Muslims and Modern Banking: A Rejoinder

#29 Zeemax, I do not think what is described in this article requires too much ``expertise``. 1. Investment goes down because the cost of investment, including its opportunity cost goes up
2. Savings and Consumption are not the same thing in fact they are opposites, one is a withdrawl then other an injection, thus the effects on growth and demand are markedly different. Savings do not automatically translate into investment, that is the main reason why tax cuts to the lower socioeconomic classes are a greater stimulus to the economy than tax cuts to the very rich.
3. Charity that is, society wide, that gets spent on consumption, due to need, can raise overall Demand, thus creating growth and jobs. Remember that Aggregate Demand consists of Consumption as a component.

That said, this article was written by me back in 1991, revised in 1995.

Escapist,

Thank you for that informative article/letter.

First of all one mistake- in 1991 it was Nawaz Sharif`s IJI government that made Quran and Sunnah the law of the land- not General Zia-ul-Haq.

Secondly ... you forget that the situation has changed again from 2001....

In 2002, the Supreme Court of Pakistan set aside the Riba judgement... and Pakistan government is no longer committed to removing it.

#30 writes <<< Are **you** suggesting that it is not? >>>

Yes, charging a higher rate of interest is no guarantee that the loan wont be defaulted. In fact going by credit cards as in your example, I`m quite sure that those paying a higher rate of interest default more often than those paying a lower rate, unless you can show me data that proves otherwise

Masadi #10
``Are you suggesting that charging interest is a safeguard against default?``
Of course it is. That`s the reason credit cards with an inherent higher risk of default, are structured with the highest interest rates (unfairly so, for the majority of non-defaulting consumers). Are **you** suggesting that it is not?

#27 by escapist

The review petition was filed by UBL on behest of State Bank of Pakistan. This was granted and the court withdrew the earlier deadline imposed for implementation. As of now, there is no `due date` as such. So everyone went home happy.

Re: # 27

Thanks for this info............this is more authentic ..........we need to look at these cases and read the judgements ........................

In 1980 a Constitutional amendment by General Zia ul Haq`s regime introduced a new hierarchy of Islamic Courts. This hierarchy consisted of a Federal Shariat Court (at the level of High Court, the highest judicial forum in a Province) and a Supreme Court Shariat Appellate Bench (at the level of the Supreme Court of Pakistan, the highest judicial forum in the Country) as its sole appellate forum. The Federal Shariat Court was given the power of declaring any law repugnant to the Injunctions of Islam. In case of such a declaration, subject to appeal to the Supreme Court Shariat Appellate Bench, the said law would cease to exist on the date mentioned in the decision declaring it so. However, the Federal Shariat Court`s jurisdiction was barred for ten years after its establishment from examining and declaring repugnant any fiscal, tax or banking law. This restriction was to expire on 25.06.1990.

In 1991, two important events took place. First, General Zia`s regime promulgated the Shariah Act, which declared Islam as the supreme law of the land. Second, the Federal Shariat Court declared interest equivalent to “riba”, thus un-Islamic and illegal. Although the General Zia`s Government had already announced in 1984 that all banks will adopt Islamic modes of financing and would eliminate riba (interest) from Pakistan, yet it had not been done in true spirit. After declaring its verdict in 1991, the Federal Shariat Court directed that all kinds of transactions, whether national or international and whether Governmental or private, had to take place on a non-interest basis. The Government and others filed appeals against this judgment, as a result of which the execution of the judgment was stayed. Only in 1999, after about eight years, did the Shariat Appellate Bench of the Supreme Court of Pakistan suddenly took up this matter and did not even allow the Government to withdraw it.

On 23.12.99, within 9 weeks of the military takeover of the Pakistan Government on 17.10.99, the Shariat Appellate Bench of the Supreme Court upheld the Federal Shariat Court ruling and declared interest illegal. The Court held (in its detailed judgment consisting of more than 1,000 pages) that any increase or gain over and above the principal amount of loan is riba, thus un-Islamic. In this regard, the Court declared there was no difference between the commercial loans for productive purposes and personal loans for consumptive purposes. Riba covered both usury and interest and thus applied to both exorbitant and minimal rates of interest. The Court declared that interest is riba regardless of whether a given transaction took place between rich, poor, Muslims, non-Muslims, or any combination of such parties. The Court further held that interest charged by banks or financial institutions or individuals today is riba, thus un-Islamic and illegal. The true alternative to interest, said the Court, is Profit and Loss sharing based on musharika (joint venture), modaraba (mutual investment fund) and morabaha (cost-plus financing). The Court also endorsed certain other non-interest based modes of financing such as ijara (lease), salam (sale) and istisna (a contract of acquisition of goods by specification or order, where the price is paid progressively in accordance with the process of a job completion).

