Islamic Banking

Is It Really Kosher?

is an interesting article by Aaron MacLean on the rise of Islamic Financing around the world. Some of the article’s better points:

…“money always looks for the best deal.” if Islamic finance couldn’t provide results close to those of secular institutions, it wouldn’t exist. … The rational profit motive never lost its place as the key factor in investor behavior.

Malaysia has the largest Islamic Financing sector outside of Dubai, if I’m not mistaken. My bank accounts are all structured Islamically, as are my house and car loan (murahaba, explained in the article). There are conventional alternatives, but I chose these instruments instead. I can claim piety was the motivator, but the fact is the terms and conditions are indistinguishable from conventional ones, at least at the layman’s level, so I was not forced to pay a monetary penalty for going halal. If I were, maybe I would have chosen differently. I have eight mouths to feed, after all.

Islamist writers such as Sayyid Qutb and Sayyid Abul-A’la Maududi envisioned Islamic finance as the economic arm of a new, sharia-guided political order. … But the post-capitalist utopia that reliance on these instruments was meant to inaugurate was dead on arrival.

This point is spot-on. People sometimes seem to be under the impression that an Islamic society is one that will be free of inequality and that Islamic financing will somehow cause every individual to behave altruistically with his money. But neither wealth nor poverty are social ills unless they prevent us from meeting our religious obligations to the Lord. Islam forbids injustice, not inequality. Among the Prophet’s companions were extremely wealthy people and poor. While it is true that many of the wealthy companions gave away every cent in the way of God, it was not because of how they ran their business. Charity and care for the poor is covered under sadaqah and zakat. Business is still business.
The author makes much fun of the similarity of conventional car and house loans to
the Islamic model. In the conventional car loan, the bank gives you money to buy a car, and charges you an agreed rate of interest on the money. In the murahaba loan, the bank buys the car that you want, and then sells it to you at a higher agreed-upon price, which you then pay back to the bank on a monthly basis. In the end, the interest rate on the money is identical to the mark-up on the price of the car. The author calls this a loophole, but whatever – it means to me that interest and riba are not equivalent terms. The Quran does not prohibit interest, it prohibits a thing called riba, the meaning of which is something both wider and more complex.

What the article does not cover well are the areas in which Islamic finance does depart significantly from conventional finance. The article does mention unsecured loans, like to start a business. The bank has to become a partner in the business enterprise, and share in the profit or loss. This puts more risk on the lender and thus the lender will be much more cautious and economic growth will be more measured. I don’t see where that’s a bad thing. Other differences that I see between conventional finance and Islamic finance – Ethical investment: no investment in haram industries like tobacco, alchohol, gambling, etc. Another, and I’m not an economist so correct me, is in the gambling on fluctuations in prices of stocks and such. What’s that called, margins trading?

Another is currency speculation. The Islamic system is based on a gold standard, where all currency is based on a quanitifiable amount of cold, hard gold, and to my mind this is the crucial element of the system that has not been implemented yet, although Malaysia has been actively pushing for it. Malaysia went so far as to mint gold dinars and silver dirhams, but thus far they are just for savings, not legal tender. A lot of the injustice in international trade stems from the fact that trade must be carried out through the medium of the US dollar, which is such a meaningless peice of paper that it is itself forced to acknowledge “In God We Trust” because there is nothing else supporting it. We muslims prefer the saying of the Prophet, peace be upon him, “Trust in God, but tie your camel first.”

Some resources for further reading:

Islamic Mint

E-Dinar

Shayh Abdalqadir As-Sufi’s student Umar Vadillo:

Paper Money

Judgement on Riba


14 thoughts on “Islamic Banking

  1. I bought a copy of a new Islamic finance magazine the other day that’s published in Sri Lanka (English-language). The quality of the writing was mixed in this issue, but it’s good to see that these issues are being addressed.

    S’pore’s also working hard at getting into Islamic financing and banking. I know of two schools here that provide diplomas in Islamic finance.

  2. A fascinating article and post 🙂 I think usery is the term for which Islamic banking is the cure, excessively high interest rates. I wonder what an Islamic bank would charge on a credit card, if they issued one?

    Ya Haqq!

  3. I taught at the College for Banking and Finance here in Jordan. (but I was teaching English to bankers, not banking!) They, the students, vehemently assured me that the Islamic banks in Jordan all deal in Riba–Riba in disguise. I think this is a topic that needs much investigation, and my feeble “what’s a dividend?” mind needs to get a grasp of this!

