Islamic Banking - Because the Muslims don't know

Subject:  Islamic Banking
by Syed Akbar Ali

I recently attended a talk on "Contemporary Islamic Finance". The speaker was a young man with a PhD in Islamic Banking and Finance (UK). He was from an outfit linked to INCEIF ( International Center for Education in Islamic Finance).

Islamic banking or Islamic finance exists because the religious folks have succesfully inculcated the idea that bank interest is riba and therefore haram. The Quran states clearly that riba is haram but nowhere can we derive the injunction that bank interest is riba. The two are not the same.

Anyway the religious folks have created 'islamic finance' and 'islamic banking'. To cut a long story short there really is no such thing. Islamic finance and Islamic banking are just arabised versions of conventional banking. There is nothing islamic about it. Neither is there anything un-islamic about conventional banking either.

If you take a housing loan from a conventional "haram" bank you pay a monthly instalment. If you dont pay, the bank will auction your property. If you go to an 'islamic bank' you still have to pay monthly instalments which can be more expensive than the conventional bank. If you don't pay your instalment, the islamic bank will still auction your property too. What is so islamic or unislamic about that?

The conventional 'haram' bank will charge you interest say 10% a year.

The 'islamic bank' charges you what they call a 'profit rate' which will also be 10% or more a year. Kira-kira semua sama, tapi ini halal, itu haram. This is called pulling the wool over peoples' eyes.

Talking about the pricing of his Islamic banking products, the young man with the PhD in Islamic banking made no bones about it. He said it quite loudly and clearly 'we want to be the same as the market'.

I discovered this islamic banking trick years ago when we were handling the earliest stages of Islamic banking in Malaysia . At that time we called it an 'Islamic window' - Maybank did not yet have a full fledged Islamic banking license. But three months Islamic Bankers Acceptances (IABs) were priced exactly the same as three months conventional BAs. And so on. Tak ada beza pun.

A colleague who wore a kopiah to work had volunteered to go and work in the Islamic banking part of the bank. After a while he became even more confused. He said the calculations were all the same. In Islamic banking you add an 'Al' prefix to everything. Al Wadiah, Al Murabahah, Al Mudharabah, Al this and Al that. Other than the 'Al' its all the same.

Then the speaker dropped a bombshell. There is a famous case where an Islamic bank was suing a borrower for non payment of a housing "loan". According to Islamic banking the bank does not give you a "loan". The bank first buys the house from you at the market price. Then it sells the house back to you at a higher price over the period of the "loan" say 10 years, 15 years etc. Its just a deferred payment scheme with a 'profit rate' factored in.

The Islamic bank determines the selling price by compounding the "profit rate" (say 10% - copycatting the conventional banking system - 'we want to be the same as the market') for 10 years or 15 years. For those of you who have financial calculators (and if I still remember my financial computations), this is just the Future Value (FV) of an annuity at 10% starting with Present Value (PV) being the price of the house today and going forward 10 years, 15 years, 20 years etc. The Casio calculator will give you the 'islamic' answer in seconds. Does that make Casio 'islamic' too?

In a conventional 'haram' bank, if you default on your 20 year housing loan say after just three years, the conventional bank will ask you to pay back the principal amount of the loan plus 10% interest compounded for three years. The islamic bank cannot do that. The islamic bank will ask you to pay the full selling price of the house (based on 10% for 20 years) - even though you defaulted only after three years.

This is what the Islamic bank was claiming. However the very wise judge of the High Court Abdul Wahab Patail, the brother of our present AG, made a landmark decision. He ruled that the Islamic bank cannot charge the borrower the full amount for the full tenure of the "loan" when the borrower had defaulted just a few years into the "loan".

This decision by Justice Abdul Wahab Patail still stands until today and it has not been overturned. It also destroys a huge chunk of Islamic banking because the Judge has essentially ruled that the islamic banking system in Malaysia is actually unjust. It is worse than riba.

So how does INCEIF and the Islamic bankers handle this situation? This is where the speaker dropped the bombshell - and with a great big smile too. He said "the Muslims dont know" about Justice Abdul Wahab Patail's decision. Well dear Muslims, I hope that now you know. Please do spread the word quickly.

