Islamic banking is about equity
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- Category: Philosofaith
- Written by M. U. Ndagi
- Hits: 956
Reactions, some of them unfounded, have continued to trail the recent announcement by the Central Bank of Nigeria (CBN) to introduce Islamic banking in the country.
This followed the issuance of license by the CBN to Jaiz Bank International to operate as an Islamic financial institution. The bank has six months to meet regulatory guidelines before it could qualify for a full license. While some of the reactions stem from the traditional phobia in Nigeria for Islam and Muslims, others derive from the animosity against the person of the Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, his only sin being his timely intervention to save depositors’ funds from the corrupt practices of Chief Executive Officers (CEOs) in eight distressed banks. Nigerians who see Mallam Sanusi Lamido from this perspective are those, I believe, who think it is a right for CEOs of commercial banks to mismanage depositors’ funds, which is also why, I guess, they sympathize with the sacked CEOs of the insolvent banks.Some of those who criticize the introduction of Islamic banking do so ignorantly without even knowing what this particular mode of banking entails. Some of them get irritated by the mere mention of the word ‘Islamic’. They see it as an attempt to Islamize Nigeria as if Islam is a religion institutionalized on just one aspect of life. Some people are already calling it Shari’ah banking as part of their smear campaigns to kill the initiative. Religious bigotry has so much eaten in to our consciousness and sense of judgment that many Nigerians today, regardless of their level of education or socio-political eminence, fail to appreciate virtues and universal values. For such, it is not good enough as long as it is coming from followers of religions other than theirs. In the opinion of religious bigots, for instance, Mallam Sanusi Lamido Sanusi would have had no achievements no matter what he does to sanitize, improve upon and consolidate the Nigerian banking industry simply because he is a Muslim.
While Muslims cannot but treasure the contributions of non-Muslim scientists including Galileo Galilei, William Harvey, Robert Boyle and Isaac Newton whose respective interpretations of the physical order prepared the intellectual ground for the Scientific Revolution of the seventeenth century which greatly improved and launched humanity in to modernity; non-Muslims on the other hand can equally not ignore the contributions of Muslim thinkers of the tenth and eleventh centuries including Al-Farabi, Ibn Sina (Avecina) and Ibn Rushdi (Averoes) whose philosophical treatises and individual commentaries on the works of Greek philosophers did not only mark the golden age of Islam until the first fall of Baghdad in 1258AD (the second being in 2003 under Saddam Hussein), but also laid the stable foundation for the development of a systematic method of experimentation that set the Scientific Revolution on course.
Let us therefore learn to reason, understand and appreciate issues that are of universal value without recourse to religious or ethnic sentiments. The operational guidelines and ethical dividends that may accrue from operating an Islamic bank should, instead of emotions, define our reactions to the introduction of this mode of banking. It is important to remind critics of Islamic banking that this approach to banking services exists in non-Muslim countries. There is the Al-Baraka International Bank Limited in London.
Islamic banking is a non-interest type of banking that is based solely on equity. This form of banking proscribes usury (riba), trading in risk (gambling) and investing in businesses that are against the general principles of ethics. These basic assumptions, we presume, should concern every justice and fair-play loving citizen even though its operational concept may have sprout from Islamic laws of economics and finance. Islam has a very specific approach to commercial transactions and the law of contract. One of the most important teachings of Islam for establishing justice and eliminating exploitation in business transactions is the prohibition of all sources of unjustified enrichment.
The Qur’an forbids wrongful acquisition of one another’s property. Allah (SWT) states in Qur’an 4:29 that “O ye who believe! Eat up not your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual good-will…” Among the common sources of wrongful or unjustified earning is receiving any monetary advantage in business transactions without giving a counter value. Riba or usury represents, in the Islamic value system, a prominent source of unjustified advantage. Riba is a sin under Islamic and Biblical laws. Those hired to write the contract or who witness (and thus confirm) the contract are equally a party to the sin. The gravity of riba as a sin in Islam may be grasped from Prophet Muhammad’s assertion of equating it to committing adultery thirty-six times or indulging in incest with one’s mother.
