Home Weekly Islamic Pages Islamic Banking Page 17th July 2020

Islamic Banking Page 17th July 2020

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Islamic Finance under Government Conditional Subsidies

Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

Subsidized Financing is a loan or other form of financing that a government provides directly or with guarantees. Subsidized financing is available at a lower interest rate because the government does not need to make a profit and can better afford the risk of loss.

 Fundamental principles of Islamic banking are the sharing of profit and loss, and the prohibition of the collection and payment of interest by lenders and investors. Islamic law prohibits collecting interest or “riba

For getting these loans in Pakistan one has to get-

  1. Dully filled Application form.
  2. Balance transfer undertaking ( In case customer wants to transfer his existing outstanding loan from another bank)
  3. Two recent passport size photographs.
  4. Copy of CNIC.
  5. All other relevant documents ( Income documents, Bank Statement, Profession proof etc. as per customer category)

The definition of a subsidy is money or grants as given by the government is to support a project, business or industry, or a grant of money or financial support offered to fund an artist, project or other endeavor. For example when the government gives money to a farmer to plant a specific farm crop, this is an example of a subsidy.

Subsidized Loans do not accrue interest while you are in school at least half-time or during deferment periods. … Interest is charged during in-school, deferment, and grace periods. Unlike a subsidized loan, you are responsible for the interest from the time the unsubsidized loan is disbursed until it’s paid in full. Islamic law prohibits charging interest as well as any usury (i.e., lending money at exorbitant or unlawful rates of interest). Therefore, interest cannot be charged on loans, nor can it be paid on savings. But Islamic banks are still banks, which mean they also seek to make profits for their investor. Subsidies take many different forms but can be divided into five broad categories.

  • Export subsidies. An export subsidy is when the government provides financial support to companies for the purpose of exporting goods to sell internationally.
  • Agriculture subsidies.
  • Oil subsidies.
  • Housing subsidies.
  • Healthcare subsidies.

Half of farmers receiving subsidies made more than $100,000 a year. Between 1995 and 2016, the top 10% of farmers received 77% of subsidies. The top 1% received 26% or $1.7 million per recipient. The top recipient was Deline Farms Partnership, which received $4 million in 2016.

The impact of the subsidy is to lower prices for consumers but to increase the price received by producers. The benefit of the subsidy is shared by the consumers and producers in a proportion that depends upon the relative slopes of the demand and supply functions.

When government subsidies are implemented to the supplier, an industry is able to allow its producers to produce more goods and services. This increases the overall supply of that good or service, which increases the quantity demanded of that good or service and lowers the overall price of the good or service.

Current government is providing subsidy of 35% for unemployed youth to start up new business as financial assistance this amount has not pay to government back. Total investment on business is 100 % out 35% is subsidy by govt and other remaining 65% is provided by banks on interest any unemployed youth who want this scheme has to take loan of 65% on interest and 35% will be provided by govt which is free. It is both mandatory 35% and 65% otherwise any one is not eligible for this scheme. But loan of 65% can be closed after 3 years it is rule from govt. As such this scheme tantamount loan on interest that is haram .

What Ulema Says on this-

Since the government subsidy is conditional on borrowing with Riba (interest and/or usury) from the bank, then it is not permissible to enter into such transaction unless one is in dire necessity. Dire necessity is when a person reaches the state that if he does not consume what is forbidden; he will die or will nearly die. Allah Says (what means): {…while He has explained in detail to you what He has forbidden you, excepting that to which you are compelled…….} [Quran 6:119]

If one is not compelled by necessity or dire need to engage in Riba, then it is not permissible for him to engage in it. The fact that the government gives a grant to those who borrow money for that investment project does not make it permissible to enter it. There is nothing good in Riba and there is no blessing in it. Allah Says (what means): {Allah destroys interest and gives increase for charities……..} [Quran 2:276]

Nonetheless, in regard to such questions, we advise that the question be asked to the European Council for Fatwa and Research (ECFR), or to the Assembly of Muslim Jurists of America (AMJA), and other institutions that are specialized in issuing Fataawa about the affairs of the Muslim communities in western countries because these communities have special conditions and circumstances that may have an effect on the Fatwa, and these institutions are more familiar with them.

So in flux matter is still hanging in the air.

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