Frequently asked 10 Questions about Islamic Banking and Finance
1-Is Islamic banking truly Islamic, or is it just cosmetically-enhanced conventional banking?
Perhaps the easiest way to determine whether Islamic banking is truly Islamic or not one has to see how it actually works in practice. Basic Objective of Islamic Banking and Finance is to inject falah and better life for the people in a society. This require practical shape of Islamic Banking and Finance to impact macro and micro variables so as to bring prosperity in a society through its stakeholders i.e. government, regulators Islamic Banking and Financial institutions and customers as well.
2-There was no Islamic bank during the Prophet’s (PBU) time, so how can there be Islamic banking now?
Admittedly, some Islamic banks do carry out impermissible transactions, but that implicates the entire field of Islamic banking no more than the sins of a few Muslims incriminate the entire Islamic community. As for the claim that Islamic banking is just part of the “system” and can be avoided, is to put one’s head firmly into the sand. As long as Muslims, money and capital markets co-exist, there will always be a need for Muslims to put their money into some kind of a market (even a little money in a checking account that circulates into global capital markets). The question Muslims should really be asking themselves is: what now? Whether they would not rather keep their money in the most Islamically acceptable manner available to them given under different options. And while new customers might be forgiven some level of healthy skepticism, we should all understand the limits of our own unqualified ijtihads when declaring something a bidat.
3-Don’t Islamic banks simply change labels, by replacing the word “interest” with “profit”?
Interest, the additional charge over the loan principal, is the “cost” of using money, and is strictly forbidden in Islam, whether given or taken, at a low rate or a high one, to or from a Muslim or a non Muslim, whether in Muslim lands or not. The problem with exchanging one amount of money for a larger amount of money at a later date is that there is no underlying asset or service transacted. Profit, rent and mark-up, on the other hand, are asset and service backed, and permissible in Islam. Profit is earned on the sale of goods and the provision of services.
4-Why does Islam forbid interest when money is just another commodity that comes at a price?
The treatment of money as a commodity is partly responsible for enhancing world poverty (by forcing poor countries to allocate increasing amounts of capital away from social services, like healthcare and education, toward debt servicing) and increased market volatility (by widening the gap between the supply of money and the creation of real assets). It is often asked how we would live in a world without interest. We might instead begin asking how we should be expected to live in a world with interest.
5-Where should I keep my money? Islamic banking doesn’t adequately address the inflation problem and you say interest banking is forbidden. If today’s Rs 100 is going to be worth Rs 90 next year because of inflation, why can’t I charge interest to compensate for the loss?
In order to compensate for inflation, Islamic banks provide plenty of instruments that mimic the security and liquidity of an ordinary savings account while also providing a reasonable interest-free return. Musharaka Certificate is just one example, but all the major banks, including non-Muslim banks that sell permissible Islamic products, offer basic consumer accounts. If making a long-term personal loan, for instance, one might consider gold (e.g. an individual lends Rs 100 in gold today and tells the borrower that he would like the equivalent gold back in 3 years) than what’s wrong in it.
6-Stocks are like gambling, but Islam permits stocks and forbids gambling. Why?
This returns to the basic principle of asset and service backing. Stocks invest in real assets (a company’s property, plant and equipment) and actual services (a company’s management expertise). Gambling invests in nothing. Even if a lottery funds charities or finances public works, the money with which it does so is still haraam. Stocks provide risk-based returns based on publicly available information. Gambling provides only uncertainty, and the distant prospect of huge gains based entirely on chance.
7-What’s the difference between an ordinary lease and an Islamic lease (ijarah)? They look the same.
An ijarah lease, like a conventional lease, is an agreement to rent out property or services. In an ijarah lease the lessor (the person granting the lease) maintains ownership of the property or service while the lessee (the person to whom the lease is granted) gains use of the property and the resulting profit. In conventional financial leasing, the interest payments have to be made to the lessor whether the lessee gains benefit from the property or not. If the property is damaged through no fault of the lessee’s, the interest payments are still payable.
8-If Islam forbids fixed-income interest, what’s wrong with floating-rate interest? Doesn’t it also rise and fall like profit?
Islam does not forbid fixation. It is permissible to fix profits (in percentage, not absolute, terms), prices, rents and installment plans, to name a few measures. But it is forbidden to exchange money for a larger amount of money (unless the currency is different, in which case it is permissible at spot). The unlike exchange of like moneys creates riba. But exchanging assets or services for money and money for assets or services is entirely permissible. So the problem does not relate to whether an interest rate is fixed or floating, but to the interest itself.
9-I don’t have enough money to buy factory equipment (or a car, a home or pay for an education)? How do I avoid interest and still fulfill my short-term financing requirements?
Murabaha (mark-up financing) is an example of an Islamic instrument that funds short-term capital requirements. Because it is the most easily confused with interest-based financing, it is worthwhile going through the basic steps in a murabaha execution that are different from conventional leasing.
10-Is there a secondary market for Islamic instruments?
Islamic banks face an unusual set of competing demands today. On the one hand, the Islamic banking sector is growing at about four times the rate of the industry as a whole. But on the other hand, Islamic banks are forced to conform to a regulatory environment that has traditionally catered to a well-entrenched interest banking system. As a result, Islamic banks now inherit a customer base so accustomed to dealing in interest that to suggest an alternative, particularly one with a well-laden “Islamic” label attached, is to imagine the seemingly unimaginable. But in just the first few decades of consumer-level Islamic banking, a centuries-old conventional finance sector is beginning to acknowledge the importance of providing an Islamic alternative, evidenced most tellingly by the creation of Islamic subsidiaries within conventional Western banks. And because all banks, whether Islamic or not, are profit-motivated and demand-driven, it is important that the Islamic banking customer demands products that are compliant, for which the first step is self-education about what actually makes a financial product Islamic. Still there is no liquid secondary market for Islamic instruments but with the increase in size of Islamic Industry and with their frequent use liquid secondary market for Islamic instruments would emerge automatically.