SANUSI'S ISLAMIC BANKING: THE UNTOLD TRUTH! PART 2
In one of Dr. Muhammad Sharif Chaudhry’s treatise, a Muslim scholar of repute, he affirmed that: “The greatest challenge which the modern Muslim states face today is how to eliminate interest from their economies particularly from the banking sector. For the last three decades, very serious efforts have been made to meet this challenge. Islamic institutions, universities, advisory bodies are doing research and studies. Many commissions and committees have been set up by the government of Islamic countries to study various sectors of their economy especially finance, banking and insurance and furnish reports suggesting how to eliminate interest in order to Islamize the economy. A number of books, articles and research papers have been written and published by various Muslim scholars, economists and study-groups. Some practical measures have also been taken to abolish interest gradually from banking and financial sectors. Attempts are being made to organise system of loan and credit free of interest. Scores of Modarabah and leasing finance companies have lately emerged in Islamic lands particularly in Pakistan who claim to provide loans on profit and loss sharing basis in accordance with principles of Modarabah and Shirkah. Of all the Muslim countries, Pakistan has been in the forefront in Islamic Jihad against ‘Riba’ (interest). Profit and loss sharing accounts have been introduced by banks in Pakistan after 1980 for the depositors, while loans are advanced by the banks on mark-up system. Investment Corporation of Pakistan and National Investment (unit) Trust and many other financial institutions in Pakistan attract deposits from the middle class investors on the basis of profit-loss sharing. The Federal Shariat Court of Pakistan, in its historic judgement of November 1991, has declared all forms of interest as ‘Riba’. Appeal against this judgement filed by the Government of Pakistan is awaiting decision in the Supreme Court of Pakistan.
Banks are paying interest to their depositors and charging interest from their borrowers under various names. Modarabah and leasing companies are providing capital to business and industry on fixed and pre-determined interest under the garb of lease-rental and lease-finance arrangements. In this whole exercise only the rates of interest have gone up! No effort has worked out and achieved the desired goal. Given the moral standards and business ethics prevailing in the society, no person or institution is prepared to take risk and provide finance on profit-loss basis. It is, therefore, rightly said that efforts made in the Islamic lands so far tantamount to protecting the institution of interest rather than abolishing it.
The causes for this historic failure of the Muslim world in eliminating ‘Riba’ from economy are many. Firstly, the socio-economic changes brought in Islamic lands by political domination of the West and industrial revolution has weakened religious and moral values of the people. The leaders, who in fact have mostly their own problem of legitimacy, have failed to offer themselves as role models before the citizens. Merely lip service is paid to Islamic values such as honesty, truthfulness, trustworthiness, fair dealing, justice and equity, fraternity and brotherhood, moderation in consumption and standard of living, austerity and simplicity, etc. Strict observance of these values is, however, a condition precedent for Islamising economy. But the same is unfortunately conspicuous by its absence in the Islamic society of today. People are living beyond their means. Everybody is after maximising his material comforts which can only be achieved through money.
So earning of wealth through fair or foul means has become religion of today. As a consequence, no moral values and code of business ethics exist these days. Nobody trusts any other person at least in money matters and business dealings. In business partnerships, brother cheats brother, son deceives father; friend commits fraud with a friend. Therefore, every person and institution is, justifiably, reluctant to participate on profit-loss sharing basis. And to eliminate interest, profit-loss basis is the only way for providing capital to business and other economic development projects.
Secondly, the Muslim scholars and economists have miserably failed so far to provide a practical, simple, safe and workable substitute for interest. The interest-no doubt it has been prohibited by Islam (and also by Christianity and Judaism) and there are many moral and socio-economic justifications for this prohibition-provides a very simple and practical mechanism to establish and govern the relationship between the lender and the borrower. It assures the lender the safety of his capital and profit on the one hand and it frees the borrower on the other hand from many worries such as maintenance of books of accounts to the satisfaction of the lender and the lender’s constant interference in his business affairs which generally leads to disputes, litigation and ultimate closure of business. But the substitutes for interest given by Muslim scholars are many often vague, complicated and impracticable. The substitute of profit-loss sharing hardly appeals to the lenders and the borrowers who cannot work in partnership because they strongly suspect each others’ motives in view of the low moral standards and business ethics obtaining in the society. It is brought to the notice of the common reader that the Qur’an and the Sunnah have abolished interest but have not recommended any substitute. Modarabah and Musharikah have not been referred to anywhere in the Qur’an or the Hadith. These are actually forms of business organisations whose rules and regulations were laid down by classical Muslim jurists of middle ages. Even those classical jurists did not introduce these concepts of Modarabah and Musharikah as substitutes of interest. It is actually the scholars of recent period who have taken fancy to Modarabah and Musharikah and have set them up as Islamic substitutes of interest. But these scholars have not yet been able to modify these concepts to the changed socio-economic circumstances of modern age and the needs of modern complex economies.