The fundamental rationale in Islamic banking is the principle of equity which provides that parties to a transaction must mutually share in the profits and in the losses that accrue from businesses. This is the underlying theory that distinguishes Islamic economy and finance from their conventional counterparts. In lieu of lender-borrower relationship, Islamic finance (unlike what obtains in the conventional commercial banks) relies on equitable profit-sharing as well as risk-sharing between the person who provides the capital and the entrepreneur. It is for this principle of equity which is lacking in the operations of commercial banks that makes their savings account service prohibited in Islam. Allah (SWT) affirms in Qur’an 2:275 “Those who devour usury will not stand except as one whom the devil hath driven to madness. That is because they say ‘Trade is like usury’. But Allah has permitted trade and forbidden usury…”
In addition to conventional banking services which though are devoid of forbidden contracts and elements, Islamic banking involves other financing techniques and facilities. It provides a wide range of contracts to be designed and implemented within the principles of Islamic economics. They include, among others, Mudarabah, Musharakah, leasing and hire purchase. Mudarabah, for instance, is a financing technique in which the owner of capital provides funds to the capital-user for some productive activities on the condition that profits generated will be shared equitably between them. The loss, if any, incurred in the normal process of the business and not due to neglect or misconduct on the part of the capital-user is borne by the capital-owner. The user does not invest anything in the business except his human capital and does not claim any wage for conducting the business. The ratio in which profits are shared is fixed and predetermined in advance by both parties. In the event of a loss, the capital-provider loses his capital to the extent of the loss; and the user of the finance loses all his labor. Scholars are of the view that the willingness to bear the risk of loss justifies a share in the profit for the finance-provider. The second part of this discourse will, insha Allah, focus on other techniques of Islamic banking.
Those who find faults with Islamic banking, perhaps, prefer a banking model in which exploitative interests rates are charged on loans and other transactions. Their position also suggests that they favor a system of transaction in which the lender does not share in the losses incurred by the borrower. Critics of Islamic banking appear to be comfortable with a banking model that precludes depositors from mutually sharing in the profits made from the use of their capital. Nonetheless, those who desire to make money or create wealth through honest transactions would still go for the Islamic mode of banking whether or not it is called Shari’ah, Muslim, Christian, Biblical or non-interest banking.
While we call on the CBN to embark on enlightenment campaigns to educate the Nigerian public on the objectives, operations and social responsibilities of an Islamic bank, it is relevant to clarify that the CBN has not promulgated any laws to force the Islamic banking system on any conventional banks, investors or depositors. May Allah (SWT) continue to guide us to do that which will benefit humanity, amin.
Articles
Islamic banking is about equity
Category: Philosofaith Written by M. U. Ndagi Hits: 956
Reactions, some of them unfounded, have continued to trail the recent announcement by the Central Bank of Nigeria (CBN) to introduce Islamic banking in the country.
This followed the issuance of license by the CBN to Jaiz Bank International to operate as an Islamic financial institution. The bank has six months to meet regulatory guidelines before it could qualify for a full license. While some of the reactions stem from the traditional phobia in Nigeria for Islam and Muslims, others derive from the animosity against the person of the Governor of the Central Bank of Nigeria, Mallam Sanusi Lamido Sanusi, his only sin being his timely intervention to save depositors’ funds from the corrupt practices of Chief Executive Officers (CEOs) in eight distressed banks. Nigerians who see Mallam Sanusi Lamido from this perspective are those, I believe, who think it is a right for CEOs of commercial banks to mismanage depositors’ funds, which is also why, I guess, they sympathize with the sacked CEOs of the insolvent banks.Some of those who criticize the introduction of Islamic banking do so ignorantly without even knowing what this particular mode of banking entails. Some of them get irritated by the mere mention of the word ‘Islamic’. They see it as an attempt to Islamize Nigeria as if Islam is a religion institutionalized on just one aspect of life. Some people are already calling it Shari’ah banking as part of their smear campaigns to kill the initiative. Religious bigotry has so much eaten in to our consciousness and sense of judgment that many Nigerians today, regardless of their level of education or socio-political eminence, fail to appreciate virtues and universal values. For such, it is not good enough as long as it is coming from followers of religions other than theirs. In the opinion of religious bigots, for instance, Mallam Sanusi Lamido Sanusi would have had no achievements no matter what he does to sanitize, improve upon and consolidate the Nigerian banking industry simply because he is a Muslim.
While Muslims cannot but treasure the contributions of non-Muslim scientists including Galileo Galilei, William Harvey, Robert Boyle and Isaac Newton whose respective interpretations of the physical order prepared the intellectual ground for the Scientific Revolution of the seventeenth century which greatly improved and launched humanity in to modernity; non-Muslims on the other hand can equally not ignore the contributions of Muslim thinkers of the tenth and eleventh centuries including Al-Farabi, Ibn Sina (Avecina) and Ibn Rushdi (Averoes) whose philosophical treatises and individual commentaries on the works of Greek philosophers did not only mark the golden age of Islam until the first fall of Baghdad in 1258AD (the second being in 2003 under Saddam Hussein), but also laid the stable foundation for the development of a systematic method of experimentation that set the Scientific Revolution on course.
