hand lures the entrepreneur to borrow on a rate of interest usually much lower than his expected Return on Equity(ROE). Interest, being a tax deductible expense, means that the effective rate for the entrepreneur will be x*y where x is the interest rate at which he has borrowed and y is the rate of income tax to which he is subject. If he

borrowed @ 16 % p.a and was in 50% tax bracket, he effectively pays only 8% p.a. Further more, even this 8% is added to the cost of production and recovered from the consumers by suitably jacking up the selling price of the products and services. So the successful entrepreneur uses others money at zero cost to fill in his coffers.

2)The depositors may not be risk lovers but if they are muslims and believe in the Divine Law, they have no choice in this matter. If they want to earn a legitimate return on their savings they have to invest them in legitimate businesses and assume all business risks(destruction, pilferage, theft, price, market, obsolescence) that the entrepreneur assumes.

Islamic Shariah accepts that there is credit risk in loaning. It does not compel any one, under any circumstances, to extend a loan. Loaning is a purely voluntary act. The lender can ask for any security to secure his principal. If the borrower dies, the responsibility to settle his debts devolves on his estate. No heir can get any thing until all debts are settled. Even if this is not enough, insolvent borrowers can be helped through zakat to enable them settle their debts. The idea is that the entire community must pitch in to protect lender's principal amount if he is not willing or is not in a position to remit it by way of charity. With all these concessions and safeguards, there is one prohibition. A lender has the right to claim the principal only. The Qur'an states,"then if you repent(and desist) you have the(right to your)principal;do not do injustice and no injustice will be done to you". This verse

clearly defines Riba. Riba is any thing in excess of principal which a lender can claim as a contractual obligation of the borrower.

There is no substance in the argument that the borrower benefits from the borrowed amount and earns profit which he must share with the lender. If the earning of profit is certain, let the lender share in it, in a just manner. He may earn a much higher return than a meager rate of interest! If it is not certain, what has the lender done to assure a positive return and security of principal? Is this not injustice of the worst kind that conventional banking promotes?

As stated above, there is no compulsion to lend. Let the saver hoard his money and see if it grows in value or depreciates. Inflation is not a natural phenomenon and it is for no fault of the borrower. Money will lose its value even if hoarded, when there is inflation.

3) This is the first time I have heard of "natural" rate of interest. How is it defined? And why should it lie outside of the definition of Riba which is any thing in excess of principal in a loan transaction? I shall be grateful for further details.

4) For my as well as several other readers' benefit, kindly state the objections raised by timur kuran or let us know the source so that we can read them in his words. I will try to answer them to the best of my capability.

Thank you.برکاتہ و اللہ رحمت و علیکم السالم

Anwar Ahmed Meenai

https://groups.google.com/forum/#!msg/nidal-islamicfinance/0ot518kigDc/PfkbsY1yjKIJ

LONDON: RESUME FROM HER.

It is not only in Pakistan where they find scepticism. The vast majority of Muslims across the globe remain dubious about the operations of formalised Islamic banks. The main criticism such people lodge against Islamic banking is that it is as exploitative as conventional banking and finance.

Conventional banking is all about borrowing cheap and lending dear, yet Islamic banks also follow the same pattern: offering a return to their investment account holders – not much different from the market rate of interest – and charging very high (albeit market-driven) profits to households and businesses. (to individual customers n corporate clients)

In Pakistan, a number of businesses have emerged, which are collecting investments informally from an increasing number of people, and offering them very lucrative and frequent returns.

Such businesses are increasing in number and size, and it is interesting to look into this newly-emerging phenomenon. If the underlying business model of such so-called investment companies is strong and robust enough, it should be studied and assessed in order to ascertain the implications for policy development on a national level. If, on the other hand, malpractices are detected, it will be helpful to take some early steps to safeguard the interests of hundreds of people who have already invested in such companies.

Apparently many groups of businessmen, represented and aided mostly by graduates of traditional Islamic schools or madrassas, have quietly been raising a lot of investment from people around the country, especially from the Islamabad and Rawalpindi region, and the areas in the north as far as Gilgit-Baltistan.

They claim to do business in strict conformity with Shariah and offer unbelievably high returns to their investors, which to date has been over 50% per annum or around 5% per month. There are a lot of small groups, mostly led by religious scholars from one prominent school of thought. The most notable of these is the Elixir Group.

The Group’s website offers general information on its business activities and investments, which are reported to be in Pakistan, Malaysia, Thailand, the United Arab Emirates, Sri Lanka, Ethiopia and even in China. While the website does not offer information on the directors and shareholders of the Group, some officials at their Rawalpindi office, who happen to be behind some marble factories in the Westridge area, disclose that a Lalika family is behind the Group. They claim to own big

names like Rocco Ice Cream and Prime Dairies, and are planning to start a housing scheme in the name of Sukoon Housing.

Since the Group is neither a regulated entity nor is well-known outside some very specific circles, many people who have come across it are at best confused. On one hand, they are tempted by the very high returns offered to investors; on the other hand, they are nervous and confused, owing to the mystery surrounding the different businesses in which the Group claims to have invested.

Apart from some general information on its website, the Group does not provide any financial information on its activities, as most of the investments received by the Group from the general public are in cash. As the Group claims to have invested in a number of overseas projects, questions arise on the channels it has used for transfer of money from Pakistan. There are many questions related to conducting due diligence, a regulatory requirement for banks and other investment companies when accepting investments from the general public.

There is a definite need to look into the matter with respect to money laundering, even if the investments are genuine, and the returns offered by the Group actually come from the investments made by it in different projects. There are also questions related to corporate governance, as there is no information at all on the so-called founding shareholders and directors of the company.

Although it may sound incredible to see these businesses offering extremely high returns to their investors, it is not impossible for high performing businesses to offer such returns.

Despite all the doom and gloom in the country, the Karachi Stock Exchange has performed exceptionally well, with the index going up 48% from January to December 2012. The textile sector provided an unbelievable return of 99% last year. The story for cement is even more impressive, generating a return of 152% in the same period.

One thing that these informal groups claim is perhaps true: putting your money in banks does not generate appropriate returns to investors who are looking for regular income. Their money, however, is safe, given the tight regulations around banking and finance. If a proper corporate governance and regulatory framework, similar to what we have for Mudaraba companies in the country, is devised for these informal Shariah-compliant investment and business groups, one may observe a new way of doing business in compliance with Shariah.

Major contributor 

$16.5b was the value of global Takaful premiums estimated in 2011, of which 30% was the contribution of Iran.

Unbelievably high

50% is the return on investment per annum offered by some Shariah-compliant finance corporations.

Rapid expansion

59.6% was the average annual growth  rate of deposits at Islamic banks, compared to 16.1% per annum for the conventional banking sector between 2002 and 2011, data from SBP shows.

The writer is an economist and a PhD from Cambridge University.Published in The Express Tribune, April 22nd, 2013.

http://tribune.com.pk/story/538577/is-islamic-banking-as-exploitative-as-conventional-banking/

Modern Structure of Knowledge and Criticism of Islamic BankingBy Omar Javaid (Along with islamic banks, other players in the industry are: investment companies, Mudharabah companies, Takaful, sukuk etc AAOIFI, regulatory firms shariah financail services boards etc.)

Islamic banking is growing by leaps and bounds in the world, many sees this as a successful utilization of Islamic principles to solve worldly problems whereas others considers it as a mistake of putting a label of ‘Islamic’ on various things which are prohibited or disliked by Islam. These two groups often debate and counter argue with each other on different forums to prove their points. It is interesting to note that the opponents are often sincere and well intentioned Muslims, and it is even interesting to note that most of their disagreements isn’t on the principles of Islam, rather on their perspective of viewing the banking system (a value neutral structure or a institutionalized form of greed and economic injustice) of the western capitalistic world.

The proponents of Islamic banking seems to stick with the text book description of the banking and economic system, whereas the opponents take a deeper and broader look (not necessary that they are right all the time) and claim to know a little more of an alternative perspective of how system works which isn’t explicitly elaborated in text books. The reason for such discrepancy is worth probing.

The  text books are written not to inform its audience but to prepare their minds and hearts to become a productive tools of the system. Text books indoctrinate the ideas and concepts approved by those in power. The text books in a communist societies would therefore be very different from those found in a capitalistic ones, for example.

Furthermore modern knowledge is extremely compartmentalized due to its rationalistic roots.

Michael Foucault account of Pierre Rivière is an interesting elaboration of above two features of specialized knowledge contained in text books.

Pierre Rivière who murdered his mother and sister, later wrote his autobiography. After reading his autobiography Rivière was declared a historian by the historians of his time, an artist by the artist community, a criminal by legal experts, and a madman by psychologists. etc. So who Rivière really is? a historian, an artist, a criminal or a madman? or all of it? The answer is further found in Foucault’s work; the knowledge which is dominant politically would eventually define who Rivière is, and subsequently determine his fate. For example if its

Psychology which dominates the other, then the legal system wouldn’t be able to punish Rivière as he is a madman, he would rather be admitted into a psychiatric hospital, and if the Legal experts or their knowledge dominates, then Rivière might be given a capital punishment for being a murderer.

Knowledge of economics and finance is also compartmentalized in a same way. An economists view of a bank is different from that of a finance fellow. A banker sitting inside the bank would view it differently then an expert of econometrics sitting in the central bank. Similarly a Masters in Business Administration (MBA), a Chartered Accountant, a Masters in Economics, and a student of Economic Philosophy would have very different view of the system. Rather none of them would have the capacity to imagine the system in its entirety.

This doesn’t end here, the compartmentalization even goes deeper, for example an MBA with majors in Marketing, HR, Finance, Risk Management etc, would also have knowledge pertaining to different aspects of their domain. So we have sub-domains inside domains of specialization in the modern structure of knowledge. Furthermore we also have schools of thought in nearly all disciplines.

In economics we have Classical, Neo-classical, Keynesian, Austrian, liberal, Neo-liberal, Marxists schools etc. Often these schools differs with each other substantially on how they view all or any specific

component of the financial and economic system and how it may function or regulated.

Now those criticizing or propagating Islamic banking differs due to the difference in their knowledge base. It is unfortunate that the proponents considers the politically distorted, non-neutral and text-bookish description of how the system works, to be true and comprehensive enough to apply shariah knowledge.

The question now arises that how we may understand the system or all aspects of it completely. The answer is simple, study all perspectives, particularly go deep down in history to understand how a system or some of its component evolved; study the values, norms, ideals, challenges of a particular time in history of a particular society which encouraged formation of a particular institution or set of institutions (system) or shaped it in a form we see today.

In this context Hollingsworth (2000) had proposed a very useful framework to study institutional structures at five different levels. This framework is comprehensive enough to visualize the entirety of the institution and the environment in which it exists.

(Click on the above image to enlarge)

The proponents of Islamic finance need to realize the short coming in their understand of the system. The Ulema-e-Kiram who are not experts on the subject need to understand how modern structure of knowledge is compartmentalized and how text books contain inadequate and unreliable description of the system, and that experts of a particular area wouldn’t know much about other interrelated domains of his field. Realization of this feature of modern knowledge, would enable the ulema-e-kiram to correctly understand the system before putting a label of Islamic or issueing a fatwa for legitimacy of the system as a whole.

http://worldeconomicsassociation.net/pakistan/2014/01/04/176/

The Islamic finance industry has often battled with the question: How Islamic is Islamic banking?The question's pertinence was raised in March last year, when Sheikh Muhammad Taqi Usmani, of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), a Bahrain-based regulatory institution that sets standards for the global industry, said that 85% of Sukuk, or Islamic bonds, were un-Islamic. Usmani is the granddaddy of modern-day Islamic finance, so having him make this statement is

synonymous with Adam Smith saying that free-markets are inefficient. Because Sukuk underpin the modern-day Islamic financial system, one of its pre-eminent proponents arguing that the epicentre of the system was flawed sent shockwaves through the industry. It also gave ammunition to the many critics who see Islamic finance as an industry more driven by cultural identity than practical problem solving: as a hodgepodge of incoherent, incomplete, impractical and irrelevant ideas. Recognisable productsThe products that modern-day Islamic bankers have created are very similar to conventional products. So similar, in fact, that to an outside observer they could be considered the same. Islamic banks now offer Islamic mortgages, Islamic car loans, Islamic credit cards, Islamic time deposit and guaranteed return accounts, Islamic insurance and some even offer Islamic managed and hedge funds. This point is conceded by Samir Alamad, Sharia, or Islamic law, compliance and product development manager of the Islamic Bank of Britain. "The industry does not want to alienate its products," he says.

Everything that is not forbidden in the Holy Qur'an is OK

Majid Dawood, chief executive, Yasaar

"They have to be recognisable, produce the same outcome as conventional products, but remain within the guidelines of Sharia." No interestThe core of Islamic economics is a prohibition on interest. This immediately creates a problem for Islamic banks, as conventional banks charge borrowers an interest rate through which they can reward their depositors and make some profit for being the broker. With interest ruled out it is harder to make money. The modern Islamic banker has found a way around this prohibition, however. As in many Islamic products, the bank enters a partnership with its depositors and invests his money in a Sharia compliant business. The profit from this investment is then shared between the depositor and the bank after a set time. In many cases this "profit rate" is competitive with the conventional banking system's interest rate for savers. Lease agreementsAlternatively, an Islamic banker might enter into a lease agreement for a car or a house with an individual.

HSBC and other Western banks offer Islamic banking

The bank would buy a vehicle outright and then lease it back to the person who wanted it, over a time period that would ensure that the capital was repaid and the bank made a profit. Alternatively the bank would enter into a partnership with a person wanting to buy a house. The bank would buy 70% of the house, the individual 30%. The bank then rents its share of the house back to the individual until the house is fully paid for. The bank makes a profit on the rent, which would be higher than equivalent rents in the area, but on an annualised percentage basis, would look very much like a conventional mortgage interest rate. To the casual observer, a spade is a spade. Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics. Sophisticated financeThe potential wealth locked up in oil-rich Gulf states encouraged the conventional banks to enter Islamic finance. HSBC established the Amanah Islamic Finance brand in 1998 and Deutsche Bank, Citi, UBS and

If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance

Investment banker in Dubai

Barclays quickly joined the fray, all offering interest-free products for wealthy Arabs. However, this new generation of Islamic bankers had cut their teeth in the City and Wall Street, and were used to creating sophisticated financial products. They often bumped heads with the Sharia scholars who authorised their products as Sharia compliant. However, these bankers had a way of dealing with this, as one investment banker based in Dubai, working for a major Western financial organisation explains: "We create the same type of products that we do for the conventional markets. We then phone up a Sharia scholar for a Fatwa [seal of approval, confirming the product is Shari'ah compliant]. "If he doesn't give it to us, we phone up another scholar, offer him a sum of money for his services and ask him for a Fatwa. We do this until we get Sharia compliance. Then we are free to distribute the product as Islamic." No consensusThis "Fatwa shopping", which was carried out by some institutions, brings us back to the Sharia scholars. Even these scholars do not agree all the time, which means that in some cases a product is deemed Sharia compliant in one market and not in another.

This is especially the case with Malaysian products, which are often deemed not Sharia complaint in the more austere Gulf. "Often no rulings exist for modern day problems, such as use of narcotics," Alamad explains. "In Islam intoxication by wine is forbidden, but at the time of the Prophet Mohammed there was no crack cocaine." Modern scholars had to interpret the rules on intoxication, and the consensus was that crack should also be forbidden to Muslims, as it is a dangerous intoxicant. "This is how we make rulings, whether in finance or societal," Alamad says. "The consensus rules, which usually will become mandatory for all Muslims to follow, but there are some opinions and sometimes scholars are not in the consensus." Banking is bankingThis makes it more important to be in the consensus, and so getting a favourable ruling from a leading Sharia scholar is important for a product manager. That is why the top scholars can earn so much money - often six-figure sums for each ruling. The most creative scholars are the ones in the most demand, says Tarek El Diwany, analyst at London-based Islamic financial consultancy Zest Advisory. "To date, most Islamic financiers have been looking at examples of financing in Islamic history and

figuring out how to apply them to today's financial products." But banking is banking. It is the taking of a deposit and then using it to finance a purchase or business. The lender pays the depositor compensation for the opportunity cost of his money, and the person borrowing the money "rents" it off the bank. The same symbiotic relationship occurs whether it is conventional banking, ethical banking, Islamic banking or Presbyterian banking. As Majid Dawood, chief executive of Yasaar, a UK-based Islamic finance consultancy says: "Everything that is not forbidden in the Holy Qur'an is OK. "Yes, the industry has to evolve, but it is only 40 years old and its competing with a conventional finance system that is over 800 years old."

http://news.bbc.co.uk/2/hi/business/8401421.stm

The essence of Islamic banking lies in the rejection of interest for loaning of money and in only making investments in businesses that provide goods or services that are consistent with Islamic principles. It is a relatively new field in modern banking. The first Islamic banks appeared in the late 20th century with the help and guidance of world

renowned Islamic scholars and financial experts to apply Sharia-compliant banking principles to private and semi-private commercial institutions around the world.Modes of Islamic TransactionsIslamic banking is commonly based around the following transaction modes, mentioned here with their traditional banking counterparts:

Mudharabah – Profit sharing Musharakah – Joint venture Wadiah – Safe keeping Murabahah – Sell & buy or cost plus Ijarah – Leasing Bai’ Salam – Contract of advance payment Sukuk – Bonds Takaful – Insurance

Some Common Criticisms of Islamic Finance/BankingIslamic banking is far from perfect; therefore, it has drawn its fair share of criticism as well. The Islamic banking industry remains somewhat controversial to date and the question of whether or not Islamic banking is really Islamic remains a topic of discussion and a hot debates among the Islamic economists and bankers as well as among the general public.  Still, despite the criticism, it may still be a better alternative to traditional, interest-based banking.

Critics most commonly claim that Islamic banking essentially mimics conventional banking in terms of interest based financial transactions. They suggest that by simply renaming interest to “profit” or “compensation for deferred payment”, Islamic banks are only deceiving people into believing that they are complying with the Shariah (Islamic Law). In an article in late 2007, Mr. Salman Ahmed Sheikh claimed that there is basically no difference in the Islamic and conventional modes of financing. In his opinion, the only differences are procedural, which are minor and do not change the nature of the transactions.In response, an influential Shariah scholar stated that the essence of Islamic financing lies in actual economic activity, and is therefore different from interest-based lending.  According to Reuters, Prof. Ali Al Qaradaghi gave an interview at the International Shariah Scholars Forum 09 (ISSF09), clarifying that the issue is the structure of these instruments and contracts and the burden of responsibility.  He further stated that the interest in interest-bearing loans is something that is guaranteed to the lender and he undertakes absolutely no risk at all.  In the Murabaha transaction for example, the bank undertakes responsibility if the commodity (such as a car) should be damaged or destroyed during the period.  Compare this with conventional car

financing where the responsibility lies with the individual, not the bank.By highlighting this key difference between Islamic and conventional banking, the scholar has also indirectly pinpointed one of the reasons why more nations have been looking into Islamic finance since the financial crisis.Comparing Islamic Banking with Conventional BankingUnlike traditional banking, Islamic banking can only be based on transactions whose source and objective is in accordance with Islamic law.  As a result, Islamic banks offer no support for projects that involve activities that are against Islamic teachings.  All transactions are purely based on halal investing and halal purchasing.Conventional banking is mainly concerned with the elimination of risk from financial transactions, whereas Islamic banking places the burden of risk on the bank, while the labor responsibility rests with the customer.  Islamic banks bear the liability in their transactions with customers. On the other hand, conventional banks are not liable for any losses, which are fully borne by the customer. This difference stems from the Islamic law that any profit without bearing risk or liability is not permissible.Conclusion

Islamic banking has a long way to go before it can be called Islamic in the true sense.  But there is a lot of work being done to improve Islamic financial products and to make them more relevant by fitting them into the capitalist economy, developing systems that allow Islamic banks to be fully recognized by financial regulatory authorities around the world, and to bring complete uniformity in the financial and accounting practices of these banks.At this point, Islamic banking can only be considered the lesser of two evils. It is still a better alternative for those who try to adhere to Islamic law with the hope that one day they will have an Islamic banking system that cannot be degraded with the label of “imperfect”.(Image courtesy of bigstockphoto.com)

http://insider.pk/life-style/religion/is-islamic-banking-really-islamic/

Islamic Finance and Its Critics

GENEVA — Before the attacks of Sept. 11, Prince Muhammad al-Faisal al-Saud felt welcome in America. A member of the Saudi royal family and a pioneer of Islamic finance, he was a

pillar of a Saudi business establishment that has long relished its ties with the United States.

Since then he has kept his distance. The company he founded in 1981, Dar al-Maal al-Islami Trust — a Bahamas-incorporated holding company with a portfolio of Islamic banks in Bahrain, Niger, Egypt and Pakistan — is a defendant in a consolidated $1 trillion lawsuit brought by the families of those who died on Sept. 11, and his lawyers have advised him not to set foot in the United States as the case winds its sluggish way through federal court in Lower Manhattan.

Though the prince was originally named in the case, the lawsuits against him were dismissed in 2005. The prince is less well known — he shuns publicity — than two of his brothers, Prince Saud al-Faisal, the Saudi foreign minister, and Prince Turki al-Faisal, the former Saudi ambassador to the United States. But as chairman of DMI, he is the public face of the sprawling financial conglomerate, which has been accused of aiding terrorism. More than that, the prince and by extension DMI represent vividly the discordant views that have surrounded Islam and money since Sept. 11.

Khalid Abdullah Janahi, in his Geneva office, is the chief executive of Dar al-Maal al-Islami Trust. Credit Fred Merz for The New York Times

Some see him as a founding father of Islamic finance, a thriving piece of the global economy that approaches $800 billion in assets; others view the prince, a follower of the puritanical Wahhabi sect of Islam, as the invisible hand behind a flow of money to Al Qaeda.

Fueled by soaring oil prices and an increasingly open investment climate, capital is flowing to the Middle East, often steered to institutions like DMI and its subsidiaries, which, to comply with Islamic law, shun interest and speculation in favor of investments in which the borrower and lender share both risk and reward.

Yet, in the wake of the attacks on Sept. 11, the tendency to connect the businesses of established Muslim financiers to Islamic extremism continues. That point became clear last year during the outcry over whether DP World, a Dubai-based port operator, should run terminals in the United States.

Even now, such suspicions show no sign of abating. Many other Muslim institutions have been named in the suit, and last month Mariane Pearl, the wife of the slain Wall Street Journal reporter Daniel Pearl, sued Habib Bank, the largest bank in Pakistan, accusing it of providing banking services to charities that supported terrorist organizations. For the prince, his legal difficulties and a growing resentment of United States policies in the Middle East have put a strain on what traditionally has been a robust business relationship.