Thirdly, interest has been prohibited by Islam to prevent exploitation. Traditionally borrowers, being persons in need, were exploited by few moneylenders who controlled substantial portion of wealth and capital of the community and who charged exorbitant rates of interest on their loans. But now the economic revolution brought about by recent technical and scientific advancements has changed the scenario. The introduction of the modern banking system has inverted, in a sense, the traditional relationship between the borrowers and the lenders. The lenders in these days are not a small number of usurious money- lenders who monopolize wealth in the society. They consist of millions of middle class individuals who deposit their life savings in the banks to meet needs of their families in a rainy day. Many of the borrowers on the other hand are wealthy people and corporations who have setup industrial empires. Therefore, it is now the lenders and not the borrowers who need to be protected. However, the Muslim economists who recommend Modarabah and other profit-loss sharing schemes for the lenders as substitutes of interest have done nothing to protect the interests of the lenders. It is a well-known fact that many businesses do not give fair returns to their shareholders. Many public companies do not declare dividends for years and the value of their shares is much lower in the market than the equity subscribed by the shareholders. Thus, if the banks resort to financing in accordance with the Modarabah or Musharikah arrangements, which are in fact similar to equity financing in joint stock companies, it would lead to the mass deprivation of the savings of the depositors. Some reasonably safe mechanism needs to be evolved to check the malpractices of businessmen and to ensure that false books of accounts are not maintained with a view to declaring heavy loss, thus denying the lenders their share of profit and sometime even deprive them of their loan capital. But unfortunately, the Muslim scholars have not yet evolved any such mechanism.
Fourthly, the scholars have not provided satisfactory solutions to the issues as to how the government would be able to raise loans from internal and external sources in the absence of interest. What would be the incentive for the public to provide loans to the government particularly when the government cannot give any profit on the basis of profit-loss sharing as most of the ventures of the government are not profit-generating in the business sense? What would be the incentive for foreign countries and international lending agencies to give loans to the poor in Muslim countries like Pakistan? How in the absence of interest, international trade and other international dealings would be transacted? The concept of global village is vastly taking its shape and economic inter-dependence of countries of the world on each other is increasing everyday. No country lives is isolation these days. In this situation, how a poor country like Pakistan or even all the Muslim countries put together can abolish interest in international dealings when most of these countries owe huge debts to non-Muslim countries and world agencies? These are the questions to which we have paid little heed.
And lastly, the major cause of our failure in elimination of interest is that we are attempting to make impossible to happen. Not that interest cannot be eliminated from economy. The fact is that it cannot be eliminated from capitalistic system of economy. In every Islamic state capitalistic system of economy with all its evils is in vogue. Interest is the backbone of this system. It is like a pillar on which the edifice of modern capitalist economy is standing. If you want to keep this system, you cannot withdraw this pillar as in that case the whole system would collapse. In capitalism you will have to swallow this forbidden fruit of interest under one name or the other. If you want to act upon Islamic teachings and abolish interest then you will have to abolish capitalistic form of economy root and branch from Islamic lands and enforce instead a simple system of Islamic economy in its pure and unadulterated form based on social justice and concept of welfare state”.
Usury in Islam
The criticism of usury in Islam was well established during the lifetime of the Prophet Muhammad and reinforced by several verses in the Qur'an dating back to around 600 AD. The original word used for usury in this text was Riba, which literally means “excess or addition”. This was accepted to refer directly to interest on loans so that, according to Islamic economists Choudhury and Malik (1992), by the time of Caliph Umar, the prohibition of interest was a well-established working principle integrated into the Islamic economic system. This interpretation of usury has not been universally accepted or applied in the Islamic world. A school of Islamic thought which emerged in the 19th Century, led by Sir Sayyed, argues for an interpretative differentiation between usury, or consumptional lending, and interest, or lending for commercial investment (Ahmed, 1958). Nevertheless, Choudhury and Malik provide evidence for “a gradual evolution of the institutions of interest-free financial enterprises across the world” (1992: 104). They cite, for instance, the current existence of financial institutions in Iran, Pakistan and Saudi Arabia, the Dar-al-Mal-al-Islami in Geneva and Islamic trust companies in North America. This growing practice of Islamic banking will be discussed more fully in a later section as a modern application of usury prohibition.
