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Islamic Bank
AN EMERGING NEW MODE OF 'FINANZKAPITAL' IN THE WORLD
Abstract
Islamic banking is making a debut in the world of 'Finanzkapital'.
Despite being new in the world of finance and still hesitant to
make bold claims, it is emerging slowly but steadily. The men who
took upon themselves the task of piloting the Islamic mode of 'Finanzkapital'
belong to the new generation of Muslims. Not only are they endowed
with a strong Islamic faith but are also equipped with the
necessary technical wherewithal to rise to this occasion. The one
who first started the ball rolling in this direction was Dr. Ahmed
El-Naggar, an Egyptian economist. Among others who joined him
later, were the late King Faisal and his son Prince Muhammad.
Tunku Abdul Rahman too played the pioneering role in the
establishment of the Islamic Development Bank in Jeddah.
Although the superstructure of Islamic banking is still in the
making and there are quite a large number of fundamental issues
waiting to be resolved, the spirit to make this premier pas a
success seems undaunted. While some Muslim countries have already
set up Islamic banks, there are others where at least a part of
the banking business has been Islamized. Pakistan is among those
countries which have set up special counters for interest-free
banking.
As Islamic economics is not only confined to mere 'finance', quite
a large number of steps are also being taken to orientate the
economic contours of these countries compatible with the basic
tenets of Islam. Zakat and Ushr have already been introduced in
Pakistan. In addition, serious efforts are under way to find new
ways and means towards raising funds through taxation etc. for
purpose of meeting both the budgetary and developmental outlays.
The World of Islam, today, finds itself in an enviable position.
Not only is it now largely liberated from the colonial yoke, but
is also endowed with the fabulous oil wealth. With a view to
enable the Muslim countries to break their centuries-old economic
stagnation, the present exercise into Islamic banking is destined
to open up a new epoch of resurgent development and distributive
justice. If this effort got crowned with success, not only will it
benefit the Muslims, but will also usher in a new era of efficient
and broad-based growth and development in the whole world.
Introduction
For centuries the Islamic economic doctrines have remained dormant
and been unable to face the more aggressive and vested-interests
specific socio-economic order inaugurated by the West. Whatever
may have been the reasons for this fate behind the unsuccessful
character of the Islamic economic order in the past, one thing
that seems to be emerging on the international economic front is
the fact that the world of Islam has in recent years started
getting awakened from this (chronic) slumber. Apart from political
awakening, some of the Muslim countries are today anxiously
exploring prospects of liberating themselves from the economic
order thrust upon them over the past few centuries by the more
powerful Western countries. A special need for this change has
been felt on account of the domination of the Western and
Communist countries in the realm of economic activity. Banking and
finance is one area where the Muslim countries feel inclined to do
something fundamentally different. The reason behind this desire
is the fact that unlike Western banking system which operates on
the cardinal principle of 'interest', the Islamic economic
doctrines abhor and forbid all those transactions which directly
or indirectly deal with interest or riba, the terminus tecknicus
used for this in the Holy Qur'an. One could judge the explicit and
emphatic character of prohibition of riba from the following verse
of the Holy Qur'an:
" Allah, permitteth trading and forbiddeth riba Allah hath
blighteth riba and made Sadaqat fruitful. Allah loveth not the
impious and guilty." (al-Qur'an, II : 275-276).
The above Qur'anic injunction was known to the Muslim community
for all the past centuries and there were many a Muslim who,
inspite of placing their funds with Western banks, did not accept
interest which accrued on their deposit accounts, but none tried
to establish banking and financing institutions compatible with
the dictates and spirit of Islam. In some countries where Muslims
ruled, the most convenient practice followed was to let the
non-Muslims carry on banking and frequently even commerce and
trading. One possible reason responsible for the successful
development of banking and financing institutions by Western
nations in the Muslims countries was perhaps again the alleged
non-Islamic character of these institutions Nevertheless, it seems
quite intriguing that despite the explicit verdict in the Holy
Qur'an:
" O ye who believe, ... give up what remainetk (due to you) from
ribs, if ye are (in truth) believers. And if ye do not, then be
warned of war (against you) from Allah and His Messenger." (al-Qur'an,
II: 278-279)
The Western banking and financing institutions were allowed to be
set up in Muslim countries and there is ample evidence to prove
that even Muslims themselves were not hesitant to establish
interest-bound banks. There are also enough instances where Muslim
countries became signatories to the establishment o?
