Sharia-compliant banking?

The present-day Islamic Banking is, in my opinion, fifty percent Islamic if viewed from a legal point of view. It is even less from the standpoint of the true spirit of Islamic teachings.
As someone whose doctoral dissertation was a critique of Islamic banking that had emerged until the time it was presented (in 1994), I believe the experience of the banking that emerged in the name of Islam subsequent to the writing of that thesis was an improvement upon what it was during the initial stages of the experiment.
However, a lot needs to be done to reach a closer-to-ideal version. The bankers and the Shari'ah scholars involved in Islamic banking will need to be more tolerant, flexible, and open-minded if they are to realise that goal.
By pleading for open-mindedness, I am not suggesting that they should give up Shari'ah principles to accommodate more liberal views on Islam. Instead, what I am asking is that they should not hesitate in reviewing their principles in order to bring them in conformity with the original teachings of their faith.
We don't want unbridled liberalism that would deface Islam beyond its true picture nor do we want unreasonably rigid attachment to traditions that would disallow ideas on understanding the true Islam; other than what the majority of the traditional scholars understand. The idea should be to appreciate and practice Islam honestly the way it is and not to promote one brand of Islamic teachings over another.
Two products dominate the balance sheets of Islamic Banks these days: Leasing and Murabaha. While in principle, leasing is in line with Islamic rules of doing business, Murabaha isn't. There is a debate whether only operating lease is permissible in Islam or finance lease is allowed too.
However, the fact is while in principle leasing is permissible in all forms, some forms of leasing contracts are closer to the spirit of Islam while others are not. Most certainly, exorbitant rentals, much higher than the market commercial rates of interest are undesirable.
However, so long as we are asking for a fixed charge for the services extracted from an asset that doesn't deplete on being utilized, we are within the allowable territory of Islam. The trouble emerges when we are asking for a fixed return on the assets that depletes or is exhausted upon being used. If a fixed return is demanded for their use, the charge shall not be in the category of legitimate rental but prohibited Riba. This latter arrangement is Murabaha and seems to be the mainstay of Islamic banking.
No matter how much one sympathetically attempts to understand the point of view of the scholars that justify Murabaha one would never be convinced that inflated price on credit sales of perishable goods (Murabaha) is acceptable in Islam. The reasoning of our conventional scholars on this issue, as indeed in many other issues on Islam, could be understood either by giving technical or philosophical arguments.
Technical arguments to show the validity of Murabaha should positively present reasons from Qur'an and Sunnah to prove that despite the apparent similarity of it with Riba, the former has been allowed in Islam. From what I have heard and read in the literature of the scholars who consider it Islamically legitimate, there is no technical argument in their armoury to make that claim.
The Council of Islamic Ideology allowed Murabaha as a way of doing financial business only as a second best alternative. One can see a definite lack of conviction in their statement while proposing Murabaha. The Report says "...it needs to be pointed out that these alternatives [i.e. Murabaha etc.] ... are no more than a second best solution from the viewpoint of an ideal Islamic system."
An official of the State Bank's Islamic banking wing, presented the defense of Murabaha in a discussion forum on Islamic Banking on the following lines:
Many disbelievers did not agree with the difference between riba and trading (Bay' Murabaha) at the time of revelation, like some so-called enlightened people do today. The Holy Quran responded to their objections in these words: "Those who devour riba will not stand except as stands one whom the evil one by his touch has driven to madness. That is because they say: 'Trade is like riba, but Allah has permitted trade and forbidden riba.'
Those who desist after receiving direction from their Lord shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they shall abide therein (forever)."
The important condition in Murabaha is that the banks should conform to the principles of trading prescribed by Shari'ah. If an ordinary person can earn profit from selling goods in cash, he is entitled to earn profit on deferred payment sales as well. And the same goes for banks.
The difficulty in understanding this argument is that when we mention Murabaha in the original, classical sense, we find no mention of any delayed payment in it. It used to be transparent sales transaction in which the seller gave an honest picture of his product to his prospective buyer including his profit margin (ribh) .
There is neither a mention of any credit deal in it nor inflated prices due to delayed payment. Ba'y Mu'ajjal was another transaction practiced in the earlier period which was a simple credit sale in the classical understanding with no mention of inflated price due to delay in payment. The present-day Murabaha practiced by Islamic Banks is a clever hybrid of the two.
Most certainly, no sane trader would ever give a commodity on sale without adding a mark-up (ribh) on it. But adding mark-up as profit margin is one thing and adding it because of delay in payment is quite another.
What I called clever is the attempt to combine the two in which mark-up has been allowed to be added because the buyer is not in a position to pay cash immediately: His inability to pay cash has been exploited to force him to pay more at a later date. If this is not riba what is? It is demanding forced extra amount for delaying the payment, whether the payer (borrower) is capable of doing so or not.
It is interesting that whenever this illegitimate hybrid of Murabaha and Ba'y Mu'ajjal is condemned by someone as un-Islamic, the Qur'anic verse 2:275 is presented in defence of the arrangement, even though the verse has nothing to do with the permissibility of Murabaha in its modern, illegitimate form.
The fact is that the verse is condemning the understanding of some people who believed that trade and riba were similar. It is not defining what riba is. Had that argument been correct, then all trade should have been permissible in Islam because, according to the argument built upon the Qur'anic verse above, no trade could be riba. How can Riba al-Fadl which is exchange of identical commodities be Riba when whatever comes within the category of trade cannot be Riba?