Controversy over Islamic banking:
In Islamabad, Pakistan, on June 16, 2004: Members of leading Islamist political party in Pakistan, the Muttahida Majlis-e-Amal (MMA) party, staged a protest walkout from the National Assembly of Pakistan against what they termed derogatory remarks by a minority member on interest banking:
Taking part in the budget debate, M.P. Bhindara, a minority MNA [Member of the National Assembly]...referred to a decree by an Al-Azhar University's scholar that bank interest was not un-Islamic. He said without interest the country could not get foreign loans and could not achieve the desired progress. A pandemonium broke out in the house over his remarks as a number of MMA members...rose from their seats in protest and tried to respond to Mr. Bhindara's observations. However, they were not allowed to speak on a point of order that led to their walkout.... Later, the opposition members were persuaded by a team of ministers...to return to the house...the government team accepted the right of the MMA to respond to the minority member's remarks.... Sahibzada Fazal Karim said the Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society. Hence, he said, no member had the right to negate this settled issue.
Some Islamic banks charge for the time value of money, the common economic definition of Interest (Riba). These institutions are criticized in some quarters of the Muslim community for their lack of strict adherence to Sharia.
The concept of Ijarah is used by some Islamic Banks (the Islami Bank in Bangladesh, for example) to apply to the use of money instead of the more accepted application of supplying goods or services using money as a vehicle. A fixed fee is added to the amount of the loan that must be paid to the bank regardless if the loan generates a return on investment or not. The reasoning is that if the amount owed does not change over time, it is profit and not interest and therefore acceptable under Sharia. Hulalaah!
Islamic banks are also criticized by some for not applying the principle of Mudarabah in an acceptable manner. Where Mudarabah stresses the sharing of risk, critics point out that these banks are eager to take part in profit-sharing but they have little tolerance for risk. To some in the Muslim community, these banks may be conforming to the strict legal interpretations of Sharia but avoid to recognize the intent that made the law necessary in the first place.
The majority of Islamic banking clients are found in the Gulf States and in developed countries. With 60% of Muslims living in poverty, Islamic banking is of little benefit to the general population. The majority of financial institutions that offer Islamic banking services are majority owned by Non-Muslims. With Muslims working within these organizations being employed in the marketing of these services and having little input into the actual day to day management, the veracity of these institutions and their services are viewed with suspicion. One Malaysian Bank offering Islamic based investment funds was found to have the majority of these funds invested in the gaming industry; the managers administering these funds were non Muslim. These types of stories contribute to the general impression within the Muslim populace that Islamic banking is simply another means for banks to increase profits through growth of deposits and that only the rich derive benefits from implementation of Islamic Banking principles.
Hence, the controversy that surrounds Islamic Banking continues. Is Islamic Banking really Islamic? This is a question that still is a matter of debate among the Muslim academia.
As a Nigerian who is deeply concerned about the direction in which his country is heading, I strongly believe that Sanusi’s attempt to introduce Islamic Banking is part of the proxy warfare against the government of President Jonathan. I will advice President Jonathan that rather than focusing narrowly on Boko Haram, he should focus more on uprooting the sponsors of the proxy warfare that sustain these miscreants and others like them. Their tactics varies and as such President Jonathan must put on his thinking hat otherwise the zoning apostles are determined to ruin his government at all cost. Also, the Federal Government need to as a matter of urgency send a larger percentage of our Police Officers on compulsory training where they will be taught the basic tenets of psychological warfare, counter terrorism, strategy and tactics for transcultural negotiations for the Government and intelligence communities and other agencies of the Federal Government, while also developing foundational strategies for hostage rescue. This is because Nigerians have witnessed kidnappings, bomb blasts and only God knows what next, perhaps suicide bombings? Our past leaders allowed the importation of corruption, kidnappings and bomb blasts into this country; and trust Nigerians, we elevated these things to another level, far more than would have been conceived by the originators. So it will be foolhardy and even dangerous if you equally allow these same people to import Sharia banking into Nigeria.
Finally, it is the province of knowledge to speak, and it is the privilege of wisdom to listen. A problem well stated is a problem half solved. So, it is up to you Mr. President to either allow this evil proxy warfare prevail over your transformation efforts or simply put on your thinking hat and quash the obvious evil warfare at once. Either way, remember that the price of liberty according to Thomas Jefferson is eternal vigilance. Fundamentally, if you do not succeed to subdue the excesses of the sponsors of this proxy warfare, then, your Government runs the risk of failure which will be to the interest of those that promised to make Nigeria ungovernable at all cost. This is a defining moment for you Sir. You either define the moment, or the moment defines you. And as your name suggests, I wish you nothing but goodluck, as always!
Contributed by: Kexter E. A. Donald Jnr, Amsterdam, The Netherlands. Email: [email protected].