“There has been a cloud on relations,” said Richard A. Debs, an advisory director at Morgan Stanley and vice chairman of the United States-Saudi Arabian Business Council. “There is disaffection — people think Prince Muhammad has been unfairly persecuted and attacked. I just don’t see the connection between Islamic finance and Islamic extremism.”

In their complaint, lawyers for Sept. 11 relatives argue that the early alliances formed by the prince with conservative political

and religious figures in Sudan and Egypt as well as the banking services DMI has provided to people and organizations who would be declared terrorists after Sept. 11 are proof that the prince and the trust have “conspired with Al Qaeda and the other defendants to carry out terrorist attacks.”

A lawyer representing DMI, James J. McGuire, denies any such intent. “The fact that DMI unknowingly had an account with someone who was later deemed a terrorist is hardly evidence that the bank is involved in terrorism,” Mr. McGuire said.

To support their case, investigators for the plaintiffs have gathered documents that show that Wael Jelaidan, a suspected founder of Al Qaeda who was designated a terrorist by the United States government in September 2002, maintained an account at Faisal Finance, DMI’s Swiss banking unit, from January 1997 to July 2003 that grew to be as large as $405,000. Mr. Jelaidan, through his lawyer, Martin F. McMahon, has denied links to terrorist organizations.

An even more significant client of Faisal Finance — now called Faisal Private Bank — was Yassin Abdullah Kadi, a prominent Saudi businessman and a past shareholder of DMI who was designated a terrorist in October 2001 for his ties to Islamic charities accused of providing financial support to terrorists. Bank records from Faisal Finance show transactions by Mr. Kadi as late as February 2003, more than a year after his designation. Mr. Kadi has denied that he has ever supported terrorist organizations and he is contesting his designation.

Other documents collected by plaintiffs show that two extremist groups in Pakistan that have been designated by the United

States for their support of terrorism maintained deposit accounts at Faysal Bank Ltd., DMI’s banking affiliate there. One is Lashkar-e-tayyiba, an armed group fighting India in the disputed region of Kashmir, and another, Lajnat al-Dawa, is a Kuwait-based foundation that has links to Al Qaeda, according to the United States Treasury’s Web site.

According to Mr. McGuire, DMI’s lawyer, the accounts were frozen as soon as the clients had been either put on a designated list or banned in Pakistan. The accounts of Mr. Kadi and Mr. Jelaidan are active only to the extent that investment payouts are recorded and fees are paid to Faisal, he said.

The complaint also focuses on the ties Prince Muhammad had with religious personalities like Hassan al-Turabi from Sudan, who was a supervisory director of the trust from 1982 to 1992, and Yusuf al-Qaradawi, who was an early religious adviser to the trust until he left in 1994.

Mr. Turabi was a once-powerful political figure in Sudan who welcomed Osama bin Laden to the country in 1991. Faisal Islamic Bank in Sudan, a past affiliate of the trust, was a major financial sponsor of Mr. Turabi, the complaint contends. And Mr. Qaradawi, a prominent Islamic scholar from Egypt, has been linked to the Muslim Brotherhood, although he did condemn the Sept. 11 attacks.

Finally, the complaint highlights some fiery language used by Prince Muhammad in a 1984 letter to shareholders in which he says, “May Allah bless your jihad and all your efforts.”

Michael E. Elsner, a lawyer representing the Sept. 11 relatives, said that it is the mix of these pieces of evidence that underpins the case. And even if DMI has now cut ties and frozen accounts, he said that having such people on the board and providing financial services to businessmen who would be designated as terrorists are signs of DMI’s sympathy toward Islamic extremism.

“All this creates a picture that DMI provided material support to Al Qaeda,” he said. “And if the accounts are frozen, why are they accepting investment payouts?”

But Khalid Abdullah Janahi, the chief executive of DMI since 1998, who has overseen a period of substantial growth for the company as the market for Islamic finance has boomed, sees something more insidious at work: latent prejudice, compounded by a broader bias he has encountered since Sept. 11.

Mariane Pearl has sued Habib Bank of Pakistan, accusing it of links to terrorist groups. Credit Richard Perry/The New York Times

“Suddenly the hatred of the petrodollar days is back,” he said. A gruff, burly man who was a partner at Price Waterhouse before coming to DMI, his voice rises as he explains that jihad can also mean a nonviolent struggle for a pure, legitimate end. He added: “Rarely in the Western media do I read anything about our food, our culture, our painting or our poetry. I just read how bad we are as Muslims.”

At DMI’s administrative headquarters in a gleaming glass building on the outskirts of Geneva, the only evidence of the

trust’s Saudi origin is a painting of a pensive King Faisal, the father of Prince Muhammad, which hangs in its main conference room. Mr. Janahi is dressed in a conservative suit and he takes pains to explain that Islamic finance is a global business that has attracted the likes of Goldman Sachs and HSBC to compete with DMI.

Technically a trust, DMI functions as a holding company, with ownership stakes in Islamic banks in Pakistan, Egypt and Africa, investment banks in Bahrain and the Faisal private bank in Geneva. It also manages $1.5 billion for largely Muslim clients, invested exclusively in businesses and funds that are in tune with Islamic law, like real estate and private equity.

Since recording a loss in 2000, its fortunes have soared as capital has flowed to the region and the trust posted a record profit of $52 million last year.

Yet the specter of the lawsuit hangs over the company, and it has spent millions of dollars on legal fees. “We will take this case to the Supreme Court if need be,” Mr. Janahi said. DMI’s motion to dismiss, along with 107 similar motions from other defendants in the case, awaits a decision from Judge George B. Daniels of the Federal District Court in Manhattan.

While he will not discuss specific accusations, the idea that an established entrepreneur like the prince — before DMI, he ran a venture in Jeddah that aimed, unsuccessfully, to bring icebergs to Saudi Arabia — would knowingly finance terrorism offends Mr. Janahi’s pragmatic sensibilities.

“These people are all part of the system,” he said, referring to many well-known Middle Eastern businessmen named in the suit. “There is no way they are going to pay people to hang themselves.”

Ibrahim A. Warde, an expert on Islamic finance at the Fletcher School at Tufts University has written a book, out this summer, called “The Price of Fear.” In it he contends that contrary to popular perception, there is no monolithic financial pool sustaining Al Qaeda — a view that is supported by the Sept. 11 Commission’s report on terrorism financing. “There is this idea that it is money that makes terror possible,” he said. “So DMI, as an Islamic bank, has a few strikes against it.”

http://www.nytimes.com/2007/08/09/business/09trust.html?_r=1

Identity crisis for Islamic finance.http://www.thenational.ae/business/banking/identity-crisis-for-islamic-finance#full

THE MYTH OF ‘ISLAMIC’ BANKING‘ISLAMIC’ BANKING IS FRAUD AND DECEPTION

by R Jagannathan Nov 23, 2012Extracts from an article by a non-Muslim

Reserve Bank Governor D Subbarao has done well to reject the idea of Islamic banking in India. Though he has left a window open in case the government makes legislative changes to enable Islamic banking, he also seemed to suggest that Islam’s injunctions can be met not through banking, but other financial options.Even in Muslim countries, what is called Islamic banking is – to put it in the dismissive words of one western critic – “normal banking sprinkled with holy water.” At best, Islamic banking is a way to deny the existence of interest and make it easier for Muslims to accept the idea of banking since the Koran includes strong injunctions against the giving or taking of “riba” – interest.Why did the Prophet of Islam forbid interest-based banking? I am no expert on Islam or the Koran, but taking a commonsense view of his intentions, it is likely that he did not want usury – he didn’t want rich moneylenders to fleece the poor…In its intended form, Islamic banking as advocated by the Prophet would be close to venture capital or even a mutual fund – where the investor earns nothing if his money makes a business loss. He gets a share of profit or dividends if the venture or underlying investment makes a profit…In the real world, Islamic banks have to compete with normal banks. They thus create instruments which mirror the returns that are close to current market interest rates in order to retain business.

They are thus pulling wool over the eyes of true believers where interest will be disguised as dividend, and borrowing as purchase of assets by the bank. A loan returned would be classified as the repurchase of the same asset by the same person or company.In a paper by Dr Nimrod Raphaeli produced for the Middle East Media Research Institute (Memri), he quotes a Kuwaiti banker as saying that conventional banks are more straightforward than Islamic banks. In an article titled “The non-usury deception”, the Kuwaiti banker, Ahmad Al-Sarraf, quotes a cleric, Prof Hamid Al-’Ali, as saying that “Islamic banks disguise usury by inventing documents that appear on the surface as sales documents, but that are actually interest-bearing loans. Therefore, anyone who distinguishes between traditional and Islamic banks is ignorant.”Raphaeli’s paper quotes Al-Sarraf as saying that “most of the Islamic banks are guided by well-paid clerics who are employed by the bank, and issue rulings according to the bank’s needs. The entire corpus of paperwork created by these Islamic banks, Al-Sarraf concludes, is in violation of the rules of the sharia and is inherently deceptive.”In India, the Bombay Stock Exchange has a Shariah Index where the leading stock is Reliance with a weight of 18 percent. Reliance, which is one of the biggest cash-generating machines in India, invests

a huge amount of its funds in interest-bearing deposits and securities – and it is supposed to be Shariah-complaint. Tata Consultancy, which also has surplus cash and invests in bank deposits, is another top member of the Shariah index.Clearly, Islamic investment and banking are little more than fig-leaves to give Muslims an excuse to adopt relabelled normal banking. Wonder if the Prophet would have liked such deceptive practices. Islamic banking is a bad idea intended to fool Muslims. Only a government trying to woo a sectarian vote would even think of legislating such a law. The RBI (Reserve Bank of India) Governor should tell the government this is no uncertain terms.http://www.themajlis.co.za/index.php?option=com_content&view=article&id=232:the-myth-of-islamic-banking-islamic-banking-is-fraud-and-deception&catid=34:majlis-articles&Itemid=27

International Journal of Humanities and Social Science Vol. 4 No. 2 [Special Issue – January 2014]

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Islamic Banking in Pakistan: A Critical Review

Dr. Hafiz Muhammad Zubair

Assistant Professor

Department of Humanities

COMSATS Institute of Information Technology

Lahore, Pakistan

Nadeem Ghafoor Chaudhry

Assistant Professor

Department of Computer Science

COMSATS Institute of Information Technology

Lahore, Pakistan

Abstract

The research paper examines the ideological contestation between Opponents and Proponents of Islamic Banking

in Pakistan. Major part of the research is based on Sharīʿah and jurisprudential study of Modes of Financing in Islamic Banks. This explores the agreements and similarities between Conventional and Islamic Banking. This also analyze that the existing system in Islamic Banks is based on illegal tricks and subterfuges while there is some superficial fractional support to this system from Islamic Law, but the real Sharīʿah objectives for implementation of these laws has been severely trampled.

Whether there are interest-free banks or conventional interest banks, in fact, they are not involved in trade or any kind of business, they only deal in money. This is the opinion of Ahl al-Ḥadīth and Majority scholars of Ḥanafī schools of thought in Pakistan, although foundation of such business institutions is the need of the Islamic society wherein on genuine basis and in the light of Sharīʿah principles, Mushārakah and Muḍārabah could be undertaken.

Key Words:

Islamic Banking, Interest-free Banking, Islamic Banks, Banking, Islamic Economics, Pakistan

1. History of Modern Banking

‘BANCO’, which means a shop counter in Italian, is the base from which the word Bank is derived (Martim1855). In early days, people engaged in money business would use a bench covered with green cloth for talking to their customers. The first state deposit bank, The Bank of St. George was established in the year 1407 in Republic of Genoa (Macesich 2000). A modern day bank is functionally described as; “A bank deals in loans. It receives deposits from people and gives loans to the needy. Securities issued by a bank are accepted by the people without any doubt and suspicion. A bank in this way creates money as well.” (ʿAbd al-Ḥamīd et al. 1995)

Securities like currency notes, bonds, and bank cheques do not represent real money. Real money is the equivalent gold which backs up these currency notes, bonds or cheques, which are in a way, various forms of receipts for this gold devised for tackling the commercial needs of the people. In early days, currency notes were issued when the equivalent amount of back up gold was available, but now this condition has been withdrawn.

Now every country could print currency without any gold backup. How the modern banking got started? Mawlānā Mawdūdī has given, in his book, ‘Sūd’ (Interest) an excellent account of this. Mawdūdī has divided the history of modern banking into three phases (Mawdūdī 1987). A brief description of this, in our words is that;

1.1 First Stage

In Europe, in early days, before the advent of currency notes, people used to put their valuables, gold and silver etcetera in the custody of goldsmiths. A gold smith would issue a receipt, referencing the quantity of gold held by him in safe deposit in the name of nominated depositor. With passage of time these deposit receipts were being used for in selling and buying as also for loan settlements.

The Special Issue on Contemporary Research in Behavioral and Social Science © Center for Promoting Ideas, USA162. People had due trust in these receipts and there was little need for withdrawing the gold from the goldsmith. The goldsmiths found through experience over a period of time that out of the gold in their custody people

usually withdrew one tenth of their deposits and nine tenth of it remained lying with them unutilized. Thus, the jewelers now started to loan out this depositors ׳ gold on interest to other people. They did not stop here. They also started issuing receipts for this nine tenth gold on interest.

The gold was lying with them and they were earning interest on the receipts. This was, in a way deceit, fraud, and misuse of others people ׳s deposits.

1.2 Second Stage

In the second phase the goldsmiths, in order to expand their business, turned their attention towards the well to do and middle classes asking them to deposit their capital with them rather than investing it in business and they would pay them interest on it. In this way, the goldsmiths would get gold on lower rate of interest from the people and loan it on higher rates of interest to others. Many people thought that in business there was always the risk of loss. It also involved time and hard work. Then there was the need for book keeping and the variations in profits. Pondering over all these aspects, there developed the trend to deposit gold with the goldsmiths and to get a fixed rate of interest ensuring safety of the capital, time saving, evading hard work and above all, risk of loss. In this way around 2/3 of the capital from society went into the hands of goldsmiths.

1.3 Third Stage

In the third phase the jewellers started transforming their businesses cooperatively. Previously, what they used to

do individually, now they were doing the same in groups. In this phase the modern banks started come into existence. Although a bank deals in a variety of business activities but even today its real business is to get deposits from people at lower interest rates and to lend at higher rates to different individuals, companies and institutions.

A bank has two types of capital. First is the principal amount from the people who joined hands to establish a bank and the second is the capital from the account holders, who put their money as deposits. The second type is the real capital of the bank and which is more than 2/3 of the total.

2. Various Views Regarding Interest Free Banking

The history of Interest Free or Islamic Banking is not very old. The first interest free bank under the name ‘Mit Ghamr Social Bank’ was established in 1963 in Egypt. This bank started the business of collecting funds for and providing loans to agriculture. In 1975, ‘Dubai Islamic Bank’ was established and in the same year, under O.I.C. Foundation for ‘Islamic Development Bank’ was laid. In 1983 with the establishment of ‘Islamic Bank of Bangladesh’, a worldwide race for Islamic banks commenced. The Accounting and Auditing Organization for Islamic Financial Institutions has 206 members Islamic Banks as declared by their official website

(http://www.aaoifi.com). Authors of Islāmī Maʿāshiyāt (Islamic Economics) have given the names of about 260 Islamic Banks in 51 Muslim and Non-Muslim countries of

the world, a figure which has so for increased in Pakistan and some other countries. In Pakistan a number of interest-free banks which include, Bank al-Islāmī, Dubai Islamic Bank, Dāwūd Islamic Bank and Meezān Bank etc. are operating. There are currently 5 full fledge Islamic banks and 13 conventional banks having Islamic banking branches with a network of 977 branches across the country and presently constitutes above 8 percent of the overall banking system in Pakistan (Islamic Banking Bulletin October-December 2012).

Contemporary scholars are divided into three groups on the question of co-operation and participation in the present day interest free banking

2.1 First Group

There is a group of scholars who consider the existing interest free banking not only as acceptable, but rather majority of them, working as Sharīʿah advisors to these innovative banks, have become a part of their system. Muftī Muhammad Taqī ʿUthmānī is patron of this group and he has explained in his book ‘An Introduction to Islamic Finance’ the basic fundamentals of interest free banking. Later a translation of this book under the name

Islāmī Bankārī kī Bunyādayn’ (Foundations of Islamic Banking) was done by Mawlānā Muhammad Zāhid. International Journal of Humanities and Social Science Vol. 4 No. 2 [Special Issue – January 2014]

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When other opinions on interest free banking from the contemporary scholars, wherein the whole system was said to be unfair and a subterfuge, came to light, Muftī Taqī ʿUthmānī in defense of interest free banking wrote a book under the name ‘Ghayr Sūdī Bankārī: Mutaʿalliqah Fiqhī Masāʾil kī Taḥqīq awr Ashkālāt kā Jāʾizah’ (Interest Free Banking: A Review of Related Jurisprudential Issues and Objections). In Muftī Taqī ׳s institution, Jāmiʿah Dār al-ʿUlūm Karachi under the ‘Centre For Islamic Economics’, there is an academy with the name ‘An authentic Institute of Islamic Banking and Insurance’ who are conducting a number of courses on interest free banking under his guidance. Muftī Taqī ʿUthmānī ׳s son, Dr. Ashraf ʿUthmānī, also wrote the book ‘Meezān Banks Guide to Islamic Banking’.

Similarly, Jāmiʿah Dār al-ʿUlūm ׳s Muftī ʿIjāz Aḥmad Ṣamdānī also wrote ‘Islāmī Bankun mayn Rāʿij Muḍārabah kā Ṭarīq kār’ (Procedure of Prevalent Muḍārabah in Islamic Banks) in justification of interest free banking and wrote ‘Islāmī Bankārī: Ayk Ḥaqīqat Pasandānah Jāʾizah’ (Islamic Banking: A Realistic Review) in defense of this. He also authored a book with the title of ‘Takāful: Insurance kā Islāmī Ṭarīqah’ (Takāul: An Islamic Alternate to Insurance). According to this group, Islamic banking is correct both in its objectives and practice even though its current practice can’t be considered as ideal. It is Islamic to the extent that the earnings from it are Halal.

2.2 Second Group

Scholars from this group are of the view that the existing Islamic Banking is, as per Islamic Jurisprudence and Law, wrong or Haram and is based on such Non Sharīʿah Ḥiyal (I ِllegal Tricks or Subterfuges) which makes it equivalent to or even more respectful than the conventional banking. Under the patronage of president of Wifāq al-Madāris al-ʿArabiyyah (Board of Secondary, Higher Secondary and Graduate Studies for Islamic Madāris) and Muftī Taqī ʿUthmānī ׳s mentor, Shaykh Salīmullāh Khān, on 28Th August 2008 in Jāmiʿah Fārūqiyyah Karachi, a two day conference of jurists and scholars from all over the country took place wherein through an unanimous Fatwa (Legal Verdict), the existing Islamic Banking was declared as illegal in Islamic Sharīʿah. Later in the Fatwa Centre of the Jāmiʿah Binawrī Town Karachi, a book under the name ‘Murawwajah Islāmī Bankārī: Tajziyātī Muṭāliʿah, Sharʿī Jāʾizah, Naqd wa Tabṣirah’ (Contemporary Islamic Banking: Analytical Study, Legal Review, Criticism and Commentary) has been compiled in which the jurisprudential and legal basis of Islamic Banking have been criticized. Muftī Dr. ʿAbd al-Wāḥid from Jāmiʿah Madaniyyah Lahore has also compiled a book under the title ‘Murawwajah Islāmī Bankārī kī chand Kharābiyān’ (Vices of Contemporary Islamic Banking) wherein the

economic ideals of Muftī Taqī ʿUthmānī and his son Dr. Ashraf ʿUthmānī have been commented upon and criticized. A book by Muftī Ḥamīdullāh Jān entitled ‘Islāmī Niẓam Maʿīshat kay Tanāẓur mayn Mawjūdah Islamic Banking par ayk Taḥqīqī Fatwa’ (In the Background of Islamic Economic System; A Research Fatwa against

Islamic Banking) has also been published in 2009. A collective fatwa by scholars of Ahl al-Ḥadīth school of thought in Pakistan has also been published against current Islamic Banking (Islāmī Bankārī Sharīʿat kay Meezān mayn 2013). Two books by Shaykh al-Ḥadīth Zulfiqār ʿAlī of Abū Hurayrah Academy Lahore ‘Dawr Ḥāḍir kay Mālī Muʿāmlāt kā Sharʿī Ḥukm’ (Sharīʿah Ruling about Present day Financial Transactions) and ‘Maʿīshat wa Tijārat kay Islāmī Aḥkām’ (Sharīʿah Rulings regarding Economics and Business) also give an outstanding academic critique on Islamic Banking in the light of Qurʾān, Sunnah and Islamic Jurisprudence.

According to this group, the objectives of Islamic Banking are correct, but the procedure and practices are wrong.

Thus, these scholars usually criticize the system and procedures of existing Islamic Banking and as such appear to be conducting an academic evaluation of the different subterfuges and jurisprudential disagreements.

2.3 Third Group

The third group of scholars is comprised of those who consider Islamic Banking an altogether incorrect, invalid

and impracticable proposition. From their point of view, Islamic Banking is a Non-Islamic thing both in its objectives and practices and its being Islamic is an impossible idea. The well-known economic expert Jāvayd Akbar Anṣārī is the sponsor of this point of view. One of his students, Zāhid Ṣiddique Mughal has compiled a book

in support of this point of view under the name ‘Islāmī Bankārī wa Jamhūriyyat: Fikrī Pass Manẓar awr

Tanqīdī Jāʾizah’ (Islamic Banking and Democracy: Rational Background and Critical Analysis).These scholars, The Special Issue on Contemporary Research in Behavioral and Social Science © Center for Promoting Ideas, USA instead of the partial or jurisprudential criticism, look at Islamic Banking in the total objectivity of macroeconomics, western economic ideas, global capitalism and the objectives of Islamic Sharīʿah.

They explore the case that a bank is not merely an organization. It is the basic unit of the global capitalism, which is the economic vision of the democratic political system. In this background scenario, a bank should not be viewed as a building constructed out of bricks and mortar, rather it is a symbol of Western mentality, philosophy, culture and civilization. Such institutions should not be accepted with closed eyes merely as the development of culture, because included in these are their thoughts and civilization as well. As it happens with the teaching of English language, it is not restricted to merely the teaching of a language; it also transfers in the name of literature, the western thought, philosophy and culture. That is precisely the reason, the Thinker of Pakistan

ʿAllāmah Iqbāl RA had said about the banking system: “These banks are the idea of clever Jews and they had stolen the light of Truth from man ׳s chest. Until you do not throw out this system from his roots, your religion, your culture and your intellect is like crude (Bāl Jibrīl 2006).”

