www.islam-watch.org

Interest-free Islamic banking is suitable only for stagnant economies, while standard banking that pays interest to depositors helps foster a dynamic and grow-oriented economy.

At the end of 1999, Pakistan’s Supreme Court ruled that Islamic banking system had to be implemented in the country from July 1, 2001, and hence Pakistani bankers were facing the fearsome task of completely transforming the way in which they were so far doing their business. It may be mentioned that on several previous occasions, the Government of Pakistan has tried to introduce interest-free Islamic banking system to please the fundamentalist religious mullahs but failed. But this time, it became a binding for the then Pakistani military dictator Pervez Musharraf and his finance minister Shaukat Aziz to implement at least a rudimentary form of Islamic economic system to oblige the Supreme Court verdict.

In this context, a circular issued by the State Bank of Pakistan says that the aim of setting up Islamic banking system is to make Islamic banking the banking of first choice for the providers and users of financial services. Its mission is to promote and develop Islamic Banking industry in line with best international practices, ensuring Shariah compliance and transparency. An Islamic Banking Department was established on 15th September, 2003, entrusted with the task of promoting and developing the Shariah-Compliant Islamic Banking as a parallel and compatible banking system in the country. It claims that Islamic Banking is one of the emerging field in global financial market, having tremendous potential and growing at a very fast pace all around the world.

“Al-Hamdulillah, the progress of Islamic Banking in Pakistan has also been commendable during the last Five years. Currently there are six licensed full fledged Islamic Banks and twelve conventional banks with standalone Islamic Banking Branches with the total branch network of over 336 branches operating in more than 50 cities of all the four provinces and Azad Kashmir in the country as of 17.07.2008 and applications for few more players are under consideration. Islamic Banking is a high priority area for State Bank of Pakistan. Steps are being taken to make Islamic banking industry in Pakistan robust enough to offer a viable alternative to conventional banking, should the market decide that Pakistan should have an exclusively Islamic banking system in the country”, it adds.

What is Islamic banking?

What is Islamic banking or Islamic economic system? Like the Bible (Old Testament), the Koran, the holy book of Islam, condemns usury and receiving interest (riba), and declares it exploitative, unjust and evil. A few serves in the Quran dealing with this issue are:

1. Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury) - Such are rightful owners of the Fire. They will abide therein”. (2: 275)
2. Allah hath blighted usury and made almsgiving fruitful. Allah loveth not the impious and guilty. (2: 276)
3. O ye who believe! Observe your duty to Allah, and give up what remaineth (due to you) from usury, if ye are (in truth) believers. (2: 278)

What made Allah so displeased with usury or receiving interest? Scholars believe that during that time the Muslims were very poor and prosperous and wealthy Muslims used to exact money from their poor debtors, supposing that it was lawful for them. So, Prophet declared usury unlawful on the very day he conquered Mecca. Ibn Abbas, a companion of the Prophet believed that money extorted as interest causes, not pleasure, but distress and grief. Most importantly, the family of Umar, another close companion of Muhammad, used to exact interest from debtors at high rates.

What is an interest? It is a common experience that the purchasing power of money declines with the passage of time. The goods and services one can purchase by spending say 100 rupees (in India) today would cost much more 10 years later. Banks try to compensate this difference in the form of interest. For example, a bank providing 5 per cent interest per annum to its depositors literally means that an individual, who can purchase goods and services by spending 100 rupees, would be able to purchase same goods and services by spending 105 rupees in the following year. If one keeps his money in his personal custody, the money cannot grow. Interest tempts people to deposit their money with the banks. But, if the bank refuses to pay interest, it is as good as keeping money in one’s personal custody. So, the interest-free banking suits an economy where the price of goods and services remain stagnant and do not rise. Or in other words, interest-free baking is suitable for a stagnant economy.

Interests paid by banks also in kind of profit sharing. When people deposit money in a bank, the bank lends that money to borrowers at interests, invest them in various economic sectors, from which the bank earn profits. A part of profits earned by the bank from lending and investing the depositors’ money is paid back as interest to the depositor as a form of profit sharing. This profit-sharing thus works as a win-win project for the depositors and banks, which is necessary for economic operations. It thus becomes evident that the interest-free Islamic banking suits a stagnant economy while the interest-based banking system ensures a dynamic and healthy economic operation that helps creation of wealth through augmentation of trade and commerce, industry and agriculture, thus helping provide a better economic system for a nation.