Even in the case of the present form of Murabahah, some believe that although mark-up for delayed payment is allowed, mark-up on mark-up is not allowed. Why, one might ask, is it not allowed? Obviously, because, according to them, mark-up on mark-up is Riba.
My question is: How could it be Riba when it is being charged on trade? The obvious answer is that it is not the question whether a certain transaction is trade or not that decides whether there is Riba in it or not. It is the question whether the arrangement, trade or otherwise, forces the borrower to pay a definite amount in addition to the principal after a delayed time that makes it Riba-ridden.
From the point of view of philosophical understanding of Murabaha's acceptability, we have to look into the reason why Riba has been prohibited in Islam and find out whether Murabaha fares any better in that respect. The apparent reason why the Almighty has prohibited Riba is that the lender demands from the borrower, payment of the principal amount plus a pre-determined interest, even when he is in no position to repay it.
This is quite clearly showing the lender's complete lack of concern for the plight of the borrower. If during the period of the loan, the borrower goes bankrupt, the lender would still demand not just the principal but interest as well. A humane soul would be hesitant in going into that kind of a financial arrangement. Islam has, therefore, prohibited it.
In view of the above, when we look at the Murabaha arrangement, it appears to be completely the same as Riba: The borrower, euphemistically the buyer, acquires an asset from the lender, the seller. Because the borrower/buyer cannot afford to purchase the asset on cash, he goes for a credit arrangement with inflated price.
Call them by whatever name, the buyers/borrowers are exactly in the same state of helplessness if the relevant asset gets destroyed. The lender/seller would demand from him the original spot price (principal) plus the mark up (interest/Riba). His plight, like in the case of Riba-based loan arrangement, would fall to deaf ears, because the 'pious' lender in this case has used the right terminology to believe that he has not given a Riba-based loan but has entered into an 'Islamically legitimate' Murabaha transaction. It is simply a stratagem (Hila) devised to declare an otherwise prohibited arrangement as Halal.
The supporters of Murabaha present two conditions in it which they think
distinguishes it, to them quite clearly, from Riba. One of them is that unlike the case of Riba where cash or cash-like circulating assets are involved, in Murabaha the subject matter is a real commodity. The other condition is that while in Murabaha they don't allow mark-up on mark-up, they believe, in Riba, interest on interest is also charged.
As for the condition of real asset, it really is inconsequential whether the commodity is real or unreal. The important thing is that if the commodity in question is destroyed while the borrower/buyer hasn't paid the amount, who is going to be responsible for the loss? The answer is obviously that it would be the borrower. How then is it any different from Riba? What difference has the physical presentation of the commodity caused to the transaction? What relief has been offered to the borrower/buyer?
On the point that in Murabaha, mark-up is charged only once and no further even when the borrower/buyer defaults, I would say that not committing a double sin doesn't make a single sin valid. Would the pleaders for the legitimacy of Murabaha accept interest too as valid if it was decided that compound interest shall not be charged?
Furthermore, the policy of not charging mark-up on default is not even being practiced by the institutions claiming to be pursuing Islamic banking. They charge additional mark-up from the defaulters but don't add it to the revenues of their banks. Instead, they distribute it in charity. In other words, they do charge what they themselves consider to be haram. However, instead of utilising that haram money for their own benefit, they give it to somebody else. How could that be justified?
If the religious experts engaged in the promotion of Islamic banking were prepared to accept Islamically valid, new ideas, they would do well to take into consideration the concept of principal-guaranteed profits. Unfortunately as yet, the understanding amongst the Shari'ah experts, Islamic bankers and economists is that the only acceptable alternative to Riba-based banking is the model of profit-and-loss-sharing banking.
That model has never seen a world beyond the realm of the books where it is mentioned. The unfortunate reality is that the understanding that PLS banking is the only acceptable model in Islam is as flawed as it is well known. It is based on a Hadith which is not saying what has been made to appear.
The Prophet (pbuh), decided an issue that arose between two individuals who were in dispute on the question whether the amount earned by a slave belonged to his de jure or de facto master. He settled the dispute by stating: "There is no benefit allowed where no risk is taken." In other words since the de facto owner was not bearing the risk of the slave in case something untoward would have happened to him, he did not deserve to enjoy the benefit of his earning. It was only the de jure master, the real risk taker, who deserved to pocket the revenues earned by the slave.
Islamic jurisprudence is replete with many such examples wherein a decision incidental to a situation during the prophet's time was made into a sacrosanct, inviolable Shari'ah principle. If one looks at the rationale of the decision in the context of the situation it was taken, it makes a lot of sense.
However, if it is generalised into a Shari'ah principle, it defeats the very purpose and spirit of Shari'ah. The condition of not allowing purchasing in the agreement of hiring is another example. Likewise is the case where our Shari'ah experts do not allow sale of an item whose possession has not been taken by the seller. Once a verdict of a situation-specific ruling is declared Shari'ah, no debate is allowed by the diligent followers of it.
Thus many 'Islamic rules' are forcibly included in the list of the God-given Shari'ah even though they have little to do with His message. The Islamic banking practitioners, the bankers that is, take whatever their scholars tell them as the ultimate verdict of their faith. Thus perpetuates the practice of Islamic banking with a confident label of Islam on its face even though some of what is practiced in it may actually have nothing to do with Islam.
The writer is the Dean Faculty of Arts and Social Sciences, University of Central Punjab. He can be reached at [email protected].