Sharī´ah legitimacy of Islamic banking
Dr. Muhammad Tahir Mansoori
Generally it is perceived that current Islamic banking is not Islamic but in current environment when banking has become a pillar of economy, we have to find some answer to survive in this competitive world, however remaining within the ambit of basics of Islam.
Sharī´ah legitimacy of Islamic banking has always remained a subject of intense debate and discussion
A group of scholars holds the opinion that current Islamic banking practices are un-Islamic. Their major objection on Islamic banking and finance is that it heavily relies on Hilah i.e. stratagems and subterfuges to circumvent sharī´ah prohibitions on riba, which frustrate the higher objectives of the sharī´ah.
Hilah literally means an artifice, device and stratagem. Technically it may be described as the use of legal means for extra-legal ends that whether legal or illegal, be achieved directly with the means provided by the sharī´ah. It enables persons who would otherwise have had no choice but to act against the provisions of sacred law, to arrive at the desired result while actually conforming to the letter of the law. Thus, Hilah (legal artifices) constitute legal means by which one can arrive at judicial outcome otherwise prohibited by the law. Hilah in Islamic jurisprudence is used in two meanings. Firstly as tricky solutions to difficult problems without frustrating the purpose of law; they are clever uses of law to achieve legitimate ends. They are employed to overcome inconvenience in law. Such Hilah are considered to be lawful. The Hanafi and Hanbli jurists prefer to call them makhārij i.e. outlets rather than Hilah. Secondly, as a device and subterfuge to circumvent certain sharī´ah prohibitions or to evade certain obligations. Such Hilah are declared unlawful by the fuqaha.
An example of a clever use of law is indirect exchange of superior dates with inferior dates, suggested in the hadith of Companion Hazrat Bilāl (RA). The requirement of Islamic law in the exchange of dates with dates is that dates on both sides should be equal. Now if a person wants to exchange its inferior quality dates with superior quality, it has to ignore quality difference and exchange it on the basis of equality in weight on both sides. Any difference in the quantity will make the transaction, a transaction of riba al-fadal. The solution to this problem is to sell inferior quality in market and buy from the proceeds of sale required superior quality. In this way the parties can overcome a difficulty without jeopardizing the letter of Islamic law. This, however, is not a Hilah in real sense; it is the act legalized by the Holy prophet (PBU), the law giver, himself. Unlawful is used either to circumvent a prohibition or to evade obligation. An example of Hilah intended to circumvent sharī´ah prohibition on riba is bai´ al-´inah.
Bai´ al-´inah is to sell a property on credit for a certain price and then to buy it back at a price less than the sale price on prompt payment basis, both the transaction take place simultaneously in the same session of contract. For example, A sells a commodity to B for Rs. 100/- on a one-year’s credit. A, then buys the commodity back for Rs 80/- from B on immediate payment. In the above case, A is a creditor and B is a debtor, A has advanced loan of Rs. 80/- under the cover of sale transaction in which he earns a surplus of 20 rupees. Another form of bai´ al-´inah is to sell commodity on cash and then buy it back at a higher price to be paid at some specified time in future. In this case, the prospective debtor sells an object for cash to the prospective creditor. The debtor immediately repurchases the object for a higher amount payable at a future date. Thus transaction amounts to a loan with certain increase. The majority of Muslim Jurists consider this transaction invalid because the intended objective of the transaction opposes the objective laid down by the lawgiver. This form of transaction, in their view, is nothing more than a legal device aimed at circumventing the obstacle posed by the prohibition of riba. It is a fictitious deal in usurious loan transaction that ensures a predetermined profit without actually dealing in goods or sharing any risk.
The example of Hilah intended to evade some sharī´ah obligation is gift of zakat-able amount before completion of one year in order to avoid zakat. Similar to this is a situation where a person combines scattered animals to reduce the amount to be paid on account of zakat. For example, a person owns forty sheep and his two sons also have forty sheep each. They combine them together as single property to give one sheep instead of three sheep on account of zakat. Conversely, a person has forty sheep. He sells two sheep so that he is exempted from obligation. The last category of unlawful Hilah is reflected in a famous sharī´ah Maxim: “Every legal artifice whereby nullification of a right or affirmation of a wrong is devised is unlawful”. It suggests that a legal artifice which serves as means to violate some established principle of Islamic law and also defeats the intention of the law is unlawful. Conversely any legal artifice that does not contravene an established legal principle is valid and may be permissible in Islamic law.