3. Contemporary Islamic Banking: A Sharīʿ ah and Jurisprudential Review

A conventional bank gets money from the public as deposits and offers a large part of it as loans on interest and distributes the interest received on its loans amongst its account holders. In contrast to this, an Islamic Bank in Pakistan gets money from public on Muḍārabah (It is a contract in which a party provides capital to the other party who offers his labor based on risk and profit sharing) and a large part of it, invests in lease purchase of vehicles or housing financing schemes and a fixed percentage of the profits earned out of it, are distributed amongst those who had put their money in saving accounts, business profit accounts, income certificate and certificates of Islamic Investments etc. Is the profit earned from such saving schemes and certificates Halal or Haram? This would be determined on the basis of where the bank invests the money it has received from its account holders.

We have already explained that an Islamic Bank in Pakistan invests a large part of its deposits through Ijārah wa Iqtināʿ (Lease and Purchase), Mushārikah Mutanāqiṣah (Diminishing Partnership) and Murābaḥah (Cost plus Profits) schemes. During Quarter end 2012, 43.8% of the investment was made in Murābaḥah, 32% in

Mushārikah Mutanāqiṣah and 10.4% in Ijārah wa Iqtināʿ. (Islamic Banking Bulletin September-December 2012)

We shall now do an analytical study of these business types of an Islamic Bank. After a study of the various types

of the business practices of the Islamic Banks, we assess that the Islamic Banks have adopted the path of unfair subterfuges to convert a wrongful thing into allowed.

According to the Qurʾān, in a Jewish town on the seaside, Allah SWT disallowed fishing on Saturdays so that they could worship on that day. With this Allah STW put them in a trial as on Saturdays the fish would, by coming on the surface, provided them with big temptation for fishing whereas on other days these used to go in deeper waters. One group of Jews did not fare well in this trial and devised a subterfuge to fish on Saturdays. They dug

small ditches near the sea and linked these to the sea through small channels. On Saturdays this group would push the fish to these ditches and catch these on Sundays. Apparently they were obeying Allah ׳s command by not fishing on Saturday, whereas the real objective of Allah ׳s order of reserving Saturdays for worship was not being fulfilled. A second group asked the first to refrain from such subterfuges but the first group declined. The third group consisted of people who told the people of the second group that there was no use counselling the first group on this issue. These people neither fish with such subterfuges like the first group, nor did they restrain them

from this act. Thus Allah SWT, for adopting this subterfuge to circumvent the Sharīʿah command by the first group, levied punishment on them, which is described in the Qurʾān as under. Allah SWT says:

“Ask these Jews about the people living in the settlement on the sea side while they were committing excess on Saturdays when the fish would appear on surface of the water on Saturdays and when it was not Saturday these would not appear before them. This way I was giving them a trial because they were disobedient. When one group from this settlement said to the other why do you guide the group whom Allah SWT is about to destroy or give severe punishment, they replied, “so that we could offer a justification to our Lord [that we had counseled them] and may be some of them get alarmed] and refrain from such subterfuges]. Thus when they ignored the advice which was conveyed to them, we saved those people who forebode them from vice and those who had committed excess We put them to sever punishment for their disobedience.” (Qurʾān: 7: 163-165)

Similarly, Prophet (PBUH) said: “Let there be the curse of Allah upon the Jews that fat was declared forbidden for them, but they melted it and then sold it.” (Bukhārī 1997) There is a consensus among the jurists that all International Journal of Humanities and Social Science Vol. 4 No. 2 [Special Issue – January 2014]

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subterfuges by which Sharīʿah laws are made void or a Haram could be made Halal are unlawful (Jāmiʿ al-Uṣūl

n.d.).

As an example, if one million rupees are lying for last 11 months with some body, and in order to avoid zakat, two

weeks before the end of the year, he gifts this money to his wife, there would be no Zakāh on this, since one full year has not been completed on this money. Similarly, his wife, in the next year, before the completion of full year, gifts this back to her husband, this money is again excluded from zakat.

Some subterfuges are such that on surface there seems to be no violation of any Fard (Obligatory) or Wājib (Mandatory) ruling, but the real Sharīʿah aims of such command are not fulfilled. Some contemporary scholars do believe in such subterfuges.

One form of such subterfuges which is commonly practiced by some present day experts involves, for anyone who wants to avoid paying zakat, to find first a Zakāh deserving person, then a deal is struck with this person that out of the Zakāh to be paid to him, he would keep a small amount with himself and gift the balance back to him.

Thus if somebody ׳s Zakāh assessment is Rs50,000., the Zakāh deserving person, would keep 2-3 thousand with himself and return the balance amount to the assesse as gift.

As a result of such subterfuges, the basic purpose of Zakāh in Sharīʿah of helping the poor, the destitute and the deprived or the self-cleansing of the rich is lost. It is the Sunnah of the Messenger of Allah that Zakāh should be collected from the rich and paid back to the poor of the same settlement (Bukhārī 1997). If any scholar adopts

such subterfuges as would return back the Zakāh collected to the rich, such subterfuges would be Haram and unjust as per Sharīʿah. Such tricks being Haram is proved by the tenets of Sharīʿah, as has been described above.

Dr. Aḥmad Ḥasan writes, “It is accepted by all jurists that for the negation of Sharīʿah law or principles, use of such subterfuges is incorrect. With some Ḥanafīs we however find the justifications for use of such tricks. There is also a book on this topic attributed to Imām Muhammad bin al-Ḥasan and there is a book of Imām Khaṣṣāf on tricks. By these subterfuges, these Ḥanafī scholars do not mean trick which would negate Sharīʿah laws and ruin the public interests for which these subterfuges were devised, rather the objective of these tricks is to find ways and means by which these public interests are realized and not the negation of Sharīʿah laws (Jāmiʿ al-Uṣūl n.d.).”

This was the position on subterfuges of the former Ḥanafī jurists, but some of the present day scholars adopted a softer position. Since with the cotemporary scholars there is a full chapter on the usage of subterfuges and these tricks are commonly used. These tricks are also used to sort out economic problems of people as well. There is no

doubt that any subterfuge which annuls a Sharīʿah law or by which a Haram is described as Halal is considered wrong by all the Muslim jurists. However with the present day scholars many such subterfuges have been accepted as correct, by which even the Sharīʿah objectives of the Divine law are compromised and these are the ones which

form the basis of Islamic Banking. We are of the view that till such time that a critical research in the validity of basic principals involved for such subterfuges, is not carried out, it is not possible to carry out any meaningful evaluation of Islamic Banking.

Some proponents of Islamic Banking sometimes quote such precedents as would justify use of such tricks, e.g.; The prophet Ayyūb ׳s AS hitting of his wife with a broom in place of the sworn lashes (Qurʾān 38:44) or The Prophet Yousaf ׳s AS tactful hiring of his brother (Qurʾān 12:70-76) or Holy Prophet ׳s PBUH advice to the companion Bilāl RA not to sell inferior quality of dates in exchange of superior kind with some price adjustments and if at all, it was necessary, to first sell the inferior quality and then buy superior dates (Bukhārī 1997) or again Holy Prophet ׳s PBUH sentencing of an old and sick person on adultery charges by hitting him with date palm twig with hundred offshoots in place of hundred lashes (Sunan Abū Dāwūd 2006). The reason for all such instances was that a trick is lawful or acceptable in Islamic Sharīʿah if its objective is to secure ones right or it is for elimination of some excess or it is for removal of some such pain which had the possibility of inflicting death, provided fair means and methods are used in such subterfuge. Some scholars like Imām Shāṭbī does not include such tricks even in the definition of a subterfuge since for them a prohibited trick is some subterfuge which is unlawful and illegal. In contrast to this some other scholars like Imām Ibn al-Qayyim have divided subterfuges in to two types, i.e., valid and void subterfuges (Jāmiʿ al-Uṣūl n.d.). The prophet

Ayyūb ׳s AS once swore during his illness that he would give one hundred lashes to her wife for her ungratefulness, once he recovers from his sickness.

The offence committed by Ayyū ׳s AS wife was not that serious as to warrant such a punishment, but then there was the question of Prophet Ayyūb ׳s oath, so to save Ayyūb ׳s AS wife from this punishment, for which she had no capacity, Allah SWT brought about a trick in his mind. So, a subterfuge which is employed to ward off a suffering is a valid subterfuge.

Similarly, holding back of his brother by Prophet Yūsuf was his moral and legal right. Additionally he wanted to save his brother from further fury of his step brothers as described in the Qurʾān (12:69). And the Holy Prophet PBUH did not award the punishment of hundred lashes to an old and sick person because there was a very strong possibility of his death, so to save him from a possible fatal punishment, a subterfuge was employed. In the tradition involving Bilāl RA, the Holy Prophet PBUH guided him to right and proper subterfuge to meet a personal situation i.e. as per the normal practice in selling, to first sell the inferior kind of dates and then buy the superior quality. In this case the Holy Prophet PBUH is persuading him to follow the commonly used practice in

buying and selling to get the quality dates in exchange for inferior dates and not coaching him in devising a subterfuge to make a Haram into a Halal.

Even if it is accepted as a subterfuge, with this kind of trick neither any Sharīʿah Law or provision has been annulled nor any objective or public interest has been lost whereas the subterfuges which form the basis of Islamic banks, not only destroy the objectives of the, these also annul the Sharīʿah rulings.

According to a group of Pakistani scholars, subterfuges being used in Islamic Banking are the same back door tricks the Jews had been using to change a Haram into Halal. Recently a group of Ḥanafī scholars have issued a unanimous Fatwa from Karachi on the existing Islamic Banking, which says: “Since the unreal and temporary grounds of Islamic Banking are Murābaḥah and Ijārah (Leasing), banking with such provisional basis and making these short lived subterfuge a permanent means of earning, it becomes rather difficult, both morally and as per Sharīʿah, to call and consider it as Islamic Banking. Some of the reasons for this are:

1) The unreal foundations (Murābaḥah and Ijārah) are mere subterfuges and making a permanent system out of these tricks is not lawful. Any Business settled by employing such subterfuges would also be invalid. As the subterfuge of ‘Bayʿ ʿĪnah’ (It means to sell something for a price to be paid at a later date, then to buy it back for a lower price to be paid immediately) according to Imām Muhammad is wrong, similarly the subterfuges regarding Murābaḥah and Ijārah and making money using these tricks is also inappropriate.

2) These subterfuges were devised by the former scholars for an interim period for particular circumstances.

3) These are very delicate and dangerous subterfuges. A slight carelessness would make these a part of ‘interest system’.

4) Using these subterfuges as permanent system is not only wrong but unfair as well.

5) In Islamic Banking the volume of Murābaḥah and Ijārah must be abolished, otherwise no Islamic Bank would be justified in calling itself ‘Islamic Bank’; instead these would best be called as ‘Ḥīlah Bank’. (The Unanimous Fatwa 2008)

Later a press release on eight pages containing this detailed Fatwa was issued. It is said in this publication that the existing Islamic Banking is absolutely unlawful and illegal. The ruling is the same for banks characterized as Islamic banks as is for other normal conventional interest banks. Participants of this session included Muftī Ḥamīdullāh Jān from Jāmiʿah Ashrafiyyah, Lahore, Mawlānā Muftī ʿAbd al-Majīd Dīnpūrī, Mawlānā Muftī Rafīq Aḥmad and Mawlānā Muftī Shuʿayb ʿĀlam all from Jāmiʿah Binawrī Town, Karachi, Mawlānā Salīmullāh Khān, Mawlānā Dr. Manṣūr Aḥmad Mangal, Mawlānā Muftī Samīʿullah and Mawlānā Muftī Aḥmad Khān from Jāmiʿah Fārūqiyyah, Muftī Ḥabībullāh Shaykh from Jāmiʿah Islāmiyyah Clifton, Muftī Mawlānā ʿAbdullāh from Khayr al-Madāris Multan, Muftī Ghulām Qādir from Dār al-ʿUlūm Ḥaqqāniyyah Akura Khatak, Muftī Aḥmad Mumtāz

from Jāmiʿah Khulafā Rāshidīn Karachi, Muftī Zar Walī Khān from Jāmiʿah Aḥsan al-ʿUlūm Karachi, Mawlānā Muftī Ihtishām al-Ḥaqq Āsiyā Ābādī from Baluchistan.

After an explanation of the basics, we now give a somewhat detailed review of the conventional and existing operational business practices of the Islamic Banks.

3.1 Mushārakah Mutanāqiṣah (Diminishing Partnership) In this type of business, as an example, an individual, by the name X, approaches the bank saying to the bank that he needed a house and that he hasn’t got the money either to buy or build a house. The Islamic Bank proposes to X to build or buy a house in collaboration with the bank. Now let us suppose that the bank and X jointly undertake to build the house .The bank takes up the responsibility

of providing 80% of the expenses, while X provides 20% of the money. X does all the efforts about for the construction of the house. He does all the supervision since he has to live in this house. The bank provides 80% money to X but does not practically participate in the construction of the house.

After the construction of the house, when X takes up the residence, the bank demands from X the rent of 80% share since he was residing in the house. X pays to bank the rent of 80% bank share and also all along continues buying back, in instalments, the bank ׳s share. With the payback instalments by X, the banks share continues declining and proportionately, the rent charged by bank

also gets reduced and ultimately X buys the entire share of the bank. In this way X has been paying instalments for house and the rent separately.

4.1.1 A Review of Diminishing Mushārakah

Following objections have been raised on this bank business by various literary circles and eminent economists.

3.1.1.1: There is no doubting the fact that the Islamic Bank starts charging the rent from X when the house is complete and X starts living there.

While the house was still under construction and the bank started providing the money during this construction period, the bank starts the calculation of rent from the day the first instalment was paid to X to buy construction

material for the house. It must be remembered that the bank does not pay in lump sum money required for construction, it is paid in instalments. Let us suppose X has got to build a house costing 5 million, in which 4 million are from bank and 1 million from X. Now as X starts the construction work, the bank pays him 1 million and the day 1 million is paid to him, the bank starts calculating the rent on this money. Similarly, if after two months, another million is disbursed, the bank would start charging rent for 2 million from this day and if after four months again 1 million more is paid, the bank would now start charging rent on 3 million when actually the situation is that the house is under construction and X has not even used it. We can say that the Islamic bank is taking rent for a house

of which only the walls are available without the roof on it. It should be made clear that during all this period of construction the bank has not been actually taking the rent, neither the bank tells X that they have been charging the rent for this period; instead the bank keeps this amount posted in its accounts. And when X takes up residence in this house after its completion, the bank instead of charging the rent on this accomplished house at prevailing market rates, they would add up the rent for the construction period to the rent of the house.

3.1.1.2: The Islamic Bank fixes the rent of the construction period on the basis of interest rate of the conventional banks. Muftī Dr. ʿAbd al-Wāḥid writes; “The existing Islamic Banks fix the price or rent on anything based on, what they call a floating rate and which basically is the rate of interest used for inter-bank dealing and is commonly known as KIBOR (Karachi Inter-Bank Offer Rate). What it really means is that prices or rents are fixed based on this rate of interest and with any change in this rate, the prices or rents continue varying. There are two flaws in this; 1: for the purpose of fixing the prices or rents, making rate of interest as the basis has no connection with Islam ׳s interest free economic system.” (Murawwajah Islāmī Bankārī 1429 AH) As an example, it took one year for the construction of X ׳s house wherein the bank had put in 4 million and X one million. If for the one year construction period the bank charges the rent, when the house had not yet been fully constructed and X had not used it, actually it is not rent but the bank is charging interest on the money contributed by the bank on the pretext of partnership with

X. It is very clear that the Islamic bank couldn’t charge interest during the construction period. Here they devised a tactic and the trick was that they didn’t charge rent from X during construction, but calculating on the basis on conventional bank interest rate he included this amount in his account and after the completion of the house, this was added in the rent to be charged to X and because of this, the rent for this house was very different from market rates. As an example, say there are fifty, one thousand square yards houses of almost equal value each, in the same area of, say, Defence Housing Society, Lahore. Now the rent for each one of the 49 houses would have some commonality, but 50th house that has been built using bank house leasing scheme, the rent for this house would be much different from the rents of 49 houses. The objective of highlighting this difference in rents in not to say that rent of bank houses is higher than the other houses, in fact it could sometimes be lesser as well. The real objective of the debate is to establish that the bank rent is not market related but is KIBOR related and its yardstick or benchmark is KIBOR.

3.1.1.3: The third point which reinforces further the second is that when a bank decides the rent for such a house, it focuses on its total investment involved. For example, for 4 million, it would work out the interest as per the conventional bank rate of 13-14% on this amount and would recover it from its partner in the name of rent. For example somebody has an agreement with the bank that he would pay back the total loan of 4 million in five years. Now the bank would split the amount of 4 million into small

units and would recover back its principal amount in instalments in five years. Along with it, 13-14 % interest on 4 million would also be recovered in the name of rent and, with the gradual payback of instalments, the principal gets reduced to, say 3 or 2 million and the 13-14% interest on this is also reduced and so the bank would get lesser rent. By recording interest in registers as rent does not make it a rent. One would take it as rent only when this house is rented out at the natural prevailing market rates and not based on KIBOR i.e. unreal and artificial rent.

3.1.1.4: For the recovery of 4 million from its partner, the bank splits it into smaller portions. For example, if 4 million are to be recovered in five years, the bank would split 4 million in such a way that its recovery in

instalments is completed in five years. If somebody at some stage wants to vouch for more than one unit at a time or to put it in simpler words, wants to pay back more than one instalment in a period, he would have to pay 3% more on combined total of these instalments, which is definitely interest.

3.1.1.5: To recover 4 million from an individual in five years, a bank divides it into instalments. It is, for example, agreed that X would return 0.2 million in the first three months and in case X fails to return this amount in this time, the bank does not suffer any loss because of the fact that still X has to pay the larger amount and as a result of this he is paying more rent for the shared house.

4.1.1.6: When a bank participate with somebody to build a house, it concludes an agreement with the person even before the start of the construction, that after completion that person would hire this house on rent from the bank, and fixes the rent at that stage. How could the rent of a house be fixed when the house does not even exist? This rent is according to interest rate of conventional banks and not as per the market rate.

3.1.1.7: Similarly, in house financing one has to get insurance or Takāful (Islamic insurance concept) which is not allowed according to majority of Muslim scholars. Muftī Dr. ʿAbd al-Wāḥid writes; “According to Islam, Insurance is surely forbidden and it contains elements of interest, gambling and uncertainty. These three elements are also included in Takāful as I have persistently written on this issue, and so the existing Takāful is also a non-

Islamic business. In car leasing case it is the bank which gets the insurance, and in case of house the bank and the customer both get in proportion to their respective shares. The following points can’t be ignored in this:

1- the customer who gets car leasing or home financing becomes the reason for the bank to get involved in insurance or Takāful business. He knows fully well that the bank for sure would do this business and would do this simply because of him, thus becomes a part of this sin (Murawwajah Islāmī Bankārī 1429 AH).”

3.1.1.8: The simple and straightforward method for justifying house financing is that X and bank jointly build a

house wherein bank has put in four and X one million. After building the house, X and the bank together put this house on rent to some third party. If this third party, for example, pays fifty thousand as rent, then the bank gets 40 thousands and X 10 thousands and X besides this would continue paying back the bank in easy instalments.

The fact of the matter was that the banks have, taking advantage of the “book of tactics”, have given to the ‘bank interest’, the name ‘rent’ and this is no secret for any sane person. If it was rent it should have been as per market rates or something around it. If it was rent then while calculating it, the bank shouldn’t have included the construction period in the rent calculations and if it was rent, then the bank shouldn’t have based it on KIBOR or LIBOR (Lahore Inter-Bank Offer Rate).

3.1.1.9: It is sometimes argued in this regard, that Sharīʿah has not fixed any rate for selling anything or for putting it on rent. A bank has the right to charge rent from its partner at whatever rate it wants. The idea behind explaining this difference in rents is not to say that the bank rents are much higher than market rents, rather in certain situations it could be much less than normal rents, the objective is to say that, this, in fact, is not rent at all.

It is only in documents that it is described as rent. By describing a police station as hospital in papers does not make it a hospital since the basic structure, needs and the environment in both cases is much different. The rent of a house is based on its location, its structure and furnishing, its value and total land area etc. As an example, if

there is 1000 square yards house in DHA Lahore and there is 1000 square yards house in Township Lahore, there would mark difference in their rents. Similarly, in DHA Lahore 1000 square yards house and a 500 square yards house would have visible difference in their rents. In Wapdatown Lahore, two houses of 1000 square yards each in the same lane, one with a sale value of 10 million and the other of 5 million would have a marked variance in their rents. In Gulberg Lahore there are two houses of 500 square yards each, one is a corner plot and the other is located in a lane, this would give difference in rents.

So the factors which are important to consider while defining the rent of a house and when without taking due care of these factors the rent cannot be determined, fixing the rent disregarding these considerations, on

conventional interest yardstick, does not make it a rent even if it be much lower than the market. A delegation of the tribe of ʿAbd al-Qays came to the Holy Prophet and they asked about the dinks, The Messenger of Allah said, “And do not drink in containers called al-Ḥantam (green pitcher), al-Dubbāʾ (varnished jar), al-Naqīr (gourd), and al-Muzaffat (hollow stump). These were the names of pots in which alcoholic drinks used to be prepared (Bukhārī 1997). Thus, the Messenger of Allah forbade not only the alcoholic drinks but also blocked the scales were being used for these. When Ḥāṭib bin Abī Baltaʿa RA while selling grapes, did not keep in view the market rate, the second Caliph ʿUmar RA ordered him to sell either at the market rate or leave the place. Saʿīd bin Musayyab RA said that ʿUmar bin al-Khaṭṭāb RA passed by Ḥāṭib bin Abī

Baltaʿa RA who was underselling some of his raisins in the market. ʿUmar bin al-Khaṭṭāb RA said to him, “Either increase the price or leave our market (Muwaṭṭaʾ 2004).”

