Islamic Banking – a Sham

At the outset, I wish to pay my respects to The Holy Prophet (pbuh), The Holy Koran, The Holy Hadiths, The Sharia’h Law, and all the other Holy Directives which my friends in the Moslem World hold dear.

This article is not about any of the above, but about the way that the directives given by the Holy Sources above are being twisted in a very hypocritical manner.

I also admit candidly that I am not a scholar in Islamic Banking, but a mere practitioner in conventional banking who has had the opportunity of receiving extensive training in Islamic Banking from Scholars and Islamic bankers. What I have written below is my own analysis of what The Holy Prophet (pbuh) intended, and how it is being practiced today.

When The Holy Prophet (pbuh) laid down the principles of business for his Followers, He (pbuh) had two major things in mind :

• Gharar (uncertainty)
• Riba (usury)

The issue of Gharar is evidently very practical. The Holy Prophet (pbuh) stated that there should be no uncertainty in the details of any commercial transaction. Some of the requirements of any sale/purchase deal as per Sharia’h are stated below:
• The goods must be described in detail.
• The price must be stated and agreed by both parties.
• The goods must be in existence and be deliverable.

I understand that the purpose of these requirements is to ensure that both parties to any sale/purchase transaction must know, at the outset, what exactly they are transacting. This is entirely logical, and laudable, because such principles eliminate the risk of future disputes between the buyer and the seller. Indeed, in the modern commercial world, contracts go into fine details in order to eliminate uncertainty (gharar).

The issue of Riba (usury) is more convoluted.

The Holy Prophet (pbuh) rightly condemned usury, as did Jesus (as chronicled in the Holy Bible). It is impossible for anyone to lay down a line between rightful interest and usury.

However, The Holy Prophet (pbuh) went the whole way.

He (pbuh) declared that

• One cannot earn money by lending money.

• One can earn only by sharing the risks and the rewards of any enterprise.

This is a very laudable and valuable concept.

If A gives money to B for investment in a business enterprise, A must share with B with profit/loss of that enterprise, be it agriculture, manufacture or trading.

If B, despite his best efforts, cannot make the enterprise a success, he should not be forced to pay a return to A for having giving B the money.

At the same time, if B makes money beyond his original expectations, B should share with A the un-expected profits.

The basic idea is that A (the owner of funds) should evaluate the proposed business enterprise of B, and agree with B in advance of how the profits/losses should be shared.

To my mind, this is a very fair business concept.

The Holy Prophet (pbuh) also examined several other business transactions, and sanctioned fair and reasonable processes for them, so as to enable both parties to the transaction to perform their duties, and share the risks and rewards. Some examples :

Salam : The Financier provides money to an agricultural Producer in full, in advance, based on the latter’s promise to deliver an agreed amount of the agricultural produce to the Financier on a certain date.

Murabah : The Financier buys certain goods, specified by the ultimate Buyer, on cash basis, and sells them to that Buyer immediately, against a promise from that Buyer that he would pay the cost price, plus a profit, on an agreed future date.

Etc Etc

To my mind,

The Holy Prophet (pbuh) was, apart from anything religious, a great Reformer, viz :

He (pbuh) ensured that :

1. Women were allowed to inherit property.
2. Women were allowed to give witness.
3. Men were limited to four wives at a time, provided that they would treat each one equally.
4. People were required to worship the One God.

etc etc.

However, The Holy Prophet (pbuh) appears (please forgive me if I am wrong) to have had no concept of a Bank, as an INTERMEDIARY in the financial world, i.e. an Institution with the following characteristics :

1. A Bank takes funds from various parties (Depositors) and lends them to other parties (Borrowers).
2. The Bank is owned by myriad Share-holders.
3. The Bank has to earn a return for its Shareholders by making a spread between what it earns from Borrowers, and what it pays to Depositors.
4. Market forces determine what the Depositors will accept as return on their money, and what Borrowers will pay on what they take.

The KEY issue is :

The Holy Prophet (pbuh) was looking at a market where Financiers lent money to Producers (farmers, traders, artisans) and very rightly stated that the Financier must be a Partner in every enterprise and share the profit or loss with the Producer.

The concept of an Intermediary may not have occurred to The Holy Prophet (pbuh).

Conventional Banks assure profits to Depositors, regardless of how much they earn from Borrowers. Similarly, they agree on interest payments from Borrowers, regardless of how much the bank(s) have to pay to Depositors.

The above is Riba, and totally forbidden by Sharia’h.

This presents a huge problem to Islamic banks.

Their main issues are :

1. How can we get Depositors, and assure them a reasonable “profit” ?
2. How can we get “Borrowers”, and assure them a reasonable (Sharia’h law) cost ?

The answer is simple ; tie both to a Conventional Interest Rate, e.g. LIBOR (London Inter Bank Overnight Rate)

SACRILIGE !!!!!!!!!!!!!!!!!!!!!!!!!!!!

How can Profit to the Depositor and Profit to the Islamic Bank be linked to a (HARAM) Interest rate ?

Therein lies the SCAM in ISLAMIC BANKING.

The facile answer given by the Islamic Scholars (fully bearded, dressed in trousers/ shalwars that are 4 inches above the ankle, saying “Bismillah Rahman Rahim” ,“Al Hamdullilah”, and “Inshallah” at every other breath) is :

1. The Sharia’h law states that profit can be “bench-marked” to any known “rate” (so as to avoid Gharar).
2. Unfortunately, there is no benchmark available in the Islamic Banking World.
3. Hence we have to use LIBOR as the benchmark.
4. Inshallah, the Islamic bench-mark will come soon, and then we will abandon LIBOR.

That is how you can get a prospectus for a Sukuk (an Islamic Bond) which states

“Profit = USD LIBOR + 0.70%”

The Holy Prophet (pbuh) was a Man far advanced of his time. He (pbuh) laid down rules of business which were fair to all parties. He (pbuh) also devised modes of financing that enabled transactions to work based on the principle of sharing “risk and award”.

Unfortunately, Islamic Banks are today abusing the entire concept of The Holy Prophet (pbuh).

For example

Let’s say that Mr A wants to borrow money from Bank B for three months.

There are no real assets involved, nor is there any share in profit/loss. Hence this is not permissible in Islamic Banking.

However, Mr A can get the money he wants through a transaction called “Tawaruk”.

This is how it works :

• Bank B buys xxx KG of Platinum through a Broker at the London Metal Exchange (LME).
• Instantly, Bank B sells the Platinum to Mr A at the same price, plus “profit” (at LIBOR + 3 months) on a “murabaha” basis, it being agreed that Mr A will pay bank B the principal amount plus “profit” (at Libor + 3 %) for three months.
• Instantly, Mr A sells the Platinum through the same Broker at LME.
• Thereby, Mr A gets the money up front, and repays bank B after 3 months with a “profit”of LIBOR + 3 %.

This is SHARIA’H COMPLIANT !! – according to Scholars.

Friends

The concepts that the Holy Prophet (pbuh) introduced to the world, centuries ago, were far in advance of the time.

However, the Islamic World seems to be in a strange dichotomy :

1. Inability to accept that the edicts stated in the Holy Koran, the Holy Hadiths etc have change with the times.
2. Attempts to twists the above Sacred Edicts to create falsehoods such as Islamic Banking based on “Profit” linked to LIBOR.

I rest my case.