Some bitter truths about inaction of Islamic Economists and
wrong doings of Islamic Banks and their Shariah Advisors
Interest prohibited in Quraan is a definite gain for the lender with no risk of loss to him. Gain in trade permitted in Quraan is governed by the Islamic principle Alkharaj bi aldhmaan i.e. no risk no gain. As everything else in the universe, market conditions go on changing and as such definite gain in trade is impossible without risk of loss. Definite gain with no risk of loss is obtainable only as interest in money lending business.
Money lending at interest and profit sharing modes of financing were in vogue in pre-Islamic days. Islam prohibited interest and permitted profit sharing to continue. As profit sharing cannot meet the financing needs of all sectors of society and loan is indispensable need of mankind Islam highly commends interest-free lending. A hadeeth qudsi declares reward for qard is 18 times implying that Islam wants widespread use of interest-free loans in society. It is either by default or by design that this hadeeth does not find any place in the writings of Islamic economists and Shariah advisors of so-called Islamic banks.
Interest-based banking, though prohibited in Islam, prevails in the Muslim world only because it meets the indispensable needs of all sectors of society for loans. Hence the only way to eliminate interest is to arrange supply of interest-free loans on a big scale in abidance of the above mentioned hadeeth. Advice to eliminate interest without providing interest-free loan facility to loan seekers is as absurd as advice to finish illiteracy without providing schooling facility to every child. It is a gross misconception that interest can be eliminated by way of profit sharing as this mode cannot meet the financing needs of millions of privately owned enterprises keen on protecting their independence and ownership structure.
Late professor Shaikh Mahmud Ahmad was 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”. He presented an interest-free banking model based on his novel concept of TMCL (Time Multiple Counter Loan). This commercially viable interest-free banking model can provide all modern banking services including interest-free loans on a wide scale and as such it can replace interest-based banking system imminently without any disruption and pull Muslim Ummah out of the miserable state of war with Allah and His Rasool saws. Full Information on the working and benefits of this model is available on web site given below.
Supreme Court judgment of 23rd Dec 1999 ordered elimination of interest and replacement of interest-based banking system with interest-free banking system by 30th June 2001. The advocates of interest-based system started claiming that interest-free banking was not feasible and that Islamic banking was heela banking. Islamic economists holding high positions in Islamic Research and teaching institutions were requested many times to refute the above claims by presenting in the Supreme Court an interest-free banking model be it the one devised by themselves or readily available TMCL-based model. They did not respond. In the absence of any refutation of their claims advocates of interest-based system succeeded in getting the Supreme Court order set aside on 24th June 2002. Thus due to inaction of Islamic economists having big name the golden chance for Pakistan to get rid of interest was lost. Nearly six years have passed since the Riba case is pending in Federal Shariat Court for re-adjudication and renowned Islamic Economists including King Faisal award and IDB prize winners continue to remain unconcerned about the fate of the case!
International Institute of Islamic Economics – International Islamic University Islamabad published ‘The Blueprint of Islamic Financial system including strategy for Elimination of Interest’. Dr. Sayyid Tahir Director General IIIE claimed “This Blueprint offers a comprehensive treatise on the Islamic Financial System”. This Blueprint negates the above quoted hadeeth qudsi by giving patently wrong advice “It is also recognized that banks should not be expected to enter into pure lending operations”. The Blueprint does not give any definite plan for eliminating interest and raises baseless objections on TMCL plan which is the only practicable plan available at present for replacing the existing system. Serious errors in the Blueprint were brought to the personal attention of Dr.Sayyid Tahir. He did not respond.
Dr. M. Umer Chapra in his book ‘Towards a just Monetary System’ wrote “the method of Time Multiple Counter Loan could be adopted for small scale financing particularly within the framework of co-operative institutions. For commercial banks it would be of limited capability”. He did not give any reason in his book for the limited capability of TMCL. Upon being asked as to why he considered TMCL would be of limited capability for commercial banks he replied “I have given my view, take it or leave it”!
Upon being pressed for a detailed discussion on use of TMCL for eliminating interest Dr. Mabid Ali Al Jarhi Director IDB Islamic Research and Training Institute advised the writer in a letter “Presently IRTI is not in a position to hold any discussion meeting, symposium, seminar or conference on the subject of TMCL as suggested by you”!
Islamic Banks started emerging in seventies of the last century with the avowed objective of getting Muslim communities and countries rid of interest. But these banks are virtually doing nothing to get Muslim Ummah rid of interest. They exclude interest-free lending from their operations and for meeting their own short-term needs of liquidity they take loans on interest from conventional banks and earn interest on their excess liquidity. They invest mostly in fake Murabaha and make interest-like definite gains with no risk of loss. In ‘Elimination of Riba from the Economy’ Prof. Khurshid Ahmad writes “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 spirit of prohibition”.