The Muslim psyche

But the Islamic psyche is completely different. In deciding things, they do not apply personal intelligence and experience. Two notions guide their entire activities – haram (not permitted) and halal (permitted). In several previous articles, this author has narrated how inbreeding or marriage between first cousins is turning the Muslims across the world intellectually crippled and stupid people. But the Muslims are not ready to accept the reports of scientific investigations and argue that, since Allah has not declared marrying cousins as haram, there cannot be any harmful effect of such marriages. So, they deplore the scientific reports in this field and say that all such scientific reports are concocted to malign Islam.

But it is strange that Muslims, particularly those who live in non-Muslim countries, deposit their money in ordinary banks and gleefully enjoy the interest, which Allah has made haram. There are several such examples. Allah has declared it haram for the Muslims to drink alcohol, but Muslims are ignoring Allah’s command every now and then. Allah has said that Muslims should go for Mecca for Hajj pilgrimage by spending his own money. But Muslims in India are cheerfully enjoining the subsidy in the air travel provided by the Government of India.

Driven by this Islamic psyche and to please Allah, Islamic scholars have been busy for past several decades in evolving a workable interest-free banking system. About 200 Muslim scholars were relentlessly working at Islamabad, Jeddah and even at Leicester to find out an interest-free stable economic system. In fact, these scholars are striving to bridge the gap between the static dictates of the Koran and the modern dynamic global economic system.

The task was very hard indeed. For example, Islamic law approves private capital but disapproves the idea of a stock exchange declaring it to be an institute for monopoly in economics. Hence there is no place for a stock exchange in the Islamic financial system and one can easily guess the difficulty of framing a modern capitalist economic system without a stock exchange. The situation turns worse when majority of Muslim rulers refuse to dispense with it and other monopolistic advantages. However, Muslim scholars have produced several fundamental works on Islamic economic such as:

(1) Banking Without Interest by Dr Mohammad Nejatullah Siddique,

(2) Monetary and Fiscal Economics in Islam by Dr Mohammad Arif,

(3) Money and Banking in Islam by Dr Ziauddin Ahmad, Dr Munawar Iqbal and Dr M Fahim Khan, and

(4) Fiscal Policy and Resource Allocation in Islam by the same authors and so on.

Attempts in Pakistan

The State Bank of Pakistan is working to develop a sound Islamic banking system compatible with the global financial sectors, providing innovative Shariah-compliant products and services so as to achieve equitable economic growth. The objectives of this endeavour are as mentioned below:

a)      Drive and Implement the Strategic Plan for Islamic banking industry

b)      Strengthen the existing regulatory framework for Islamic Banking Industry

c)      Strengthen and broaden the scope and functioning of SBP Shariah Board through inclusion of more members and engaging of consultants of international repute

d)     Arrangement of IFSB events, particularly Council and Technical Committee meetings, along with the side events in Pakistan in November, 08

e)      Leverage from/support the efforts of IFSB, IDB/IRTI, AAOIFI, IIFM and other international institutions for promotion of Islamic banking in Pakistan

f)       Coordination with BPRD regarding licensing of full fledged Islamic Banks (IBs) and their branches and Islamic Banking Branches of conventional banks (IBBs) and formation of Islamic banking subsidiaries

g)      Coordination with BID for Shariah compliance inspection of IBIs and proper compliance of the observations/recommendations of inspection report (regarding Shariah Compliance)

h)      Utilizing SBP-SECP Joint Forum for the promotion of Islamic financial industry

i)        Support industry players in development of Shariah-compliant liquidity management instruments

j)        Utilizing the Shariah Advisor Forum for conflict resolution and for discussion on AAOIFI Shariah Standards for their adoption in Pakistan

k)      Conduct awareness program within and outside SBP to eliminate the misconceptions and to develop the confidence of the public about Islamic banking

l)        Publication of Islamic Banking Bulletin (IBB) and Islamic Banking System review (IBSR) and facilitate different departments in preparing various SBP publications

m)    Human resource capacity building in the Islamic banking industry through coordination with educational institutes.

It is needless to say that the policy adopted by the State Bank of Pakistan is based on the theories developed by scholars mentioned above.

