Issue 08 2014 / Islamic Banker ASIA / 4342 / Islamic Banker ASIA / Issue 08 2014

ACADEMIC VIEW

BANKING IN ISLAM OR ISLAMIC BANKING - PART 1Islamic Banking is for Islamic community whereas Christian banking is for the Christian society. But in reality the Jews are ruling the monitory world. Why? It has a very simple answer that they were the pioneers of banking, banking practices and banking institutions. The concept of banking introduced by Jews was refined by Christian, and adopted by Islam and other religions as a “shop” to sell and buy the money at price which is either known as “Interest” as general or “Right of Lender” on his lending to the borrower, according to Aristotle.

BY PROF. YOUSUF IBNUL HASAN

In Islam banking revolve around a word “Massraf”. The word Massraf means “purpose” and purpose of banking in Islam is to unite primary factors of productions, which are Man, Money and Commodity for an economic activity that leads to socio economic development for the community, state, region, continent and the humanity. Massraf operations demand the conduct of saving of a common man and convert these savings into investment by way of participation, using financial products like Modaraba (Skill financing), Musharka (Venture or Equity financing), Morabaha (Trade financing) and Ijarah Assets financing). In reality Massraf is similar to a common trade house with specialised activities that generate the profitability by using man, money and commodity as the factor of production.

In Massraf operations saver is important contributor rather the savings because of the motives of saver which

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Issue 08 2014 / Islamic Banker ASIA / 4342 / Islamic Banker ASIA / Issue 08 2014

BANKING IN ISLAM OR ISLAMIC BANKING - PART 1

encourages him to take a decision for avoiding un-necessary spending of his income and use the saving for better purpose on some later time. The saver distinguishes the possibility to make saving operations as a commitment that draws through realising his own interest. Massraf under the rules of Islamic financial system defines a way to saving funds which are employed according to the requirements of all the means of incentives. These incentives give individual, a practice of saving and not to neglect by leading saving motives as a caution to ensure safety for saver for future. It gives a raise to individual’s standard of living and caution towards wastage and directs to make profit.

And as for those who store up gold and silver, and do not spend those in Allah’s cause, announce to them a painful destiny IX, 34 Chapters the Regret The Massraf is also the clear concept of

custodianship of wealth which is called “Amana”. It is a pre-Islamic practice and in Islam it turns into as the adopted trend to place the wealth with a person of trust. In the Jewish and Christian society the wealth kept in custody for long and short period and brought to utilization in earning the return or usage of wealth. This act was justified with a rational answer that safe keeping is a serious and sensitive assignment which cannot be performed by ordinary person. The chances of loss and risk are higher on individual custodianship rather than an organised or institutional custodianship.

The archives in Islam point towards “Az-Zubair bin Awwam” who was one of those who engage with the safekeeping of money. He was a man of wisdom and intelligence who refused to take money for safekeeping and preferred to take it as participation for investment. Thus realising two objectives, he reserved his right to

dispose of the money, considering it a financing not a safekeeping that represent his obligation to owner because where money remains a safekeeping without use, it would constitute a loss to owner. But when safekeeping becomes a financing it would be secure as investor liable for it and money remain in circulation rather than idle.

From the beginning till today, orthodox banking and the modern banks are practicing on the concept of custodianship. But in refined and with modern techniques that give helping hand to professionals in handling monetary affairs. The old custodian practice is now called as the banking and today millions of bank all over the world are “Ameen”, a kind of caretaker of financial affairs by keeping the individuals or organisational funds as “Investment” rather to be deposits only and circulate the money for the economic development. Massraf add the socio concept in economic development of investing these funds or money.

In Islam the funds or the wealth kept in custody is termed as AMANAT. Breach of trust in Amana considered as an offense. The institution where Amana is kept is called Amanatgah. Islam strongly emphasises on the social justice, social values and socio economic development instead of only the economic development. All such banks and financial institutions are classified to operate with the aim to achieve socio- economic system. The purpose of banking practice under Massraf has social banking motive with valid objectives. For the reason first financial institution was established at Cairo, Egypt in 1960 and titled as NASIR SOCIAL BANK. It was launched as a financial institution on socio financial system. The aims of this bank were:

a. To implement social responsibility of each member of community for the elimination of Riba from the financial matters that harms the life of individual and community.

b. To provide financial assistance to skill and commerce that develops socio economic development.

c. To develop strong financial grip on the wealth of Muslim nation.

