ISLAMIC JURISPRUDENCE
Islamic Jurisprudence may be defined as either code of conduct or understanding / knowledge of the rules of Islam. These rules or code of conduct are derived out of the sources of Shariah. Islamic jurisprudence guides us about how to live life according to Islamic Ideology, what is fardh, halal (allowed), haram (prohibited), makrooh (allowed but not recommended) etc.
Islamic jurisprudence philosophy is spread over and covers all aspects of our lives including social, economical, political, criminal, etiquettes, theological etc and provides us guidance about the way of performing above stated activities.
The approach of the Muslim Jurists towards deciding specific issues is known as the ‘Principles of Islamic Jurisprudence’ (Usul-e-Fiqh). There are different approaches used in Fiqh to derive Shariah from the Islamic sources. These approaches are known as Islamic Schools of Thought.
ISLAMIC BANKING PHILOSOPHY
The philosophy of Islamic banking also takes the lead from Islamic Jurisprudence and is governed by Islamic Shariah. According to Islamic Shariah, Islamic banking cannot deal in transactions involving interest/riba (an increase stipulated or sought over the principal of a loan or debt).
Further, they cannot deal in transactions having element of Gharar (Excessive level of uncertainty or ambiguity created due to the lack of information or control in a contract) or Maiser (Game of Chance). Moreover, they cannot deal in any transaction, the subject matter of which is invalid (Haraam in the eyes of Islam). Islamic banks focus on generating returns through investment tools which are Shariah compliant as well.
Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.
ISLAMIC BANKING
Islamic Banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. Islamic Banking practices are derived out of Islamic Jurisprudence.
Islamic banking, the more general term, is based not only to avoid interest-based transactions prohibited in Islamic Shariah but also to avoid unethical and un-social practices. In practical sense, Islamic Banking is the transformation of conventional money lending into transactions based on tangible assets and real services. The model of Islamic banking system leads towards the achievement of a system which helps achieve economic prosperity.
INTEREST FREE BANKING
“And Allah has permitted trading and prohibited riba.” [Surah Al-Baqrah 2: 275-281]
Islamic Banks are avoiding Riba through trading of tangible assets, provision of real services and investments in projects through Sukuk. Real and tangible assets & commodities are purchased and are either sold or are rented out at banking market price or rent to earn profit.
To ensure interest free trading, no extra or compounded profit is charged.
PILLARS OF ISLMAIC BANKING SYSTEM
1. Free of interest 2. Shariah compliant
Free of interest
Excess, increase or addition, which according to Shariah terminology, implies any excess compensation without due consideration. In Islamic Banking, interest is avoided through trading in real & tangible assets and services.
Shariah compliance
Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (?) and supplemented by the juristic interpretations by Islamic scholars.
Islamic Shariah or the divine law of Islam is derived from the holy Quran, Sunnah, Ijmah (consensus of ulmaa), Qiyas and Ijtihad.
PROHIBITION OF RIBA (INTEREST)
“O those who believe do not eat up riba doubled and redoubled." [Surah Al-e-Imran 3- 130]. "
"Those who take interest will not stand but as stands whom the demon has driven crazy by his touch. That is because they have said: 'Trading is but like Riba'. And Allah has permitted trading and prohibited riba. So, whoever receives an advice from his Lord and stops, he is allowed what has passed, and his matter is up to Allah.
And the ones who revert back, those are the people of Fire. There they remain forever. Allah destroys riba and nourishes charities. And Allah does not like any sinful disbeliever. Surely those who believe and do good deeds, establish Salah and pay Zakah, have their reward with their Lord, and there is no fear for them, nor shall they grieve.
O those who believe!, fear Allah and give up what still remains of the riba if you are believers. But if you do not, then listen to the declaration of war from Allah and His Messenger.
And if you repent, yours is your principal. Neither you wrong, nor be wronged. And if there be one in misery, then deferment till ease. And that you leave it as alms is far better for you, if you really know. And be fearful of a day when you shall be returned to Allah, then everybody shall be paid, in full, what he has earned. And they shall not be wronged." [Surah Al-Baqarah 2:275-281]
“O believers, take not doubled and redoubled Riba, and fear Allah so that you may prosper. Fear the fire which has been prepared for those who reject faith, and obey Allah and the Prophet so that you may get mercy.” [Surah Al-e-Imran 3:130]
From Jabir (Gbpwh): “The Prophet (?) cursed the receiver and the payer of interest, the one who records it and the witnesses to the transaction and said: ‘They are all alike [in guilt]’.