Interest-bound international institutions like the International
Monetary Fund and the International Bank for Reconstruction and
Development.
Despite the acceptance of Western banking institutions by the
Muslim countries, the West does not seem to be inclined to allow
the establishment of Islamic banks in their countries. This is
evident from a recent effort made by leading members of the Muslim
community in South Africa to set up an Islamic bank on the basis
of equity and profit and loss sharing with a share capital of 2
million Rands. The government did not approve the application
saying that: "The registration of an additional banking
institution at this juncture would not be in the public
interest."' Other Western countries are likely to adopt similar
attitude because the establishment of Islamic banks based on the
principle of profit and loss rather than interest would shake the
very foundations of Western banking institutions.
The two banking institutions, one working on the basis of interest
and the other on profit and loss, represent two different
socio-economic orders. The difference, rather the cleavage between
the two is of such a magnitude and quality that there are no
prospects of any convergence between their goals. Both work for
and aim at the realization of different goals. If some-how the
ultimate result comes out to be not too divergent from each other,
this is more incidental rather than inherent and innate.
Growth of Western Banking System
The Western banking system grew as it did historically was
supposed to serve the interests of the powerful class of
entrepreneurs, whether businessmen, industrialists or stock
traders. The banks operated through the ingenious mechanism of
dividing the society into savers and investors. Both these groups
were assigned a certain role to play in the society. While the
savers were encouraged to do a large part of the 'passive
capital-formation', the investors were inspired to use initiative
and enterprise to make the best use of this capital through
investment activity. The result of this 'division of
capital-saving and capital-investing' was that while the former
class continued to remain condemned vegetating on paltry rewards,
the latter class grew in wealth and stature day in and day out.
Notwithstanding other factors which led to the emergence of
capitalism in Europe, the role of banking institutions seems to
have served as the principal agent responsible for having
"triggered off this development. It is indeed a great irony of
human history that people who saved capital were the least to
benefit from it, while those who dexterously collected and used it
through the mechanism of investment were the ones who profited the
most. The way this system operates, enables the investors to
appropriate the lion's share of the earned profit, while only the
remainder falls to the lot of the savers. In some cases, as is the
situation in Pakistan at present, the savers were condemned to
have even a negative rate of return, while the intermediaries,
namely, the banks and the final investors were the ones who made
fortune on these savings.
Factors Hindering Growth of Islamic
Banking
Many factors led to the non-emergence of banking
institutions along with Islamic principles in the Muslim
countries. One was the treatment of the doctrine of ribs more as a
religious commandment rather than as an economic imperative. It
was this approach which led to theological interpretation of
concepts, such as, ribs and, in this way, economic rationality and
egalitarian thrust inherent in Islamic principles were thrown
overboard. The Muslim scholars unfortunately kept themselves so
much immersed with religious obligations and the concomitant
trivialities that the great Islamic concepts of economic utility
and human welfare were never allowed to be transformed into
gigantic institutions serving the greater cause and dynamic
pursuits of the larger Ummah. It is, in fact, this
non-enterprising spirit of the Muslim people which kept them down
on the economic front for centuries, while other nations, although
not well endowed in terms of great religious commandments, were
quick to set up institutions on the basis of human institution,
reflection and endeavor.
Max Weber also admits this phenomenon
when he says that while the majority of the great ideas were born
in the Orient, it was the Occident which transformed them into
great institutions. Not only does this verdict apply to riba, it
even holds true in the case of Zakat. While the concept of Zakat
is fourteen hundred years old, the forerunners of the present
'welfare state' or 'social security system' are no more than two
hundred years old. The latter development, it may be mentioned
here, wasn't, however, all too natural.' ... it arose as a way to
combat socialism by mitigating some of the most conspicuous
excesses of capitalism and thus removing the mobilization basis of
the Social Democrats. As against this, the Qur'an concepts, such
as Zakat and Sadaqat, aimed at offsetting the inequalities
inherent in human social and economic order, were taken more or
less as rituals rather than as the necessary wherewithal for
institutionalizing social justice and social security. Similarly
the doctrine of riba was also not understood in its broader and
deeper perspective, and, as a result, the great revolution that it
was supposed to usher in on the socio-economic front was
frustrated.