Let us therefore learn to reason, understand and appreciate issues that are of universal value without recourse to religious or ethnic sentiments. The operational guidelines and ethical dividends that may accrue from operating an Islamic bank should, instead of emotions, define our reactions to the introduction of this mode of banking. It is important to remind critics of Islamic banking that this approach to banking services exists in non-Muslim countries. There is the Al-Baraka International Bank Limited in London.
Islamic banking is a non-interest type of banking that is based solely on equity. This form of banking proscribes usury (riba), trading in risk (gambling) and investing in businesses that are against the general principles of ethics. These basic assumptions, we presume, should concern every justice and fair-play loving citizen even though its operational concept may have sprout from Islamic laws of economics and finance. Islam has a very specific approach to commercial transactions and the law of contract. One of the most important teachings of Islam for establishing justice and eliminating exploitation in business transactions is the prohibition of all sources of unjustified enrichment.
The Qur’an forbids wrongful acquisition of one another’s property. Allah (SWT) states in Qur’an 4:29 that “O ye who believe! Eat up not your property among yourselves in vanities: But let there be amongst you traffic and trade by mutual good-will…” Among the common sources of wrongful or unjustified earning is receiving any monetary advantage in business transactions without giving a counter value. Riba or usury represents, in the Islamic value system, a prominent source of unjustified advantage. Riba is a sin under Islamic and Biblical laws. Those hired to write the contract or who witness (and thus confirm) the contract are equally a party to the sin. The gravity of riba as a sin in Islam may be grasped from Prophet Muhammad’s assertion of equating it to committing adultery thirty-six times or indulging in incest with one’s mother.
The fundamental rationale in Islamic banking is the principle of equity which provides that parties to a transaction must mutually share in the profits and in the losses that accrue from businesses. This is the underlying theory that distinguishes Islamic economy and finance from their conventional counterparts. In lieu of lender-borrower relationship, Islamic finance (unlike what obtains in the conventional commercial banks) relies on equitable profit-sharing as well as risk-sharing between the person who provides the capital and the entrepreneur. It is for this principle of equity which is lacking in the operations of commercial banks that makes their savings account service prohibited in Islam. Allah (SWT) affirms in Qur’an 2:275 “Those who devour usury will not stand except as one whom the devil hath driven to madness. That is because they say ‘Trade is like usury’. But Allah has permitted trade and forbidden usury…”
In addition to conventional banking services which though are devoid of forbidden contracts and elements, Islamic banking involves other financing techniques and facilities. It provides a wide range of contracts to be designed and implemented within the principles of Islamic economics. They include, among others, Mudarabah, Musharakah, leasing and hire purchase. Mudarabah, for instance, is a financing technique in which the owner of capital provides funds to the capital-user for some productive activities on the condition that profits generated will be shared equitably between them. The loss, if any, incurred in the normal process of the business and not due to neglect or misconduct on the part of the capital-user is borne by the capital-owner. The user does not invest anything in the business except his human capital and does not claim any wage for conducting the business. The ratio in which profits are shared is fixed and predetermined in advance by both parties. In the event of a loss, the capital-provider loses his capital to the extent of the loss; and the user of the finance loses all his labor. Scholars are of the view that the willingness to bear the risk of loss justifies a share in the profit for the finance-provider. The second part of this discourse will, insha Allah, focus on other techniques of Islamic banking.
Those who find faults with Islamic banking, perhaps, prefer a banking model in which exploitative interests rates are charged on loans and other transactions. Their position also suggests that they favor a system of transaction in which the lender does not share in the losses incurred by the borrower. Critics of Islamic banking appear to be comfortable with a banking model that precludes depositors from mutually sharing in the profits made from the use of their capital. Nonetheless, those who desire to make money or create wealth through honest transactions would still go for the Islamic mode of banking whether or not it is called Shari’ah, Muslim, Christian, Biblical or non-interest banking.
While we call on the CBN to embark on enlightenment campaigns to educate the Nigerian public on the objectives, operations and social responsibilities of an Islamic bank, it is relevant to clarify that the CBN has not promulgated any laws to force the Islamic banking system on any conventional banks, investors or depositors. May Allah (SWT) continue to guide us to do that which will benefit humanity, amin.