Some thoughts on Islamic banking
This week, I offer some rambling thoughts on the desirability of criticising Islamic banking, in hope of producing a manifestation of Islamic finance which truly engenders justice for all.
‘I believe that we should be completely honest with ourselves, and admit that we have yet to even come close to tackling riba in its true sense. What we have now is still productive of injustice, and as long as that remains the case, what we have cannot be truly Islamic.’
By Hizami Iskandar
Islamic banking is certainly a ‘hot’ topic today, but one which I’m not particularly well-qualified to talk about. Yet, on reading an article in the Star the other day, I was moved to pen a response, however limited in value it might be.
On one view, Islamic banking is halal. Its contracts are designed by expert scholars, whom are very pious in their personal life, and are therefore halal. The contract, or aqad, is what is important - as long as the type of aqad or transaction is halal, doubts over the substance are not important. Islamic banking exists to assist Muslims who face difficulty in obtaining financing. Therefore, we should not be criticising this institution, and expend our strength on attacking each other, when the more important issue by far is to unite in dismantling riba-based banking.
The problem with this argument is a simple one: to critics of Islamic banking in its current form, much of Islamic banking is simply riba-based banking in an Islamic covering - in other words, the proverbial wolf in sheep’s clothing. Unfortunately, the article side-steps this completely, despite recognising the issue at the outset.
On this view, the ‘halal’ nature of the transaction does not matter if its underlying foundations are still riba in all but name. Now, it is certainly true to say that to some extent, all monetary transactions in the modern world are inevitably tainted by riba, due to the presently unbreakable link between money and interest. However, it is perfectly possible to say that our immediate goal should be to eliminate all forms of riba from banking, except for the unavoidable taint caused by simply dealing in money in the first place.
This is where the defenders of Islamic banking have gone astray. Our short-term goal should not be to match halal transactions to their conventional analogues, and structure a system based on mirror substitutions. It is not enough to say that it is a step in the right direction, for if anything, it is the opposite.
Rather, as the article itself states, our starting point must always be a riba-less world. Yet, what is riba? If you turn a 10% interest rate into a 10% profit-sharing rate, does the magical term ‘profit-sharing’ automatically turn riba into non-riba, much like the fabled Philosopher’s Stone turns metal into gold? The analogy is unfortunately rather apt, for just like the Philosopher’s Stone, to ascribe such a role to this humble term is to slide into the realm of pure myth.
I am no scholar, but as an ordinary Muslim, my understanding of riba cannot be separated from the Islamic quest for justice. The road of Islam must always lead to justice, and that which is not just cannot possibly be Islamic. In the same vein, the prohibition of riba is purely in the interest of justice and fairness in the economic life of society. Riba is bad not because it is ‘interest’ - riba is bad because it creates injustice.
With that in mind, is it any wonder that the critics of Islamic banking are so relentless in their criticism? If Islamic banking is supposed to promote justice, then the example given in the article of more expensive contractual prices and higher debt obligations do not sound very Islamic at all.
From where I stand, Islam says: do not make money from money. If that is our guiding principle, then contractual prices for loans should not be high at all, but should instead be as low as they can go while keeping the bank afloat. Rather than consistently out-performing other sectors, banking should rather be the sector with the lowest profit margins - not by accident or mismanagement, but by design. I believe that Islam teaches us that finance can never be a road to wealth, only a service performed for the community, and that real wealth accumulation can only come from productive activity, i.e. manufacturing and the trading of real goods.
Many may call me hopelessly naive, but I fail to see why the picture I have painted is so impossible. Imagine a world extremely watchful of unfairness and risk in economic transactions. Credit would not be available for consumer spending, but that would not matter, as people should never be borrowing to finance such spending in the first place. Finance would be available at a minimal transaction cost, but not for the ’sub-prime’ borrowers whose defaults (and more importantly, the willingness of banks to lend to them in the first place) helped trigger the near-collapse of the financial system. On the other side of the coin, those who place their money in banks would not be gaining profits from bank lending, but instead would only profit from genuine economic activity - i.e., bank Z lending money for X to buy a house would not generate any profits for Y, a holder of an investment account with the said bank; rather, Y would only gain if enterprise W, which is in a real profit-sharing deal with bank Z, actually made a profit in the course of its business.
Certainly, there would be no such thing as easy money, but then again, Islam has never recognised the legality of easy money. Wealth must be earned, not simply generated through no enterprise of one’s own - hence the hostility towards gambling.
When I criticise Islamic banking as it stands now, I think of the picture above, and I cannot help but be aware of how far we are from the ideal, so much so that the use of the term ‘Islamic’ is all too often not so much description, nor even aspiration, but pure misrepresentation. I believe that we should be completely honest with ourselves, and admit that we have yet to even come close to tackling riba in its true sense. What we have now is still productive of injustice, and as long as that remains the case, what we have cannot be truly Islamic.
Therefore, let us start over. Let us redesign our banks on the pure principle of eliminating injustice, and stop treating them as vehicles for profit. Let us look at banking in the context of the economy as a whole - for our push towards an end to a riba-based banking system cannot proceed without an equal emphasis on boosting productive capacity, creating ample opportunities for decent employment, and imaginatively using zakat for sustainable wealth distribution. If we stop thinking of Islamic banks as a viable halal alternative, and instead realise that the truly halal alternative has yet to truly come onto the scene, then we shall be better spurred on towards creating a truly just alternative to what we now have.
Please don’t get me wrong. I am not suggesting that the thousands of scholars and bankers in the Islamic banking sector are being dishonest; only that we are suffering, as we so often do, from a failure of imagination. In our quest for justice, we are sometimes driven to compromise on certain matters, merely to avert a greater evil. Yet, the danger inherent in too positive a view of current Islamic banking is that we can fail to recognise that we have made compromises in the first place.
In this matter, we cannot afford to think small; to move gradually. The final step towards ending riba is divorcing money from interest; but the first step is not Islamic banking as it stands now; but rather, the introduction of wholly novel, imaginative ways of thinking about banks and finance. Thus, to criticise Islamic banking is not an evil at all; instead, it may well be our only way towards the justice that Islam so vociferously seeks for all human beings.
And God only knows best.
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Salam Hizami,
Do you mind to give the link to the article(The Star),that you mentioned.I’m still confusing and I can’t capture in toto what you’re trying to defend.
Btw,I hope you still be writing on CEKU,even when you’ll become a retired General.(Love to criticize and read your ramblings.)