Extracts from authentic writings on Islamic Banks’ use of fake
Murabaha and Bai Muajjal and earning disguised interest.
1. ‘Introduction to Islamic Finance' by M. Taqi Usmani:
It should never be overlooked that originally Murabaha is not a mode of financing. It is only a device to escape from ‘interest’ and not an ideal instrument for carrying out the real economic objectives of Islam.
2. 'Elimination of Riba from the Economy' by Prof. Khurshid Ahmed:
The confusion has arisen only from the fact that in case of a credit sale, some people think that the price of time which appears in the form of a higher price is lawful because the transaction is not that of a loan but of trade. In trade, both the parties are free to agree to transact a business at any price provided they agree to it by their free will. In this case, goes the argument, both the parties agree at a price, which may be higher than the cash price. Therefore, there should be no objection if the credit price is higher or lower than the cash price. But this argument leaves out of focus the shariah condition that the price should be agreed by free will of the two parties. We understand that in this case there is a hidden coercion. Why would a person like to pay a higher price if he can buy a certain thing for a lower price? In this case he agrees to do so because he does not have ready cash. Some people have tried to argue that the difference in the cash and credit prices is allowed since the shariah recognizes bai' muajjal by a consensus. In fact this argument is misplaced. Bai'muajjal means that the sale can take place on the condition that the buyer will pay the price later on. It does not necessarily mean that the seller has a right to sell the commodity at a price which is higher than the price he is charging for a cash sale.
It emerges that practically it is impossible for large banks or the banking system to practice the modes like mark-up, bai salam, buy back, murabaha etc in a way that fulfils the Sharia conditions. But in order to make themselves eligible to a return on their operations, the banks are compelled to play tricks with the letters of the law. They actually do not buy, do not possess; nor actually sell and deliver the goods; but the transaction is assumed to have taken place. By signing a number of documents of purchase, sale and transfer they might fulfill a legal requirement but it is by violating the sprit of prohibition.
Unfortunately, the current practice of buy-back on mark-up is not in keeping with the conditions on which murabaha or bai muajjal are permitted. What is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods or sharing any real risk. This is against the letter and spirit of Shariah injunctions.
3. Federal Shariat Court Judgment of 14-11-1991
There is a genuine fear among Islamic circles that if interest is largely substituted by 'mark-up' under the PLS operations it would represent a change just in name, rather than in substance. PLS under the mark-up system is in fact the presentation of the old system of interest under a new name. The concept of Bai Muajjal is sale on deferred payment is of this technique, though not prohibited according to Hanafi and Hanbali schools of Fiqh and that too in exceptional circumstances, it is being misused in its widespread use which is not permissible as the mark-up does not differ, in essence from the interest system. A prominent Muslim Economist, Dr. Najatullah Siddiqui while commenting on 'mark-up' system writes as under:-
" I would prefer that Bai Mujjal is removed from the list of permissible methods altogether. Even if we concede its permissibility in legal form we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to Bai Muajjal in order to save interest-free banking from being sabotaged from within"(Money and Banking in Islam by Ziauddin Ahmed)"
Those needing finance for purchase or import of inputs would approach the banks to buy it for them with the commitment to buy it from the bank at a higher but deferred price. The mark-up will naturally tend to be higher, the longer the period of time involved. The banks will have guarantee of receiving back the price they actually pay plus a predetermined return as mark-up'. For practical purposes it will be as good for the bank as lending on a fixed rate of interest. It should, therefore, be abundantly clear that if the banking system is to be Islamized mark-up is no solution and some way has to be found which preserves the financial character of the banking institutions and steers clear of interest which is prohibited by Islam.
4. Studies in Islamic law & Society: Islamic Banking and Interest by Abdullah Said :
Murabaha finance and the higher credit price involved therein has clearly shown that there is a value of time in murabaha based finance which leads, albeit indirectly, to the acceptance of the time value of money. It has been conveniently ignored that accepting the time value of money logically leads to the acceptance of interest. Accepting time value in murabaha transactions (which as has been shown in this chapter, is scarcely any different from a purely monetary transaction, and then rejecting the same in monetary transactions appears to be inconsistent and illogical. If Islamic law can allow murabaha financing as it is practiced under Islamic banking then the question is, "is there any moral basis for not allowing fixed interest on loans and advances?"
5. Kluwer Law International – Islamic Law and Finance.
Islamic banks have survived not on profit and loss principles (mudaraba) but via mark-up (Murabaha) transactions some of which have been condemned as 'synthetic' interest substitutes."
6. Islamic Banking: True Modes of Financing by Dr. Shahid Hassan Siddiqu.
Murabaha in ancient Islamic connotation reffered to a particular kind of simple sale and had no relevance whatsoever with a transaction of financing. In view of the difficulties and risks visualized in adopting PLS system of Islamic banking on a large scale, in recent times, the Murabaha for all practical purposes was transformed from the sale transaction to be a mode of financing.There are however, serious reservations to the widespread use of murabaha technique as a mode of finance where the bank purchases the commodity only after the customer has agreed in principle to purchase it from the bank at profit mark-up. It must therefore be appreciated that under Murabaha, a trading transaction is being transformed into a mode of finance just to meet the Shariah requirements.While referring to the alternate modes of financing based on Murabaha and Ijara (Leasing) etc Justice Taqi Usmani observes that if designed to fulfill the Sharia requirements, these codes can be adopted as transitory measure. He however cautions that"- - - there should be a gap between purchasing the commodity and selling it to the customer and the risk of owning the commodity during the period should be borne with all its basic components and all its essential consequences” In actual practice, practically there is no gap as in many cases, the bank makes the payment almost simultaneously or even after the goods are delivered at the premises of the client. The bank thus does not in fact assume any risk including even the risk of the goods, during the short period, the bank is supposed to own and possess these goods. The banks however get a return at a pre-determined fixed rate, which is not dependent on the operational results of the entrepreneur. This in any case does not appear to be in conformity with the requirements of Shariah.