Sharia Advisors employed by Islamic banks dare not criticize wrong doings of Islamic banks. They approve of whatever Islamic Banks do and also speak highly of their performance. Some of them even tell half truths to justify what Islamic banks are doing. M. Taqi Usmani presides over Shariah Supervisory Board of Meezan Bank. Some extracts from his concurring judgment of 23rd Dec 1999 in Riba case and comments thereupon are as follows:-
“159. In order to limit the use of loans, the Shariah has permitted to borrow money only in cases of dire need and has discouraged the practice of incurring debts for living beyond one’s means or to grow one’s wealth”. This contention is not supported by any material from Quraan or Sunnah and the fact is exactly opposite to what is stated. A hadeeth qudsi declares reward for qard is eighteen times, implying that Islam wants widespread use of loans in society. Shariah does not discourage the practice of incurring debts to grow one’s wealth. Several Sahabah Karam ra and Imam Abu Haneefa ra borrowed money for doing business.
“159. The well-known event that the Holy Prophet (peace be upon him) refused to offer the funeral prayer of a person who died indebted was, in fact to establish the principle that incurring debt should not be taken as a natural or ordinary phenomenon of life”. What is quoted about this event is only half truth; the half truth omitted is that the Holy Prophet saws led the funeral prayer after the debt was cleared. It proves that the refusal was to establish incumbency to clear debts and not to discourage incurring debt. As loan is an indispensable need of mankind and Islam caters for all genuine needs of mankind, it is natural that Islam commends lending (of course interest-free) and condemns default in repayment of loan. It is not understood why only a part of an event was quoted and a wrong misleading conclusion drawn therefrom.
“199. The experience accumulated by Islamic banks in general, and the Islamic Development Bank in particular, as well as attempts made in a number of Muslim countries to apply an Islamic Financial system, indicate that the application of such an Islamic system by any Muslim country, at the national level is feasible”. This statement does not present true picture of current Islamic banking. True Islamic financial system is not reflected in the operations of present Islamic banks which ignore hadeeth qudsi and do not advance interest-free loans. Present Islamic banks themselves are not rid of interest and most of their earnings come from interest-like fixed returns. In his own book ‘Introduction to Islamic Finance’ M. Taqi Usmani 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”. It is highly regrettable that Justice M.Taqi Usmani commended application of so called Islamic banking soiled with element of interest and ignored TMCL plan whereby Pakistan could have got rid of interest immediately.
“204. The basic and foremost characteristic of Islamic financing is that, instead of a fixed rate of interest, it is based on profit and loss sharing”. The contention that Islamic financing is based on PLS is not supported by any quotation from Quraan and Sunnah. As present financing is based on interest which is a lending device, Islamic financing must naturally be based on interest-free lending device like TMCL. Interest-bearing loans and PLS were in vogue in pre-Islamic days. Islam prohibited interest, permitted PLS to continue and commended Interest-free loan. Hence Interest-free loan can logically be said to be the basis of Islamic finance and not PLS which is only permitted and not commended.
“229. The upshot of this discussion is that the Doctrine of necessity cannot be applied to protect the present interest-based system for ever or for an indefinite period. However, this doctrine can be availed of for allowing a reasonable time to the Government necessarily required to the switch-over to an interest-free Islamic financial system”. This contention is untenable on two grounds. (i) Allah knows when, where and what is necessary for His creatures and has allowed concession where necessary like eating pork for saving life and postponing fasting during illness and travel. Allah has not allowed any such concession in respect of interest nor has He authorized anybody to permit delay in implementing His command using dubious doctrine of necessity. The unanimous judgment written by Mr. Justice Khalil-ur-Rehman states: “The Ahkam of Riba are no different from the Ahkam of, for example, salah (prayer) and saum (fasting). The Ahkam for none of these were prescribed with the dawn of Islam. However, once ordained, the relevant Ahkam were enforced at once”. (ii) Immediate switch-over to interest-free banking is possible by implementing TMCL-based interest-free banking plan.
Islamic Economists, Bankers and Shariah advisors are requested to give serious consideration to this discourse and produce a well defined commercially viable interest-free banking plan better than the TMCL plan or endorse the later for replacing the interest-based banking system to get Muslim Ummah rid of the curse of interest and earn Allah's blessings. Wassalam.
14 April 2008