Another tradition narrates that ʿUmar RA explained Ḥāṭib later on that his order was for public interest and not an obligatory judgment. When during the period of the Holy Prophet PBUH there was a big increase in the prices of things, some Prophet ׳s companions requested him to fix market rates. The Holy Prophet PBUH replied, “This is Allah who increases the prices. He alone is the curtailer of sustenance, the enlarger of sustenance and the provider of enormous sustenance. And I am hopeful that I meet my Lord and none of you are seeking recompense from me

for an injustice involving blood or wealth (Sunan Abī Dāwūd 2006).” This Hadith shows that not the state has the authority to fix market prices, as is given in the Qurʾān; “O you who have believed, do not consume one another s wealth unjustly but only [in lawful] business by mutual׳consent (4:29).” Thus when the market rates get fixed by people in free trading, opposing these gives rise to a lot of social and economic disasters. It was for this reason that ʿUmar RA had ordered Ḥāṭib RA to leave the market for his selling against market rate.

3.2 Ijārah wa Iqtināʿ (Lease purchase Scheme) In this form of business, a person goes to a bank telling them that he needed a car or a machine but he has not got the money to buy. The bank makes him its agent and buys the item. For example a person expresses the desire to buy a Toyota Corolla to the bank. Now the bank would make him

their agent and ask him to buy the Toyota Corolla of his choice on behalf of bank. Suppose the person buys that vehicle in 2 million for the bank. The bank in turn hands over that car on rent to him for, say, five years and at the end of five years the same person buys back the same car on a nominal price from the bank.

3.2.1 Objections on Lease Purchase Scheme

Following objections are raised on this business of the bank.

3.2.1.1: When a bank buys a car on somebody ׳s demand, for example, it buys a Toyota Corolla in 2 million. The Bank, to the actual price of the car, which is 2 million, adds the interest on 2 million, calling it rent, adds car insurance expenses etc. And it calculates the total as, say 2.5 million. The bank would now divide this 2.5 million into instalments payable over five years and give the car on rent for five years, to the same very person on who ׳s demand it had bought the car in the first place and the rent, instead of the market rate, would be fixed in a way that it ensures the recovery of 2.5 million in five years. In this way, using the tactic of rent, it would recover 2.5 million from this person which includes the actual car price, the insurance expenses and the bank interest in the name of rent. After five year, the bank would sell this car to the person in exchange for the normal security amount. In this way a business initiated as rent results in a sale. It should be clear that it was agreed between the bank and its customer on the very first day that after the receipt of

rent of five years the bank would sell this car on a nominal price to this person.

It becomes clear from all these details that the bank had not purchased this car to sell to X, and to sell this car at price higher than its purchase price to X, it devised the trick of rent. In all this X had the advantage of returning the entire bank money along with the profit in the name of rent in easy instalments, while the bank had the benefit that it made the interest allowed by giving it the name of rent. If what the bank receives is really rent for the car then it should be as per market rates. If it is rent, then the bank should not have contracted in the beginning to sell the car to the same person after five years. If it is rent, then the bank should have sold that car after five years to that person not on nominal price but on market rate. And finally if it is a rent, then bank should not have determined that rent keeping in view the car insurance, the principal amount and conventional bank interest rate linked with KIBOR.

3.2.1.2: The bank is not the actual buyer in this deal. Its actual position is that of an investor for buying a certain item. The car was located by that person, he chose the model, the color etc., he did all the running about for its purchase, and the bank provided only the money and got the car in their name. So the bank is not the real buyer even though in papers it is being shown as such. The bank, thus, is not in the business of purchase and sale of

cars; rather it provides the money for purchase and has devised the tactic of lease to sell the same on interest.

The unanimous fatwa of Ḥanafī scholars states: “The basic objective of the parties is not the leasing business but to do purchasing. As per law and practice, the ruling would apply to real objective i.e. sales and not on word “leasing” .This sale is subject to leasing and that is against Sharīʿah (The Unanimous Fatwa, 2008).”

3.2.1.3: Even if we accept the bank as a buyer, its purchase is not genuine because the bank has purchased this car to sell to X on his request and the Holy Prophet PBUH has restrained from such buying and selling. Narrated Ḥakīm bin Ḥizām RA: Ḥakīm asked (the Prophet): Messenger of Allah, a man comes to me and wants me to sell him something which is not in my possession. Should I buy it for him from the market? He replied: Do not sell what you do not possess (SunanAbīDāwūd). Imām Ibn al-ʿArabī (ʿĀridah al-Aḥwadhī 1415 AH), Imām Nawavī (al-Majmūʿ), Imām Ibn Qudāmah (al-Kāfī 1399 AH), Imām Ibn Daqīq al-ʿĪd (al-Iqtiraḥ 1406 AH), Imām Ibn al-Mulqin (al-Badr al-Munīr 1425 AH) and ʿAllāmah Albānī (Irwāʾ al-Ghalīl 1399 AH) have affirmed it as Ṣaḥīḥ (Sound) hadith. Imām Ibn al-Qayyim (Zād al-Maʿād 1418 AH) and Imām Ibn Ḥajar (Tahdhīb al-Tahdhīb 1416 AH) has established it as Maḥfūẓ (Preferred).

The wording of another Hadith is: Yaḥyā related to me from Mālik that he had heard that a man wanted to buy food from a man in advance. The man who wanted to sell the food to him went with him to the market, and he began to show him heaps, saying, "Which one would you like me to buy for you." The buyer said to him, “Are you selling me

what you do not have?” So they came to Abdullah bin ʿUmar and mentioned that to him. Abdullah bin ʿUmar said to the buyer, “Do not buy from him what he does not have.” He said to the seller, “Do not sell what you do not have.” The situation in this case was that somebody was going by himself to market to make a purchase to later make a sale to someone else wherein the buyer did not have anything by himself except the money and this arrangement was stopped by a companion of the Holy Prophet PBUH. As against this, the Islamic bank does not go to market to bargain. It makes an invalid purchase to do a real sale to X in future i.e. he is doing an artificial transaction today and this is not fair and allowed.

3.2.1.4: If somebody expresses his intention of buying a car to the bank, the bank gets a car booked in his name,

and if let suppose it takes 2 months to get the delivery of this by the bank, the bank would charge to this customer, the opportunity cost by adding it to the rent in an appropriate way. The longer the delivery time, the higher would be this opportunity cost and higher the rent proportionately. The rental calculations are initially based on the prices on the day the bank books the car, not the day when it is delivered to the customer. Any price movement in between the two dates goes to customers account in the form of rent increase.

3.2.1.5: If anybody gets a car on lease from bank, say a Toyota Corolla for five years on rental and after paying of rent for three years, he wants to buy this car from the bank, the bank should sell this car to the customer on the

prevailing market price, but the bank would not do this. Instead the bank would examine in the first place, how much did it pay to buy this car? Say, it is 1.5 million; secondly, how much of the principal amount is paid? Say, it is 1.2 million leaving 0.8 million in balance. It is important to understand that during these three years the bank has not received only 1.2 million but he has been paid back 0.3 million as rent during the last three years.

Similarly, to sell this car to the customer at the termination of the five year lease agreement, the bank would charge termination penalty of 5% on the balance of 0.8 million. This method of selling the car to its customer by an Islamic Bank is exactly like that of a normal conventional bank. Thus the bank, to sell the car to its customer at

any stage during the currency of the five year lease agreement, would keep in view the principal amount and the remaining amount to fix the price of the car. From all this it becomes very obvious that from the very beginning, the bank and its customer were set on a sale/purchase transaction and this sale/purchase deal was already settled between the two. This lease strategy was adopted as a cover up so that the bank could earn its interest and customer in the name of rental could buy a car on easy instalments.

3.2.1.6: When the bank buys the car, it acquires its ownership and as such is responsible to bear all its expenses.The bank bears all these expenses, but charges these to the customer by including the same in the rent. As an example, if the bank determined forty thousand as

normal monthly rent, the first month rent will be charged at eighty thousands, so that it could recover the additional expenses it had incurred while acquiring the ownership of the car. Thus the rent is eighty thousands in one month and forty thousand in the next month. This wide variation in the rent in a limited period of one month is not justifiable. Writes Muftī Dr. ʿAbd al-Wāḥid: “In the car leasing scheme of Meezān Bank, it is mentioned in their tentative monthly rent schedule that the first month rent includes the registration and transportation expenses and the rent of remaining months includes Takāful (Islamic Insurance) payments (Jadīd Maʿāshī Masāʾil 2008).”

3.2.1.7: When a bank purchases a car for leasing out to someone, it has to get it insured, which is forbidden

according to all present day fatwa committees. The Islamic Banks usual answer to this objection was that in case of car financing, State Bank of Pakistan ׳s permission is not granted till such time that insurance is secured and as such they are constrained to do it. The answer to this objection was that why an Islamic Bank gets involved in a mode of business wherein it has to adopt a forbidden practice. The solution devised by the Islamic Banks to the insurance problem was the introduction of Takāful in the name of Islamic Insurance whereas naming Takāful as real Islamic Insurance is by itself debatable and questionable (Jadīd Maʿāshī Masāʾil 2008).

3.2.1.8: If a customer does not pay the car instalment in time, the bank imposes a fine which continues to increase with time. This is unfair. According to Islamic banks, this

fine is donated to a charity fund working under the bank. Writes Mawlānā Muftī Zulfiqār: “Like the conventional banks, The Islamic Bank also charges fine on any delay in payments which later are, deposited in the charity fund working under the Islamic Bank. Here again the conventional thinking is adopted i.e., first the fine is imposed proportionate to the outstanding amount and secondly with increase in delay period the amount of fine continues to increase (Dawr Ḥāḍir kay Mālī Muʿāmlāt 2008).” The proponent of Islamic Banking fined the justification for this fine from a verdict assertion of IbnDīnār al-Mālikī. The unanimous fatwa of Ḥanafī scholars says, “For those who trust Ibn Dīnār al-Mālikī weak, obsolete like non-existent verdict of providing justification for imposing monetary fines by the banks, it is expected from the scholars that they would, accepting the reported stance and observations of Imām Muhammad, announce the investments employing the tactics of interest bearing system of trading and leasing, as forbidden (The Unanimous Fatwa).” Mawlānā Muftī Zulfiqār has given a detailed and critical view to this verdict of Ibn Dīnār al-Mālikī in his book.

3.2.1.9: In bank leasing if the car gets damaged, the bigger damage is to bank ׳s side and the smaller damage is to lessee account. It is stated in unanimous fatwa: “In the prevailing leasing practices the bigger damages are taken by the bank and the minor losses are booked to the lessee even though these may have been because of normal usage. Be it may the matter of leasing (in theory) or of trading (in practice), this division of losses is

absolutely unfair because in leasing (including all the Islamic Banks’ agreements on Mushārakah, Muḍārabah and trading etc.), the investor ׳s capital and material is in the custody of the owner and the users as Amānah (Deposit). Except for intentional carelessness and negligence there could be no fine on Amānah whereas in this case, responsibility for some form of losses during usage by the renter has been put on the user in the prior agreement. If this was leasing based on valid principals, then putting any additional burden on the lessee other than the rent, is totally unfair and invalid. If we treat this as sales then transferring the bigger damages to the seller (bank) is a bigger evil than the first. So, such a sale is unfair (The Unanimous Fatwa).”

3.2.1.10: In leasing the Islamic Bank decides the rent according to the interest rate of the normal conventional banks which continues varying according to the circumstances (Dawr Ḥāḍir kay Mālī Muʿāmlāt 2008) and this is unfair (Jadīd Maʿāshī Masāʾil 2008). It is stated in unanimous fatwa: “In leasing, standardizing the traditional bank interest rate as the yardstick for fixing the rate of rents is basically invalid because of, firstly, its similarity with conventional banking and secondly the doubts about its interest related nature. Additionally the traditional bank interest rate continues to change with time or due to inflation, it moves up or down. Any lease wherein the rent rate in not for sure predetermined, is not allowed (The Unanimous Fatwa).

3.3 Bayʿ Murābaḥah (Cost plus Profit)

The word Murābaḥah is derived from ‘Ribḥ’ which means profit. According to classical Muslim jurists Bayʿ Murābaḥah means a sale wherein a person buys something and then sells the same thing to somebody else at an increased price. The difference between this sales and an ordinary sale was that in Murābaḥah, the seller has to tell his customer his real purchase price and then demand a fair profit on its purchasing cost. For example when a businessman tells his customer that he had bought this thing in 100 dollars and was selling to him at 110, this would a Bayʿ Murābaḥah. But if the seller does not disclose to his customer his purchase price and through on the spot bargaining, is able to sell his sales at some profit, this would not be Murābaḥah, this is known as Bayʿ Musāwamah. Explaining the meaning and the essence of Bayʿ Murābaḥah as seen by the famous four schools of Islamic Jurisprudence, writes Dr. Wahbah al-Zuḥaylī: “This means a sale wherein some increase is made to the cost price. And the Mālikī school of thought explain Murābaḥah with the example that the seller has to explain that at what price did he buy the material and in addition to his purchase price has put in some profit. In brief the merchant would say to customer that he has purchased the item in ten dinars, would you give me one or two dinars on top of it or the seller negotiates details of the profit with the customer saying for example, that for every dinar of the purchase price, the shopkeeper would charge one dirham as profit. This means he has to indicate his profit in definite figures or in multiples of ten. With Ḥanafīs Murābaḥah is defined as selling something on profit after its ownership has been obtained by the

person through a prior sales agreement. According to Shāfaʿī and Ḥanbalī school of jurisprudence this means a sale wherein the seller, in addition to the purchase price and procurement expenses obtains some profit on it, for example, one Dirham on every ten dirhams, provided both the buyer and the seller know the actual price (al-Fiqh al-Islāmī 1985).”

Now this is the concept of Murābaḥah which has been given by predecessor. The Islamic Banks have introduced their own self fabricated definition as given below. Writes Dr. Muhammad ʿImrān Ashraf ʿUthmānī; “The term is ‘however’ now used to refer to a sale agreement whereby the seller purchases the goods desired by the buyer and

sells them at an agreed marked-up price, the payment being settled within an agreed time frame, either in instalments or lump sum (Meezān Bank ׳s Guide 2002).”

3.3.1 A Critical Analysis of Bayʿ Murābaḥah

Following objections are raised on this businessas conducted through Islamic Banks.

3.3.1.1: The use of the word Bayʿ Murābaḥahby the Islamic banks is a misuse of this term. The concept of Bayʿ Murābaḥah which the traditional Jurists have declared as correct following some narrations is very different from what the Islamic Banks are introducing these days in the name of Murābaḥah. The Islamic Banks have named a sale as Bayʿ Murābaḥah which is not a Bayʿ Murābaḥah but is actually a Bayʿ (Sale and Purchase) totally against Sharīʿah directions as we have

already described in Ḥakīm bin Ḥizām RA tradition. There is a great difference in the definitions of Bayʿ Murābaḥah given by Dr. ʿImrān Ashraf ʿUthmānī and that of the four school of jurisprudence, which becomes very obvious to anyone doing comparative analysis of the same. Take the example of a person going to a market, buying machinery for 1000 dollars, stocks the machine in his storehouse, after sometimes a customer comes to buy the same, the seller tells the customer his cost price and offers him to sell this one in 1100 dollars. Now this businessman has worked, spent his time in purchasing and stocking the machinery in his store. This is the actual trade practice.

The same job if handled through an Islamic bank, the sequence would be something like this. Anybody requiring machinery would go the bank and tell them that he was looking for that. The bank would buy this in one 1000 dollars for him. In fact this person would himself go to the market to buy the machine; the bank becomes the owner of this machinery and in papers only, by simply supplying financing for this purchase. Now the bank sells this machinery to the person in 1100 dollars on instalments. In this sequence the bank has not done any real endeavor. The bank is providing merely the capital and is earning profit through processing of paperwork. The Messenger of Allah PBUH has disallowed this type of sale wherein the seller has not got the material he wants to sell as we have found it from the tradition narrated by Ḥakīm bin Ḥizām RA. The unanimous fatwa states: “There is no similarity between Islamic banks ׳ Murābaḥah and jurisprudential Murābaḥah. In jurisprudential Murābaḥah, from the very

beginning, agreement on settlement of price and order, and firm information on cost of the item are very necessary, where as in Islamic banks ׳Murābaḥah the bank does not make prior payment for the order or there is no cost figure available. That is the reason why this Murābaḥah, leaving aside a terminological Murābaḥah, is not included even in any common type of Bay (The Unanimous Fatwa).”

3.3.1.2: The second objection was that the profit that a bank charges from its customers in Murābaḥah is not as per market rates, instead the Islamic Bank adds 4-5% to the interbank exchange rate of conventional banks i.e.

KIBOR + 4-5 % and calculates the rate accordingly to charge its customers.

3.3.1.3: The third objection was that when somebody approaches the bank for buying something, say, a machinery for industry, the bank, to ascertain the price of machinery, adds KIBOR + 4-5% to the real market price, and signs a sale agreement with the customer that he would buy that machinery at this price from the bank. The fact is that the bank has still to buy something, neither there is anything in its possession, yet it is signing an agreement to sell it at a predetermined profit. The Islamic Bank ׳s reply to this objection is that it is just an agreement; they have not made any sale. The fact however is that the Islamic Bank, playing a tact, has declared it as just an agreement whereas the bank is actually doing a sale of something which it does not own and it has yet to buy the same. If, as the bank claims, it is

not a sale at this stage and it is an agreement between the bank and its agent for the agent to buy from the bank a certain thing at the specified price. In such a case the agent has the right to break such an agreement. When a bank buys something on some one ׳s demand with an agreement with the person that he would buy the same thing on a higher price from the bank and according to the Islamic Bank no sale has been made so far and as such the person can break this agreement. However, if as a result of this breach of such agreement, if some Kaffārah (Expiation) as per his school becomes due, he should pay the same. But the Islamic bank would never accept such a happening. If a customer does not live by his promise of buying, and the bank is obliged to it sell to somebody else on lower price, the bank is going to cover up its loss from this customer (Dawr Ḥāḍir kay Mālī Muʿāmlāt 2008). Thus this was not an agreement since the bank was treating itself as a seller instead of a contractor to his customer in this deal.

Secondly the bank had no intention of buying this thing in the first place; it was because of the assurance of the customer of buying the same at a higher price from the bank that the bank bought it. Thus in reality the bank did no actual buying or selling, but invented a tactic to earn interest.

Thirdly the bank, before any Murābaḥah, demands 10% as token money from the customer so that it could cover up any loss in case the customer breaks the contract to buy the agreed thing. Getting money and using it, prior to any sale from the customer is also not

valid. Writes Mawlānā Zulfiqār ʿAlī: “Like the conventional interest banks, Islamic Banks are also non-risk banks, a very obvious example of this was that whenever someone approaches an Islamic Bank for some kind of Murābaḥah or Leasing, the bank charges a good amount of money which is about 10% of the price of the item involved, as token money, so that if the customer at any time refuses to buy that item and the bank is forced to sell the same at a price lower than the self-cost to someone else, the bank could cover up its possible losses with this token money. The question arises whether taking this peril is not included in Islamic Banks RISKS? It is possible that proponents of Islamic Banks may testify that this type of risk taking was not included in the Risk. In that case the question arises that if by selling the same item elsewhere the bank makes a profit, would the bank be willing to share that profit with the first customer? Obviously the bank would not be willing for this. The real question now is that if the bank is not prepared to own the loss, what the justifications for accepting the profit are?”

3.3.1.4: The fourth objection is that when someone in need of something approaches a bank, the bank appointing that person as its agent or attorney, buys that item, through him, say, in 1000 dollars and then sells back the same item to the same person in 1100 on instalments. Now if the bank had provided the money to buy the item to this agent on 1st of May and the delivery of the item to the bank is made on 1st June and the bank in turn sells this item to its agent on 2nd June, the bank is going to calculate its profit starting 1st of May i.e. the day the

money was paid to the agent. The bank had not got the items in its possession, neither the thing was yet sold to the customer but the profit was being charged from 1st May!

3.3.1.5: The fifth point is that anyone buying anything through bank likes land, car, machinery, jewellery, clothing etc., would pay the same rate of profit, which is 4-5% plus KIBOR in addition to the basic price of the item. What sort of trade is this wherein the rate of profit on a car, fabric, land and jewellery including an assortment of big and small items is same? Obviously this is not the real profit. Had this been real profit, the bank would have charged different rate of profit on different items as was the normal practice in open market. The profit a goldsmith earns on the sale 1000 dollars ׳ worth of gold is never the same as the profit which the owner of a car or a plot of land worth 1000 dollars makes on the sale of these items.

3.3.1.6: The sixth issue is that in normal interest transactions money is charged against money like somebody borrowed 1000 dollars and returned 1100. In this sale the bank is doing the same thing. The bank is charging 1100 on a sale of 1000.The Islamic Bank would say that it had received 1100 through sale. Our contention is that the bank has made it a sale through a trick and in actual fact it was not a sale because the bank finances, doing only the paper work, 1000 dollars and gets back 100 and all the running about to procure the item from the market is done by the customer himself. What makes it more significant is that the bank has not gained profit on

this as per market rates but adds KIBOR + 4-5% to the actual market price to charge its customer.

3.3.1.7: Even if we accept this as a sale, it is Murābaḥah of currency and Murābaḥah of Currency is unanimously declared as not allowed by all the jurists. It simply means take 1000 dollars from the bank, buy something of your choice and then in exchange of 1000 returns 1100 to the bank. Thus this is a sale of 1000 in exchange of 1100 and this is forbidden.

3.3.1.8: The eighth point is that if any customer of Murābaḥah does not pay the price to the bank in time, the bank imposes some fine on the customer and this is wrong. Mawlānā Zulfiqār ʿAlī writes; “There is no concept of fines on delays in the Qurʾān and Sunnah and neither the jurists permit it. Imām Mālik says: “no sin including murder makes a person ׳s wealth Halal.” Imam Shāfaʿī say: “a punishment is only physical and not financial.” Ḥanbalī ׳s well-known book ‘al-Mughnī’ states: “punishment is by lashing, prisoning and scolding. Cutting off of any part or inflicting injury or taking of money is wrong because nothing to this effect has been prescribed in Sharīʿah by those whom we follow.” According to Ḥanafī jurists, financial fine is not permitted. Thus, writes

ʿAllāmah Ibn Nujaym “the gist of the matter is that according to Ḥanafī code financial punishment is wrong. With reference to ‘al-Durr al-Mukhtār’ it is written in ‘Fatāwā Dār al-ʿUlūm Dauband’ that “in Ḥanafī code financial punishment is not correct (Dawr Ḥāḍir kay Mālī Muʿāmlāt 2008).”