Many factors have given birth to the above situation.
One of them, for instance, was the notion that theological
doctrines and dogmas were anachronistic in nature. Perhaps there
was some truth in this approach as far as it related to older
religions like Christainty and Hinduism, but surely it wasn't
applicable to Islam, a religion committed to progress and human
emancipation. The tragedy that overtook the Muslim world was the
time perspective. In the period during which the great banking
institutions were established, the Muslim world had become the
victim of intellectual decadence or it was forced to come under
the influence or hegemony of non-Islamic nations. It is this era
of decline which forced the Muslim world to submit itself to alien
institutions arid, worse still, to antithetical intellectual
concepts. Although many Muslim countries are now sovereign and
active as far as the resurgence of Islam is concerned, there is no
denying the fact that the century's old Western supremacy in the
world of finance and trading is still far from being shaken.
Islamic Concepts under Scrutiny
The great concepts enunciated by
Islam are at present passing through an era of intellectual
scrutiny and inquiry. The task before the Muslim scholars is not
simply to understand and interpret the Islamic doctrines in the
light of the contemporary challenges, but also to prove the
economic viability of these concepts. It is here where Islam must
compete with other civilizations on an equal footing.
We come back
once more to the role of interest-free banking in the process of
socio - economic, development. As mentioned earlier, the Western
banking system, although it has over the past successfully removed
some of its earlier shortcomings, nevertheless it still continues
to serve as a financial arm of the capitalist class. The savers
who generally represent a large majority of the population in the
Muslim countries are continually .deprived of their legitimate
share in national income. Because of the manipulations through the
discount rate and, the concomitant cartelization of banks in
respect of their rates of interest offered on deposits, it is the
saver who gets the least reward for his efforts. The largest chunk
of the profit is taken away by the investor and the bank serving
as the intermediary between the saver and the investor. Through
this modus operandi, it is the saver who is generally placed in a
position of unequal relationship with the investor. As experience
has shown, it is the investor who gains the most and passes on
only the residual gain to the saver. I am reminded of a German
proverb which says 'A saver always finances his own decline'. In
Pakistan this proverb seems to be quite valid because the large
majority of savers generally get a negative return on their
savings if calculated b y giving due weight to inflation. The
banks play the role of deposit collectors in the rural areas and
dump these funds into the urban centers. The result is just
catastrophic. Not only are the rural people given an inadequate
return on their savings, but are also deprived of the
opportunities to use their 'own' capital for local development
purposes. The capital which is moved to the urban centers also
creates a situation where a scarce commodity like capital is made
plentiful with the result that the pattern of development financed
with capital turns out to be more capital-intensive with the
concomitant consequences of more demand for imports and the
built-in-need for more foreign aid. Such a strategy is, of course,
a volte-face on the development front. Not only does it lead
towards further sharpening of income distribution but also
neglects the proper and fuller use of the local resource
endowment. The economic principle of 'opportunity cost' is thus
thrown overboard.
Side by side with lesser utilization of local
resources, inequitable reward for the savers' capital, the present
banking system also leads to greater propensity to consume and the
accompanying lesser growth of investible funds. Because of the
cartelization of banks in respect of fixed rates of interest
offered on deposits, there also does not take place the required
competition among the banks towards making optimum utilization of
the capital resource. This too is a serious drawback in the
existing working of the Western banking institutions.
Interest-Free Banking System
Unlike Western banking institutions
the interest-free Islamic banks are endowed with certain inherent
features which make them quite distinct. For instance, operate as
they do largely on the basis of profit and loss sharing, the
majority of their clients are not savers but holders of profit and
loss accounts. In this way not only are the holders of PLS
accounts enabled to get a much larger share of the
investment-return, but are also psychologically converted from
traditional savers into investors.
It may be mentioned here that
unlike a traditional saver who generally saves to finance some
expenditure in future, an investor generally thinks of not meeting
a particular expenditure in future, but much more in terms of
building reproductive assets and services for the purpose of
future command over resources in a dynamic sense. The Islamic
banks operating to fulfill the latter function contribute towards
acceleration of investment activity along with the realization of
other concomitant goals of better income distribution, higher
efficiency of capital and lesser attraction for demonstrative
expenditure. An investor's Weltanschauung is world apart from that
of a traditional saver. The efficiency of capital increases under
the Islamic banking system, because, unlike the payment of a
predetermined rate of interest on deposits, the banks are now
forced to work efficiently for considerations of attracting
clients on the basis of the rate of profit already announced by
them in recent years and in the light of their future profit
projections. Under the existing interest-bound savings, the banks
are obliged to pay a pre-determined rate of interest which is
generally no more than a quarter of the actual rate of profit
earned on an average unit of investment.