Keeping in mind the huge foreign debt liabilities of Pakistan, the Court held that foreign debts are liabilities of special nature. It was stated in the judgment that these cannot be exempted from the prohibition against interest. The Court held, however, that this does not mean that foreign liabilities should be shunned. The Court suggested that Government should discuss some new arrangements for the foreign loans with the lender Governments and organizations. The Court allowed some time for conversion of foreign transactions into riba-free mode.

The Court acknowledged that to lay down economic and monetary policies and to frame laws is not its responsibility. On the insistence of the Government and taking advantage of large number of expert opinions, the Court has nonetheless provided detailed guidelines for establishment of an interest- free economic and legal framework in accordance with the injunctions of Islam. These guidelines include, among others, enactment of laws to provide for necessary prudential measures to ensure transparency, inter alia, along with the lines of the Freedom of Information Act, the Privacy Act and the Ethics Regulations of the United States, and the Financial Services Act of the United Kingdom; establishment of institutions like the UK serious Fraud Office to control white collar economic crimes; establishment of credit rating agencies in the public sector, establishment of a system of evaluators for scrutiny of feasibility reports, etc.

Of the laws declared illegal, the Court specified some (mainly concerned with money lending) that would cease to have effect from 31.03.2000 and others that would cease to have effect from 30.06.2001. Although a nationalized bank has filed a review petition against the judgment, the Government has accepted the verdict and has shown its willingness to implement it in toto.

Tipu Salman Makhdoom
JURIST Pakistan Correspondent

Well attempted by Mr. Asadi, for which he deserves compliments. However, this doesn`t appear to be his area of particular expertise since all three conclusions drawn are simply incorrect. (1) Investment is discouraged only in the hypothetical event of fixed income returns being consistently higher than net margins available on business. In practice this is impossible because the high fixed returns have to come from higher borrowing rates paid by businesses from available margins. If businesses can`t survive with those rates, the entire rate structure will crash back to an equilibrium level. (2) Whether interest spurs savings or consumption, its the same thing because in either case capital formation takes place in the economy. (3) How charity can increase demand is beyond me. It appears that charity is for the most needy whose demand would be extremely basic and inelastic. They would hardly increase demand in manufactured goods and/or services from alms handed out. The whole concept is ... well ... beyond comprehension.

#24 Manto writes <<< First of all... I am sure Masadi will agree that there can be no dispute that atleast that percentage of interest that equals inflation can in no way be described as ``riba``. >>>

Of course that is what the article states and what I posted earlier. Therefore the interest given by banks on most checking/savings accounts, almost never overshoots the inflation rate and therefore is not riba.

Next, the Quran is against Interest Banking, and as HP correctly pointed out, interest is not the only part of the banking enterprise, and the interest part of banking, even in an interest environment is going down. Here is an industry wide report that provides empirical evidence for HP`s claim

American Bankers Association & the Federal Reserve Bank of Minneapolis

HP wrote:

``All Islamic principles mentioned here or elsewhere talk about a personal transaction between an individual lender and an individual borrower. I think stretching Islamic principles to modern day banking and all types of banking is little too much. ``

I think this says it all.


First of all... I am sure Masadi will agree that there can be no dispute that atleast that percentage of interest that equals inflation can in no way be described as ``riba``.

Coming to the Interests Rates in general... one has to harp back to the classical Theory of Loanable Funds, which in its very basic form shows loanable funds as a commodity plotted with Interest rate as price of Loanable funds... (The monetarist Money supply argument goes to strengthen this view

Therefore Banking is the buying and selling of loans pure and simple ...

Interesting comments about Pathans filling the Baniya Gap... and so true. Pathans have filled in the shoes of the Hindu Baniya very well... I agree with Hamidm when he says that this Neo-Baniya is still alive and well... Modern Banking is the only Islamic Mechanism to combat the menace of Baniya-ism ...

If Banks can provide more loans at lower interest rates... these panch-waqt kay namazi pathans would be out of business soon.

HP, the title was added by the Chowk editors. You are correct in your assessment that the banking that the Quran (and I ) are against is interest banking. In addition to that, the speculative buying and selling (based more on news management than anything real) amounts to gambling in my opinion (which would also be against the Quran), which is rigged against the common folk. Any stupid news, selectively reported by the corporate media, can wipe out someone`s entire life-savings in a few hours. The harms on a macro scale of such banking (interest and speculative) are quite obvious, as I pointed out in the other thread as well. I don`t see much difference in lending by an institution representing its owners or lending by a ``banya`` as you put it, except that the former has greater effects society wide than the latter.

HP writes <<< PS.
Fluactuations in the Fed interst rates are not primarily to increase or decrease savings. More on this later >>> On a macro level, an increase in the Fed`s rate would curb investment controlling inflationary pressures, while slowing down growth. Interest is a convenient manipulation tool in the capitalist anarchy of production.

