How much do you think the “Islamic banking” is Islamic?
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There are several opinions on whether Islamic banking is truly Halal or not? There is a lot of difference in opinion on the financial instruments as summarised and detailed between the muftis as well when it comes to Islamic finance but you can always find a safe way in sha ALLAH.
For those who declare Islamic Banking Halal
Those in favor of this opinion rate Islamic Banking typically a different model of banking comparing to Conventional Banking. The main point is that the Islamic Banking and Conventional banking are two different things, one should not confuse the interest earnings by the bank with the profits they earn through their trade activities. Hence, to them it is Halal.
Islamic banking is purely halal banking and certified by mufityan deen so no questions about there authenticity and halaal
Islamic banking vs conventional banking: It is more about the Process
There is no need to define conventional banking. The concept of paper money was an innovation in the society and now that it prevails qualified muftis etc have studied this for years to differentiate the fundamental concepts as described in Islamic law against conventional laws of finance that are predominantly haram. Just because the end result is similar has got nothing to do with the methodology. You can make money in gambling and you can make money by trade. One is haram. One is halal.
How’s buying a car at interest/lease/Ijara from an Islamic bank different from buying it from other commercial banks, when you pay the extra amount at both banks? There is a huge difference between the two. The truth lies in the process. Just like you don’t eat chicken abroad but when you see a halal certificate you eat it. It has to do with the process. In terms of process, there is a huge difference. Also, how Nikkah papers are not just ceremonial and a contract that disavows Zina and makes sex halal. What is the difference between wife and a girlfriend? Just a “contract “ (Nikkah nama) makes the girl halal for you. In Islamic banking, usually, a process has been defined in Islamic Banking whereas in any conventional bank it is not.
It’s sad to see people having such a negative opinion about Islamic Banking just because they are unable to see a physical difference in the transaction. Remember that a steak made of Halal cow meat and a Haram dead cow meat looks the same once cooked. But it’s the crux/intention/context/process behind the steak that makes it Halal or Haram.
The Two Basic Sides of Banking Transactions
About the Process – there is a fine line. For instance, a conventional bank provides financing to its clients by giving them interest-based loans whereas an Islamic bank provides financing to its client based on profit-based financing such as Murabaha, Ijarah, Salam, Istisna etc.
Let us discover:
Car on Installments Case Study
When you buy a car using equity-based ‘Murabaha Financing’ the bank buys that car for you, adds it’s profit* and sells you the car on installments. *The profit earned here is not interest because it was not earned by lending money rather it was earned by selling you an asset. Ijarah is also a trade-based activity, the bank buys the asset and leases it to the client, and at the end of the lease period, the ownership is transferred. Correct me if I’m wrong, in diminished “musharakah” the bank and client jointly own the asset and the client then buys the share of the Bank. These are the main three types of Islamic banking.
Basically, factor in the importance of Islamic banking encourages a Profit and Loss sharing model in which both parties (Customer and Bank) take benefit and bear loss together. Conventional gives you money to buy a car and charge interest on money whereas Islamic bank gives you a car and charges rent on the car. For example: If you have a car value of 20K and you want to sell it for 25k to someone saying you can pay anytime but you have to pay 25k and you signed a contract then 5k is your profit it is not Mortgage. But if you say you have to pay 25k on extra you have to pay me some percent or some amount on top of it, that’s not allowed. In the contract which you are signing with the bank if it defines any term like Mortgage or late fee on missing payment than it’s not allowed in Islam. If they are saying you have to pay a fixed amount without any time restrictions and extra amount what you have defined on a contract then it’s allowed.
Profit and loss is equally shared in Islamic banking
Islamic finance transactions are based on the concept of sharing risk and reward between the investor and the user of funds. For example, in conventional banking, the premium paid by the Customer is lost in case of an accident, and the car is completely destroyed whereas, in Islamic banking, both banks and Customers share the loss and a certain amount is refunded back to the Customer after settlement. This is just one difference, there are many other differences.