The Islamic banking
system has also the advantage of promoting investment habits among
the large majority of the people which in the longer perspective
lead to lesser consumption and better distribution of income.
There is also another advantage bound up with the Islamic banking
system. It emerges as a result of the elimination of
interest-bearing credit facilities offered to a businessman or a
limited company. While under the Western banking system a limited
company can meet its additional requirements of capital by
obtaining a loan carrying a fixed rate of interest, the same
company will, have to obtain funds on profit and loss-sharing
basis under an Islamic banking system. The difference between the
two is that while in the case of the former the company directors
and shareholders pay the usual rate of interest, in the latter
case, they will have to part with the larger part of the profit
earned on the funds obtained from the bank under the PLS scheme.
In the latter cast, it will not be the directors and shareholders
of the company who will be able to appropriate the largest chunk
of the profit earned on funds borrowed/ obtained from the bank,
but it will be the original savers who by virtue of having opened
their PLS accounts with the concerned bank will now become the
legitimate recipients of the largest chunk of the profit earned by
the company. The maximum that the bank can do in this case would
be that it will retain a certain amount as management charge. The
practice of the PLS scheme is going to have far reaching impact on
the social structure of the population. ' Instead of the earlier
capitalistic inequitable distribution of the profits earned on
savings between the savers and the investors the Islamic banking
system will enable the savers' community to receive a much larger
share of the profit earned on their deposits. One must also
mention here a special feature bound up with the issuance of
credit under the Western banking system. This is that the
borrowers of funds from the Western banking system can claim tax
exemption on the amount of interest paid by them. In order to
enable the Islamic (banks to compete with the Western banks, it
would therefore be desirable either to withdraw the above
tax-exemption or allow similar tax exemption on the basis of the
'profit' passed on by the investors to the savers through the
intermediary banks. Prof. Dr. Rittershausen of the Cologne
University told me and Ahmed El-Naggar in 1960-both of us were
then doctoral students that the tax-exemption granted on the
amount of interest paid by the borrowing firm was one of the
cardinal privileges enjoyed by the entrepreneurial class under the
capitalistic system.
Some Distinctive Features of the Islamic
Banking System
It is clear from our above analysis that the
Islamic banking system is far superior to the Western banking
system. This is evident from the special features enjoyed by the
Islamic banking system.
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The Islamic banking system is committed
to efficient utilization of 'capital'. Savers being PLS holders
force the banks to compete with each other and look for attractive
investment opportunities. This leads to higher efficiency of
capital.
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Under an Islamic banking system a large majority of
the savers will switch over to PLS accounts, which will earn them
better reward than is available under the Western banking system.
This will also mean a better distribution of income.
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The change
from a traditional saver to an investor will reduce the propensity
to consume and thereby contribute towards increasing the
propensity to save/invest.
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The shift from interest-bearing
deposits to PLS will increase the share of the savers and reduce
the 'unearned' income of the borrowers under the older system.
This egalitarian character of 'investment management' will remove
sharp income differentials between different income echelons.
The
first experiment in interest-free banking was undertaken by Prof.
Dr. Ahmad El-Naggar during the early sixties in the Nile Delta.
This maiden attempt covered a large number of villages.4 After
achieving success in the Nile Delta, Dr. El-Naggar moved to Saudi
Arabia and started a campaign for the establishment of Islamic
banks throughout the Muslim World. In this struggle he was
fortunate to get the support of Prince Muhammad and his
illustrious father King Faisal. With hard work and persistent
endeavors Dr. El-Naggar was able to steer through many
difficulties and saw his efforts crowned with success when the
Islamic Development Bank was established in Jeddah in 1975. Over
the past few years, he has been instrumental in the establishment
of no less than a dozen Islamic banks spread over the wider canvas
of the Muslim world. Countries at present having one or more
Islamic banks are Egypt, Sudan, Jordan, Kuwait, Dubai, Bahrain and
Sharjah. Malaysia and Mauritania have also recently set up one
Islamic Bank each. The reports so far received from the Islamic
banks reveal that the performance of these banks has been quite
satisfactory and it is hoped that they will be able to offer a
much better service and reward to their clients than the competing
Western banks. Egypt is the leader on the Islamic banking front. A
few years ago Dr. El-Naggar set up the International Institute of
Islamic Banking and Economics, Lefkosa (Turkish Cyprus)/Cairo to
cater for the intellectual and operational needs of the Islamic
banks. This institute also offers training facilities to banks
staff in Islamic banking. There also exists an International
Association of Islamic Banks with headquarters in Cairo. This
institution helps member Muslim countries towards the
establishment of Islamic banks.