ACADEMIC VIEW I BANKING IN ISLAM OR ISLAMIC BANKING

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d. To crate the awareness among the Muslim community in regards to financial responsibility and sharing of wealth of economic stability

e. To create the saving concept and investment in rightful manner.

f. To act as bridge between saving and investment.

g. To curb the prices and monopoly of commodities and services.

h. To eliminate the discrimination between wealthy and normal saver and to respect the customer as potential part of the institution.

j. To develop relationship among Muslim nation with strong treasury facilities and system

Activities of Massraf The banking activities which are prominent in the Massraf concept revolve around several well established concepts which are based on Islamic principles and remain to the concepts of Islamic law. a. Islam emphasises on Social Justice and since the concept of Riba is forbidden in Islam.

b. All banking activities under Massraf banking system must be executed without an involvement of Riba.

c. Massraf earns profit and does not charge fees on financial facilities as investor is the partner of the bank and any charge or fee is the cost of the transaction which has to be deducted from the gross profit and not from the principal investment.

d. The funds of investors and Massraf’s capital is jointly invested in the financial transaction.

e. Massraf is not eligible for any profitability in case they do not invest with investor’s funds. However management fee illegible them to cover their professional services which is treated as the expense on investment and it is pre-agreed.

g. Massraf is the partner to the skills that generate economic activity in projects or transaction.

h. Investors get their share of profit on the “Net Profit” and not on gross profit.

j. Returns declared under terms as fixed rate and guaranteed on principle

investment is an interest which is prohibited. Whereas in Massraf, operation profit is determined on the .

k. Massraf participates its own funds with funds of its investors in proportion basis and condition of investment remain as profit sharing on Net Profit according to investment participation in total investment amount.

l. Massraf makes financing to such transactions and projects that are financially viable upgrade socio economic life of the state or the community, develop a system that brings the discipline in the life of a citizen and awareness of financial responsibilities and obligation.

m. Massraf operations are only for monetary or finance related and not for religious or charitable purpose as Islam strongly defines such activities as purely based on financial system without Riba (bad earning) with no interest base transaction.

n. Massraf serves the Private and Public affairs and these affairs are separate to spiritual and material

Banks declare IslamicIslam defined the concept of commercial, social, legal and financial activities. Separating charitable aspect as obligatory part of income and earning through such activities that relates to money and finance. Rational approach to finance and banking can evaluate lack of transparency around the world in conventional financial institutions and practices. Banking system based on social concept in financial activities relates to economic activities in transparency. If basic spirit is missing then institution has no a right to call them as Islamic. So for the reason it is recommended that banks are either title as Massraf or Social Bank.

Islam encourages on making profit from financial and economic activities and separates the purpose of welfare and means along with the principles of commercial activities. Earning of profit is soul of socio economics and Islam justify making a profit for socio economic development, community welfare and better mankind.

Today banking practices are free

from all moral and social restrictions. Banking is the main instrument of economic development but lacks the socio-economic aspect and importance. The bases of economic development concept remain without fear from the movement of wealth on wrong directions. Banking is loyal and obedient to banking ordinances, regulations and policies that are made to be implemented and promulgated by the central banks and financial regulatory authorities without considering the social aspect of the money and its monetary system. These irrational and discriminatory set of laws are the perimeters and guidelines for the financial houses dealing in monetary affairs on the conventional basis. The conventional bank have created a concept of minority to rule the majority by creating 5% population as “in-laws” and the rest of the population as “out-laws” or “Step children of the community”.The Central Bank is the monitor, governed and instructs the monetary market and control monetary activities and practices. It is a fact that 95% monetary houses operate on the bases of Riba (Usury) of various character in the monetary matters and transactions. 99% monetary houses, money dealers, monetary services agents, concerns and professionals are involved in RIBA practice in their daily monitory transactions. Many avoid interest in their daily monetary transactions, but ignore the other categories of Riba that remain in the monetary matters.

