In Islam, banking revolve around the word, “Massraf” which means “purpose” and the purpose of banking in Islam is to unite primary factor of productions, which one men, money and commodity for an economic activity that leeds to socio-economic development for the community.
Massraf does not lend or borrow the funds as the system does not justify the landing and borrowing as it leads to the interest. Thus the deposits are classified as Investment on participation between Rab-al-Maal (owner of wealth) and Massraf (wealth manager). Before we discuss the banking and banking practices in Islam, let us see a small idea that differentiates between financing and lending. It will give a clarity and understanding to Islamic way of monetary affairs and present conventional system that practice money as potential capital.
a. Financing is an equity and not liability
b. Landing is liability and not participation.
c. Financing is made and Loan is given
d. Loan is secure financing support.
e. Financing is an investment and loan is facility.
f. Loan cannot be financing until it is agreed on profit and loss sharing and financing cannot be a loan till return is guaranteed.
g. Lending is against the rate and financing on the basis of ratio.
h. Lending has the returns confirm and financing return are estimated and declared upon the maturity of the transaction.
i. Lending demand collateral and financing structure the collateral within the system.
j. Lending results are based on principle amount of investment and financing results are shared on net profitability.
k. In lending money is treated as “potential” capital where as in financing money becomes actual capital only when it joins hands with other resources to undertake a productive activity. Islam
recognises the time value of money, but only when it acts as capital, not when it is “potential” capital
Banking industry provides services to their customers against certain charges and fee. In conventional banking such charges and fee are the schedule of charges over and above of the earning from the customer’s money transactions. In Massraf such fee and charges fall in the category of Riba as Massraf are the financial partners and participate with the customer. Massraf invests these savings in combination with many savers’ funds on a condition to earn profits. This profit is shared between the investors and Massraf. In addition Massraf are permitted to take management fee from the gross profit on the investments on pre-agreed terms. The management fee is treated as the cost of the transaction and Massraf treat it as the earning on the services and management affairs on the transaction. Any excess to the pre-agreed terms falls in the earning under Riba. Banks make the Riba earning while deducting from the customers account as “minimum balance charges”. The investors participate with its funds for economic activity and to keep these funds as safe on trust. The banks use these amounts in its business activity and earn on it. No matter the amount is Rs.100 or Rs.10 million or more, several hundreds combine together and become billions. Massrafs are not permitted to involve in such activity as the earning on such practice is an act of taking advantage of the status and depriving the investors of his share on the income that was generated from his small amount of investment through savings.
Today every bank is introducing the Islamic banking division within their banking operations. The State Bank of Pakistan permits such requests on the conditions that the bank will perform in accordance of the Shari’a compliances with mandatory to hire an advisor, competent and knowledgeable to the Shari’a. The question arises that does Islam have a concept of banking and banking practice? What are the findings from the archives in the period of post Islam in regard to the banking and institutionalise financial practices? Researchers are not sufficiently expert to find any witness of banking institutions in the post Islamic period. However certain practices are seen which are the important instrument in banking practice of today, like Arboon (margin against the transaction or up-front) Suftaja (bill of exchange) Ruka (cheque) Warik (promissory note) and many more. Associating the spirituality with the commercially practices, systems or commercial organisations is also a category of Riba. The earnings of such institutions by using the name of the religion as the institutional title and practicing with the name of the religion are the exploitation of religion. No such religion permits the involvement of its name where there is a slight doubt of misdeed in functions. The question arises; can Islam which is Deen allow any kind of filth that damages the total teaching of Islam? In the entire world the conventional banking system practiced, which was introduced by Jews much before the birth of Islam. Till today none of the bank called itself as “Jewish Bank or Banking”. The Christian have proved that they are the best bankers who contributed in the economic development of the world. Today Christian society is considered as one of the most advanced society of the world having the clear concept of community development through social justice. The society avoids illegal commercial practices and keeps transparency in their monetary dealings.
Conventional banks invest their funds in the manufacturing, distribution and trading of commodities and services that fall in categories harmful for the community and human to health. But their way of using money in the trading of such commodities and services are permitted and these are the needs of the society which are permissible and acceptable in their society. Like Liquor and pork business, speculation, interest and life insurance are the part of the society needs and have substantial income and profitability. On the other means, activities which are treated criminal acts are considered as punishable acts. Like payment instruments unpaid or bounce back, non-compliance of promissory notes on the maturity, deduction of charges without informing the account holder, bypass and superseding in business deals, deprive of financial share in business transaction, obtaining services without payments, over charging, monopoly, black-marketing, holdings, tax evasion, smuggling and conspiracies against the law of the state. Thus law breaking or insult to legality is treated as crime. Whereas rules and regulation, law and legal affairs to be respected and treated as binding of community development and any earning by ignoring these bindings fall in Riba practice which is prohibited. The recent movement for the Islamising the banks and financial affairs by way of eliminating interest from the monitory affairs is no doubt is the hatred that is emerging from the cruelty of interest and Riba practices in the monetary affairs. No doubt the banks are taking initiatives for such move to eliminate the filth of Riba from the financial matters. But the question arises whether interest is the only sin that is prohibited that convert the conventional banking into Islamic Banking or other Riba categories also applicable in the prerequisite to call banking as the Islamic Banking?
If we see banks entering in the Islamic way of banking around the world, it looks that all of a sudden every conventional banker becomes authority on Islamic Banking without knowing the rules and requirement of Islam on financial matters. For instance like a cricketer reaching at its peak of professionalism, opted overnight to play hockey and claim him the captain of the game. In the case of elimination of interest from monitory dealing without considering categories of Riba is like removing pork from pork curry, drinking water from bottle originally containing liquor, but sterilised to contain drinking water or women dancing in audience for charity and welfare purpose instead for money. Elimination of interest alone is not the solution of converting conventional banking into Islamic Banking and naming the institution as Islamic Bank. The titles that suits for such financial institutions which are keen to introduce Riba free banking as the part of their banking business is “Massraf”, “Socio Commercial Bank Limited” and not Commercial Islamic Bank Limited. For an Islamic bank it should be clearly mentioned “Riba Free”. Working for Massraf as Modarib, Musharik or Morahib (working partners) there are certain conditions that had to be followed and one involve in Massraf must take into consideration the below givens: R10
a. He/ she should be knowledgeable enough to understand the basic concept of Islamic financial systems.
b. Theory and practice for handling day to day affairs of avoiding Riba.
c. He/she must be an example to his subordinate and has a sense and capability to face day to day transactions without Riba involvement and to lead his team.
d. The institutions he/she is heading and working on the system should be transparent and follow the
Shari’a instructions and bindings on financial matters and affairs.
e. He/she must be carefully handling the distribution, realisation and accreting the profitability with clear and transparent means.
f. He/she must know the investment viability on the basis of socio economic aspect and guide customers on the system that lead to the interest of state and the community.
g. He/she understand the concept of saving for investment in participation.