The Holy Prophet (?) said, “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates and salt for salt – like for like, equal for equal, and hand to hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand to hand.
KEY DIFFERENCES WITH CONVENTIONAL BANKING PRACTICES
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| Money is treated as a commodity. |
Money is not a commodity though it is used as a medium of exchange and store of value. |
| Time value is the basis for charging interest on capital. |
Profit on trade of goods or charging on providing service is the basis for earning profit. |
| Interest is charged even in case the organization suffers losses. |
Islamic bank operates on the basis of profit and loss sharing. In case, the businessman has suffered losses, the bank will share these losses. |
| While disbursing cash finance, running finance or working capital finance, no agreement for exchange of goods & services is made. |
The execution of agreements for the exchange of goods & services is a must, while disbursing funds. |
| Conventional banks use money as a commodity which leads to inflation. |
Islamic banking tends to create link with the real sectors of the economic system by using trade related activities. |
MYTHS & OBJECTIONS ON ISLAMIC BANKING
Islamic Banking Practices are subject to number of myths and objections raised by various sects of society ranging from laymen to highly qualified professionals.
Banking is not allowed in Islam
Initially financial services were handled by individuals, however, later banks were emerged as organized financial institutions with the development of civilized society with basic purpose to facilitate the funds management and financial needs.
Banking in not haraam or disallowed in Islam. Unfortunately, focus of banking has been more shifted to conventional based money lending which gave rise to interest. Islamic Banking Institutions do not deal in conventional mode of creating credit by lending money to a borrower. Islamic banks work like trading & investment houses and provides financial services to their customers. Islamic institutions deal in sale, participation and rental based modes of financing.
Islamic banking practice is limited to papers and no practical operations
As earlier discussed, Islamic banking practices are derived out of Islamic jurisprudence and Shariah. These practices are derived out of the guidelines provided by Quran, Ahadees and qayas/ ijmaa of learnt Islamic Scholars.
Islamic banking practices are performed practically according to prescribed guidelines and are regularly monitored to ensure optimum shariah compliance, there is no exemption to any deviation except allowed under Islamic principles.
Islamic Banking is not Riba free / Trading profit is nothing but interest
Islamic Banks deal in trading and sale or rent out tangible assets on bank market rates. No excess amount or compounded interest is charged from customers. Islamic banking practices give rise to real economic activities.
Profit is not earned through lending, therefore it cannot be counted as interest. Again, no surplus or income is earned against late receipt of profit or rent except charity which is not profit or income of the bank.
Conventional banks also doing the same practices
It is no so. Conventional banks are involved in interest based money lending activities. These transactions are not backed by adequate assets. Islamic Banks first own and possess tangible assets, then these assets are either sold at profit or are rented out.
However, conventional banks not only charge interest with respect to time value of money, but they also charge compound interest, that is interest is charged over interest, that is the worst form of riba. Conventional banks do not own assets, neither there is any concept of loss sharing. Interest is charged even borrower suffer losses.
Profit rates are same as followed by conventional / Profit rates should be equal to real market rates
It is commonly observed that same product is available at different higher or lower rates with respect to certain area in the same city. It is the market circumstances that determine the price.
On the same pattern Islamic Banks earn profit, where banking market rates are followed. It is not possible that conventional bank may charge Rs. 100 profit for a transaction and Islamic bank may charge Rs. 80 for the same, as rates are determined by market forces.
Islamic banks are welfare institutions
Islamic banks are not welfare institutions, they are business organizations set-up to earn profit through trading. However, human wellbeing is integral part of all activities performed under Islamic mode. Islamic institutions apply welfare through avoidance of riba, profit and loss sharing, earning of halal profit and real trading.
CONCLUSION
Islamic Banking is expected not only to avoid interest-based transactions prohibited in the Islamic Shariah, but also to avoid any unethical practices. However Islamic Shariah prohibits ‘interest’ bit it does not prohibit all gains on capital.
This system is based on risk-sharing, owning and handling of physical goods, involvement in the process of trading, leasing and construction contracts using various Islamic modes of finance. As such, islamic banks deal with asset management for the purpose of income generation.