Concept of Interest and Riba vis-à-vis Profit. In the monetary market professionals consider interest as the only Riba, whereas interest is the part of Riba and it is rather difficult to avoid Riba from the monetary transactions until the user of money have clear concept of Riba and relationship of interest with Riba. Riba practice and dealing in particular to monetary affairs have been prohibited in all the religions of the world and in Islam which is DEEN is ahead of all religion. Almighty Allah principally declares war against those who practice interest which is a category of Riba and fall under SHIRK

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(entering into jurisdiction of Almighty Allah) due to its nature.

What is Riba? “Any earning, income, profit or benefits being earned, taken or received through wrong means, bad intentions, shady practices or wicked participation are classified as RIBA. Such earnings & benefits are not only treated as immoral, injustice & filthy but furthermore negative to socio economic life of society. Such earning leads to crimes of various nature, cruelty, exploitation & self-importance.”

What is Interest? Any amount, earning or income that is taken over and above to the principal amount, without risk, efforts and activity and without loss sharing with term of that returns, income or earning on investment should be fixed and fixed percentage upon principal amount, is an Interest. Thus Interest is the price of money whereas money is just an intermediary between exchanges of transaction. (Prin-ciple x Rate x Period /100)

What is Profit? Income on Financing determine not on Financing Amount but ascertain by taking Principal Amount + Cost of Transaction + applicable fee & charges as a part. Profit is aim of financing & loss is acceptance & precaution.

Trust and confidence are the part of will & sprit and considered as business ethics. (Investment-proceeds=gross profit-

cost and expenses= Net profit/pre-agreed share. “I-P=GP-C+E=NP/PES”)

The above definition clarifies the two bases of banking and finance in the explanation of Riba. Interest fall in the category of SHIRK. Interest is one of the category of Riba in which the results are guaranteed prior to the maturity of transaction and Almighty Allah have not allowed “guarantee” even to Prophets and Messengers (may peace be upon All).

Forty-eight types of Riba observe and prohibited by Islam which have been researched and these characters of Riba are in fact treated as the “Social Crimes” in civilized world. These characters of Riba in fact destabilize the community life and encourage the crime and disturbance in community living. In fact the western world expresses disapproval some of Riba practices in their financial matters that come in the financial transactions and treat such Riba activities as the criminal offence.

a. Return of the cheque unpaid, b. Promissory notes not honored,c. Non application of contract for

transactiond. Irregular weight and measurementse. Declaring wrong information for

monetary benefit.f. Non-compliance of promise and

taking advantage with the funds that belong to the other.

Massraf operations are more purified

as interest is not the only factor that has to eliminate from the monetary affairs. It is Riba and Massraf take provisions to guard its system and operation from the involvement of any character of Riba. As a result the Massraf are not allowed to go into transactions that fall under any category of Riba. Such transactions are:

a. Declaring non transparent and unjustified results on investment.

b. Speculation, conjecture, unfounded information

c. Trading of commodities prohibited Islam and law of the land,

d. Income from the practices or activities that are prohibit by Islam,

e. Breaking and abuse of state law for self benefit or for any purpose that is declared as punishable act.

f. Disobedience the state law by declaration and submission of wrong information for self-benefits.

g. Interest that is the price of money taken in cruelty, exploitation, wrong means, false declaration, and advantage based on weak or wrong calculation,

h. Return on loans on fix return without appraising the usage of funds given to user of fund,

i. Keeping deposit with person or institution having involved in Riba practices

j. Using deposits as investments and declaring non-transparent results that led to discrimination of sharing in accordance with investment percentage,

k. Holding/storage of currency or commodity that affects economic activities negatively,

l. Storage and holding of commodities that leads to scarcity in supply of any commodity against the market demand

m. Monopoly and monopolization of activity, transaction and business to take sole benefit, stopping the growth of employment and earnings

Massraf follows Islam and its guidance in commerce; business and money matter and provides means to develop a healthy community without race religion, language or class with no borders and barriers in trade commerce and finance except restriction of Riba.IBA

(Read Part 2 of this article in IBA Issue 09)