Response to the article « The Myth called Islamic Finance »

Recently a small article was sent to the Darul Ifta titled « The Myth called Islamic Finance ». Mufti Vawda has written some comments about it presented hereunder. The text from the Article is presented in bold and italic.

The Myth of Islamic Finance by Sultan Al Qassiimi
One of the latest additions to such urban legends as the Loch Ness monster, UFO’s and environmentally friendly land reclamation is what is now known as Islamic Finance. A new scam that started in the second half of the twentieth century and only really took off in the last three decades.

We must at the outset commend the writer for taking the bull by the horns and exposing the fact that, by and large, the concept of Islamic Finance is truly a myth. By this we mean that the vast majority of institutions purporting to offer Islamic Finance are in fact deceiving the Muslim public. Their products are not Islamic.

However, to this an important rider needs to be added. While the above is the general trend, it would be unfair to paint everyone with the same brush. There are those few rare exceptions that need to be acknowledged. Some institutions do offer what could be termed as proper Islamic Finance.

One could wonder why the Islamic world needed 1,400 years to invent such a system. One may also wonder why we never hear of such terms as Christian, Jewish or Hindu Finance?

We must respectfully disagree on this point. The need for Islamic Finance is born out of the fact that Islam has its own laws of commerce. Whether Christianity, Judaism or Hinduism has any legal system, and whether they wish to practice on their own legal system is a matter for them to decide. Should the followers of these denominations wish not to pursue this avenue, it in no way diminishes the need and desire of Muslims to find means of practicing on the laws of Islam. This comment of the writer indicates a clear lack of understanding.

How it works?
In a process known as Murabaha a person decides to purchase an asset (car, home) via an Islamic bank which buys it in its own name and immediately “resells” it for a higher amount which ultimately works out to be equal or higher than conventional interest.

We agree that should the bank wish to resell the asset, it should first take possession thereof. The idea of « immediately » passing it on in the case of a sale is unacceptable, and is one of the grounds on which we must agree that most of the so called Islamic Banks are deceiving the public. As far as the rate is concerned, it is a matter to be decided upon between the parties. There is no objection to the interest rate being used as a benchmark.

In the meantime the bank retains ownership of the asset until the client is able to pay back the entire amount plus the finance charges. Basically, Islamic banks make more money and take much less risk, the burden of which rests solely on the Shariah compliant client.

We must again agree. The notion that the bank has sold the asset while at the same time it withholds ownership of the asset (in whatever form) is self contradictory and in violation of the Shariah. This is another reason why we would say that the vast majority of so called Islamic Banks are pulling wool over the eyes of the naïve Muslim public. These methods used by them are unacceptable. The matter of risk is at the heart of the issue. Conventional banks do not take risks. Islamic economics is centered on risks. We are attempting to merge two totally opposite systems. Those Islamic banks who are not prepared give in and take risks (as understood in Islamic economics) are the thieves of this industry. They resort to deceptive methods to cover their backs.

How it started?
The development of this fast growing industry that preys on the religious beliefs of 1.2 billion people is that a few terms were literally translated from English into fancy sounding Arabic words to appeal to the pious. Words such as Lease became Ijara, Bonds turned into Sukuk, Joint Venture changed to Musharaka and Insurance morphed into Takaful.

We must agree. Fancy Arabic terminologies are being used to disguise the actual transactions. Insurance is called Takaful. These miscreant Islamic Banks use the term Murabaha for example, but do not strictly apply all the rules of this Islamic transaction. However, sight must not be lost of the rare few that apply these terms in their correct meaning, and apply the correct exposition these valid Islamic transaction. The public needs to become more circumspect, and give support to those who wish to do things the correct way.

Folks, the truth is, all the above words are literal translations from English to Arabic and have nothing to do with Islam. For non Arabic speakers it is similar to saying flat in British English and apartment in American English which is very acceptable. What is not acceptable however is when one is expected to pay much more to buy the very same flat should the seller decide to call it an apartment in the contract. Also, for those who believe in the sham of Islamic banking, turning a regular bank into an Islamic one by changing its name or logo does not make it an “Islamic bank”. It is clearly set in Islamic principles that if money that was used to start a business was itself tainted then everything that was built upon it is so and cannot be laundered or white washed no matter how many fatwas are collected. There are various reasons behind the emergence of this belief-finance system. In Malaysia it was seen as a way to grab a share from the more developed hubs of Hong Kong and Singapore; in the Gulf, Western banks wanted to offset any migration of long established customers to fledgling banks that have window-dressed their names as well as capture a new slice of the $1.5 Trillion estimated wealth in the region.
Is it regulated?
Once again, as in the case of the Arab League, GCC Customs Union and the Peace in the Middle East, it was decided to outsource the establishment of what make up so called Shariah compliant regulations to the Western world[4]. Even so, the current lack of standardization of Islamic Finance came under attack in a recent McKinsey report that called it “an industry that is little more than a collection of national strongholds. » For an industry that claims it has $500 Billion dollars under management having « no common approach on regulatory frameworks” as a KPMG report found coupled with a “lack of transparency in operations » doesn’t bode well for its clients.

We can attest to the lack of transparency. We have repeatedly experienced the hesitation of these plundering « Islamic » banks to divulge details of Shariah Compliance.

Did you ever wonder why in the Kingdom of Saudi Arabia which is the cradle of Islam there isn’t one openly Islamic bank? And yet the UAE with 20% of KSA’s population has five such banks, three of them white washed. In KSA when a client goes to open a deposit account banks openly ask her if she wants a “riba account” which means an account that pays interest, the majority of clients decline as it is seen as “morally unacceptable” which leaves the banks to rack in the profits. With deposits approaching $150 Billion in 2006 and little interest charges to pay the clients no wonder they are amongst the most profitable banks in the world. A professor from the Wharton School in the US argued that “it serves little purpose to extend financing with interest charges using a set of tricks that disguise them as something else.”

We endorse the sentiment.

In today’s world, more and more people are looking for salvation, even if it was a trick; in this case salvation got an Islamic disguise.

With a few exceptions, the entire Islamic Finance industry is nothing else but a disguise. Having said that, we should not throw out the baby with the bathwater. Should any financial institution be prepared to take risks and offer truly Islamic alternatives to conventional systems of finance, we are there to offer them solutions. Solutions do exists, but require a commitment to Islam from the side the managers of these institutions. In our experience there are those few who are prepared to do it the correct way.

Comments by : E. Vawda, for Daarul Iftaa
Checked and approved: Mufti Ebrahim Desai Saheb
Originally posted on on Nov. 12, 2007

Un commentaire

  1. Bismillahi rahmani rahim
    Selam aleykum
    I have no Medresa education, however I am an economist and teach finance last 35 years in the UK Universities and elsewhere. My Islamic Sharia knowledge is self taught and limited, but I discussed these issue also with my son. I could not publish on these issues because I needed to exchange views with Ulema, with sacred knowledge. Whoever I debated, they directed me to Taki Uthmani’ s group, who fuged the issues. Thanks to Allah that there is a formal voice now. We came to the similar conclusion as you did via different hadiths and examples. If needed, I offer my support and my knowledge for Allah’s sake.

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