3.3.1.9: When someone approaches the bank for some Murābaḥah, the bank, for the purchase of his required item makes him its agent and buys the required item through the same very customer to whom it would sell that item in future. Besides this, before the purchase of the item or sometimes even before making the customer its agent, the bank enters into a contract with this customer agent to the effect that when as an attorney of the bank he buys the item from some market, then after the bank has become its owner, this agent customer would be contract bound to buy this item. This authorization by the bank is void. The unanimous Fatwa say: “In Islamic Banks ׳ Murābaḥah the prior signed paper agreement by the bank is firm and final. After issuing of any power of attorney at different stages can’t be advocacy as per Sharīʿah, rather, because of the entire responsibility of transaction revolving round one person only, it is a void authorization. Thus this way of advocacy, in Sharīʿah, is simply like drawing lines on a paper and playing with words. In actual fact the same person is both buyer and seller which are absolutely against Sharīʿah. Islamic Banks ׳Murābaḥah is a purely a tactic of interest. This Murābaḥah has no concern with the Sharīʿah terminological Murābaḥah(The Unanimous Fatwa).”

3.3.1.10: It has already been explained that when a bank makes a customer his lawyer in a Murābaḥah, it concludes a prior agreement of buying with him. As per this agreement when anyone as an agent of the bank buys

something on behalf of the bank, he is bound to immediately take possession of the item and to take it into

his ownership and this is wrong. The unanimous Fatwa says: “In Islamic Banks ׳Murābaḥah, as given in the annexure to the order form, under the terms of the prior agreement the customer is bound to take possession and ownership of the items immediately, otherwise the customer would responsible for any loss. Again this is wrong (Ibid).”

3.4 Muḍārabah

We have already explained that a bank has two basic and major functions. The first is to collect money from people as deposit or loan and the second to advance this money on interest bearing loans. The Islamic Banks receive money from their depositors on the basis of Muḍārabah and Mushārakah and invest it in business. The major part of the business of Islamic Banks consists of Diminishing Mushārakah i.e. Lease Purchase Schemes and Bayʿ Murābaḥah.

3.4.1 A Review of Muḍārabah

3.4.1.1: We have already explained in detail Mushārakah and Murābaḥah position according to Sharīʿah. We have also made it clear that these transactions of the Islamic banks are based on illegal tactics and so profits earned through these transactions are also wrong. Therefore, earning profits by opening an account with any Islamic Bank is not correct.

3.4.1.2: Another very important point was that the banks in addition to their agreed upon rates of profits, take out money for their personal expenses, various fees and

allowances etc., from those of its depositors who do Muḍārabah with it, and that is wrong. The unanimous fatwa explains: “In Muḍārabah the account holder is the owner and the bank is the operator. The bank ׳s share in the revenues from the Muḍārabah, according to Sharīʿah, is only from out of the profit made and as per the agreed upon rates. Apart from this, according to Sharīʿah, it is not allowed for the bank to charge anything for its administrative expenses, different types of fees or compensations and allowances and deductions of any sort, but the Islamic Banks do it (Ibid).”

3.4.1.3: The third point is that in Muḍārabah, it is the principle of weightage that is given the real importance by the Islamic Banks. Mawlānā Zulfiqār ʿAlī writes: “In Islamic banks for the distribution of profits, weightage is assigned to the big and small of the deposits separately for each depositor. Big deposit would get a higher weightage and the smaller, lower weightage. For example, based on the information given by Meezān Bank for the month of April, 2008, weightage assigned are as follows: For a deposit between ten thousand (10,000) and hundred thousand (100,000) the weightage assigned is 0.31 and for deposits of above hundred thousand (100,000) but below 0.99 million, the weightage assigned could be up to 0.36. This means that keeping smaller deposits in an Islamic Bank is a crime and the punishment for this is lower weightage. To tag the weightage assigned with the big and small of the deposit is unfair. In 1987, the State Bank by itself has declared it wrong. There is another

excess in this and that is that in this Muḍārabah the bank puts its own money as well and the bank assigns it a different weightage. For example, in this month of April, the Meezān Bank assigned a weightage of 1.7 for its own money. This is against its own principles and this is how it is. If, for example the bank puts in 10 billion in the Muḍārabah, this has 9 billion customers’ money and one billion bank ׳s own money, so according to this principle the weightage assigned to customers money should be higher than of the bank money, since in totality, the depositors money is more than the banks’, but the bank to the contrary assigns higher weightage to its share of the money (Dawr Ḥāḍir kay Mālī Muʿāmlāt 2008).”

3.4.1.4: The fourth point is that for partnership, the Islamic Banks open a current account wherein various people continue drawing money at different times and also deposit their surplus capital. For example, if a bank has to start work on a project of one year, a current account would be opened wherein people would continue depositing and withdrawing money during the year. After one year the bank distributes the profit earned during the year after first of all ascertaining how much money on average was used per day. With this method the bank calculates the profit on the basis of per day per rupee and then as per the amount of money that anyone has kept in the account, per day figure is multiplied by the number of days to calculate the profit to be paid. It is very obvious that, this way of ascertaining the profit is based on guess and estimation. As an example, take the case of person who has put in one million at the start of a project with a

bank and after ten days withdraws the entire amount while the bank had made no profit in those ten days. Now from the profit that the bank makes in the remaining twenty days of the month, it works out the per day per rupee average and pays to this customer as well, some share in this profit which it actually did not justify. The unanimous fatwa states, “In Mushārakah and Muḍārabah the proposed method of profit distribution does not fulfill the Sharīʿah requirements. Instead of the real rate of profit, an estimated and fictitious rate based on weightage or daily production, is employed for payment of profit. This is absolutely against the basic principles of Mushārakah and Muḍārabah(The Unanimous Fatwa 2008).”

4. Conclusion

The existing Islamic Banking is based on illegal subterfuges while there is some superficial fractional support to this system from the Islamic Law, but the real Sharīʿah objectives for implementation of these laws has been severely trampled. Thus the present day Islamic Banking consists of such tricks which are a hindrance in the attainment of Sharīʿah objects similar to tactics employed by the people of Book. Whether there are interest free banks or conventional interest banks, in fact, they are not involved in trade or any kind of business, they only deal in money. According to majority of religious scholars in Pakistan, the case of Islamic Banks is the same as is of conventional banks. For working in Islamic Banks the directions are the same as for working in conventional interest banks. Those services of the interest free banks which are fair and just and could be utilized

under the principle of necessity, same could also be utilized from the Islamic Banks.

Here we must mention that the foundation of such business institutions is the need of the Islamic society wherein on genuine basis and in the light of Sharīʿah principles, trade, Mushārakah, Muḍārabah could be undertaken. It is a common observation of the general public that the religious scholars criticized on everything, but do not come out with any solutions. The facts however were that solutions were there but the materialistic ideology, moral values and the desires of leading lives of luxury and pleasure in the name of people ׳s needs by the capitalist class has given rise to such a thinking that such solutions were not found acceptable to them. A very simple rule was that in Mushārakah or Muḍārabah the possibility of loss was always there, even though with help and assistance from modern management sciences and knowledge the risk of the expected loss could be reduced but it can never be totally be eliminated. How many investors there are today who would be prepared to invest accepting the risk of loss from such a possibility? This simple example is to focus that business or trade is after all business and trade with its own requisites and demands, for example the apprehension of a loss etc., If we try to eliminate these requisites, it would no longer remain business, it would transform itself into something else and this has practically happened in Islamic Banks. Thus if the responsibility of creating commercial institutions to look after the economic needs

of the people lies with the religious scholars, then the society is many times more responsible for bringing about the needed mental change for the acceptance of the principles of Islamic Economics. In any case, for the Islamic Economic System, the establishment of a truly commercial institution rooted in the Islamic spiritual values, to do research and technical work, its need and importance is well established and this issue needs to be further debated.

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 can't see the video at the moment so I cannot comment on what he says but normally the opponents of Islamic Banking say the same thing that it is exactly like conventional banking system where you lend money on interest but named differently. But I don't agree with this point because if you see a goat being slaughtered by non Muslim and a Muslim, both will look the same there is no difference but still one is haram and other is halal because the later take's Allah's name on it. So this slight difference makes it halal but physically they may look the same. In the same way Islamic Banking has slight differences as compared to conventional banking which may not be visible to naked eye immediately.

Secondly a common person has to rely on

judgement of Muslim scholars and he can't personally check each and everything. I mean when Islamic Banks have sharia advisory board employing knowledgeable persons like Mufti Taqi Usmani and they say that this is halal then who are we to say otherwise? A common man has to rely on religious scholars in this matter just like you rely on doctor in medical matters and accountant in financial matters. Or you start your own investigation and prove yourself that you are right!?

How many of you have personally checked each and every food item that is sold that it is halal? I mean for e.g. what if the innocent Rooh Afza we drink is haram? How can you be so sure that it is halal? Have you personally tested it? I know you will say that there must be some government body that oversees this and since it is in market and sold so widely hence it must be halal. So this is not your responsibility to check each and everything because you simply cannot.

In the same way don't you have to rely on knowledgeable religious scholars who also knows financial matters in this regard? If you say no we do not have to rely and personally check it then I must say you start checking each and every item you eat and drink like Nestle mineral water, Haleeb

milk, Daal maash, KFC e.t.c and don't just rely labels on their product which says "Halal"http://www.siasat.pk/forum/showthread.php?111479-quot-Islamic-Banking-quot-is-DOUBLE-Haraam-Sheikh-Umer-Vadillo

ear Brother,Assalamoalaikum, I have two question as below please explain in light of Quraan and Sunnah. Q1. I would like to know there is so many Islamic Bank they are providing loan for Car or other work. Instead of interest which other banks charging x% per annum, they (Islamic bank) are saying profit and charging x+1% per annum.My question is taking loan from Islamic bank for car or other work is 100% Halal or not? Since some of my colleague are saying both are same Islamic bank just renamed the interest as profit and charging more amount. Q2. As per n-number of question answer, which is available at your site, what I can

understand. Doing job in Bank is not good for Muslim. My question is Banking is very big sector where n-number of Muslims working. If we segregate ummah from banking than who will control banking sector. Should we leave this sector for nonbeliever?  JazakAllahKhair, (There may be some grammatical and spelling errors in the above statement. The forum does not change anything from questions, comments and statements received from our readers for circulation in confidentiality.) Answer: No difference between Islamic and conventional bankingIn the name of Allah, We praise Him, seek His help and ask for His forgiveness. Whoever Allah guides none can misguide, and whoever He allows to fall astray, none can guide them aright. We bear witness that there is no one (no idol, no person,  no grave, no prophet,  no imam,  no dai, nobody!) worthy of worship but Allah Alone, and we bear witness that Muhammad(saws) is His slave-servant and the seal of His Messengers. 

Q-1: My question is taking loan from Islamic bank for car or other work is 100% Halal or not? Since some of my colleague are saying both are same Islamic bank just renamed the interest as profit and charging more amount.Dear Brother in Islam,  there are several good Islamic banks and Islamic Financial Institutions,  that adhere to the Shariah in their financial transactions.    If these Islamic financial institutions are not 100% Islamic in your view,  brother,  you will at least agree that they are trying to work towards the right way as ordained by Shariah.    Islamic banking is still in its infancy,  and they need all the support and help of professionals who are sincere believers.    And if believers and brothers like you and us do not help and support them;  we cannot expect the pagans and the disbelievers to come and help them!  The thing is brother,  the world is so used to the forms of conventional interest-based banking,   that it is difficult to convince someone to start a new or alternate phase of banking,  which adheres to the Shariah and Laws of Allah.   Besides,  all these banks have Shariah boards,  with eminent scholars who approve each and every transaction or deals,  done by these Islamic institutions.    Instead of us pointing fingers at the work they do,  it would be prudent if one is a believer and a banker,  to join one of these Islamic

financial institutions,  and help them to reach their goal of interest-free banking. There is absolutely no doubt that conventional banking is interest-based,  and therefore haraam.  And even if in your view,  the Islamic banks are not 100% interest-free;  you will at least agree that they are at least trying to conform with the laws of Shariah.   Thus if one is a believer and wishes to take a loan;  he should obviously opt to take it from legal sources and thus further the cause of Islamic banking,  rather than from the guaranteed haraam transactions of a conventional interest-based bank. Brother,  please do not misunderstand us.   We am not trying to protect or say that all of the current Islamic financial institutions are all 100% in conformity with Shariah;  what we are trying to say is that if the only choice for a person is transacting with a conventional bank or an Islamic bank;  we just think that it would be purer for him to take his transaction to the Islamic financial institutions.  Insha Allah,  Allah will help them and maybe in 30 or 50 or 100 years they will actually be recognized as a halaal alternate source of banking.   This process has to start somewhere someday… and today is as good a day as any!   Their intention is good,  and it is expected that their results will also be good,  Insha Allah.

 Q-2: As per n-number of question answer, which is available at your site, what I can understand. Doing job in Bank is not good for Muslim. My question is Banking is very big sector where n-number of Muslims working. If we segregate ummah from banking than who will control banking sector. Should we leave this sector for nonbeliever?Conventional banking is indeed a huge sector in itself, but in the past 30 years or so, Islamic banking has come of age, and today it is the fastest growing sector in the banking industry. Several of the big banking houses like Citicorp, HSBC, ABN-Amro, etc. have started their own Islamic banking units, and it is only a matter of time when non-interest based banking will be a power and institution to be reckoned with.  It is not to say that muslims should not associate themselves with the financial world, but if Allah Subhanah has blessed a believer with financial knowledge and with faith, it would be beneficial to him and to the Islamic Ummah if such brothers would use their expertise to formulate and associate their knowledge and skills in strengthening interest-free banking.  Allah will reward each one of us for our intentions… and if the intention of a believer is to substitute his expertise in the field of conventional banking with

helping the cause of interest-free Islamic banking;  it will not only be his source of earning halaal income for himself and his family;  but will,  Insha Allah,  also be a source to earn huge reward from Allah Subhanah on the Day of Judgment.   Whatever written of Truth and benefit is only due to Allah’s Assistance and Guidance, and whatever of error is of me.  Allah Alone Knows Best and He is the Only Source of Strength. Your Brother in Islam, http://www.gowister.com/islam-answer-2534.html

IS RIB FREE BANKING POSSIBLE?

Islamic banking has grown reasonably fast in the last decade in Pakistan. People invest religiously trusting the fatwa of the so-called Sharia boards of these banks.

Are these financial instruments really riba-free (interest-free)? Do these instruments conform to the juristic and ethical frameworks laid down by the Quran, the Holy Prophet (PBUH) and the imams of the leading schools of thought? If the analysis shows otherwise, then why not do ‘modern’ banking instead of

labelling riba-infested products as ‘Islamic’ and selling them as halal and riba-free?

The theoretical problem arises out of our inability to comprehend the meanings of two words ‘riba’ and ‘ba’ah’ used in the Quran to strictly prohibit the former and clearly permit the latter. There are two verses in the Quran which deal with the concepts of riba and ba’ah and adjudicate reasons for their subsequent prohibition and permission.

The Quran clearly refers to the inherent psychological nature of men, which ordinarily thrives on boundless greedy profiteering and moneymaking without personal labour and effort. So the Quran clearly describes in a verse this human weakness and declares that those who approve of riba are “possessed by Satan” (2:275). It is strictly forbidden and instead one should engage in ba’ah which requires personal labour and effort.

The second verse of the Quran explains the economic rationality of riba and declares that it is forbidden because it leads to profiteering and moneymaking in a multiplication mode of economic exchange (3:130) which does not involve labour and effort by the owner of the economic resources.

Therefore, one should engage in socially and ethically permissible economic activity of ba’ah. On the other hand, the practice of riba leads to unprecedented social and economic inequalities which create an unjust society, which the Quran and the Prophet disapprove of in manifest words.

Ba’ah is permitted because it is based on rational, ethical and mutually agreed contracts of economic exchange, sharing risks,

benefits and liabilities and profit (land, labour, capital, commodity or intellect). The law of riba and ba’ah applies equally and universally to both tangible and intangible economic resources. In simple terms, riba is an irrational, exaggerated, labour-less and unethical accumulation of wealth in a multiplication mode, while ba’ah is a rational and socially and ethically agreed economic exchange of labour and money.

The actual labour and work done by a person is weightier and considered a sacred trust, for according to a hadith the worker is a friend of God.

Now let us illustrate by an example to show what it means to accomplish a riba-free economic exchange. I own one acre of land and I give it for cultivation to a peasant on mutually agreed terms. A riba-free land-tilling agreement between me and the peasant would be something like this: the owner of the land should provide the water, seed, fertiliser and protection in case of natural calamity hitting the crop and distribute ushr forthwith.

The peasant would cultivate the land with honest labour, take care of the field, protect the crop against dangerous animals, sell it at a fair market price and distribute the profit equally with the owner of the land. This land modaraba and the transaction thereof will be a completely riba-free economic activity. The peasant shall be duly compensated for his labour in case he opts out of the transaction before the maturity of the crop.

Let us now analyse a so-called Islamic financial product offered by Islamic banks in Pakistan. The product is known as ‘car modaraba’. The Islamic financial product is a nomenclature shift from the routine banking sector offering the same product as

‘car-leasing facility’. All terms and conditions of the modaraba contract are analogous to the car-leasing agreement, favouring the Islamic bank rather than the end-user. It is a misnomer to call it modaraba because the Islamic bank is not the first owner (in this case the car maker/manufacturer is the true owner).

The Islamic bank thus does not fulfil the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product which is produced by another party in the first place.Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.

An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation. According to Islamic economic rationality, labour is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination.

The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.

The writer is a social scientist and teaches at the University of Management and Technology, Lahore.

http://www.dawn.com/news/713800/is-riba-free-banking-possible

Cheating God: Islamic Banking۔۔ . One of the major sins that Judaism, Catholicism, and Islam take seriously is the sin of usury (i.e. taking interest on loans of money). The Torah, Gospel, and Quran are unequivocally clear on this matter: Exodus (22:25), Leviticus (25:25-37), Deuteronomy (23:19-21), Matthew (5:17-18), Luke (6:35), Quran (2:275-280, 3:130, 4:161, 3:39).

Moreover, Aristotle (384 BC – 322 BC), known as the first teacher among Muslim scholars and philosophers of the Islamic Golden Age, referred to usury as unnatural and immoral. In the Islamic Golden Age,  St. Thomas Aquinas(1225-1274), the leading authority of the Catholic Church till this day, along with his teachers: Maimonides (1135-1204), the leading authority on Jewish Law and philosophy until today (appointed as one of Salahuddin’s court members and physicians), Ibn

Rushd (1126-1198), one of the greatest philosophers and most influential figures in Europe’s Renaissance (appointed as supreme judge in Seville, Cordoba, and Morocco); all wrote extensively on the evils of usury on mankind.

Usury, in Islamic Shariah, is defined as money made in excess for no work done or entrepreneurial risk taken. In modern terms: interest. St. Thomas Aquinas compared usury to selling time, and time is not a good or service to be sold.Islamic BankingWe know that banks make their money by lending money and collecting interest. That is the whole purpose of  commercial banking. An Islamic bank, however, figured out a way to make that money by playing a little game: Instead of lending money and collecting it back with interest, the bank engages in business contracts with the borrowers, for a profit.

Example 1Samir wants to buy the new Audi A8, selling at $75,000. He can take out a loan from a commercial bank. Samir then owns the car “now,” and pays the loan back in small monthly installments over a period of six years, with an annual interest (may include collateral). When Samir pays the last installment, he will have paid the original $75,000 plus the accumulated interest, totalling up to $100,000. Or…Samir can go to an Islamic bank. The bank purchases the car for him at full price, and Samir agrees to buy the car from the bank at the new price of $100,000, paying that

amount in small monthly installments, interest-free! The ownership of the car is fully transferred to Samir upon paying his last installment. Should he be unable to pay the amount in full, the bank retrieves the car as collateral.Certified Islam refers to this form of transaction as murabaha, meaning profiteering, which is of course 100% halal.Example 2Samir wants to start a business (for profit). He goes to a commercial bank and explains his business idea with a detailed plan (including cost and revenue estimates). If the bank approves the feasibility of the project, the bank will give Samir a loan to be paid back, with interest, in installments. Or…Samir goes to an Islamic bank and explains his business idea with a detailed plan (including cost and revenue estimates). If the Islamic bank approves the feasibility of the project, the Islamic bank will sign an agreement with Samir, in which they establish a partnership, known as Mudaraba (also means profiteering). In this contract, the bank offers the capital, and Samir offers the work. But then both Samir and the bank share the profits (each gets the percentage of the profit agreed upon in the contract).n the end, both types of banks end up making money without putting any work or risk. A commercial bank calls it interest, while an Islamic bank calls it profit. In fact, the idea was so lucrative that HSBC established an Islamic banking subsidiary, in 2003, known as HSBC Amanah, with their slogan (Commitment to the highest Sharia standards).

This system of Islamic banking was only developed in the mid-twentieth century. In 1973, upon the official declaration of the Muslim countries’ finance ministers’ first conference at the Organization of Islamic Conference (OIC), the first Islamic banks began operations in Jeddah and Egypt (Islamic Development Bank) and Dubai (Dubai Islamic Bank) in 1975. As of 2009, Islamic banks’ assets combined (including Iranian banks who joined the game in 1980) are estimated at 400 billion halal dollars.Fishing On SabbathIslamic Banking brings to mind the story of The People Of The Sabbath from the Islamic tradition, when a small group of Jews in the coastal village of Ayla on the Red Sea cheated God. According to the story, the fish swam near the shore on Saturdays (Jewish Sabbath), the only day they weren’t allowed to do any work, including fishing. But then on all other days, there was barely any fish in the sea. The majority of these Jewish villagers, the true believers, knew that it was a test from God. Thus, they persevered and continued to observe the Sabbath. But then a small group figured out a smart way to circumvent the Law, without upsetting God: They set up their fishing nets on Fridays, and collected their plentiful catch on Sundays. God’s punishment was severe: the Shabbat violators were disfigured into apes.Whether this story is real or metaphor (still debated among Muslim scholars) is irrelevant. What matters is the moral of the story: no one can fool God by circumventing his rules. He knows exactly what they’re doing

42 Responses to “Cheating God: Islamic Banking”

The writer seems to have good knowledge about what is written in the holy books of the three religions. I invite him to read the verses relating to interest in the Holy Quran again in ver. 275 of Ch. 2 it is clearly mentioned that "Wa Ahall Allah ul Bai and wa Harramur Riba". (Allah has peromitted trade and forbidden usury). Murabaha comes under the same ligitimate permissibiliyt. In the second example the writer has given, the bank also shares loss as mudarib and that is also permissible in Islam.God also allowed Jews to work on Fridays and Sundays. He only forbade work on Saturdays. So why did he punish those Jews for setting up nets on Fridays and collecting what they caught on Sundays?