A few scholars who theorized Islamic economics

Dr Mohammad Nejatullah Siddiqi is one of the pioneers among the Muslim scholars who could develop a workable theoretical formulation for interest free Islamic economic system. He was born in India in 1931, studied economics at the Aligarh Muslim University. He is the winner of the King Faisal International Prize for Islamic Studies.

Dr Siddiqi served as Associate Professor of Economics and Professor of Islamic Studies at the Aligarh University and as Professor of Economics at the King Abdul Aziz University Jeddah, in its Center for Research in Islamic Economics. Later, he was a Fellow at the Center for Near Eastern Studies at the University of California, Los Angeles and after that a Visiting Scholar at the Islamic Research Training Institute, Islamic Development Bank, Jeddah. For his contributions to Islamic Economics, he was awarded the Shah Waliullah Award in New Delhi (2003).

Dr M. Fahim Khan holds B.A. and M.A. (Statistics) degrees from Punjab University, Pakistan, M. A. and Ph.D. in Economics from Boston University, USA. He was associated with the Islamic Research and Training Institute (IRTI) since 1988 serving at various positions such as Head Research Division, Head Training Division and Chief, Islamic Economics, Cooperation and Development Division. He is currently working as a Chairman of Riphah Center of Islamic Business, Riphah International University, Islamabad, Pakistan. His major works on Islamic banking are: Recent Theories of Profit: A Critical Examination (1971); Economic Enterprise in Islam (1972); Muslim Economic Thinking (1981); Banking Without Interest (1983) and so on.

Dr Munawar Iqbal, a Pakistani economist. He has his M A degree in economics from McMaster University Ph.D. from Simon Fraser University, Canada. He has worked as Senior Research Economist, Pakistan Institute of Development of Economics, Islamabad; Dean of the Faculty of Social Sciences, International Islamic University, Islamabad; Director, International Institute of Islamic Economics, Islamabad; and Economic Adviser, Al-Rajhi Banking and Investment Corporation, Saudi Arabia, before joining IRTI. He has published several books on Islamic economics and banking.

These authors have so far managed to work out two kinds of interest free Islamic banking systems, namely (i) mudarabah and (ii) murabaha. We like to discuss these aspects in the next part of the article.

(To be continued)

Comments (17)

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Why islamic banking without interest is nonsense
written by Gnostic , May 18, 2012

It is so much easier. Interest is nothing but the product of money, time and an interest rate. Islam says that interest is usury but this is nonsense. Too high interest rates may be considered usury, but this applies to anything. Every economist knows that there is hidden interest in any product. If I buy a farm for 1 million dollars I want to receive something back every year. Of course not only for the working hours, fuel and other materials and the wear off of things, but also for the money I spent. Maybe another guy has inherited the same farm but he would also try to get interest out of it. If not, he would be stupid. Any investor who invests a certain amount of money in a business calculates how much money he receives every year from it minus all other spendings.

If I rent an apartment most of I pay is interest if not all. It is easy to separate all other costs such as maintenance, repairs, taxes, electricity gas and water. If I take all this away there will be two things remaining, both forbidden by some or many muslim scholars: insurance (for the economic risk because earth quakes and the like might happen, and interest! If you rent a car, a ship or anything it does not matter: You are renting capital/money and you are paying interest for it!

Ha ha ha
written by Abc , May 18, 2012

From love jihad to economics! Living it!
Even those infidels at goldman Sachs have been corrupted.

http://my.firedoglake.com/dswright/2012/03/31/goldman-sachs-tries-to-get-into-islamic-banking-or-why-they-hate-us/

Let's call this economic jihad!!!!!

Mmmmwaahhhh. ha ha ha!

Why islamic banking is stupid (II)
written by Gnostic , May 18, 2012

Without banking system small companies have no opportunity to expand their business. We can see the results even today: No private owned industries, private companies cannot become larger than kebap fast food restaurants. Muslim countries are still suffering from a lack of meaningful induistries and a lack of a middle class. People are forced to rely on self exploiting small business. The history of idustrialisation is closely related to the development of a modern financing system. The fact that islamic financing is growing has a different reason: The petro dollars must be recycled.

