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Islamic Banking

06 August, 2007

By Col. Riaz Jafri (Retd)


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Introduction:

First of all, please let’s be very clear, Pakistan was NOT created in the name of Islam but for the Musalmaans of the sub continent - a subtle difference but with deep implications if someone cares to comprehend. Pakistan was created not to save Islam or make Muslims more religious but to improve their socio-economic condition. Most  religious political parties including Jamaat-e-Islami, Jamiat Ulema-e-Hind and Majlis-e-Ahrar etc.,  who had bitterly opposed the creation of Pakistan soon  high-jacked it in the name of Islam with the result that we are confronted with their ever increasing demands of Islamising Pakistan. They seem to be taking revenge from the secular followers of secular Jinnah, whom they call  la deen  as per their interpretation of the word ‘secular’. In their such ‘service’ to Islam they have caused immense damage to the unity and integrity of the nation by polarising it in various sectarian and ethnic divides. Now they are demanding for the introduction of the Islamic Banking in the country and in that want the banks to be totally interest free. Sood, sood, sood is the red rag to them and they are not prepared to differentiate between the interest (Sood) and the usury (Riba), which is in fact haraam in Islam for very obvious reasons. Some of the banks under pressure have transformed themselves into Islamic Banks and gotten the better of the naïve mullah by simply changing the nomenclature of the interest paying Savings Bank Accounts to the PLS Accounts (Profit and Loss Sharing accounts) and renaming the interest  as Mark Up or Profit. Mullah is happy that the bank now takes the money on profit & loss sharing basis, and whatever the additional amount the bank pays to an account holder over and above his principal amount is ain hilal. What he does not know is, that the bank would never lend him any money on such an understanding of sharing the profit and loss with him and instead ask him to furnish various securities and collaterals to ensure recovery of every penny lent to him with full interest – ooops – mark up irrespective of his making any profit or losing the money in the business! Otherwise too, if one looks a little closely at the working of these Islamic banks, there is hardly any difference in their operational practices from the other banks, particularly in their transactions with the foreign banks where they have to follow the International Banking rules which are NOT Islamic in any way. In other words these Islamic Banks have double standards – one for the local operations for the consumption of the mullah and the other for their international working. Is it not hypocritical on their part and by their such doings don’t they smudge the sacred name of Islam?

Interest  - raison d’etre

There are no two opinions about inflation and the fact that the money looses its buying value with each passing day. Therefore, the money lent to someone today when returned in the same amount after, say, 5 years would have certainly lost its worth to some extent. How fondly do we reminisce about how cheap were things in our childhood and young days. I remember in 1940 we used to hire a tonga for transporting fruit worth Rs. 10/= only from market to our place. Now I can’t buy even a good quality apple for this amount. To elucidate; gold was Rs. 60/= per tola in 1957.  Today, after 50 years in 2007 it is Rs.16,000/= per tola. A whopping jump of more than 266 times!  If I had borrowed Rs. 60/= from someone in 1957, it would be ridiculous for me to return him Rs. 60/= today in 2007 as repayment towards the loan.  But I can’t pay him more nor can he demand more as according to our Ulema that will be interest and interest in ANY FORM is haraam in Islam. Now suppose in the same 1957 he had lent me a gold coin (Pound Sterling, Ashrafi etc.) or one tola of gold on the mutual agreement that whenever feasible I would return him the same gold coin or one tola of gold in kind. Naturally, in1957 I sold the gold in the open market and got Rs. 60/= for it which money I used for my immediate need then.  But, now in 2007 if I have to return him his piece of gold how much would it cost me to buy it from the market? Rs. 16,000/= . That means I will pay him 266 times more of the ‘money’ that I originally borrowed from him.  The money got so much devalued over the period of 50 years that today’s Rs.16,000/= are just equal to Rs. 60/= of 1957.  Therefore, quite logically if I had borrowed Rs. 60/= in currency from my friend in 1957 I should return him Rs. 16,000/= in currency today in year 2007. But can I? What would you call it?  Sood, Interest, Riba, Mark Up or what?  Is it really Haraam in Islam or is there something more to it than what we are made to believe or understand?  If it is acceptable to Ulema in the case of gold, which I am sure they will have no object to, why can’t the same analogy be applied in the case of currency bills also?

The Way Out

Anyway, assuming that the Ulema will have no objection in returning the same weight of gold to the lender as originally borrowed from him, irrespective of the period that the borrower kept it under his use, the bank could also resort to converting their transactions in measure of gold of equivalent weight. Let me explain using a hypothetical case. Suppose I opened an account in a bank by depositing Rs. 10,000/= on 1st July. For ease of understanding, let’s suppose the gold was Rs. 1,000/= per gram on that day. In this computer age my Rs.10,000/= will instantly be converted into the exact weight of gold which will come to10 grams and my Balance will show 10 grams of gold. On 30th July I want to withdraw  Rs. 5,000/= and write a cheque for it. The bank will pay me Rs. 5,000/= in the currency bills but adjust it against my balance of 10 grams of gold. Again, suppose the gold price had in the meanwhile gone up by Rs. 50/= per gram making it Rs. 1050/= per gram on 30th July.  The bank will, therefore, at this rate of gold deduct, 4.76 grams from my balance of 10 grams leaving me a balance of 5.24 grams. Again, on 4th August I deposit Rs. 20,000/= into my account and the gold price on 4th August happens to be Rs. 1100/= per gram. The bank computer will instantly convert my Rs. 20,000/- at this rate into 18.19 grams of gold and credit it to my previous balance of 5.24 grams making it a total of 23.43 grams of gold for me. Apparently it would seem that I have lost some money during the month because 10,000 + 20,000 – 5,000 are equal 25,000/=  and I have a gold balance of 23.43 grams only. But it is not so. The value of 23.43 grams at Rs. 1,100/= (the bullion rate of 30th July and assuming there is no increase in gold price during the last 5 days or so – upto August 4) comes to Rs. 25,773/= .A clear gain of Rs. 773/= in the balance what should have been ordinarily Rs. 25,000/=. According to my reckoning this hypothetical gain of Rs. 773/= will not fall under the purview of Riba or usury or interest etc. and the Ulema should not have any objections to such a ‘profit’.

Bank’s Profit: 

Now,  if the creditors are to be paid exactly what is due to them and the borrowers charged exactly what they owe, then how does the bank make money to meet the expenses of running the establishment and support the huge paraphernalia for the bookkeeping of the account holders and carry out other financial transactions?  I admit my inadequacy to answer this question completely which is the domain of the actuaries and financial gurus. However, to my mind the following could do the needful for the bank :

 

1. Service Charge:  The bank could be allowed a Service Charge of, say, 0.1% or so on all transactions. Exact rate can be fixed by the State Bank after negotiations with the banks.

2. Type of Account: The “Transaction through Bullion” shall apply only to the interest bearing accounts like Savings and Fixed Deposit Accounts etc.. The Non-Interest bearing accounts like Current and Foreign Currency Accounts will be operated as hither-to-fore.

3. Miscellaneous Operations:  All other operations of the bank like furnishing credit lines, securities, bank guarantees, letters of credits, lockers, certificates etc. will remain also as hither-to-fore.

4. Any Other Option:  The financial pundits, the actuaries, the State Bank, the Financial Institutions and government can come up with more ways and means of allowing the banks to make REASONABLE profit for providing the Interest-Free banking to the public.

The above are the random thoughts of the scribe, not at all intending to tread upon the domain of the experts and Islamic scholars, who can expand upon the basic idea of ‘transactions through bullion’, if found feasible. 

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