A Hilah affected on a debt transaction is generally treated as unlawful Hilah, because it intends to give some extra benefit to the creditor. Buy- Back agreement, sale with right of redemption belong to this category. A famous maxim states: Hilah affected on debt is a Hilah for riba. Some examples of Hilah on debt transaction are: to mortgage a house with the creditor and allow him to stay in it, or to sell an object to the prospective debtor for an exaggerated price and then immediately lend him some money or to buy from him certain commodity at a lower price or to lease him some asset at a rental higher than its prevailing market rate. Ibn Qudamah (d.620 H) writes: Unlawful Hilah means to do an act which is apparently permissible with the intention to achieve some unlawful purpose such as to do a prohibited thing or avoid some obligation or nullify a right. The permissible Hilah, on the other hand, is sought to overcome difficulty and inconvenience. However this is not the end of the story, hence further efforts with new concepts and tools are required to resolve these conflicts.
Focusing on Sharī‘ah Governance in Regulating the Islamic Banking Institutions
Islamic banking and finance has developed consistently over last four decades despite serious global financial crises time to time. This values based finance system can serve the real purpose of financial intermediation to create sustainable value in the real economy at national and global levels.
But, Islamic finance institutions (IFIs) are using ‘Islamic’ equivalents of almost all conventional products for financing and liquidity / risk management, from ‘over draft’ to the most toxic derivatives to compete with the conventional banks in profitability. This has created credibility problem for Islamic system of finance. It refers to need for strengthening the governance of the IFIs. Islamic banking practices in two categories of jurisdictions namely the countries where mainstream approach based on AAOIFI’s Shariah Standards prevails and the countries like Malaysia where specific approach has been adopted on a number of juristic issues. Although the approach is apparently different, but practically Islamic banks in both categories of countries are replicating many conventional products to get comparable returns in financial markets. It is suggested for reorientation of the regulatory and governance framework enabling Islamic banks to contribute for stability of the national and global financial systems. There has to be one basis for products approval and decision making, and AAOIFI’s Sharī‘ah Standards could be the best such basis.
The regulator needs to further fix-up the framework and emphasize upon the Sharī‘ah scholars that increasing use of controversial modes has adversely affected the image and true identity of Islamic banking and finance. Once such built-in flaws are removed, the main responsibility would lie on the Sharī‘ah scholars who are sitting on the ‘driving seat’ and who could lead Islamic banks not only to get rid of ribā in letter, but also lead for transformation of the national and the global finance to infuse in it morality and Divine ethics and to make it really beneficial for mankind.
Islamic Banking at Risk in Pakistan
The Islamic banking industry holds approximately 15 per cent of total banking deposits i.e Rs 2 trillion. But when it comes to investments, Islamic banks have a share of only 5pc in the form of liquidity instruments i.e less than Rs 555 billion.
Since in Pakistan banks are not required to extend insurance coverage, hence banks keep government liquidity instruments to meet their Statutory Liquidity Requirement (SLR), which is aimed at protecting the institution in the case of a panic run on the bank.
Previously, both conventional and Islamic banks were supposed to keep 20pc of their demand and time liabilities in the form of SLR-eligible instruments. But later on the State Bank of Pakistan (SBP) revised the SLR requirement downward to 14pc for Islamic banks since they were short of SLR-eligible instruments.
With this, bai muajjal i.e deferred payment purchases by the government was introduced thus making such instruments eligible for SLR before some grace period before their maturity.
Due to a lack of government-guaranteed SLR-eligible papers, Islamic banks have been forced to finance PSEs at fine rates, raising the risk of non-performing loans. Due to smaller returns on their assets, Islamic banks are finding it difficult to raise deposits at higher rates, resulting in deposit attrition. Also, these institutions don’t have the luxury of an interest rate corridor (available to conventional banks) where banks can place funds at a minimum rate or borrow at a maximum rate from the SBP in dire need. Hence, the rule that the central bank is the lender of last resort to all banks doesn’t exist for Islamic banks.
To avoid this government should issue more sukuks on its assets whether generating revenue or not .The government should also come up with a short-term alternative to treasury bills for Islamic banks by taking example of Federal Investment bonds once floated by SBP.A possible solution can be a product that allows the government to fund its quarterly purchases of crude oil/furnace oil through the Islamic banking industry by issuing SLR-eligible short-term paper using mode of Salam.
In the absence of these measures, there is a risk that Islamic financial institutions will fail to meet their statutory liquidity requirement and be forced to supplement it with cash, further eroding their profitability.
- The Islamic banking industry is set to flourish further even in non-conventional markets as the International Monetary Fund (IMF) approved a plan to incorporate Islamic finance into its financial sector assessments of select countries starting from January 1, 2019 to improve regulation in the growing sector