Taqi rightly observes:-
a) Islamic banks are using the Instrument of Murabaha and Ijarah within the framework of the conventional benchmarks like LIBOR etc, where the net result does not differ much from interest-based transactions.
b) By not even gradually enhancing the financing on PLS basis, the basic philosophy of Islamic banking seems to be totally neglected by the Islamic banks.
c) The Shariah scholars have allowed the use of fixed return financing techniques ie Murabaha and leasing etc only in those spheres where Musharaka can not work.
d) When the common people realize that the net result in the transaction of the Islamic banks is the same as was in the transactions of conventional banks, they become sceptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non-Muslims who feel that it is nothing but a matter of twisting documents only.
Najatullah siddiqui says:-"The payment obligations of the firms operating with Mruabaha-financed goods and services are independent of the profitability of the enterprise unlike profit-sharing, thus exposing it to the charge being inequitable as in the case of debt financing. At this point it is important to mention that Maududi observes:- " Islam says in clear terms that the lender is not justified in earning a fixed rate of profit, irrespective of the operational results of the business." It therefore, appears that, in most cases, the fixed returns charged by banks on transactions which are financial in nature are not permissible simply by providing them a cover of Murabaha or the like modes which are in fact transactions of sale.
Hasan Uzzaman says."- - The ghost of interest is haunting banks to calculate a fixed rate percent per annum in many modes of financing including Murabaha (Bai-Mujjal mark-up) etc. The spirit behind all these contracts seems to make a sure earning comparable with prevalent rate of interest and as far as possible, avoid losses which otherwise could occur". He adds that " they (second line techniques), have failed to do away with undesirable aspects of interest thereby they have retained what an Islamic bank should eliminate." It does not appeal to the mind that by simply assuming some risks by banks in financing through Murabaha and the like during shifting of stocks from the godown of the seller to the entrepreneur (party availing finance from the bank) which can also be practically avoided and ensuring a fixed return on financing while not sharing in the operational losses of the entrepreneur, which is the essence of Islamic banking, the objectives of the Shariah are met. It is obvious that the widespread and persistent use of the second line techniques has neither contributed in removing the injustices of the interest-based system as ordained by Holly Quraan (2:279) nor in securing the socio-economic justice in the society. If Islamic banks persist with these modes for bulk of their operations, the cause of Islamic banking would never be fulfilled. Unfortunately these modes have been allowed to be perpetuated by Islamic banks. This is injurious to the cause of Islamic banking.
During the last few years, a number of western banks, economists and journalists have posed to this writer a rather cynical question about what the real difference between the interest-based system and its Islamic counterpart as being practised by Islamic banks actually is. However, even they concede that the PLS system of Islamic banking, if practised in earnest, could ensure socio-economic justice across the globe. It is therefore, seriously apprehended if sad state of affairs is allowed to continue, even many innocent Muslims may develop doubts about the feasibility, practicability and usefulness of the' Islamic system of banking' notwithstanding that the fault lies with us and not with the system. To make the situation worse, some of the Islamic banks find it more feasible to divert part of their funds received from Muslims to multinationals and large corporations of the West.
7. 'Islamic Finance' by Rodney Wilson:-
Islamic finance is often approached from the perspective of the service provider rather than the needs of the client. The financial instruments have largely been developed from what is deemed practicable and convenient for the bank, provided they can be seen to be consistent with Sharia law. Often it has been a case of adapting and modifying conventional instruments so that they can be seen to be Islamically legitimate.
Murabaha has become by far the most widely used Islamic financing instrument, accounting for over 80% of Islamic financing. The attraction is the low risk involved with this type of trade financing from the bank's point of view. The return is certain as the mark-up is written into the agreement, and the dates when the payment or payments will be made are also specified in advance. The only risk is of payments default by the purchaser, but when such trade financing is for relatively short periods, the risk is minimal. The probability of a significant change in the financial position of the typical importer seeking Murabaha financing is relatively small. Some Shariah boards have questioned the extensive use of Murabaha in view of the limited risks involved to the financier, and the similarity of the percentage mark-up to interest. The basic principles are different, however, but a number of Islamic financial institutions notably the Al-Rajhi Banking and investment corporation, have attempted to respond to these criticisms by decreasing the amount of Murabaha financing and increasing the use of other Islamic financing instruments.
8. 'Islamic Banking and Finance' by Andrew Cunningham
Islamic banking in practice is often very different from Islamic banking in theory. The majority of actual Islamic transactions involve disguised interest rather than genuine sharing of risk, profit and loss.
9. 'Islamic Finance – Theory and Practice’ by Paul. S Mills and John R. Presley.
The asset side of Pakistan's interest-free banks mirrors that of Islamic banks elsewhere. Approximately 80-90% of return-bearing assets have been devoted to trade related mark-up techniques with some participation in equity investment and musharika partnerships. The mark-up contracts used bear striking resemblance to interest-bearing trade credits.
Conclusion: For their own good and good of others, Islamic bankers and their Shariah advisors are requested to give thoughtful consideration to the above writings and bring Islamic banking operations strictly in line with the letters and sprit of Islamic injunctions.
6th Jan. 2008