THE "REAL" ISLAMIC BANKING SYSTEM

Continued from THE "FAKE" ISLAMIC BANKING SYSTEM

Late Professor Sheikh Mahmud Ahmad“our country’s most outstanding economist and researcher and a leading thinker--had devoted considerable part of his life in the study of the theory of interest”. He devised interest-free lending instrument which he named as Time Multiple Counter Loan - TMCL consisting of two simultaneously exchanged interest-free loans between two parties such that the multiple of the amount and period of one loan equals the multiple of the amount and period of the other loan. It facilitates interest-free loaning of large sums against counter-loans of smaller sums advanced for proportionately longer periods. For example an entrepreneur requiring a loan of $10.0 Million for one year can get interest-free loan of $10.0 Million (against collateral as usual) for one year by advancing an interest-free counter loan of $1.0 Million to the bank for 10 years. Thus TMCL fulfills the client’s need of funds for the required period and also enables the bank to earn profit from long-term investment of counter-loan money. Whatever gain or loss the bank earns comes from investment of counter-loan amounts which are actually borrowed sums and in Islam there is no bar on earning profit by investing borrowed sums. In interest-based loaning the lender always gains because he earns interest whereas the borrower may gain or lose from investment of the borrowed sum. Therefore interest-based loaning is inequitable and unjust. In TMCL transaction none of the two parties is a definite gainer and each one of them may gain or lose by investing the loan taken from the other party. Hence TMCL transaction is equitable and just. In TMCL transaction each party does good to the other party and as such TMCL-based loaning conforms with the Quraanic precept Hal jaza-ul-ihsaan illa al-ihsaan and the noble teaching of our Prophet saws that a favour done to any one should be reciprocated.

As TMCL can perform Islamically all legitimate financial intermediation functions which are performed by interest, it can instantly and effectively replace interest without any disruption in the banking system. After switching over to TMCL-based loaning system the banks will continue to function as usual with the basic change that no interest will be paid or charged. All loans will be advanced against counter-loans and all transactions involving credit will be executed on TMCL-basis. Banks will continue to receive deposits and issue cheque books as usual. Account holders will have the option to keep their money in investment or demand deposit accounts. Investment account holders will share profit/loss with the bank on daily product basis. Banks will earn profits by investing counter-loan amounts and surplus deposits in Shariah-compliant modes like stock exchange, real property, musharakah, mudarabah, etc. Outstanding interest-based loans will be converted into TMCL-based transactions. Each borrower will repay only the principal amount of loan on due date or earlier and instead of paying interest the borrower will advance to the bank a counter-loan of the same amount as he took in loan and for the same period for which he availed the loan. Alternatively the bank and the borrower may mutually agree to a different amount of counter-loan for proportionately longer or shorter period on TMCL-basis. Interest-bearing bills and bonds will be encashed at their face value and the holders will receive appropriate counter-loan on TMCL-basis from the issuer.

In the interest-free regime there will be no role of interest-based treasury bills and bonds etc. and all such documents will cease to be issued and no function involving interest will be undertaken by the Central Bank. Other functions not involving interest will be performed as usual. The Central Bank will set up a framework of Central Depository-cum-lender of last resort for mobilizing surplus funds of banks and federal and provincial governments and autonomous bodies and advancing interest-free loans to them in times of need. The Central Depository will receive deposits and advance interest-free loans on TMCL basis. For example, if a bank has a surplus of Rs. 5.0M for 1 month, it may deposit this sum for 1 month with the Central Depository and obtain an interest-free loan of Rs. 0.5M for 10 months. If a bank is short of liquidity and requires Rs. 10.0M for 1 week, it will obtain from the Central Depository an interest-free loan of Rs. 10.0M for 1 week by depositing Rs. 1.0M with the Central Depository for 10 weeks. Central Depository will also earn profits by investing surplus funds in Shariah-compliant businesses.

BENEFITS OF REAL ISLAMIC BANKING:

Adoption of TMCL as loaning instrument by Islamic banks will bring the following benefits to Islamic banks and the Muslim ummah as a whole.

1.      It will open for Islamic banks the vast field of loaning to reliable and capable cost conscious entrepreneurs who want to remain independent and in full control of their enterprises and do not accept any sharing of profit or outside interference. Without providing loans to this big class of loan seekers, Islamic banks will not be able to compete with western banks who have started capturing business in Islamic investment field.

2.      It will facilitate inter-bank interest-free loan transactions and Islamic banks will not have to turn to western banks for meeting their short-term needs of liquidity.

3.      It will facilitate setting up of a central depository for mobilizing surplus funds of Islamic banks and governments on TMCL-basis and advancing to them in times of need TMCL-based interest-free loans.

It will facilitate utilization of the financial resources of the Muslim ummah in developing Muslim countries through the Central Depository, instead of being diverted to western financial markets.

I wish and pray that Islamic economists will not let it be said that champions of Islamic economic system did not prove equal to the task to show practicable way to implement Allah’s Law to eliminate interest and the way for Islamic countries to retain / gain economic independence

This article is adapted from paper written on TMCL by Dr.Abdul Wadood Khan