Hamidm2, you are worried beyond rationality about my living arrangements. I rent a studio that eats up 60% of my income per month, those are the benefits of living in this land of hypocrisy. In many socialist countries of the past not only was health care free but rent formed less than 10% of income being a basic necessity. No mortgage here, however I see nothing wrong with taking out a mortgage if it a house, a place of residence that is needed or to buy bread to feed your family etc. The Quran talks against consumption of interest earning not against giving interest on loans out of necessity.

#22, Interest Banking is not the same as renting out an apartment, both have different implications for the economy. If banks provide a service like deposit accounts, safeguarding, transfers etc etc, let them charge a fee. If loans are to be given for consumption of necessity, then such loans due to moral necessity, should be principal based only and if they are given for investment then, share in the investment ownership. In a just society, in a moral society, extreme surplus and extreme deprivation should not exist side by side. That is what it boils down to in an Islamic society, what to do with the surplus that benefits most. Should one place a premium cost on it for others to use it so that wealth makes a circuit among the rich while impoverishing the masses or should there be more just distribution. Now, who sees a problem with this?

Masadi,
Interest is the rent you charge for someone to use your money.
Just as in you charge rent on an apartment when you let someone use it.
Would you agree with this concept? If not, why?

Thanks,

Hamidm,

Well! You may be right. Pathan may have some influence in punjab and Sarhad but in Sindh and Karachi baniya banking is on decline. In sindh, Agriculture loans by banks have replaced Baniya. Since Hindu Baniya left Sindh in 1948, the fuedal now has to provide some personal loans and that is leading to many other issues. But that is outside of this thread`s scope.

Chowk:

This article is a freakin` joke! This author has written all this nonesense and its been let slip through on chowk!

Supposing interest is Islamically haram, then why the hell are Allama Javed Ghamidi, Sir Syed, or Al-Azhar University contradicting Islam for? Are they pagan fuks??! Is Masadi the messaiah??

HP:

Service pricing. Makes sense. Not to Masadi though!

hp,

......good post but you are mistaken if you think that ``baniya banking`` is on the decline in pakistan - it is still thriving and the monthly interest rate ranges between 10-50% ....... unlike the banks, the baniyas have a good collection system and the default rate is very low .....

It is not a rejoinder. Asadi, if the title is your choice, then it is a poor one. The other article was childish and made no sense at all as the author was discussing Islamic banking from the retail banking pov. Here we are talking about the principles. How it is a rejoinder beats me.

There are thirty (at least) different kinds of banks and they operate on different principles. Interest banking is actually a very small part of the banking and financial world. It appears to me that Asadi is talking about all type of banking and he seems to be in agreement with other types of banking and disagrees with interest only banking.

Someone mentioned Interest and risk. The current banking at least the retail side of it, takes interest as the pricing of the product. So there is a risk factor but it is really a small part of it and it is spread over all customers of the product. Some borrowers do pay a higher price because of their rating or the type of security they offer to the banker and some others pay less. That is like buying a product from Nordstrom or from Wal-Mart. One product can be differently priced in different stores based on the target customers.

Imo, the correct term is pricing and the banks in Islamic countries should call it so.

There is no bank in the world that can survive on interest alone or even the fees for the services they provide. The spread between lending and borrowing price is so thin that no bank can live on the spread alone. The annual financial statements from banks will show that interest income and the fee income constitute a very small part of a bank’s revenue generation. Most banks are involved in different kinds of trades from currencies in the international markets or the commodities and stocks on different exchange. That is where the profits and losses are interests and fees barely pay for the employees salaries.
For retail banks, branches provide the drop that is needed for investments somewhere else. This is just one and a very poor model.

I think that Islamic scholars had a very limited view of the finance industry when they embarked upon turning the banking into Islamic or non Islamic. The Quranic principles talk about the kind of interest where loans were made on personal bases. Since the people taking loans were not used to making deposits with the same person, his(lender`s) only way of generating capital was a higher rate of interest and compounding it to first cover the risk, and then to provide loans to other borrowers to keep his business going.

This is what is called baniya banking in our part of the world. I have not heard that people who borrow from Baniya also make deposits with him too, when they have excess money. People who work with Baniya type of loan providers usually buy gold when they had extra cash to invest.

All Islamic principles mentioned here or elsewhere talk about a personal transaction between an individual lender and an individual borrower. I think stretching Islamic principles to modern day banking and all types of banking is little too much.

IMO, Islamic world does not even have the expertise, at least among the Muslim scholars, to truly evaluate the banking system and apply some principles that were developed to stop a bad practice.

The Baniya Banking is still extremely popular in India and as I understand it most personal borrowing is still outside of banking institutions. In Pakistan, Pathans have tried to fill that gap but the practice is mostly on decline.

PS.
Fluactuations in the Fed interst rates are not primarily to increase or decrease savings. More on this later.