What makes it halaal or haram is the “Contract”, wordings are important,
Concepts and instruments are Islamic. The issue is about their application. Usually, Islamic banks are applying them for their own profit.
Being a finance professional had come across a scenario in a listed company where the bank was sharing a profit under the Musharika agreement but when the company registered a loss bank asked to change the formula.
It’s not about names and terms they are using. It’s all about concepts and practices they implementing.
Islamic Banking is Haram
Firstly the term. Calling anything Islamic means it comes from Islam. And Islam was completed by prophet Muhammad ﷺ.
Now there will be people who say that’s because it is within the bounds of Islam that’s why it’s called Islamic. Which doesn’t make sense, because if we take anything that was never approved by Islam and add Islamic elements to it, it shall not work. Like doing a robbery after performing ablution would still be haram.
Some of the companies and individuals’ money pertain to interest-based businesses like NBFC, DFI, AMC funds not always but 90% deposits of these companies are interest base. Then Islamic Bank reinvests these deposits into different projects. The quest is the profit generated by Islamic Bank which they further distribute to their lenders shariah-compliant or not? Definitely, it turns out to be Haram if the gains are from companies that themselves rely on capitalism and/or do prohibited stuff trade. Also, banks are selling and buying currency notes which is totally haram. In Islamic banks, they also sell and buy currency notes.
A lame remark often encountered by those opting for Islamic banking:
As mufti has endorsed it so even if it ain’t 100% Islamic you won’t share the blame (gunnah).
Islamic Banking is the same as Conventional Banking
Whereas to some people Islamic or conventional banking makes not a dime of a difference – but people say the sin will be on MUFTI Sahab and not you so Islamic banking in Pakistan basically becomes sugar-coated banking. The difference is they call markup and stuff as “RENT” by which you feel and consider it’s not Riba. Javed Ahmed Ghamdi also shares the same thoughts about renting for the capital cost borne by the bank in our Car Ijarah example. Some people who opt for Islamic Banking products because the extra amount they pay on late repayment is Donated to Charity (Sadqa) whereas in the conventional bank it becomes income of the bank. But the trouble is when you get advert statements like
Interest = insha’Allah munaffah.
The second thing, the impact is the same in your pocket. This is a manipulative control built to make sure you as a customer pay your rentals on time. After all, the bank is a Financial Institution and exists to earn either Conventional or Islamic. Although it is stated that profit and loss are always shared between the Islamic bank and the customer but eventually every business turns into profit, that’s the miracle of Islamic banks. No bank is out there to give you something with NO PROFIT. If you have to pay any extra amount other then decided amount that’s interesting and that’s Haram. Simple is that.
Argument 2: Also, back to the popular car lease case study.
Interest is one source of the bank’s profit. Using the term “Islamic” is just a marketing strategy to target unknowledgeable “holy people” who cover their eyes like an ostrich. How Islamic Banking works is purely Islamic until the procedure is followed as per the timeline. If not so, then why penalty or donation % is the same as the interest rate in case of late fee. Interest on loose cash does not have anything liable object attached. In case you don’t pay back, the bank will ask you for money which you don’t have. In case you don’t pay for your car the bank takes your car away.
It’s a million times better than conventional banking or is it worse?
Islam talks about the betterment of the society as a whole whereas Islamic banking is more expensive for customers and when it comes to giving profits it gives less. So the objective dies.
Not 100% Halal but Better is Islamic Banking Pakistan
Then is it just the change of name with more or less the same non-Islamic financial system? There is an ocean of difference between Islamic and conventional banking. But that difference is more on the soul and logic side of a transaction rather than the facade or front of it. Islamic banks receive bank deposits from all types of individuals and companies. The fact is that normal people don’t understand the basics of Islamic financing and/or the fundamental line of thinking which leads to illogical and ill-informed opinions in society. I would say you rather speak to a few people who are actually knowledgeable in this field who can help and advise.
