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Shariah compliant vs Shariah based
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The argument is that the product offerings by these banks are simply shariah compliant (selling conventional methods in Islamic garb by tweaking its features so as to not violate any shariah rulings) instead of creating new products that doesn't have any semblance to conventional banking practices and hold true and dear to the very teachings of the Quran and Hadith.
But to some, even by tweaking its features is simply not enough because it doesn't even comply to shariah law in its entirety. Proponents to this belief often use the Bay-ul-Inah concept often used by Islamic banks in their Home Financing-i and Personal Financing-i products.
I shall elaborate more on Personal Financing as the BBA Home Financing-i product is still hugely debated in my part of the world.
Personal Financing-i (a mirror product to Personal Loan offered by conventional banks) uses the Bay-ul-inah principle. Many critics to this practice claim that it is not Shariah compliant at all.
Bay-ul-inah is when an asset (even when sold in a certificate) is sold by the bank to its customers at a certain price that is equivalent to the loan amount borrowed. The customer then has to pay for this asset in installments or deferred payment to the bank at a higher price. The difference between this two deals is the profit to that bank and present rates varies within the industry.
Critics therefore argue what exactly is the 'asset' being bought? It surely isn't the money received or a piece of land somewhere. It must only be concluded that the asset purchased in the immediate buy back is only a paper asset (certificate asset). In fact, this 'asset' that the buyer never sees is sold to him nonetheless only for him to pay for it in installments. On top of this, the customer is more or less compelled to accept the higher fee as demanded by the bank for him to sell back. Surely these two acts are not permissible in Shariah?
Proponents to Islamic banking argued that the asset sold is actually real asset. In fact, for every Personal Financing application, the bank produces a list of tangible assets to the customer for the customer to scrutinize. The list usually has buildings, inventory, and motor vehicles/machinery which belongs to the bank only for the customer to buy it and sell it again immediately. True that they have not seen the asset. And true again that the asset bought/sold is only a certificate. But does this comply with Shariah? Is the asset real and tangible? Yes. Was the asset transferred at a particular time to the borrower (and therefore qualifies him to sell it back to the bank because it was his even for a briefest moment)? Yes.
Then why is it that the critics continue to criticize this procedure even when one (out of four) Sunni School of thought thinks this as permissible? In fear of misrepresenting, I shall forfeit myself from answering this question. However, it does seem like it mirrors a conventional loaning facility. And it surely did not violate Shariah law, at least on the facade of it.
Maybe this is the reason why banks still pass themselves off as Shariah compliant and not Shariah based.
Again, I think in order for the Islamic Banking industry to grow and flourish, bringing about fresh banking solutions to the consumers which are based directly from the Quran is useful. But by offering Shariah compliant financial solutions today, and to remain competitive against a more established conventional banking system, remain a big challenge, particularly when there are a lot of eyes scrutinizing the growth of Islamic Banking.
3 Ps - PRICING, PEOPLE & PERSONAL TOUCH
Posted by Goh Pei Loong on Wednesday 04 November 2009 07:06CIMA Islamic Certificate
Posted by Dr. Shahinaz Ab... on Thursday 12 November 2009 11:07May I pose a question here?
Posted by Adrian Rutter on Thursday 10 December 2009 14:01As someone who knows very little about this, I'd like to understand, please, what is the Shariah moral reasoning for the prohibition against lending money at interest? I know the early Christian church forbade usury, but I believe that term quite quickly took on its relatively-modern meaning of interest at an unfair rate.
It's interesting that trade itself is apparently morally acceptable, so, for example, a baker can sell bread for more than the cost of the ingredients. Why, then, can someone who gives up their own asset (money) so that the baker can buy an oven not ask for a return? How else could a baker who did not have an oven apply their skills and feed their community as well as themselves and their family?
Perhaps there is something to learn here to illuminate ethical business practices in all parts of our world.
Why interest is prohibited in Islamic shariah?
Posted by Faisal Merchant on Monday 18 January 2010 11:30I really appreciate Mr. Adrian's open-mindedness and an urge to learn.
As per my understanding of Shariah, capital should be combined with one or more factors of production so as to be entitled for a return. Like the baker assumes risk i.e; he may earn a profit or incurr a loss, Shariah encourages the provider of capital to assume risk by agreeing with the baker to share both profit or loss. Here, the capital is combined with enterpreneurship at the end of the provider of capital.
This principle is based on the law of equity and if followed would actually prevent concentration of wealth in fewer hands.
Plus, in the modern banking system, the rate of interest is usually much lower than the rate of profit earned by the enterprise due to risk-return tradeoff concept. The banks borrow at even much cheaper rate, lend after adding a spread to the enterprise which either earns high profits or make losses. This is against the principle of equal distribution of wealth and creates a divide in the society. Islamic Shariah (laws), on the contrary, encourages sharing of profit and losses by the provider of capital in the larger interest of the society.
I hope this would make sense to you. I shall be glad to know other members' views.
Note: I am a humble student of Islamic financial system and whatever I have written is based on my personal understanding of the subject.
Principles that makes sense; rules, perhaps less so?
Posted by Adrian Rutter on Wednesday 20 January 2010 10:03Thank you, Faisal, for your gift of time and understanding. Your explanation is clear and concise, and there is indeed something here worthy of note for all parts of our world.
The concept of interest itself, and the relative certainty of the full settlement of debt reducing the risk to capital-providers and hence reducing the cost of capital itself, has arguably been a material driver for many economies and created very much greater national wealth than there could have been without such access to capital. But, at the same time, many voices are raised against the inequalities of wealth this has also created, and there is more and more debate across what Ibrahim has described as "conventional" banking about how risk and reward could and should be better balanced across all the communities and stakeholders involved. Shariah practitioners may wish to to look at some less conventional banking and commerce being developed in many parts of the world to address these concerns.
There is perhaps a very human complication: Shariah or conventional, we are all rather better at working to simple rules and prohibitions rather than meeting the broader principles behind them.
It is good to learn, and I shall re-consider these principles in my own work. Thank you to all who have posted here.