Even though they did not "technically" break the law, they actually did, because the law isn't an end, but a means to an end (to prevent a certain activity). And in the case of murabaha, the activity taking place is called "exploiting the poor." The Islamic bank knows very well that this individual doesn't have the $75,000 and thus takes advantage of his limited resources and offers him the service of lending money, in return for a profit of $25,000. That's not the selling and buying that the Quran was talking about, and you know that.

If the bank was truly trying to be Islamic, it would buy the car for $75,000 and resell it in comfortable installments to

the individual for the same price of $75,000, not a dime more! Otherwise you're just playing dumb with God.

In the second example of mudarabah, the word itself is misleading. The actual contract includes fine print (just like any other bank) where the losses are shared between the entrepreneur and the bank "the bank's liability in the project is limited to the original capital." Any additional losses from debt is to be compensated by the entrepreneur. But more importantly, the bank is not directly involved in the enterprise's management in a mudaraba. Money is being lent, and the bank awaits its profitable returns while it sits idle. The profitability is usually guaranteed by the entrepreneur's business history. It's not like any schmuck with an idea can walk into an Islamic bank and sign a mudarabah contract.

Suppose you see a five year old kid with an ice cream cone, holding up a dollar to the vendor. The vendor then says to the kid that it's $1.50, and the kid's face flushes because the dollar he's holding up is the only money he has, and it's not as though he can return the ice cream swirl back into the machine. What would you do?

As the modern Muslim you are, you pull out $1.50 from your wallet and pay the vendor, then you tell the kid that starting today, he must give you $0.50 of his daily allowance for four days, until you have received a total of $2.00, because it was you who bought that ice cream for $1.50 and resold it to him for $2.00!

Are you sure you wanna explain to God on judgment day that what you did was halal?

The author is perfectly right Dear Brother. Do not conceal the truth even you know it. The Verses you Pointed out, I myself studied. I am also a student of Finance, i.e. I am an MBA but I also have good Knowledge of Islam. Islamic Banking is just a mocking against the Golden rules of Islam. Islam announces in Chapter No 53 Verse No. 39 (39/53) that Reward is for Labor Only. i.e. their is No Reward for Capital. Keeping in mind this verse Modharba Transaction also falls in the category of Prohibited Interest or Ribba. Be true to Islam, not let the world to mock against Islam.1.

o

Imam Ali, you are a naive little boy easily convinced. I don't normally comment on exceptionally foolish statements; but seeing you bring in verses of the Holy Quran and twisting it to satiate your communist leaning fantasies…. well I just had to butt in.Here are two translations of the verse I found:That man can have nothing but what he strives for (53:39)Every human being is responsible for his own works. (53:39)It doesn't say://You can only earn your bread by manual labor. //Naouzubillah.You are playing with fire, by putting your own

words into God's mouth. Beware of Allah's wrath. Repent!What your leftist halaqa instructor has done is take the verse out of context and put his own spin to it. Then he fed it to you. And you believed him.A lot of people criticize Abd al-Wahhab, but one of his most intellectual reformations is his denouncement of the practice of blind adherence to the interpretations of scholars (in your case 'scholars', with the apostrophes). Ibn Abd-Al-Wahhab argued that individual Muslims were responsible to learn and obey the divine commands as they were revealed in the Quran and the Sunnah. I feel that it would do you well, to follow this tenant to the letter.

POSTED BY OOOKHALID | NOVEMBER 24, 2010, 10:39 AMLOG IN TO REPLY

OooKhalid, some ideas of communism were probably to the liking of Mohammed. You're the naive one. You're twisting verses to satiate your fantasies. You showed your true face. You're greedy!

You say that "Abd al-Wahhab" was against "the practice of blind adherence to the interpretations of scholars" but you tellImran Ali to "to follow this tenant to the letter". Nice!

POSTED BY PAUL | JUNE 17, 2013, 9:13 AMLOG IN TO REPLY

o

The bank shares the loss but the guy who came with the idea and went to the bank for funding didn't put any money in the business.He's basically a employee for the Islamic bank. In other words it's profitable for the bank. Also the question is when the guy gets the company like he does in non-Islamic banking (he becomes the owner)? If it never happens than that's a problem. If he's good and makes a lot of money the Islamic bank gets more than a non-Islamic bank does. If he doesn't know what to do the bank sells everything and the guy is hopefully where he started (if he doesn't have to pay to the bank the remaining losses) and the bank gets its money back, this happens in non-Islamic banking also as the bank sells the bad business (it is the colateral). Anyway you look at it, Islamic banks are just as bad as non-Islamic ones if not worse.

POSTED BY PAUL | JUNE 17, 2013, 9:25 AMLOG IN TO REPLY

2.Those who devour usury will not stand except as stands one whom the devil by his touch has driven to madness. That is because they say: Trade is like usury: but Allah has permitted trade and forbidden usury…. Allah will deprive usury of all blessing, but will give increase for deeds of charity, for He loves not any ungrateful sinner…. O you who believe, fear Allah and give up what remains of your demand for usury, if you are indeed believers. If you do it not, take notice of war from Allah and His messenger, but if you repent you shall have your capital sums; deal not unjustly, and you shall not be dealt with unjustly. And if the debtor is in difficulty, grant him time tin it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew. [Surah al Baqarah, verse 275-280].What Sarakenos brings to the table is nothing short of the common ignorant discourse that can be found amongst the Muslims around tea-stalls, who know very little about banking and even less on Islamic banking.Islamic banking is not a new concept of the 20th century, but historical records reveal the presence

of medieval institutions of money lending early in the Muslim Empire. Maybe they haven't progressed to international corporations due to intolerant Muslims, (like Sarakenos) who are unable to tolerate any vision of Islam beyond that present during the time of the Prophet(pbuh). They would probably say that driving cars is not the Sunnah so we must go back to riding the camels.However anyone who is familiar with these people know that this show of Islamicity is just a pretense, to cover up for the shirk that they believe in called: secularism. They think they can impress others of their Islamicty using their pretense to Salaf-ness. The want to life life exactly as the Prophet(pbuh) did ~ The Prophet(pbuh) didn't use banks, so banks is haram (regardless of the fact that the bank is Islamic or not).Example 1:Trade is halal, interest is haram. This is the words of the Quran. So the banking procedure is very aptly and Islamically catered towards those who wish a Shariah compliant banking.The fundamental difference between the Islamic and Western is that, in Western banking the interst on capital can go on forever, until all the money is paid. Hell, even if you have only the interest unpaid in the bank, the bank will charge you interest on the interest until you have paid up. Even if it takes you 50 years. So that $75,000 loan can well balloon to $200,000. In Islamic banking

there is a ceiling to the amount that the car-buyer has to pay.Example 2:A Mudaraba is basically a contract of profit-sharing, not profiteering as Sarakenos so sarcastically put it. In Western banking, banks lends to business-man, business makes loss and closes down. The debtor still pays back money PLUS interest.In Islamic banking, the businessman and the bank establish a partnership. If the joint venture is loss making, both the bank and the businessman share the losses. If the joint venture makes a profit, then both the bank and businessman share the profit. This is the most fundamental difference between Western banking and Islamic banking.POSTED BY OOOKHALID | NOVEMBER 14, 2010, 5:10 AMLOG IN TO REPLY

o

There is something called Shariah-compliant banking, and it has nothing to do with the current Islamic Banking system we have today. The current Islamic Banking system is a tool of corporate exploitation, so profitable that even non-Islamic banks sought to adopt it, without necessarily calling it Shariah-compliant.

RE: your comment on Example 1, so what you're saying is that the commercial bank is more evil because there is no ceiling on how much money it can take over the original sum, whereas an Islamic Bank is so benign that it limits its exploitation of the individual? Actually, when the individual cannot complete payment for the car, as I mentioned above, the Islamic bank doesn't charge more interest, it just takes the car back, and the installments paid go bye-bye. I don't know which one is more inhumane, but why does Islamic Banking holds Commercial Banking as its standard of benevolence?RE: Example 2, you say potato, I say potato. Profit-sharing is called "musharakah," which is another Islamic Banking transaction I didn't talk about (go look it up while you're at it). Mudarabah, in the Arabic language, comes from Darb, which means to seek profit through work. In a mudaraba, the entrepreneur is referred to as "mudaarib" (because he is the one who does the actual work), while the bank is referred to as "saahib al-'amal" (the business owner). The bank collects its original sum and percentage of profit for work it did not do. How is that different from a Mafia Lord who walks down the market and collect percentages from the baker and the florist?

It is true that when losses are incurred, the bank also shares in the losses (the mudaarib also pays losses, even though he didn't put any money in to begin with). That sounds to me like a good deal for the bank. It’s like, you can argue that Wal-Mart is a great business because it allows its customers to return any merchandize (with receipt) and get their money back if not satisfied with the product (Wal Mart’s loss). But you'd be missing the whole point of why Wal-Mart is evil in the first place.The fact that you put the word "progress" and "international corporations" in the same sentence really proves what I've been saying all along about certified Islam's marriage into consumerism, and how Western capitalism has been sold to the Muslim world as "compatible" with the teachings of Islam: KFC and Hardee's in Mecca are OK, as long as they state that their beef and chicken have been slaughtered in accordance with Shariah standards, 100% halal.I thought your second paragraph was quite rude, especially when you don't know my credentials, line of work, and educational background. This is not the first time you do this. I implore you for the future to reconsider your thoughts before you hit the "submit" button.PS/ Although Islamic Banking did exist in many forms since the prophet’s days till now, the

current 20th-century Islamic Banking System is unprecedented. Don’t try to play dumb

POSTED BY SARAKENOS | NOVEMBER 14, 2010, 8:28 AMLOG IN TO REPLY

In Islam, trade is halal. Usury is haram. Please refer to the verse I provided.The Prophet Mohammad (pbuh) actively participated trade, both before receiving Prophethood and after.What is trade? Trade is the buying and selling of commodities for PROFIT.Is profit good? This is a question of morality. Some people (communists) think of profit as bad, but the rest of the world does not. Islam encourages trade, for profit. Islam doesn't encourage trade for loss regardless of the fact that some Muslims think (ignorantly) that profit is bad. Some Muslims think that to get rich is also bad (un-Islamic). But God loved Solomon and he was one of the filthy rich (multi-billionaire of our standards).Is Islamic-banking Islamic? It is, if it complies with the ruling of Islam.What is the ruling of Islam? Islam rules that

usury/interest is forbidden and trade is permissible.Example 1: Does it comply with the ruling of Islam? Yes, because it is according to the rules of trade as opposed to that of interest. So even if Sarakenos thinks that taking away the car is inhuman, well that’s business. You pay, you get goods. You no pay comrade, I thake car. I sell car. And I take my capital back! Anything left is sent back to the borrower.Example 2: Does it comply with the ruling of Islam? Yes, because it is according to the rules of trade as opposed to that of interest. So Sarakenos might think that the bank is lazy and not taking part in the decision making of the company, but he has to come up with the religious documents (Quran or Hadith) to back his claim that the business then becomes haram. If it is not haram, then it is halal.Sarakeos makes the funny simile between Mafia and Islamic bank. You see Sarakenos, the main difference between the two, is that one takes what is not theirs and the other is asking for a share of the profits of the business it floated with its own capital.It would be better for Sarakenos to do a bit more studying, before making outlandish statements like "Cheating God:Islamic

Banking". While it might gain the approval of other ignorant and/or biased people, it makes very little intellectual significance to intelligent people.

POSTED BY OOOKHALID | NOVEMBER 15, 2010, 8:08 AMLOG IN TO REPLY

The Quran allowed trade, but encouraged charity (not trade). Don't put words in God's mouth. Look back at the verse you quoted (which I had also referenced in my post).There is nothing wrong with making a profit. God doesn't love the rich. God loves the charitable. Hundreds of verses throughout the Quran have made that absolutely clear. I don't understand how you missed it. And God did not love Solomon because he was filthy rich.The Mafia and the Islamic Bank are both taking what is not theirs. You call it "asking for a share of the profits," I call it "asking for what is not theirs." There is nothing wrong with making a profit, earned out of hard work. To make a profit out of "lending

money" to someone else who did the hard work is called "asking for what is not theirs." Just because the bank called it "trade" doesn't make it so. If you ask the Mafia lord, he will say that he's collecting money in return for providing the baker and the florist with security. He's not gonna tell you that he's taking what's not his.The reason I called it "cheating God" was in reference to the people of the sabbath. You see, the people of the Sabbath did not break the rules. Fishing on Fridays and Sundays is permissible, fishing on Saturdays is not. Compare this with "trade is permissible, usury is not." They people of the sabbath played a trick, which appears on the surface to be completely legit! They DID NOT ACTUALLY FISH ON SATURDAY! How can anyone accuse them of being sinners and breaking the law of the Sabbath?Oh but they knew, deep down, they knew what they were doing. It's just like the guy who upholds all five prayers, but then plays at the casino and sleeps with hookers. You ask him: "but isn't that haram?" And he answers you: "But the hadith says that prayer washes away all sins." The Hadith, indeed, does say that. But the hadith did

not mean to say: "go ahead and sin all you want, as long as you pray five times a day." Playing dumb with God will not suffice. The Islamic Banks make obscene profits, without doing any work to deserve them, just like any commercial bank. The fact that they found a loophole around the "usury" definition doesn't make it halal. It just makes them foxy, at best.If you’re thinking: “so what if they made huge profits? God allowed it!” … You’d be missing the point. The point is, they are making these profits over the shoulders of people who can’t afford to buy those things they need. You take a guy in, say, Jordan, who earns 400 JD per month, and he’s a senior computer programmer, wears a suit every day to work. He wants a car, but will never be able to afford to buy a decent one. So he approaches an Islamic Bank… When I think of the word “Islamic,” I’m thinking of charity, kindness, love, forgiveness. I don’t think “exploitation of the poor and obscene profits.” An “Islamic” Bank sounds like a bank that will not take any interest from you (i.e. not put a burden on you). But instead, the Islamic bank DOES put a burden on you, and renames it to “profit,” and says: “Islam allowed profiteering.” Nice work really.

POSTED BY SARAKENOS | NOVEMBER 15, 2010, 8:50 AMLOG IN TO REPLY

Please read Surah Bakarah, ayah 275://Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition…..//Do you notice the part where God says //But Allah has permitted trade and has forbidden interest.// Even tough there are numerous instances in the Quran where charity is encouraged. But according to the context, I referred to the verse 275 of Bakarah where God made trade halal!!I never said the Quran encourages trade. I said Islam encourages trade. Islam is the combination of what God said in the Quran and the Sunnah of the Prophet.I never said God loved Solomon because he was rich. I just used Solomon as an

example to explain that being rich is not a sin in Islam.Now! before you make your fatwa on the haram-ness of Mudarabah, please do provide the appropriate hadiths. Just because you 'think' that it is not moral for the banks to make money on the capital they provide, does not automatically make it un-Islamic. Because you, my friend, do not represent the legal basis of Islam. That is the function of the Quran and the Hadith.BTW. Who are you to say how much money a person/corporation deserves. If the method is halal, no Islamic jurist of any school of thought can bring any corporation to book. You have to understand that these Islamic banks are just normal businesses who wish to make transactions in the halal way without resorting to usury. They are not institutions of social welfare. They are an alternative to the Western system of interest based banking. Period.The bottom line still remains, making profit in not bad. Islam is not communism. Islam believes in a system of free market economy. Free market

economy is not capitalism, even tough it is included in it. For those who find this confusing, then I advise them to study up on world ideologies.ps. the premise behind your mafia analogy is just childish, with no ground on reality.

POSTED BY OOOKHALID | NOVEMBER 16, 2010, 4:02 AM

I like your analysis. could you please join me on facebook page "Premier Halal Banking and Finance" ? I am trying to gather a group of people in my locality be selling them the idea of Islamic finaance so that we can establish a co-operative union bank to deal in islamic finance in North Western part of Ghana. Your insights will be very helpful.

POSTED BY YUNUS | JULY 28, 2013, 8:17 AM

you have good points there! BUT, I ask you, do you think that muslims should

just fold up our hands and allow the conventional banking and financial system (interest based) to operate and cover us without looking for a halal alternative or any thing closer to it? Assuming the answer is NO, I put it to you that Islamic banking is the best alternative available! It is now up to you and me to concentrate on research and innovation to remove those unislamic things that we see in Islamic banking. This is a human crafted system which is still bound to have lapses! but the bottom line is that, muslim business people should be able to provide banking and financial services within the confines of the shariah. Trade is not aid! Bankers are business people and NOT charities. Charities give away, but businesses make profit (which is halal), so now you figure out how (alternatively) genuine profit can be made in banking and finance. Other wise, it will be very difficult for the Muslims to participate in commercial activities now. Banking and Finance is needed in our modern socities but we must eschew Riba. Investors (profit makers) are the only ones who can provide sustained financial services and products NOT charities!

POSTED BY YUNUS | JULY 28, 2013, 8:41 AM

Wonderful! That is how you cheat to God! your "remarkable" comments in favor of Islamic Banking are nothing but a mocking against Islam. Did you not Study the Holy Quran ever? It is clearly mentioned in the Holy Quran that the Money and Time have no Reward. It is just Human Effort in shape of Labor which has the right to be awarded. It is mentioned in Chapter No. 53 (Al Najam) Verse No. 39. Please refer to that verse also. And in verse No. 219 of Chapter No. 02, Allah announces not to accumulate surplus Money. When it is asked to the Holy Prophet How much we should spend in the way of Allah, it is said Open and spend all that is surplus of your necessity. Means that you can only hold what is your need and all the rest have to be deposited in Bait ul Mall. i.e. Islamic State. So how can Islam Offer to do an investment business when it is clearly mentioned not to accumulate Funds/Money? I am ashamed of the Muslims like you. In verse No. 275 Chapter No. 02 Allah the Almighty Declares war from Allah & Rasul i.e. Islamic State

against the People/Institutions/States who are in Usury (Riba) Business. Well done so called Muslims well done!

POSTED BY IMRAN ALI | NOVEMBER 21, 2010, 6:48 AMLOG IN TO REPLY

Here are two translations of the verse I found://That man can have nothing but what he strives for (53:39)Every human being is responsible for his own works. (53:39)//It doesn't say://You can only earn your bread by manual labor. //Naouzubillah.You are playing with fire, by putting your own words into God's mouth. Beware of Allah's wrath. Repent!//And they ask "What ought we to spend (in the way of Allah)"? Say"Spend whatever you can spare." (2:220)//Read together with Book #23, Hadith #383 of Sahih Bukhari. It tells of an old man with only one daughter, who asked

the Prophet(pbuh)on how much to give in charity in his will. At first the old man wanted to give two-thirds in charity. The Prophet(pbuh) objected. Then the old man suggested half of his property to charity; but then again the Prophet(pbuh) objected. The old man then suggested one-third and finally the Prophet(pbuh) accented. The Prophet(pbuh) said that it is better to leave the inheritors wealthy rather then leaving them poor.1)I ask you, how is it possible to distribute excess wealth if all of it was in the Baitul Maal in the first place. The Prophet himself encouraged passing on, if possible, enough wealth to make the inheritors wealthy. Must I remind you of wealthy sahabas like Uthman(RA); he wouldn't have been wealthy if he had given up all his excess wealth to the Baitul Maal.2)The hadith you provided, does not in any way support the conclusion you arrived at. According to the hadith you provided, the Prophet(pbuh) merely stated the maximum amount that a person can donate to the cause. This is due to the fact that some of the early Muslims were so high on zealotry, that

they were willing to give up ALL of their wealth for the establishment of (political-) Islam. This hadith practically eliminated this tendency of donating excess wealth AND means-to-livelihood of many sahabas; which would have just brought ruin and misery to the said sahabas and their family.

POSTED BY OOOKHALID | NOVEMBER 24, 2010, 11:17 AM

o

Excellent. Jazaaka Allah khair

POSTED BY YUNUS | JULY 28, 2013, 7:13 AMLOG IN TO REPLY

3.Jct: In the mort-gage musical chairs death-gamble, everyone borrowed P, everyone owes P+I, only P/(P+I) survive, at least I/(P+I) are knocked into foreclosure resulting in Shift B inflation, same money chasing less goods, not Shift A inflation, more money chasing goods. http://johnturmel.com/biglie.htmGod wants everyone to be a winner and the mort-gage death-gamble of usury violates God's plan.

POSTED BY KINGOFTHEPAUPERS | NOVEMBER 14, 2010, 7:53 AMLOG IN TO REPLY

4.Interesting perspective on the subject. I find loans from ordinary banks to be cheaper than from 'Islamic' banks. So until they switch to adopting better competitive standards and, in the case of profit sharing, actually engaged in profit sharing, they do not interest me.POSTED BY FARRUKH | NOVEMBER 15, 2010, 7:25 AMLOG IN TO REPLY

o

yep! that is because islamic banks are your partners in investment, meaning they assume higher risks than ordinary banks. ordinary banks will force u to pay back loan and interest even if you make losses! To compensate the islamic banks for the extra risk (because if your business fails they can lose every thing), you need to pay them hiher share of the profit. NOTE that the profit is not your alone to begin with, so it is not a cost to you but to the joint project.

POSTED BY YUNUS | JULY 28, 2013, 7:20 AM

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5.I have a problem with the overall premise of your article but I still think its really informative. I really like your other posts. Keep up the great work. If you can add more video and pictures can be much better. Because they help much clear

understanding. thanks Aavasaksa.POSTED BY AAVASAKSA | NOVEMBER 15, 2010, 10:39 AMLOG IN TO REPLY

6.I don’t bookmark sites but i will bookmark this! LOL!POSTED BY OCHRONA OGNIOWA | NOVEMBER 17, 2010, 12:11 PMLOG IN TO REPLY

7.Islamic Banking is nothing but a mocking against Islam. The Holy Quran declares that the Money and Time have no Reward. It is just Human Effort in shape of Labor which has the right to be awarded. It is mentioned in Chapter No. 53 (Al Najam) Verse

No. 39. Please refer to that verse also. And in verse No. 219 of Chapter No. 02, Allah announces not to accumulate surplus Money. When it is asked to the Holy Prophet How much we should spend in the way of Allah, it is said Open and spend all that is surplus of your necessity. Means that you can only hold what is your need and all the rest have to be deposited in Bait ul Mall. i.e. Islamic State. So how can Islam Offer to do an investment business when it is clearly mentioned not to accumulate Funds/Money? I am ashamed of the Muslims like you. In verse No. 275 Chapter No. 02 Allah the Almighty announce the People who eat Riba are the Mad People. (URL : http://corpus.quran.com/wordbyword.jsp? chapter=2&verse=275). After only three verses i.e. in Verse No. 279 All the Almighty Declares war from Allah & Rasul i.e. Islamic State against the People/Institutions/States who are in Usury (Riba) Business. (URL: http://corpus.quran.com/wordbyword.jsp?chapter=2&… I am ashamed of all the Muslims who Promote Islamic Banking. Its a challenge to all those claiming the Islamic Banking to be true to Prove it from the Holy Quran to be true. If any one can Prove the Islamic Banking, Prove it I shall be his/her Slave and shall do according to his/her wishes if he/she proved Islamic Banking from the Holy Quran? Well done so called Muslims well done!