Well in Islamic banking treating credit cards as debit cards is a good approach. Spend what you have, and avail facilities at the same 0 percent interest rate. Secondly, Ijarah or Diminishing Musharikah is a totally fine model of Financing not only authorized by Mufti’s or Allamas but yet authorized by State Bank and AAOFI (International Institution for Islamic Financial matters) so if your state authorized some Islamic Banking then God forbid if it’s wrong then sin is not on you. There is a Persian saying…
الا بلا ب گردن ملا …
Islamic banking and finance are not 100% Islamic so far, but it does adhere to some Islamic principles. It is an effort to provide an alternate model for the banking and finance system, like all endeavors, it has its own flaws and deficiency because it is still evolving, but it is an effort in which everyone should play a part so that the goal to achieve an ideal state without even any little bit of discrepancy can be achieved. All companies like Unilever, Siemens, even local co-operation take bank loans or are involved globally in a bank activity that involves Interest. So everything is haram. You currently need to start from somewhere if Islamic banking is encouraged than I do assume a day will come to all banks in Pakistan follow the same structure, therefore, taking away the last interest filth. You won’t start nothing will change.
Finance says money is interchangeable and mental accounting is a BIAS. Meaning, the amount you budget to be expensed out on furniture can be used to buy groceries. There should be a clear and crisp understanding of religious rules in terms of lending and borrowing and the general conventional banking rules. The fundamentals, policies, and parameters of Islamic Banking are different from that of conventional Banking. Yes, there is a factor of interest which consists of Kibor and spread, yet the execution of the transaction is what that matters. Giving an example, why do you ask the butcher to recite Bismillah before slaughter, because that assures that this execution has completed the requirements to make it halal.
Understand what KIBOR is?
KIBOR is only a pricing benchmark. A pricing mechanism. KIBOR is KARACHI INTER BANK OFFER RATE which is decided daily by almost 20 banks by 11:30 a.m. Kibor is implemented by State Bank so every Islamic Bank has to follow the market rule implemented by State Bank.
The Case of IBOR or IIBOR: KIBOR in Islamic Banking
Islamic Banks Proposed their Islamic Banks Offer Rate which is still to be implemented. Despite a summary is already on the desk of the Governor of State Bank of Pakistan for the past 10-12 years but it’s not approved as yet with the issue that Islamic Banks and divisions are not even 30% as compared to the conventional bank’s. Unfortunately in Pakistan IBOR (ISLAMIC BANKING OFFER RATE) is not implemented despite having Trillion of Deposits, so this is the reason State Bank ordered all Banks to make their Islamic windows so after a decade or so deposit and transaction size match up. Our ulema Hazrat are already working on IIBOR and due to their previous efforts, no new conventional bank will ever come into existence only already existing ones are operating. So, hopefully, we can except IBOR soon to compete with KIBOR (Which is actually a market practice or Monopoly), and then every assumption regarding KIBOR will vanish.
Mufti Taqi Usmani is Authority on Finance
When you need to interpret or understand law you go-to a lawyer. Then you follow their guidance because they are subject matter experts. When you are sick you go to doctors, buy pills as prescribed, because they are subject matter experts. When it comes to Shariah banking with shariah endorsement/sign off, you should follow subject matter experts. Mufti Taqi Usmani, is a renowned Islamic scholar and jurist, one of the best contemporary Islamic economists, and a former judge of the SC. Mufti Taqi Usmani wrote hundreds of books on function of Islamic banking.
Hoarding of Dollars
Making money out of money is not allowed in Islam, but of course, trade-based activities are allowed. Hoarding anything which creates chaos and anarchy in a country is a sin. In either case, the action revolves around selfishness and the result is the exploitation of the masses. Everyone trades as per the trend because the trend is your friend in Forex business. What he said is best for us in the current scenario. Taqi Usmani sb’s white papers on Islamic financing, his shariah court rulings, and commentary on an interest-free economical structure is the strongest theoretical framework for laying principles of Islamic Banking regulations globally.
