Basic Principles and Methodology for
True Islamic Banking
Islamic bank must conduct business strictly complying in
letter and spirit with Islamic principles laid down in Quraan and Hadeeth and
fulfill the following requirements in its own and Muslim Ummah's interest:-
- Total abstention from interest. No open or disguised
interest shall ever be paid or charged by the bank. All transactions shall
be interest-free, transparent and above doubt with no promise or
understanding separate from the main contract.
- The bank shall earn profits only from investing in PLS
and permissible trading modes noting that gain in trade permitted in
Quraan is governed by the principle Al-Kharaaj bi Al-dhamaan
meaning that profit is tied with risk of loss i.e. no risk no gain. Risk here
means market risk and not the risk of loss due to some accident or failure
in payment. As market conditions constantly change definite gain without
risk of loss is impossible from genuine trading. Definite gain with no
risk of loss is obtainable only from lending money at interest. The bank
shall strictly avoid interest - like profit earning in the form of
predetermined return on investment.
- Islamic bank shall advance interest-free loans. Quraan
lays down that lender's claim is limited to the principal amount of loan
and as such the bank shall not receive from the borrower any amount on any
pretext like service charge, in excess of the principal amount of loan.
Loan is indispensable need of mankind and interest-free loans are not
available on commercial scale. Interest-based banking prevails in Muslim
countries only because it fulfills the needs of all sectors of the society
for loans. As Islam caters for all legitimate needs of mankind, Islamic
bank worthy of its name must provide interest-free loans for permissible
purposes including business. Muhammad saws himself bought food
items on credit and borrowed for state purposes. Also several Sahaba Karaam
ra and Imam Abu Haneefah ra borrowed money for doing
business. Hence it is terribly wrong to hold borrowing to be undesirable.
What is condemnable and unpardonable is non-repayment of loan. Islam
prohibits interest and zina and commends interest-free lending and nikah.
Accordingly interest-laden debt-based economy is condemnable, but
condemning interest-free debt-based economy is as wrong as condemning nikah
along with zina.
- Providing interest-free loan facility to loan seekers
by Islamic bank is absolutely necessary for eliminating interest and
pulling Muslim Ummah out of the miserable state of war with Allah. Profit
sharing and lending at interest were the prevalent financing modes in
pre-Islamic days. Islam prohibited interest and permitted profit sharing
to continue. Profit sharing cannot meet the financing needs of all sectors
of the society especially the financing needs of very large sector of the
economy comprising millions of privately owned enterprises keen on
protecting their independence and ownership structure. Accordingly Islam
highly commended interest-free lending by way of a hadeeth qudsi declaring
reward for qard is eighteen times, implying that Islam wants
widespread use of interest-free loans in society. It is quite wrong to
hold profit sharing to be ideal Islamic alternative of interest as it is
only permitted and not commended whereas interest-free lending is highly
commended. Hence interest-free lending can be held to be ideal Islamic
alternative of interest and not profit sharing. It is a gross
misconception that interest can be eliminated by using profit sharing for
financing. Interest cannot be eliminated without providing interest-free
loan facility to loan seekers just as illiteracy cannot be eliminated
without providing schooling facility to every child.
- A true Islamic banking model based on the above stated
principles was produced by Late Professor Shaikh Mahmud Ahmad applauded in
Supreme Court Shariat Appellate Bench unanimous judgment of 23rd
Dec 1999 in Riba case as “our country’s most outstanding economist,
researcher and leading thinker who had devoted considerable part of his life
to the study of the theory of interest”. He conceived of a novel
interest-free lending device named TMCL (Time Multiple Counter Loan).
TMCL-based interest-free banking model devised by him is commercially
viable and is capable of providing Islamically all modern banking services
and also interest-free loans on as large a scale as interest-bearing loans
are provided by conventional banks. This model was unanimously held to be
potentially useful by a 17-member panel of senior economists and bankers
appointed by Council of Islamic Ideology (CII)) to produce interest-free
economic system. In its report of 15th June 1980 to the government CII
recommended use of TMCL principle by banks for giving interest-free loans
to account holders for personal and non-productive purposes. Supreme Court
Shariat Appellate Bench that heard the famous Riba case in 1999 comprised
of 5 judges including two renowned Islamic Scholars, Mufti M. Taqi Usmani
and Dr. Mahmud Ahmad Ghazi. The writer presented in the Supreme Court TMCL
banking model as Islamic substitute of interest-based banking and argued
in its favour. It was well received by all the judges and it is narrated
in the Supreme Court Unanimous judgment of 23rd December 1999 without any adverse comment.
Hopefully the above mentioned guide lines together with the
information on working details and benefits of TMCL-based interest-free banking
model available on website given below will suffice for setting up and/or
running a true Islamic bank efficiently for its own and Muslim Ummah's good.
Comments and queries on this discourse will be gratefully received and duly
responded by the writer. Wassalaam.
Abdul Wadood Khan
P.O.Box 62380, Riyadh 11585, Saudi Arabia
Tel. +966-1-4644915
25/1 Street 15 Cavalry Ground , Lahore Cantt. Pakistan .
Tel. +92-42-6610678, 6676678
Email:
aw_khan@hotmail.com
www.realislamicbanking.com
www.geocities.com/aokhan2/index.htm
19 April
2008