POSTED BY IMRAN ALI | NOVEMBER 21, 2010, 7:01 AMLOG IN TO REPLY

o

Thanks Imran,Those verses you listed were very helpful to confirm the overall understanding of the Quran's message.I want to add one more verse to yours: 9:34 (O' believers, there are many clergymen and priests who take people's money unrightfully and prevent God's way; they accumulate gold and silver and do not spend it in God's cause. Warn them of a great torture [awaiting in the afterlife]).In Ricardian and Friedmanite economics, efficiency is defined as any act that leads to more profit for the owner of the business. So for example, when hospitals put three beds per room, instead of one bed (to give the patient privacy), they call that efficiency because you triple your profits without incurring additional costs. And when hospitals provide you with lower quality healthcare and use cheaper devices, they call it efficiency. When they throw you out of the hopsital after three hours from

having surgery or delivering a baby, they call it efficiency (eliminating waste. increasing profit).

POSTED BY SARAKENOS | NOVEMBER 22, 2010, 3:04 AMLOG IN TO REPLY

8.Yes Hypocrites in shape of Muslims are Cheating God. They are on the Payroll of Zions, but a Muslim can’t even think to cheat God. They are hypocrites who do so. My message to the Young Western Non-Muslims is not pay any attention to those Zionists. They are Hypocrites in the veil of Muslims. Be aware those are not Muslims who Promote Islamic Banking.POSTED BY IMRAN ALI | NOVEMBER 21, 2010, 9:43 AMLOG IN TO REPLY

o

Any Muslim who puts profits before the welfare of people, in the name of "God allowed profiteering" is a hypocrite. God did not say "go make riches and accumulate profit," he clearly stated "help the poor, give the needy, feed the hungry, offer dwelling to the travelers," and so on.

After some more research, I found out that some Islamic banks, like the Egyptian-Saudi Islamic Bank, has been discovered to have deposited its "profits" into commercial banks and accumulated interest on it.

POSTED BY SARAKENOS | NOVEMBER 22, 2010, 3:04 AMLOG IN TO REPLY

o

if you think Islamc banking is hypocricy, what do you say about ordinary banking? what solution do you propose for muslims whose commercial activities are surrounded by ordinary financial system? say in the West, Asia Africa Latin America etc?

POSTED BY YUNUS | JULY 28, 2013, 8:02 AMLOG IN TO REPLY

9.i agree with you general view about banks abusing Islamic finance and implementing the theories of Islamic finance wrongly or in a way that comply with form but does not comply with substance. However this issue is reported in every law

including modern law , and it called ( creative compliance).on the other hand, i don't believe that Islam is only about help poor!! Islam is also about making profit but in a lawful way. and if you read the sayings of the Prophet peace be upon him and his companions you will see the big picture .. Islam in the middle between capitalism and communismPOSTED BY MY PHD | NOVEMBER 30, 2010, 7:32 AMLOG IN TO REPLY

o

Islam allows and supports making profit, but has a big problem with "accumulating money." Capitalism is a system where money is accumulated so you can have a "capital" by which you own massive lands, build massive factories, establish massive corporations, and have excessive power on the overall economy and labor force.Read Quran chapter 104:1-9"Woe unto him who accumulates money and increases it manifold." (104:2)"Thinking that his wealth would make him live forever." (104:3)"Nay, they shall be thrown in Crushing Torment" (104:4)

"And what do you know about the Crushing Torment?" (104:5)"It is God's blazing fire!" (104:6)Making a profit means you grow eggplants then sell them in the vegetable market and make some money, or make a calculator and sell it for a profit. Capitalism, on the other hand, has been developed in the Middle Ages, against the Holy Church's fatwa on the illegality of Capitalism.If I am reading the Quran correctly, I believe that Islam is for a "socialist" system, where the government controls those big projects like providing electricity or internet… big projects that require "accumulation of money." Except when the government accumulates that money, it is not allowed to make a profit from it. It must be for the "good will" of the public, i.e. public goods. To have such important resources like "water" or "oil" in the hands of "private capitalists" and their "islamic or commercial banks" is evil and against Islamic teachings.

POSTED BY SARAKENOS | NOVEMBER 30, 2010, 1:00 PMLOG IN TO REPLY

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13.Here is a short video from Sheikh Imran Hosein regarding islamic banking, He call it Riba through the back-door , must listenhttp://www.youtube.com/watch?v=qstKsE0THzAPOSTED BY FAHEEM | APRIL 25, 2013, 4:24 PM

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15.Some one should tell these sheikhs and salafist theologians to not focus all their energies in calling every new thing haram, but, they should also lead the people to find the halal ways in the millieu of mordern challenges. Other wise they will definitely become irrelevant to the muslim community!POSTED BY YUNUS | JULY 28, 2013, 8:08 AMLOG IN TO REPLY

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19.But have you ever given a thought as to why these debt amounts are called lawsuit settlement loans and not credits? There are two reasons for this: first of all, these cash advances fall in the category of loan amounts and second they completely bypass the necessity of checking a plaintiffs credit score. Now you need to get into the depth of these loans more commonly called pre settlement loans, as the two points mentioned above depict the complete nature of this lawsuit funding financePOSTED BY ARNOST | MARCH 11, 2014, 3:57 PMLOG IN TO REPLY

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22.Murabaha sale (trade) is allowed in Shari'ah but Murabaha financing is not allowed. It is just li Riba transaction.POSTED BY AYUB | APRIL 29, 2015, 5:07 PMLOG IN TO REPLY

23.That's much interesting post.POSTED BY RONO | JULY 29, 2015, 5:34 AMLOG IN TO REPLYPOST A COMMENTYou must be logged in to post a comment.

http://www.kabobfest.com/2010/11/cheating-god-islamic-banking.html

Is Islamic Banking Really Islamic?Mohammed Waseem June 25, 2014 Is Islamic Banking Really Islamic?2014-06-

25T14:44:56+00:00Islamic Banking in Bangladesh, Questions from Readers 2 CommentsS.M Nurul Momin Asked:Dear Concern,

I want a FDR to Islami Bank Bangladesh Ltd.

But i have some question to Islami Bank Authority

Question:

01. Is it maintained 100% as Islami rules & regulations ?

02. As i know every commercial Bank control under central Bank rules and Bangladesh central Bank based on interest and that Prohibited in Islam. So could you pls clear to me that, what system do follow Islami Bank BD Ltd with Bangladesh central to avoid interest system ?

Honestly i want to make a FDR with any Islami Bank in Bangladesh but my doubt will it legal? If it is illegal so how i will answer to Allah after my death as a Muslim.

Hope you will answer my question.

Thanks

Nurul Momin.

Answer:Dear Nurul Momin, Assalamu’alaikum,

I appreciate your concern about the legitimacy of Islamic Banking. I will provide some facts which will help you decide, in sha Allah. First of all, I am not sure what you mean by FDR. If you mean a Fixed Deposit Receipt, then it is of itself haraam. A fixed deposit is a conventional banking product, in which, funds are held by a bank for a specified period and a fixed rate of interest is paid every year, until the funds are liquidated. I couldn’t find any details about FDRs on the IBBL website.

Islamic Banking is about profit sharing and partnership. All Islamic Banking products are necessarily based on the Sharee’ah or are Sharee’ah compliant. The former means that there are evidences from the Quran and the Sunnah for the legitimacy of those products. The latter are products derived from other rulings or products that do not oppose the Sharee’ah in any way. While discussing the products in Islamic Finance, jurisprudence is taken into consideration as well.

However, there may be instances where banks claim to offer Islamic Banking products, while that may not be true. So, you should be cautious while making your investment. You could enquire with an Islamic Bank in Bangladesh and provide us the details. We will in sha Allah help you identify whether the product they are offering is truly Islamic.

You could also read the posts under Islamic Banking Products to know more about them.The answer to your second question is that the central banks do regulate the operation of Islamic Banks, but their transactions are totally different from each other. The extent of regulation differs from country to country. Central banks’ objective is to regulate money supply and the operation of banks. They also control interest rates that banks can charge, which is not applicable to Islamic banks. Generally, central banks deal with Islamic banks based on the Musharakah and Mudarabah capital.

In most countries, banks are required to deposit a percentage of deposits collected from customers with the central banks. This is called Cash Reserve Ratio or Statutory Liquidity Ratio in case of securities. In Bangladesh, the government has introduced the ‘Bangladesh Government Islamic Investment Bond’ which is used by the central bank to cater to Islamic Banks. Excess liquidity of a bank is invested in these bonds. In case of crises, the banks can avail investment from the Islamic Bond Fund. In case no surplus funds are available with the Islamic Bond Fund for a particular Islamic bank during crisis, it can avail investment from the central bank of Bangladesh (Bangladesh Bank) under the Mudarabah scheme.

In addition, Islamic banks in Bangladesh are also allowed to maintain accounts (Sharee’ah based investment schemes) with each other to maintain liquidity.

Most Islamic banks operate under the guidance of a compliance committee to ensure that all of the banks’ operations are in line with the Sharee’ah. Just to quote an example, you can learn about the Sharee’ah Supervisory Committee of Islami Bank Bangladesh Limited here.Md. Abdul Hakim - August 16th, 2015 at 2:57 amnoneComment author #16126 on Is Islamic Banking Really Islamic? by Islamic Banking InformationThanks for your brilliant answer. But there may have some problems in lending money to the coustomers. Your policy is you will not give cash/ direct money to the borowwer. rather You perform as an intermediary like you purchase products from the supplier with the market rate and sell it to the borowwer with market above rate and makes profit between that transactions. So far as i know that this transaction is not legal from the perspective of Islam. Because the buyer or borrower is loosing independence for purchasing that products. On the other hand, It is a clear violation of perfectly competitive market. Why will i pay Tk. 5 higher than the prevailing market price???

Thank You.

HelloAssalamualaikum.If I make a deposit of 5 lakh for five years then as far the schemes bank suppose to facilitate me by paying around

5000 per month as well as an uncertain amount in the end of the year.Is there any policy to have loan on that deposit???2nd if so then what is the procedure??Finally after being matured exactly full amount of deposited money would be paid back or bank can raise an issue to deduct from my money???I like to know about this matter as I am looking for a Islamic system to invest my money…….. I have a lots of way to do so.such as post office…. Interest based private bank etc etc etc… ..but non of them can make me satisfied as I am deeply sticked with Islamic rules and regulations.Please help me to invest my money in such a way where I will get at least a good return back…. As well as I get my whole amount of money back after it is matured…..Thx in advance. Awaiting for your reply.http://islamicbanking.info/islamic-banking-really-islamic/

The contractum trinius was a legal trick used by European merchants in the Middle Ages to allow borrowing at usury, something that the Church fiercely opposed. It was a combination of three separate contracts, each of which was deemed permissible by the Church, but which together yielded a fixed rate of return from the outset. For example, Person A might invest £100 in Person B for one year. A would then sell back to B the right to any profit over and above say £30, for a fee of £15 to be paid by B. Finally, A would insure himself

against any loss of wealth by means of a third contract agreed with B at a cost to A of £5. The result of these three simultaneously agreed contracts was an interest payment of £10 on a loan of £100 made by A to B.I had read about the contractum trinius some months before first encountering the full documentation behind an Islamic banking murabahah contract. It was the kind of contract that Person A might use in order to finance the purchase of good X from Person B. The bank would intermediate in the transaction by asking A to promise to buy good X from the bank in the event that the bank bought good X from B. With the promise made, the bank knows that if it buys good X from B it can then sell it on to A immediately. The bank would agree that A could pay for good X three months after the bank had delivered it. In return, A would agree to pay the bank a few percent more for good X than the bank had paid to B. The net effect is a fixed rate of financial return for the bank, contractually enforceable from the moment that the bank buys good X from B. Money now for more money later, with good X in between.The above set of legal devices is nothing other than a trick to circumvent riba, a modern day Islamic contractum trinius. The fact that the text of these contracts is so difficult to come by is one

shameful fact of Islamic banking. If so clean, why so secretive? The following is an excerpt from a murabahah contract that was used frequently by two major institutions during the 1990's. The 'Beneficiary' is the client that needs finance, and earlier clauses require that the Beneficiary acts as the agent of the Bank in taking delivery of the goods.Promise to Purchase the Goods.1 The Beneficiary undertakes to purchase the Goods from the Bank immediately after it has taken delivery thereof on behalf of the Bank on the terms specified in this Agreement.2 The contract of sale of the goods to the Beneficiary shall be concluded by an exchange of telexes or telefax messages as soon as the Beneficiary has taken delivery of the Goods on behalf of the Bank.3 If, for any reason whatsoever, the Beneficiary shall refuse or fail to take delivery of the Goods or any part thereof or shall refuse or fail to conclude the Sale Contract after taking delivery of the Goods, then the Bank shall have the right to take delivery, or cause delivery to be taken, of the Goods and shall have the right to sell, or to cause the sale of, the Goods (but without obligation on

its part to do so) in a manner determined by it in its sole discretion and shall have the right to take whatever steps it deems necessary (including demand from the Guarantor to pay) to recover the difference between the price realised upon sale and the price paid by the Bank plus any other expenses incurred by it in relation to the Goods and/or any damage caused to the Bank as a result of the breach of undertaking by the Beneficiary to take delivery of the Goods or to conclude the contract of sale of the goods.We see here that there is even a guarantor used to ensure that the bank does not lose money on the deal in the event that the Beneficiary defaults. So much for profit-sharing.Yet the words 'profit-sharing' are to be heard constantly at all of the conferences. Some of the scholars, if pressed, will talk about moving towards more satisfactory products such as mudaraba. But then everyone goes home and works on another murabahah contract. We are told that Muslims must work within the existing banking system and change it from the inside. But we have been trying this for over forty years and nothing has changed. We are still fixing financial rates of return in advance using the Islamic triple contract.One head of Islamic Trade Finance admitted to me over lunch not long ago that there is

no practical difference between the murabahah business that he does now and the conventional letter of credit business that he used to do in his previous job. Just the labels are different. Then there's the Islamic banking department that uses interest-bearing financial instruments for the purpose of closing some of its deals. When deals are done the funds often go to lubricate the trading operations of large corporations such as BMW and General Motors. Meanwhile, in many countries, small and medium sized Muslim-owned businesses are offered no Islamic finance facilities at all. When they do finally encounter a financing proposal from an Islamic bank, many of these businessmen quickly become cynical because the financing cost is fixed at the outset of the financing agreement.These are all signs that something has gone badly wrong in this industry. But I'm not saying that it is all the fault of the people on the inside. The Western academic establishment is at least partly responsible for the way that the Islamic financiers are thinking. For example, because Brealey and Myers have written a standard text on corporate finance, they are probably as big a force in Islamic finance as Judge Taqi Usmani. It is awfully hard to escape from the value judgements that the overwhelming mass of usury-based finance books

contain. That's why an educated Muslim in Islamic finance can ask his client a shocking question such as 'what cost of finance are you looking for?' without thinking twice. He's been taught by Brealey and Myers that fixed-rate finance plays a part in any 'good' financing structure and so off he goes in search of a way to do fixed-rate finance Islamically. The possibility that fixed-rate finance may be completely incompatible with Islam in the first place may not even occur.But there are two other reasons that prevent Islamic banks from giving up on the doubtful fixed rate products and adopting profit and loss sharing instead. The first is that the clients often prefer to take finance on a fixed rate basis. The second, more overwhelming problem, is the nature of the very business process underlying commercial banking itself.To explain the first reason, let me tell you about a discussion I had with the Chairman of a major construction company in Asia. His company specialised in building toll roads. It had borrowed heavily at fixed interest in the middle of an economic boom. I told the Chairman that we could develop a toll revenue-sharing financing package. We would part-finance the toll road and share the toll receipts. No toll receipts, nothing for us to share. This would be good for his company

because if no one used the road, there would be no financing cost. With the interest based alternative, whether the toll road was full or empty, there would still be a financing cost.But the Chairman felt that 7% interest was a good deal and so our suggestion was not adopted. Probably this was because he knew that the toll road was going to provide profits of 30%, and there's no point paying out 30% in profit share when you can pay out 7% in interest instead, is there?Well, the economy turned down, fewer motorists than predicted used the toll roads, but the interest still had to be paid. And so the company had to be rescued. The Financial Times commented a few days later that the rescue was required because 'interest costs exceeded toll revenues'. I kept that article because it summarised with a real life example everything that true profit-sharing would have avoided. The moral of the story is that the chairman wants to fix his financing cost because he believes his business is going to be profitable and he wants to keep most of the profit to himself. He's practicing financial leverage like all those un-Islamic textbooks tell him to.The unfortunate fact is that even if the Chairman had given the go ahead for profit-sharing, no Islamic bank would have offered it to him. This

brings me on to the second of the two reasons for the general failure of Islamic banking to provide profit-sharing finance.When the first banks began lending paper money, they knew that they were taking a huge risk. They had spent many years promoting their paper money. Some of the phrases they used to persuade the public are still with us today ... 'as good as money in the bank' ... 'prudent' banking. Bankers were respectable chaps who only wanted to conduct honest business and make a reasonable profit in the process. Your paper, they promised, could be converted into gold simply by presenting it at the bank.So the public came to believe this promise and put their trust in the bankers' paper money. And then the bankers did their little trick and began to print more paper than there was gold in the bank to redeem it with. They could then lend this paper money at interest and make a fat profit.The banker's promise to redeem this extra paper money with the state's gold coinage was an empty promise, but one that he took because it gave him the power to manufacture money. The crucial idea that Muslims everywhere must understand is that, because this process was in itself risky, the bankers did not want to take any further risks. So they therefore avoided investing money on a profit

sharing basis. Why take the additional risk that the borrower's business would fail? Better instead to create money, lend it at interest and take a mortgage on the borrower's assets as security. Then a profit would be much more likely for the banker. This has always been the business process underlying commercial banking.Today of course the banks practice their 'business' in a different way. Remember, the bank still manufactures your cheque book and cheque card, and sends you an account statement with numbers printed on it at the end of the month. The bank tells you that these numbers can be converted into state money, but if everyone held the banks to their promise on the same day, the banks would all collapse just like the banks of old.I propose that if banks couldn't manufacture money, they could not survive commercially. They could not survive if all they did was to rent out the entire stock of money created by the state. The banks must create extra money on which to collect interest in order to have a viable business. And they must fix their financial rate of return in advance because profit sharing is one risk too many when you're in the business of money creation. Today, at least 91% of UK money supply is manufactured by the banking system. State money supply is £30 billion, bank money supply is

at least £300 billion. Even if the banking system charged a clear 20% interest on the whole £30 billion, it still could not generate sufficient revenue to survive. Hence it has manufactured an extra £300 billion on which it can charge interest.An Islamic bank is no different. It must partake in the money creation business. And it must therefore fix its financial rate of return at the outset in most of its business. That's why Islamic banking cannot succeed in being Islamic. At least, not in the way that we understand the terms 'banking' and 'Islamic' today.It gets worse. Because the banks create money by agreeing new loans, society must be in constant debt to the banks by an amount approximately equivalent to the total of a nation's money supply. But when the banks create money, they do not create the money needed to repay the loan plus the interest charge. The loans that the banks make are therefore unrepayable. The unrepayable debt in turn forces society to compete instead of co-operate since the borrowers in aggregate experience a constant shortage of money. Only one thing can save current borrowers, and that is the creation of more money, either by the state or by the banks. This provides sufficient new money with which current borrowers can repay old debts. When the banks and the state don't create enough

new money, we have a recession. If they create too much, then we have inflation. And always we have more debt.Wherever you live in the 'developed' world, look at your country's monetary statistics. You will see a steady expansion of total debt (private plus public) accompanied by expansion of money supply to a similar degree. More telling is the fact that total debt is in almost all cases showing substantial growth as a proportion of Gross Domestic Product. So despite decades of hard work, using ever more productive technology, the people are more in debt than they have ever been. Net, they own less of the wealth in their possession than they have ever done. Does this make any sense to you? Only when we understand that modern money is manufactured mostly by the banks for the sake of profit, can we understand the modern economy. Then it will all make sense.Islamic finance is not a product to be offered to a niche market. It is a system. It must be promoted and implemented as a system. Where the monetary system is concerned, I am beginning to feel that this is something that cannot be achieved by the private sector alone, Islamic or otherwise. A lead is required from the State since we must redefine the meaning of the words 'legal tender'. We must somehow overturn the monetary system

as it is. And that will require us to defeat the monster that faces us.Some of our scholars have yet to recognise the monster for what it is. They think of the banking system as a necessary part of economic activity. They do not connect the deaths of millions of children in Africa every year with the burden of debt repayments to the banks (the United Nations Development Programme's annual Human Development Reports 1997 - 1999 do show this connection). We need a payment transmission system, a safekeeping service, and investment advisory services. To all these things, yes. To money creation for the sake of profit, no.Which politician will be brave enough to challenge the wealthy bankers and their friends in the leveraged corporate boardroom? The prize awaiting a successful challenge will be huge. Such a nation will be a light for the world to follow. Imagine no more debt. Imagine all those bankers being released from their unproductive industry (the largest by value on the London Stock exchange) to do something useful instead. Imagine a world free of dominance by a few huge firms, huge and dominant because they have been leveraged with the bankers created money. Imagine what we once had before all of this. A world of small businesses, a world of variety, of

individual responsibilities and co-operating communities.Failure to defeat the monster means a never ending necessity for growth. A world awash in the dust of riba, ruled by the 'Money Power', paying perpetual interest on an unrepayable debt.Oh, I know they'll say I'm being extreme, it's just that these other fellows have all been saying it too ..."The Bank hath benefit of interest on all moneys which it creates out of nothing".Statement of William Paterson, first Director of the Bank of England, upon receiving the Charter of the Bank in 1694: quoted in Tragedy and Hope, Carroll Quigley, MacMillan New York (1966)The unlimited emission of bank paper has banished all specie .... private fortunes, in the present state of our circulation, are at the mercy of those self-created money lenders, and are prostrated by the floods of nominal money with which their avarice deluges us. Thomas Jefferson in a letter to John Wayles Eppes on June 1813, Jefferson, Writings (1984) New York: Literary Classics of the United States