  4. Irving, I don’t feel qualified to speak on the topic, but from what I understand, interest and unsecured credit are haram whether the rate is high or low. The issue is that there is no good or commodity being exchanged – it is charging money for lending money. Thus far there are no Islamic credit cards that I know of here in Malaysia. All the instruments in use over here have some kind of asset involved. Like with the car loan, it really is different in principle. The bank has bought the car and you are buying it from the bank at a higher price. The fact that the monthly payments are the same as they would be for interest payments on a cash loan is beside the point. In principle, it’s not the same thing. I think this does have some practical ramifications too – since I’m buying my car from the bank, I accumulate equity in the car. If I default on my payments, the bank can seize the car and sell it to recover their investment, but I’d be entitled to my share of the sale price, since I own the car in part. At least I think that’s how it works 😀

    Kind of reminds me of the motto of my University philosophy club: “Yes it works in practice, but will it work in theory?”

  5. The fact that the monthly payments are the same as they would be for interest payments on a cash loan is beside the point.

    That’s the time value of money being applied. I worked for one guy back around 2000, where he started buying cars for friends and leasing them back to them. When I asked how we would set up a payment schedule (I was the company accountant), he said to base it on a certain interest rate (whatever that happened to be). Technically, we weren’t charging interest…but we were.

  6. JDsg – Haha. It was funny watching our loan officer giving us the breakdown on our loan and being extra careful to use all the islamic terms, like profit rate instead of interest rate. What’s that saying? The devil is in the details…

    UmmFarouq – yeah, I totally lack the necessary vocab to discuss this stuff. But it has indeed been well investigated and validated here in Malaysia. There isn’t any debate locally at the scholarly level about whether or not it is legitimately Islamic. There is still some resistance from the general public, but I chalk it up to people expecting Islamic Banks to be like charities and not profit-seeking businesses.

    There are some similarities to me between Islamic Banking and Halal Slaughter. Halal food is an important part of God’s wishes for us, there is a right way and a wrong way to do it, and it brings certain benefits to the parties involved. But it still is fundamentally the killing of an animal and eating it’s flesh, and too much of it will still make you fat and unhealthy. I don’t what I’m getting at here except that the existence of an Divinely sanctioned method does not imply the activity takes on a magical quality devoid of earthly considerations. You can still get sick on zabihah food, you can still be unhappy in a halal marriage and you can still ruin yourself financially with Islamic investments.

  7. About that margins trading thingy (I’m no economics major either)

    I think that it’s an investment if the money that you invest can somehow influence all those fluctuations. But it’s gambling if no matter how much more or how little you spent have absolutely no influence at all. You know, like playing 4D.

    But I’m no expert.

  8. …and you can still ruin yourself financially with Islamic investments.

    “Past performance is no guarantee of future results.” 🙂

    But it’s gambling if no matter how much more or how little you spent have absolutely no influence at all.

    Well, as someone with a Bachelors in Finance and is a lecturer in accounting and economics, I wouldn’t go as far as to compare all investments with gambling. Yes, there are a few investments that I would classify as “gambling” (certain futures and options in particular), but those are only a small number compared to the very large number of investments available (halal or otherwise).

  9. Assalamu ‘alaykum wa rahmatullah.
    I pray you are in the best of health & imaan. This is a short
    message to notify you that this entry has been selected for publishing on Ijtema.net; a venture to highlight the best of the Muslim blogosphere. May Allah bless you for your noble efforts.
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  10. I only lament my own experience with the Islamic banking system here. Bank Islam (Malaysia) has too many complicated terminology that I failed to grasp entirely. But I trust the fundamentals to be just. The only problem is (for me personally) the loan officers have some “things” to gain from the deal (as in a car/home purchase). Yep, I trust the concept but not the practice.

    Bro BG, you might want to mention a bit about the Islamic insurance concept (Takaful). They’re (freelance agents)selling this concept to everyone like you wouldn’t believe.

  11. Hmmm kalau dah susah sangat, naik unta je laa… belum ada bank pun yang bagi pinjaman nak beli unta huhu… COD! Unta beranak boleh jual, dapat untung lagi! Kereta tak boleh beranak… lugi maaaa

  12. Nizar – Unta ada banyak lagi kelebihan: unta boleh makan rumput tepi jalan percuma – kereta mau makan minyak yg sangat mahal. Unta kasih baja yg boleh menyuburkan tanaman dari telpiapnya – kerata bagi asap yg merosakkan kesihatan and alam sekitar. And finally, bila unta sudah tua, boleh dimakan. Bila kereta sudah tua, dia menjadi longgok sampah sahaja.

    Manas Shaikh – Thanks very much and keep up the good work.

  13. Salamu alaikum all,

    regardless of whether or not the Islamic banks deal in riba directly, all financial institutions generally will have to deal in seignorage, which will touch on aspects of Riba al-Fadl.

    Another issue for modern banking, islamic or not, is the concept of unsecured lending, and whether or not secured lending (which is basically what a mortgage and a carnote are) are equivalent to Riba or not.

  14. they should’ve call it islamic banking, banks always make up interesting and religious names for loans in islamic banking, but bottom line is probably like getting a regular loan.

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