How Islamic Banks can get themselves
and Muslim Countries rid of interest.
It is ironic mistake of Islamic banks not to lend money that is universally recognized main bank function. Islam prohibits interest but highly commends interest-free loan. Hadeeth qudsi declares reward for qard is 18 times, implying that Islam wants widespread use of interest-free loans in society, Muhammad saws took loans for state purpose. Some Sahabah ra and also Imam Abu Haneefa ra borrowed money for investing in business. Hence it is utterly wrong for Islamic economists to dissent pure loans and for Islamic banks to avoid interest-free lending. Loans bring idle surplus money in circulation and boost the economy. Abundant supply of bank loans, though interest-based, to enterprises brought tremendous economic development in the West.
Islamic banks started emerging in seventies of the last century with the declared aim to get Muslim societies rid of interest. About three hundred Islamic banks are now prospering in seventy countries but so far they have not got even themselves rid of interest, nor have they produced any dent in interest-based banking prevailing in Muslim countries. Islamic banks do not give loans even to one another and in times of need Islamic banks and governments of Muslim countries take loans on interest. Against Pakistan's urgent request for funds in 1998 after nuclear explosion Islamic Development Bank and several other Islamic banks jointly offered a loan on interest and that too at a rate 5% above LIBOR!
M. Taqi Usmani is chairman or member of Sharia Advisory Boards of a dozen or more Islamic banks. In 'introduction to Islamic Finance' on the dire need of Islamic banks for a system of interest-free lending he writes "The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest."
Loan is indispensable need of mankind and at present interest-based banking meets this need of all sectors of society. That is why interest-based banking, though exploitative and prohibited in Islam, prevails in Muslim and non-Muslim world. If apart from making money Islamic banks also want to get themselves and Muslim countries rid of interest then they must give interest-free loans to loan seekers for genuine business, social welfare and personal needs. IDB-IRTI Research Paper no 29 and Sept 2002 issue of the Journal 'Islamic Economic Studies' highlight the need and importance of interest-free loans as follows:
i- In order to effectively replace interest the Islamic economy needs a comprehensive financing mechanism defined as a mechanism which provides
monetary financial accommodation to enterprises but remains neutral with respect to their longer run ownership structure" Obviously the needed mechanism defined here is interest-free loan as it can meet all financing needs of enterprises keen on protecting their independence and ownership structure.
ii- "Dayn financing plays an important role in Islamic financial system" 'Dayn’ includes loan and other liabilities.
For giving interest-free loans Islamic banks can use commercially viable novel interest-free lending device TMCL (Time Multiple Counter Loan) invented by late Prof. Sheikh Mahmud Ahmed applauded in Supreme Court Shariat Appellate Bench 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".
TMCL transaction comprises two simultaneously exchanged interest-free loans between two parties such that the multiple of the amount and period of one loan equals the multiple of the amount and period of the other loan. It facilitates loans of large sums against counter-loans of much smaller sums for proportionately longer periods. For example, a trader can get a loan of RS 10.M for one year by advancing a counter-loan of RS 1.M to the bank for ten years. As per agreement the trader returns Rs 10.M to the bank in one year and the bank returns Rs 1.M to the trader after 10 years. The bank earns by investing counter-loan money in long-term profitable shariah-compliant modes. Thus TMCL enables the borrower to get interest-free finance and also enables the bank to earn profit and play effective role in eliminating interest. Unlike interest-based loan, in TMCL transaction none of the two parties is a definite gainer or loser and each of them may gain or lose by investing the money borrowed from the other party. As in TMCL transaction both parties do good to each other it conforms with Quraanic precept hal jaza-ul-ihsan illa-alihsan and teaching in hadeeth that a favour done should be reciprocated.
The five member Supreme Court Shariat Appellate Bench that heard Riba case included two sharia expert judges M.Taqi Usmani and Dr. Mahmud Ahmed Ghazi. The writer presented in the Court TMCL plan for immediate elimination of interest and also submitted his book on TMCL-based interest-free banking officially in the court and also individually to each judge. It was well received in the court and no judge raised any objection on TMCL. The plan is also described with no adverse comment in the Supreme Court unanimous judgment of 23rd Dec1999.
In its report of 15 June 1980 Council of Islamic Ideology held profit-sharing and interest-free loan as ideally real alternatives of interest and recommended use of TMCL principle by banks for giving loans to account holders for personal and non-productive purposes. Kuwaiti Finance House fatwa no: 264 quoted in a book co-authored by Dr. Abdul Sattar Abu Ghudda and Dr. Ahmed Mohiuddin Ahmad and also Dallah Albaraka group unified Sharia panel Fatwa 11/6 clearly indicate permissibility of TMCL in Sharia. Thus compliance of TMCL with Sharia is proved beyond any doubt.
At present TMCL is the only known commercially viable financing device that can effectively and imminently eliminate interest and also fulfill the intent of the above mentioned hadeeth qudsi. Hence use of TMCL for giving interest-free loans is bound to be blissful for Islamic Banks.
Muhammad saws said" Those who do not care about the affairs of Muslims are not from amongst us" Hence every Muslim must strive utmost to get Muslim Countries rid of interest.
The writer offers his services free of charge to work for any institution willing to implement TMCL-based interest-free banking and get Muslim countries rid of interest. Description of working and benefits of this system is available on web site given below. Comments and queries on this discourse will be gratefully received and appropriately responded by the writer.
30-12-2007