And I sincerely believe with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scaleThomas Jefferson in a letter to John Taylor 28 May 1816, Writings (1984) New York: Literary Classics of the United StatesThe distress and alarm which pervaded and agitated the whole country when the Bank of the United States waged war upon the people in order to compel them to submit to its demands cannot yet be forgotten. The ruthless and unsparing temper with which whole cities and communities were oppressed, individuals impoverished and ruined, and a scene of cheerful prosperity suddenly changed into one of gloom and despondency ought to be indelibly impressed on the memory of the people of the United States. If such was its power in time of peace, what would it have been in a season of war, with an enemy at your doors? No nation but the free men of the United States could have come out victorious from such a contest; yet, if you had not conquered, the government would have passed from the hands of the many to the few, and this organised money power, from its secret conclave, would have dictated the choice of your highest officials and compelled you to make peace or war, as best

suited their own wishes.President Andrew Jackson, Address to the American people, 4 March 1837, recorded in Richardson's Messages, volume 4, p. 1532The government should create, issue and circulate all the currency and credit needed to satisfy the spending power of the government and the buying power of the consumers. The privilege of creating and issuing money is not only the supreme prerogative of government, but it is the government's greatest creative opportunity. By the adoption of these principles, the long-felt want for a uniform medium will be satisfied. The taxpayers will be saved immense sums of interest, discounts and exchanges ... money will cease to be the master and become the servant of humanity. Democracy will rise superior to the money power.President Abraham Lincoln, Senate Document 23 1865I am afraid that the ordinary citizen will not like to be told that the banks or the Bank of England can create and destroy money.Post-war Banking Policy, p. 93 (1928) William Heinemann, by Reginald McKenna, Chancellor of the Exchequer of Great Britain, later Chairman of Midland BankIn the abstract it is absurd and monstrous for

society to pay the commercial banking system interest for multiplying several fold the quantity of the medium of exchange when a) a public agency could do it all at negligible cost, b) there is no sense in having it done at all, since the effect is merely to raise the price level, and c) important evils result, notably the frightful instability of the whole economic system. Saturday Review of Literature, p. 732 (1927), Frank KnightBy allowing private mints to spring up, Parliament has fundamentally and perhaps irretrievably betrayed democracy. Before the War it was customary even in the works of apparently respectable economists to find absolutely dishonest hair-splitting distinctions between the invisible money so created and paper notes. The latter were really money and the former was not! In fact the reader can always tell in such standard works on the subject when he is approaching the fishy part of the business. The essential fact, the creation of new money, becomes obscured in a cloud of anticipatory justification and special pleading.The Role of Money (1933), Frederick Soddy, Nobel Laureate in ChemistryDespite the accusations of neo-imperialism leveled at the IMF and the World Bank, in the same way

that a country's domestic banking system is carried out with apparently scrupulous honesty, the financial conduct of the IMF and World Bank appears above reproach. If a nation borrows, it must repay. Naturally! What other conclusion can there be? The true injustice of the IMF and World Bank only become apparent when the fraudulent nature of these 'loans' is understood, and how they relate to the debt-based banking system ... It is an injustice amounting to international slavery and extortion; it is an aggressive injustice, involving the subjugation of whole nations and their sovereign peoples, operated on a scale that exceeds the total of all the more obvious efforts at dominance by individual nations indulging in warfare over the centuries.The Grip of Death (1998), Michael RowbothamEditorial, Original July 2000; updated June 2003

An abridged version of this article was published in Banker Middle East during November 2002http://www.islamic-finance.com/item100_f.htm

he journey was started to accomplish Shariah compliant prudent banking opportunities. The concept was to provide Halal Banking and safety

from Riba (Interest). The will was to avoid foreign banks and their banking system in Muslims countries. The vision was to establish Islamic Economic System.

After passing an initial life of its working today in 2010 people have questions in their mind that Is Islamic Banking really Islamic? The matter derives from two aspects. First – what is the difference in methodology a common man can see while he deals with Islamic Bank in comparison to conventional commercial bank? Second – weather Interest is completely weeded out even at the benchmarking level from Islamic Banking System?

The problem arises when Islamic Banking System is considered as merely a change of name. People try to figure out what if we say Ijarah to Lease? Is it a same product that a conventional financial institution can offer? If we sees it closely so Ijarah Muntahiya Bitamleek (Islamic Leasing Product) is very similar to the finance lease provided by conventional financial institution except the difference of Insurance cost (Takaful / Islamic Insurance) which has to be borne by lessee in Islamic mode and it is built in the rentals. But again it is not enough to say something goes wrong. Here I just want to indicate that people always try to compare Islamic banking product with conventional

financial institution’s one. But it goes critical when it has some fixed return embedded. 

Regardless of a fact that many of Islamic Banking products have some embedded component of fixed return there is another issue that is still a biggest objection of current Islamic banking system. This is the issue of using Interest rates as a benchmark. Being Investment Banking professional of an Islamic bank in 2006 I prepared many term sheets based on KIBOR for benchmarking Diminishing Musharika profits. It made me feel that we are just working under the same capitalist system by giving a name of satisfaction i.e. Islamic. A person can say that if the price of beef is being benchmarked by pork so we can not say beef prohibited just because of pricing mechanism but there are two points here first is the development of Islamic benchmarks and second the tentative nature of rates that are not a benchmark within but a mere estimate assigned by relevant probabilities or there is a will of having something fix part and making the rest performance based.

There is another argument on Islamic Banks and it is regarding their transactions with commercial banks. In addition the way commercial banks are having Islamic banking branches. It raises the issue of credibility that whether it is the same money or not? Sometimes it is also odd that what the will of

seller of banking product is. At one place a bank in Muslim Country is selling Conventional Banking Product and on other hand they have Islamic Banking Products. It is same that if Hamdard shall announce to sell wine with their parallel sale of Roh Afza. The point has to be addressed by Islamic Banks and regulators.

In my view all above mentioned apprehensions are minor. The big point is different. The real important point is we can not accomplish truest Islamic Banking System without having a true Islamic Economy and we can not accomplish Islamic Economy without surrendering our Non-Islamic lifestyles and societies.

I don’t know why we are more interested in names. No one can sell Halal Wine; simply we can not make wine Shariah compliant. The same way we can not find a way to Halal the interest. An interest free banking system is correlated to the will of economy to invest in risk. People just can not derive Islamic Banking with a will to have fix income securities in their portfolio with tagging of “Islamic”. It is actually risk that we fix rather than return in fix income product. If the concept is risk sharing so we have to work far too long to aware our societies in this regard.

I never say that we have to discourage Islamic Banks. We just need to learn and implement faster. The more we are emphasizing on Islamization of Islamic banking, the more we have to work for Islamic economy and the more we want Islamic economy, the more we have to be good Muslims in all aspects of our society otherwise it is all a debate that can not end. Don’t find Islam in Islamic Banking. Implement Islam on youself then your economy to banking shall automatically be Islamic.

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Adnan Amin Khan Says:I think that Islamic Banks are in starting phase so they can not become purely islamic at once. we people have to give this system at least this much so that they can make their on benchmarks and get rid of KIBOR .We are all the spending time on critising islamic financial system rather than finding any suitable way to help this system to do better than what it is doing .Alhamdulaih at least we hav e realized that Conventinal system was not for muslims this is a big achievement .One gentleman have raised a very valid point that our economy is not supportive for islamic financial system ,we have to built our economy first.And for that firstly we have to select a suitable leadership

and sorry to say we are touching thae ground in this aspect.So how can we bring islamic financial system. we have to think for others for for making our economy favourable for islamic financial system.Do u think If Meezan Bank Starts giving QARZA HASANA and our people will get good out of this ? One day all u people will see a true Islamic System will be in our hand Inshah Allah

22 - October - 2010 06:35:28 PMMr Fuji Says:charging intererst is permisable and there is nothing wrong in it when a compnay is borrowing heavy sum for investment or to grow.however, charging interest is not permissbale in those cases where people are needy and charging interest would futher supress then.Thus,charging interest depends on the inviduals background --the purpose he is borrowing money for.Therefore, there is no fix formula by whcich u can say that interest in all cases is haram.Interest is just like rent on assets or anything else similar to that

25 - June - 2010 06:31:40 PMbibi maryam Says:in banks either it is Islamic or conventional run on interest during my internship i came to know how banks earn their income other then their customers.it is totally on interest whatever banking

system is?

02 - August - 2010 03:59:27 PMAli Says:Islamic Banks are still evolving and are in a transition stage. We should back them and give them a chance. At the least they are better then the conventional "interest based" banks

21 - January - 2011 09:44:08 AMsam shah Says:renaming a bitmap image to jpeg works on some windows, but it never alters or reduces the images pixels, so lets not rename interest a gift because it will make no difference25 - January - 2012 06:25:35 AMUmm Haneen Says:It's heartening to see someone actually voice their opinion on this very controversial topic. As an Ex-Islamic Banker, i somewhat agree with your view with a slight addition: In their plight to success these Islamic Banks fail to ensure the strict guidelines laid out by the Shariah scholors...... these guidelines are what make the transactions halal, however there are many instances when the banks simply focus on the completion of documentation and not the actual process flow of the transaction! This is especially the case in short term Murabaha Financing where ideally the bank

should have their own procurement department. Unfortunately the banking mindset has not changed and till we don't see a profound change in mindsets of the management of these banks it is highly unlikely to experience Islamic banking in its full glory!02 - August - 2012 12:48:58 PMSalman Hameed Says:Islamic banking needs Islamic depositor that is willing to deposit his/her money on lesser profit than conventional banks. For example in Pakistan in a hire purchase agreement Islamic banks charge around 12% rent per year. But in actual the rent is around 6% per year of the value of property in case of residential property. So when Islamic bank tries to compete with conventional bank it mix 6% interest in the rent to keep it as profitable as conventional bank. Unless Islamic bank change there target customers and priorities they may not become Islamic and it will be just hiding or mixing interest in halal Islamic transactions.24 - February - 2015 06:37:29 PMhttp://www.bizomer.com/Is-Islamic-Banking-really-Islamic.html

There's Nothing Wrong With Islamic Finance As Long As It Really Is Islamic Finance

This is a fascinating little interview with Timur Kuran, an expert in Islamic finance. The point being made is that Islamic styles of finance aren’t, in fact, all that different from the “western” type that we are used to. And in fact, in certain situations, being “more Islamic” would actually be beneficial, work better than those traditional western systems.

The heart of the comments about the banking system are here:

Whether the Qur’an bans all forms of interest, or specifically its exploitative forms, was a matter of controversy in the early decades of Islam. It still remains in doubt. What is crystal clear is that what passes as Islamic finance is anything but interest-free. Almost all of the Islamic banks in existence, including those in Egypt, charge their borrowers what any economist would call interest; they also pay their depositors interest as a matter of course. This is not surprising, for interest continues to provide tangible benefits to both lenders and depositors.

In economic terms, while the banks don’t charge or pay what they call interest, the effects are that they do indeed charge and pay interest. Those of us who have dealt with such banks, in however minor a way in my own case, know this to be true. The really interesting, to me at least, point made is the following:

Having suggested that in its present form Islamic banking would not solve any of Egypt’s pressing economic problems, let me acknowledge that Islamic banks might bring benefits by abiding by their stated mode of operation. The charters of Islamic banks instruct them to lend on the basis of “profit and loss sharing” rather than for a fixed return. They are to operate like the venture capital companies that have financed the global high-tech industry. Venture capital firms lend to promising entrepreneurs, for a share of any profits, without regard to collateral, track record, or connections. They take genuine risks, losing money when investments that they finance fail.

With its young population and high unemployment, Egypt desperately needs more venture capital. That is why genuine Islamic finance could bring major benefits to Egypt.

That is, it would be a good idea if these banks, or some of them, stopped copying the western model and actually moved over to the VC model they’re supposed to be based upon.

Or alternatively, perhaps they should adopt a different one of the western models. Instead of calling themselves banks and then going through the contortions that allow synthetic interest (which is really rather what they do) why not go all a#out and adopt that other, entirely sharia

compliant, idea of being, well, being venture capitalists?

The reason this all rather amuses and interests me is because it mirrors an argument going on in British politics about banking. Traditionally, the British banks (as opposed to the investment banks) don’t in fact invest in industry or even in business particularly. They’re pretty much into property (both residential and commercial) and consumer finance and that’s it. There’s a desire, usually from the left, to change this. Banks should be lending to business and to commercial enterprises. Further, they should be financing them with capital as well as simply debt. The “should” here is coming from political aims of course. To which I have, for ages, been saying that that’s just fine. Except that what you’re asking them to do is not “banking” as we understand it in English English. You’re asking that they become venture capitalists instead. Which brings with it two rather different problems. The first is that the UK commercial banks really aren’t very good at being VCs. The second is that if anyone ever suggested paying them as if they were VCs then there would be uproar.

http://www.forbes.com/sites/timworstall/2013/03/16/theres-nothing-wrong-with-islamic-finance-as-long-as-it-really-is-islamic-finance/#b8a932e6939e

According to a recent survey by YouGovSiraj, 54 per cent of consumers in the region cannot properly differentiate between Islamic and mainstream banking.Ryan Carter Staff

Mystery of Islamic banks unveiledColin Gibson never thought he would join an Islamic bank. As the head of communications for the International Cricket Council in Dubai, Mr Gibson found himself travelling several times a month to matches and events around the world. For months he tried to secure a car loan and while he already belonged to a well-known Western bank, he didn't have time to drop by during office hours to deal with the paperwork.

Mr Gibson was desperate to get the ball rolling. After exhausting the mainstream options, he decided to call Noor Islamic Bank based on recommendations from colleagues. He couldn't believe it when the bank said that a representative would be in his office the next morning. "They were prepared to fit into my time frame and my location," says Mr Gibson, who signed on with Noor in April. "This bank actually came out to my office on more than one occasion. When I was looking for a car loan, I went through a series of banks and the one that offered

the best rates and service was an Islamic bank. Western expatriates tend to stick with what they know.

"But what I have learned from Noor is you not only receive similar banking services, but in some cases it exceeds expectations." At first, Mr Gibson was uncertain whether an Islamic bank was right for him. When he moved to Dubai from the UK about a year ago, he admits that these kinds of institutions, such as Abu Dhabi Islamic Bank, Dubai Islamic Bank and Emirates Islamic Bank, weren't on his radar.

It's a scenario most expatriates can relate to. Banks such as HSBC, Barclays and Citibank are just some of the usual suspects they tend to recognise from home. So naturally, they often go with what is familiar. According to a recent survey conducted by YouGovSiraj, 54 per cent of consumers in the region still cannot properly differentiate between Islamic and conventional banking services. The survey included 2,268 locals and expatriates above the age of 18 in the UAE, Saudi Arabia and Egypt. Respondents who didn't use Islamic banks said they avoided the institutions either because they were unaware of Islamic banking principles or believed that these institutions were only for people of a certain religious belief.

Meanwhile, in Standard and Poor's Islamic Finance Outlook 2010, the US-based financial services company reported that assets of the top 500 Islamic banks expanded 28.6 per cent to US$822 billion (Dh3 trillion) in 2009. The industry now represents a total of $1tn

worldwide and there are more than 300 Islamic banks in 51 countries. Indeed, Sharia-compliant institutions are spreading their wings. But despite the numbers, Islamic banking still remains a mystery for many Westerners. This reality was one topic of discussion at this week's International Islamic Finance Forum in Abu Dhabi.

The two-day event, hosted by Abu Dhabi Islamic Bank, brought together dozens of key representatives with the common goal of expanding the brand and bringing Islamic banking into the 21st century. Simon Eedle, the head of Islamic banking for Credit Agricole CIB, attended the conference as one of three representatives on the keynote panel. After more than 66 years in the region, he says that the corporate and investment bank is poised for tremendous growth in the next few years.

"If you think about it, 23 per cent of the [world's] population is Muslim, and less than one half of 1 per cent of assets are Sharia controlled," Mr Eedle says. "But beyond that, as the banks continue to grow, Westerners will use these banks if it gives them something that they don't get from a conventional bank, whether that's more social responsibility, access to funds or at a very basic level such as a good credit card. If you are non-Muslim, you just have more choice and competition for services."

While membership in Islamic banks is not limited to Muslims, they are supported by five basic pillars: no interest, no uncertain speculation, no financing for the socially harmful. of companies involved with goods or services deemed haram, such as weapons, pork or

gambling, the sharing of profit and loss and the understanding that all financial transactions must be backed by tangible assets. Mr Eedle says that most Islamic banks offer similar services to mainstream banks, but often with a slightly different approach.

Rather than interest, customers with savings accounts will instead receive money in the form of profits made by the bank. In the case of mortgages, the institution will actually purchase the property and subsequently sell it to the client at a higher price. The buyer then pays off the higher price in equal installments over a fixed term, which is similar in cost to what customers could expect to shell out in interest with standard banks.

"The assets are actually owned by the bank, as you are repaying it to support the financing," Mr Eedle says. "So for some customers, it may be better to use this form of mortgage. It's far more difficult to foreclose because of the common principles. That said, don't go into a financial transaction thinking you don't have to pay just because it's Islamic." There are other advantages that prospective clients should be aware of. In the case of off-plan properties, many Islamic banks will not begin charging the client until the home has been completed. With the construction problems faced by so many expatriates in the past couple of years, this particular feature could be a life saver. But for Mr Eedle, the most redeeming aspect of these institutions is the attentive and ethical treatment of its customers.

"Fifty years ago, banks were there to be the conduits for money," he says. "You had a mission in society to facilitate this financing. In the last 20 years that ethic has been lost to an extent, and it became more about pure profitability. I think Islamic banking's core principles are more in line with fairness and equality. "Water companies have to make money, but they can't turn the water off. Banks have to lend and I believe in the worst days of excess, banks lost sight of what their core functions in society really are."

Hussain Al Qemzi, the group chief executive officer of Noor Investment Group and Noor Islamic Bank, is of a similar mind. "Our non-Muslim clients are appreciating the 'less risky alternative' to banking, especially since the onset of the global credit crisis over a year ago," he says. "This highlighted gaps within Western risk management practices. Non-Muslim clients most value the transparency and straightforward way Sharia products are delivered."

Since joining Noor, Mr Gibson says he agrees that Islamic banks provide excellent service. After signing on for the car loan, he also applied for a credit card with Noor Islamic Bank. And just as he didn't have to visit the branch for the loan, a representative of the bank brought the card to him just before he left on a business trip to the Caribbean. "Every transaction has been treated well," he says. "To be honest, the deals and programmes they present are as good as any, but what attracted me was the ability to receive professional service."

As the industry continues to evolve and grow, the future is bright for Islamic banking. But there are issues that any

future client should know. Because these institutions don't offer interest, and instead share their profits with clients, the symbiotic relationship can also swing the other way. In other words, account holders could technically lose money in their savings accounts, although instances such as these are very unlikely. When it comes to credit and debit cards, clients should be aware that some cards may not function in venues selling goods deemed to be haram, such as alcohol or pork.

Finally, the sukuk, or an Islamic bond, which gives the holder a common undivided share in a group of assets, has not always been secure. In May of last year, a Kuwaiti firm, Investment Dar, missed a payment on a $100 million sukuk, while a year later Saudi Arabia's Saad Group defaulted on a sukuk worth $650m. So far, none of these issues have affected Mr Gibson. He happily remains a client in both the mainstream and Islamic banking systems, although he credits the latter for helping him get his hands on the steering wheel of a new Audi Q7.

"They even came out with me to purchase the car, if you can believe it," he says. "Joining an Islamic bank seemed like a daunting prospect because it was unfamiliar. It isn't daunting and it's not unfamiliar. And the service you receive is equal or better."

jtodd@thenational.ae

http://www.thenational.ae/lifestyle/personal-finance/mystery-of-islamic-banks-unveiled#full

Challenges of Islamic Finance Industry.

p.4. Fatwa shopping is a threat to Islamic Finance Industry because it works against the harmonisation of fatwas.

p.4. In fact, there is a proposal to setup a Supreme Shariah Board. Indonesia serves a good example where a national shariah board issues rulings that are mandatory for all shariah boards in the country.

p.6. These so-called Islamic products are Shariah compliant in their form but not in their spirit.

Issue of replication, i.e. trying to provide what all is provided by conventional banks.

Regulatory challenges of Islamic finance.

P.11. Islamic Banks need to change the perception of conventional secular economics to Islamic economics, which is a more a just and equitable system. This can only be done through collaborative effort from Muslim states (governments), scholars, banking practitioners, universities, media and eventually the public.

P. 12. 2)The depositors may not be risk lovers but if they are muslims and believe in the Divine Law, they have no choice in this matter. If they want to earn a legitimate return on their savings they have to invest them in legitimate businesses and assume all business risks(destruction, pilferage, theft, price, market, obsolescence) that the entrepreneur assumes.

P.13. As stated above, there is no compulsion to lend. Let the saver hoard his money and see if it grows in value or depreciates. Inflation is not a natural phenomenon and it is for no fault of the borrower. Moneywill lose its value even if hoarded, when there is inflation.

p.16. Uleman need to understand moder economics, banking and finance structures thoroughly only then they will be able to correctly issue fatwas against or for them.

p.19. Whether the product is dressed up in Arabic terminology, such as Mudarabah, or Ijarah, if it looks and feels like a mortgage, it is a mortgage and to say anything else is semantics.

p.20.

London-based Islamic financial consultancy Zest Advisory.

48. despite the criticism, it may still be a better alternative to traditional, interest-based banking.p. 50 developing systems that allow Islamic banks to be fully recognized by financial regulatory authorities around the world, and to bring complete uniformity in the financial and accounting practices of these banks.

p. 55. “Rarely in the Western media do I read anything about our food, our culture, our painting or our poetry. I just read how bad we are as Muslims.”

p. 58. Islamic banking is “normal banking sprinkled with holy water.” he quotes a Kuwaiti banker as saying that conventional banks are more straightfor۔76پ۔ We are of the view that till such time that a

critical research in the validity of basic principals involved for such subterfuges, is not carried out, it is not possible to carry out any meaningful evaluation of Islamic Banking.

ward than Islamic banks.p. 160 Murabaha sale (trade) is allowed in Shari'ah but Murabaha financing is not allowed. It is just like Riba transaction.