Currency exchange didn’t exist at the time of the Prophet (PBUH), so more recently Mufti Taqi Usmani mentioned Hadith of the Prophet(s) and others establish principles to be applied on issues arising in later ages totally nonexistent at the Prophet’s time. Using the same principle of Ijtihad Mufti Taqi Usmani concluded that dollar hoarding in such a situation was proving to be toxic to the country’s economy. He said the purchasing dollar in this critical economic situation is hoarding because it is against the country’s interest. He never explicitly said (where he should have) to invest in foreign currencies.
As so it is extrapolated, it wasn’t just about food rather about hoarding in general that would trigger panic in the society at the lead to a situation where there is a scarcity of that commodity. The hadith was about hoarding in times of need and dollar hoarding is causing damage to the country right now. Buying a currency or a stock in hope of gain is speculation business without any actual economic activity dealing in any financial instrument by just following the trends to gain some short-term benefit is not admissible.
Who said this hadith is not admissible?
We need to come out of individualism. You want investments, do it in halal income funds. In the long run, the currency will follow interest rate differential. Again, Molana sb understands this but certainly not any attention-seeking dullard. People just having read Farkhanda Noor, having ZERO knowledge of the global financial system and even ZERO knowledge of religion and its logic had been praising Atif Mian Qadiyani for his expertise might not digest Mufti Taki Usmani. Not realizing, where, Mufti Taki Usmani is the main member of the Islamic council in the whole world. Anyways, liberals had to find a fault, if Mufti Sb stayed quiet, they would have said Economic Advisory Counsel for Pakistan doesn’t care and when he has spoken they have a problem with that.
Mufti Taqi Usmani proposed the Islamic banking system
The elite business class, bankers all the way down to bond traders have been hoarding foreign currency for quite some time now which causes heavy inflation. The lack of it makes it a commodity thereby exploiting and increasing its value by the hoarders. He simply released a fatwa in which he states that wealth hoarding is tantamount to treason. Mufti Taqi Usmani Sb said about hoarding food and brought an analogy towards hoarding money. There’s absolutely nothing wrong with what he said. There are a saying and authentic quote of Imam Abu Yousuf (R) about hoarding money too. Thus, this Hadith is not only restricted to hoarding food but anything that’s is in shortage and used against people/nations to earn profit which includes money too.
“…That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest…” — Quran 2:275
Also, you don’t need to be an expert in Islamic injunctions and economics to see what’s happening here. It’s a surface-level problem that the artificial demand for foreign exchange is a strong variable in rupee devaluation which is triggering inflation that would eventually impact the prices of imported goods. Hoarding to hedge risk in such a scenario is treasonous under any ethical framework. Let me break it down, dollar accumulation shall trigger further devaluation which shall result in some sort of import ban or default hence no basic food like oil, and no jobs. It’s DAMAGING YOUR COUNTRY! Simple! even if mufti sahib doesn’t say anything, use some sense and stop making money at the cost of the overall economy.
What is meant by riba? Now, in Islam, if even a speck of interest/riba (interest is not only monetary in Islam) is mixed with your money, the whole money is effected. Now consider it in the case of a country, money is money, mixed together, interest or interest-free. So, this question will only be valid if the state denounces interest. If existing currencies, operations, treasury, process, risks mitigation tools, fractional reserve banking system, administrative discrepancies and other violation of Islamic Teachings e.t.c remains in these so-called “Islamic” Banks, then it’s the religious obligation on every Muslim to proclaim loud And clear: Islamic Banking Is HARAM. Make Pakistan a Riba Free State. Until then, nothing is interest-free.
This is a big discussion and in the end, it’s your mental settlement. Now if we talk about comparison, Islamic banking is a better option from conventional banking until we find its truer version. My belief is that current Islamic banking is a nicely engineered facade over conventional banking. Don’t go for it. Especially investments like mutual f***s and life insurance policies. Mufti Taqi Usmani who granted Fatwa against hoarding Dollars endorsed Islamic Banking. So if you trust him then trust Islamic banking as described in “Islamic Bankari” Book by Mufti Taqi Usmani. If anyone thinks he has more knowledge than Taqi Usmani (not the gold standard) then he/should not trust it. Because then again, Islamic Banks also perform currency trading. At least, that is what the history of Islamic banking tells.