The speaker said that 'Islamic banking can still go on in our country because the Muslims dont know the decision by Abdul Wahab Patail'. In other words the islamic bankers are not going to tell the Muslim borrowers either. They will keep it quiet. Shhhhh ! ! And this is Islamic?

Then I learned something else too. While the speaker was talking about murabahah (one method of islamic financing), the Chairman at the talk was getting quite agitated. The Chairman was a foreigner from the Middle East and is an internationally acclaimed Islamic scholar himself. Suddenly he interrupted the speaker and made a clarification. He said that according to the Hanafi madhab (I think he is a Hanafi) murabahah was riba. Meaning murabahah was haram.

He then said that the Islamic banking practised in Malaysia was according to the Shafie madhab. Madhab means sect. Only then did it dawn upon me that in Malaysia we dont have generic islamic banking. It is "Shafie banking", according to the Shafie madhab.

A Muslim friend with a PhD from Cambridge later explained that this is partly the reason why there cannot be an "international Islamic capital market". One madhab's murabahah is another madhab's riba. One madhab's al bai al bithaman ajil is another madhab's riba also.

When a borrower defaults (or prepays) a 20 year housing "loan" say after just three years, the islamic bank can do what is called 'ibrar'. (In the old days they called it muqassa - I dont know why the change). 'Ibrar' means to refund the balance owing but not yet due. In other words 'buah belum masak lu jangan kira lah'. But there is no fixed or detailed idea about 'ibrar' among the islamic bankers.

So defaulting borrowers have no choice but to fight it out in the Courts with the Islamic banks. The speaker said that todate there are 3,500 unresolved cases of islamic banking BBA housing loans (Al Bai Al Bithaman Ajil) being disputed at the Courts in KL.

 

And one judge, a Dato Rohana, has been assigned to handle all these cases. Well good luck Justice Dato Rohana. She will become an expert in Al Bai Al Bithaman Ajil calculations - maybe faster than Casio.

If it is a conventional housing loan, all these 3500 cases can be resolved by a Casio calculator. (Ya Allah, why do the Muslims like to create all these strange things and end up tying themselves in knots?)

During the talk, the speaker put up a slide that had the arabic word 'zulm'. Zulm in Malay is zalim, meaning oppressive. The meaning was that Islamic banking should not be zalim or oppressive like the 'conventional' banking system with its interest based practises.

But how is the islamic bank less oppressive than the conventional bank? You charge the same rates - quite unashamedly saying 'want to be the same as the market'. The terms and conditions are the same except when the 'loan' turns bad. Then the islamic bank can become worse than Shylock the Jewish moneylender. They want their pound of flesh. And the conventional bank is still 'haram'?

There is another danger lurking. Talk is some ignorant do gooders are thinking of legislation where Muslims will be barred from using the conventional banking system. They can only go to the Islamic banking system. That is how we end up in the Club of the Doomed.

END-

ARTICLE 2:
Saturday June 26, 2010

Bank Negara: Islamic financing rebate is mandatory


KUALA LUMPUR: Bank Negara has ordered syariah banks to give
borrowers a rebate for early settlement under new rules designed to
prevent legal disputes and restore confidence in Islamic financing
contracts.

The ruling from Bank Negara’s syariah advisers will standardise the use
of rebate, or ibrar, in bai bithaman ajil and murabaha financing contracts
which are widely used in Malaysia’s US$95bil Islamic finance market.
In practice, Islamic banks can grant a rebate to waive their right to the
unaccrued sum but such discounts are discretionary, resulting in legal
disputes. If a rebate is not given, syariah financing contracts can be more
costly than conventional loans.

“In line with the need to safeguard maslahah (public interest) and to
ensure justice to the financiers and customers, Islamic banking
institutions are obliged to grant ibrar to customers for early settlement of
financing based on buy and sell contracts,” the ruling said. The ruling,
effective June 7, requires the right of rebate to be specified in contracts.
— Reuters

The method of computing the rebate will be determined by the central
bank. - Reuters

ARTICLE 3: 
Clerics declare Islamic banking haram
By ranigee
Lahore : Pakistan | Jan 28, 2009


LAHORE: As many as 31 top Islamic clerics and scholars of the country have declared the present Islamic banking system 'Hara'am' and 'Ghair Sharai' and termed all the dealings with such Islamic banks un-Islamic as they are based on interest.