@ Abc
written by 1proudkaffur4life , May 18, 2012

Looks to me you are reduced to either name calling or posting links to what others have written as a attempt to distract from the fact that you run when faced with though questions regarding the kooran.

You run from simple questions like is a day by allah 1.000 or 50.000 years, do you not question yourself the validity of these statements in the eternal word of your demented stoned-gawd allah, for which you have not the smallest bit of evidence.

But the REAL funny thing is this: here we have Muslim scholars trying to create something Islamic which allah the stoned-gawd did not lay down in his holey book. So Islam (as it shows to me again) is not something which was carved in stone and can not be changed, but needs the input of mere humans and is simply a developing religion/system of thought or ideology and now economy. And with such a crap which has to be invented at every turn to deal with new situations people would want to create a "just" society? YES THIS this is laughable.

Islamic math
written by Guy Macher , May 18, 2012

For a real laugh read the Islamic rules on inheritance. These idiots tell us they invented algebra!

Sura 4:11-12 and 4:176 state the Qur'anic inheritance law. If a man dies and leaves three daughters, his two parents and his wife then they will receive the respective shares of 2/3 for the 3 daughters together, 1/3 for the parents together [both according to verse 4:11] and 1/8 for the wife [4:12] which adds up to more than the estate available.

Ball's in your court, Muslims. Explain the math!

...
written by vbv , May 19, 2012

Islamic banking is pure bullshit. It is only aversion to interest , and nothing else. If muslims are so sure of their financial system , they should implement in their own banana/islamic republics and prove its efficacy. It is like the barbaric sharia which the muslims want to escape from and flee to the west; and once they are settled in the west they call for the very same poison called sharia to be implemented in their adopted country. What are they trying to prove? They want to drag everyone down their miserable shanty hole of islamic shit exitence which will at the mercy of mad fanatic mullahs dictating every aspect of living in the name of all that islamic bullshit called 'halal' and 'haram'. Do they want to prove all the great economists like Adam Smith, J.S. Mill, Alfred Marshall, John Maynard Keynes, Iriving Fischer, Paul Samuelson, Milton Freidman, etc were all wrong ? Next these stupid , idiotic, moronic muslim a*****es will say that why learn science at all when all that is required for 'islamic' living is there in Quran and Sunnah ! Muslims are utter and total failures in modern civilisation; their contribution is nothing at all , nothingconstructive, creative and progressive. Hence they want to lead everyone into the dark hole of ignorance and misery , backwardness and destruction called islam.

...
written by y.m to vbv , May 19, 2012

I disagree with you when you stated that muslims are total failures in modern civilisation that their contribution in scince and modern technology is nothing at all.They created nothing constructive.I would like to state that one of the great muslim scholar Dr,Gulam jalani berq has stated in his book that in the world there is not a single nation who produces so many traitors in his whole history that muslims have produce just in one century. of course muslims has not invented any modern technology but they are entitled for a u.n.o.s noble prize to produce traitors.

Islam is Pseudoscience
written by Gnostic , May 19, 2012

Islamic scholars only pretend to be scholars and they only pretend to do something like science. In real nobody can claim that what he teaches is on behalf of god or Allah. Anybody who makes such a claim is a scharlatan and nothing else. And if I see so many obviously wrong claims about like in the quran, I would even say that this is blasphemic.

Muslims are lied to yet once again
written by 1proudkaffur4life , May 19, 2012

Economic ideas like "Islamic Banking" are now being "developed" in the Islamic world at least for a few decades. There would be nothing wrong with this, if ANYWHERE in the Kooraan anything like "humans can develop and create" their own society to be found. But it is not, the message which is repeated over and over again, is that "allah" knows best" and all knowledge comes from him ONLY. So Islamic scholars have to create a new thought to deal with the economic aspect. In the end they tell Muslims a lie that all this can be found in the Kooran.

So people like "abc" defend these Muslims who are LYING to THEM! And go against those who expose the lies in their "religion/ideology/laws". Muslims seem not to mind if they are being lied to, if this props up their believe in a CONCEPT of a deity which can not be proved, and that is a sad part.