Islamic Banks : Both Efficient and
Distributive
With the successful working of the Islamic banks, the
Muslim world is again heading towards a new era of financial
institutions and equitable socio-economic development. The results
so far obtained from the experience of the few Islamic banks look
quite baffling. Not only the new PLS accounts are improving the
efficiency of capital, but are also contributing towards the
betterment of the existing pattern of income distribution. Even
the present high propensity to consume rampant among the Muslim
peoples is expected to go down in the long run and in its place
there will emerge an overall acceleration of investment. These are
revolutionary changes, if properly handled they are sure in due
course of time to overshadow older and more sophisticated Western
banking institutions.
The Islamisation of the banking sector is
likely to come of age in the next decade or two. The other thrust
of the Muslim countries is likely to be on Zakat and other
taxation measures. With proper planning and careful
implementation, they too can play their role in changing the
unequal relationship perpetrated on social groups. While doing all
this, we must not lose sight of the fact that all these great
doctrines of Islam are not rituals, they are in fact the
foundation-pillars of an egalitarian and development-inducing
order.
The Totality Thesis
Despite the too obvious superiority of
the interest-free banking system over the Western banking system,
there are Muslim scholars who, for some reason, are still feeling
hesitant to come out openly for the abolition of interest. One
observes this, for instance, from a study recently published in
Pakistan. It says: "To think of abolishing riba without reference
to the 'totality' of the Islamic economic system is to put the
cart before the horse. In fact, there is a real danger that the
abolition of riba and its replacement by the profit-sharing system
will increase the level of economic exploitation of the poor by
the rich, thereby negating the basic Islamic principle of al-'Adl
wal Ihsan.
It seems that the authors have not understood the basic
message of the Holy Qur'an and have tried in vain to underrate the
issue by tying it up with the change in the totality of the
Islamic economic system. The Islamic banking system as explained
in this paper is not going to strengthen the forces of
exploitation, as apprehended by the authors. On the contrary, the
Islamic banking system will eradicate the existing exploitation by
the investors/banks of the savers. Not only this, the Islamic
banks will also improve the efficiency of capital and will inspire
many a saver to become active investors. The process of
Islamisation in the banking sector is sure to have positive spill
over and trickle down impact on the broader social canvas
resulting in more equitable distribution of income and quicker
development. No doubt the 'totality thesis' has its own merit, but
there is no reason why one should wait endlessly lor it and stop
looking for partial solutions to set the ball of Islamization
rolling in the Muslim countries. We know there are numerous
excesses at present obtaining in the Muslim world, but aren't we
forgetting that the gravest of all sins that a Muslim can commit
is the dealing with riba-bound business. The Holy Qur'an says :
"Those who devour riba, shall rise up before God like men whom
Satan has demented by his touch." (al-Quran, II : 275)
Beyond
Theological Frontiers
In this exercise of Islamisation one will
have to be quite careful in not letting himself be misled by the
historical endowment of the Muslim civilization. The riba doctrine
as well as several others must be interpreted in the light of the
Qur'ari and the contemporary challenges. If, however, we let
ourselves be dictated by interpretations of early scholars and
jurists, the results might not always be much rewarding; our
approach must be beyond theological frontiers and surely away from
barren discourses. In this scientific era, it is time that we look
at ribs strictly from the point of view of the Holy Qur'an and
examine how it could serve as a new intellectual break-through on
the economic and banking front. It is only through such an
attitude of mind that we can clear a backlog of more than a
millennium. The existing order needs to be corrected and the
abolition of riba will be just one effective way of making a
start. ***By: M.A. Hussein Mullick
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