The scholars declared the Islamic banking against the Islamic teachings and values, saying that all the business with these so-called Islamic banks was not Islamic. They gave a 'fatwa' and urged the Muslims not to deal with these so-called Islamic banks.
They agreed on the final judgment after having deep thinking and consultation that no Islamic bank was lending interest-free loans and instead of issuing Qarz-e-Hasna, every institution is involved in interest-based business.

Dr Azizul Bari, a research economist, said that Islamic banking system did exist in Islam but there was no proper platform available for the purpose. "There is a need to introduce a new banking system different from the existing one for the 'real Islamic banking system," he said, adding that ulema, clerics and religious scholars must be consulted for finalising the theory.

He said without getting an expert opinion from the Islamic scholars, Islamic banking system, in its true spirit, could not be introduced and implemented. Commenting on the bank-lending system, He said the proposed banking system should not be devised to earn profit rather it must have the idea to support the borrower.

He, in his verdict regarding existing Islamic banking, said that Islam presents a complete code of life and similarly, in the money lending and borrowing, presents a set of rules but there is no platform present in the prevailing situations. "Furthermore, the rules presented for the system are not being used accurately," he added.

He said government should arrange discussions on Islamic economic system so that the practical shape of the Islamic system could emerge, adding, "We have moved from the divine path owing to which, we have indulged into a severe financial crisis. The nation is facing a financial crunch that was tarnishing the social and economic system in our society."

While referring to the responsibility of the parliament, he said that it was the prime responsibility of the parliament to debate on the issue of Islamic banking and to find a practical way out of the interest-based banking system. On the other hand, the grievances of borrowers must be redressed as no body was hearing against the interest charging on the borrowed amounts.

Islamic economist Abdul Wadood Khan said that no Islamic bank was lending interest-free loans, rather these banks were charging hefty amounts in term of profit against the lent money. He further said that Islamic banks were earning interest by lending and borrowing money on interest, adding that if interest-free lending is introduced, the prices of commodities would decline as the interest amount has been added in the prices of all items. He said Islamic banking was neither Islamic nor banking at all because there is no concept of interest in Islam.

The religious leaders who signed the 'fatwa' includes Maulana Salimullah Khan of Jamia Farooqia Karachi, Maulana Mufti Ghulam
Qadir of Akora Khattak, NWFP, Mufti Hamidullah Jan of Jamia Ashrafia, Lahore, Maulana Mufti Ahtashamullah of Makran,
Balochistan, Maulana Mufti Abdul Majeed Dinpuri of Jamia Banoria, Karachi, Maulana Mufti Saaduddin of Lakki Marwat, NWFP, Mufti
Maulana Abdullah of Multan, Mufti Gul Hassan Bolani of Quetta, Maulana Zarwali Khan of Karachi, Maulana Saeed Ahmed Jalalpuri
of Karachi, Maulana Mufti Hamid Hassan of Kabirwala, Punjab, Maulana Mufti Rozi Khan of Balochistan, Mufti Habibullah Sheikh of
Karachi, Mufti Abdul Qayyum Dinpuri of Karachi, Mufti Nazir Ahmed Shah of Faisalabad, Mufti Saeedullah of Balochistan, Maulana
Mufti Inamul Haq of Karachi, Maulana Mufti Ahmed Khan of Karachi, Maulana Mufti Imdadullah of Sindh, Mufti Amanullah of Karachi,
Maulana Kalimullah of Sindh, Mufti Ahmed Khan of Sindh, Mufti Abdul Ghaffar of Sindh, Maulana Dr Manzoor Ahmed Mangal of
Karachi, Mufti Asim Abdullah of Karachi, Mufti Samiullah of Karachi, Mufti Shoaib Aalam of Karachi, Mufti Rafiq Ahmed of Karachi