Islamic Banking
written by balam , May 19, 2012

Islam and Muslims have failed in every sphere of life.I agree with Y.M that they are good only at producing traitors.Their history is full of that.The Muslims never even trust one another because they know their own character very well.Mohammad was an accomplished salesman though.He sold SAND to the Arabs and he has thrown sand into the eyes of the rest of the world.As the saying goes:A LITTLE KNOWLEDGE IS A DANGEROUS THING.He was an Illiterate man but very cunning.He learnt a lot of things from the Jews without real understang.He put all that in his ambigous quran.Muslims are the real victims of Islam.According to Dr.Guma of Al Azhar University,the followers of Mohammad used to drink his urine and eat his feces out of devotion for him .Hence what can you expect from these brain washed,braindead or brainless muslims.No wonder they can not manage even a BROTHEL properly.Look,how Pakistan is being run!!!!

Balam
written by abc , May 20, 2012

dont make me laugh slumdog!
Sitting in India and telling people how to live!!!
Glass house comes to mind!

@ abc
written by 1proudkaffur4life , May 20, 2012

Thanks for proving my point yet again, name-calling is one of the last avenues left for Muslims like yourself because your "religion" CAN NOT BE defended!

Lack of "divine signs" explained thusly:
17:59 "Nothing stops Us from sending signs and proofs except that earlier people rejected them as lies. We sent to Thamud the she-camel as a clear sign, but they treated her cruelly."

So in essence allah the stoned-gawd quit giving clear proof of his existence because some earlier people did not believe his "signs" which consisted in one case a "she-camel"! He send a she-camel to a people were used to see this animal!

Well maybe it did not occur to this demented deity to USE other more convincing signs!

Proudkaffir
written by Abc , May 20, 2012

Yawn yawn!!!!

contempt of the kooran by a devout Muslims, who would have thought of that...
written by 1proudkaffur4life , May 20, 2012

Ah I see you come to hold your own holy book in contempt.

This could be light at the end of the tunnel and you will see the foolishness in your religion, If you need help I'll post more foolish verses, so that the contempt of the kooran becomes more complete. look see:

“Alexander the Great” was a Muslim
(Sure 18: 83 They ask thee concerning Zul-qarnain. Say, "I will rehearse to you something of his story." 84 Verily We established his power on earth, and We gave him the ways and the means to all ends. 85: One (such) way he followed, 86: Until, when he reached the setting of the sun, he found it set in a spring of murky water: Near it he found a People: We said: "O Zul-qarnain! (thou hast authority,) either to punish them, or to treat them with kindness."

And yes reading the kooraan one can fall asleep too, it happened to me, and then I got night-mares.....

more about Alexander the Great
written by Yibel , May 21, 2012

According to the Qur'an:
The sun doesn't just set in a pool of black mud, it also rises in the east "upon a people whom WE (the gods Ar-Rahman/Ar-Raheem and Al-Muqtadir, The Determiner) exposed to its flaming rays." (Qur'an 18:86)

According to the Qur'an, after damning up a valley with molten brass so that some people named Gog and Magog could not scale it or dig their way through, Alexander the Great traveled on a road that took him to where the sun rises and burns people's skins because Muhammad's gods put them to close to the sun's flaming rays!

It is interesting that Muslims never seem to notice that their gods speak directly to Dhu'l-Qarnayn (Alexander the Great). Actually, Muhammad's gods speak directly to everyone in the Qur'an but never spoke to directly to the "perfect" man, instead sending a spirit to speak on their behalf.

And, not only did these gods speak directly to a pagan who worshiped the Greek god of war Ares, they apparently didn't know Alexander's name but called him Dhu'l-Qarnayn (Zul-qarnain) meaning Lord of the Two Horns, after the god Ares.

why alexander is great ?
written by HARKAT UL JIHAD EI KAFIROOON , May 21, 2012

why do we consider alexander great ? he was a killer milions,he did not try to spread peace love humanity he was a hateful kilelr who wanted to rule the world by words.

thus to me alexander is not great.

@ HARKAT UL JIHAD EI KAFIROOON
written by 1proudkaffur4life , May 21, 2012

I used the title because this person is know by it, a Non-Muslim, who never studied the Islamic writings would not who is meant if one used the name used in the kooraan. This does also not mean that I consider him to be great either...

@ Yibel the story of the Wall-building to keep Gog & Magog locked in, comes also from Jewish ORAL tradition, Josephus mentions it in two of his books IIRC , need to look up in which ones though.
IIRC = "If I remember correctly" old news-groups talk habits....