THE "FAKE" ISLAMIC BANKING SYSTEM

The global debt crisis has reached a dangerous new phase.  Unfortunately, most people are not taking notice of it yet because most of the action is taking place overseas, and because their financial markets are riding high.  But just because the global economic crisis is unfolding at the pace of a "slow-motion train wreck" right now does not mean that it isn't incredibly dangerous.In this special report, Talha offers essential information on solution for Global Economic Crisis.

THE DEFECTS IN THE (FAKE )ISLAMIC BANKING: 

  For meeting their own short-term needs of liquidity Islamic banks take loans on interest from conventional banks and almost all Muslim governments also do the same. Muhammad Taqi Usmani who is chairman / member on Shariah Supervisory Boards of a dozen Islamic banks and financial Institutions, in his book ‘INTRODUCTION TO ISLAMIC FINANCE’ writes 

“The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged Interest”.

The modes of financing used by Islamic banks in two categories “advancing funds on a profit-and-loss sharing basis” and “financing the purchase / hire of goods (including assets) and services on a fixed-return basis”. The share of profit-sharing modes in the total financing by Islamic banks is very small. Most of the financing is provided on a Murabahah basis. Murabahah which is permissible in Shariah is a sales contract at a price markup between buyer and seller. In fake Murabahah transactions Islamic banks do not actually buy or sell and they simply provide finance to buyers in a round about manner through proxy buying and selling and use this mode only to legitimize fixed-return on capital which virtually is the same as interest earned by conventional banks. Thus in principle interest-based transactions have been replaced by those based on Murabahah, leasing and some Musharakah all of which are permissible under Shariah. But Appearances are deceiving, however, and only the form of the transactions have changed with no change in the underlying transactions”. “Another issue of importance to consumers is the financing of loans… . These can easily be handled via the instrument of Murabahah… . There are virtually no differences between it and the conventional interest-based financing”.

THE REMEDY FOR THE (FAKE) ISLAMIC BANKING: 

Interest-free lending and borrowing can remedy the deficiency and defects in Islamic banks and eliminate interest from the banking system. Hence the need for an interest-free lending instrument. Wide spread practical use of Islamic concept of Qard Hasan i.e. interest-free lending for productive purposes is highly commendable and deserves to be encouraged as according to a Hadith reward for lending is eighteen times. There are several authentic examples in Islamic history of staunch Muslims investing loaned sums in trade. It is a gross misconception that Qard Hasan is meant only for the poor and disabled whose needs are fulfilled through zakah and sadaqaat in Islamic economic system. It is a pity that nowhere in the paper under discussion interest-free lending is mentioned although it is the most useful and commendable means for economic development. No doubt profit- sharing mode of financing is far superior to interest-based lending, but due to moral hazard profit-sharing on large scale has proved to be impracticable. In these circumstances it is necessary to put in use another zero interest rate mechanism i.e. interest-free lending as a mode of finance. Interest-based lending, though exploitative, has played a major role in the enormous economic development by providing finance freely and widely to industry, commerce and agriculture. Interest-free lending being commendable as a rewarding mode in Shariah will definitely bring economic development to an extent far greater than that brought by interest-based lending and what can be expected from wide spread use of profit-sharing which is permissible in Islam but not as rewarding as interest-free lending.

ANOTHER MISTAKE OF APPLICATION OF (FAKE) ISLAMIC BANKING:

This islamic banking system has gradualism in implementing the Shariah injunctions .Allah’s laws are all for the good of mankind at all times and in all circumstances. It is inconceivable that elimination of interest even if it is done abruptly could bring any harm because Allah assures in Quraan

 “those who act upon My instructions will have nothing to fear nor will they be sorry”.

 Gradualism is understandable and can be acceptable for transforming the whole economic system to Islamic System. However, gradualism in eliminating interest cannot be acceptable in any circumstances because giving up of interest is condition of Iman and Quraan declares war from Allah and His Rasool saws against perpetrators. Interest must, therefore, be eliminated forthwith and not gradually. No doubt “every system has its own institutional requirements” but these come into being through constant evolving process which goes on side by side with the expansion and development of the system. However, elimination of interest must not be delayed on any account.

See THE "REAL" ISLAMIC BANKING SYSTEM