Bank as Intermediary

The second position makes it an intermediary to attract deposits from the saver and advance them to the user of funds. Thus, it establishes a link between supply of and demand for funds.

As an intermediary, the bank would neither be liable to any loss nor entitled to a share in profit. It may, however, claim a remuneration for its act of intermediation. This remuncra tion may be a prefixed lump sum or proportionate with the amount it handles. This remuneration may not, however, be contingent upon earning a profit because in this case the return of the bank becomes uncertain which, according to the Shari‘ah, would make it a voidable contract. As an intermediary the bank is committed to serving both the parties — the saver and the user of funds. In this case, it has a right to claim remuneration of its service from cither or both the parties irrespective of whether the entrepreneur uses them profitably and whether the owner of funds gets any return on his capital. But in this case also, the bank will relate its charges to the service it renders but not to the period of its retaining the funds with it or with the user of funds. Moreover, the entire share of earning it receives from the user of funds will be passed onto the owner of funds. Similarly, the entire burden of loss to be shared with the user of funds will be borne by the owner of funds after debiting his account for the amount receivable by the bank by way of its remuneration and of any other charges that the bank has to incur on behalf of the owner.

The terms of providing finance would depend on the option of the depositor. He may choose to finance on the basis of mudarba with a trader, an importer or exporter, musharakah with the bank or through the bank with a construction company, manufacturer or hotelier, share-cropping with a cultivator and so on. But this will not involve the modes like murabaha, bai’ mu'ajjal, bai’ salam or bai' wafa. The function of the bank will be to ensure through the services of its specialised staff that the interest of the depositor is protected. Expenses incurred on this staff will be deducted from gross profit payable to the depositor. The rate of remuneration chargeable from the depositor and/or entrepreneurs will be fixed by the central bank.

This proposal involves the bank as an intermediary between the depositor and the entrepreneur or trader. This seems to be a practicable alternative in the case of small or moderate size interest-free banks. In the case of very large banks and the countrywide banking system this is not as establishment of investment companies and financing institutions to finance the different sectors and specialised in different modes of financing would seem to be a more manageable alternative.

The investment companies would be subsidiaries of the bank to relieve the latter of the function of direct supervision and monitoring. It would be possible for these companies to have closer contacts with the businessman and gain much accurate information about market conditions. These would in fact be the effective operational wings of the banks.

To sum up, many techniques that the interest-free banks are practising are not either in full conformity with the spirit of Shari‘ah or practicable in the case of large banks or the entire banking system. Moreover, they have failed to do away with undesirable aspects of interest. Thus, they have retained what an Islamic bank should eliminate. PLS has a limited scope and should be retained but the fields where it can be applicable should be specified. The banks cannot act as trader nor as a working partner under the contract of mudarba. In this mode and in other techniques of financing it would serve as an intermediary and would charge remuneration for its services irrespective of whether the business earns or loses. Large banks and countrywide banking would require structural change by setting up investment companies as specialised operational subsidiaries. It is not necessary that all the banks set up similar investment companies to eater to all the sectors of economy; it would be preferable to have specialisation in only a few spheres. The subsidiaries of a bank A, for example, may specialise in housing and transport while those of bank B may concentrate on services and small-scale industries, and so on.

The last question that needs to be tackled is the economic implication of charging a remuneration from the depositor in case he incurs a loss on his funds. A loss will happen only when funds are separately operated for each individual. Banks, on the other hand, would pool up funds for different portfolios and diversify their investment to become profitable on the whole. If even then, some portfolio fails to earn, a number of solutions may be devised to compensate the bank without putting an additional burden on the fund owner who has already lost a portion of his capital.

Financial institutions should be categorised on the basis of period of finance. Commercial banks should finance for short and medium term; NBFI and specialised banks should concentrate mainly on long-term financing. Short-term financing of agriculture, small trade and handicrafts should be the exclusive concern of cooperatives. Commercial banks may perform all the conventional banking functions on the basis of commission, service charges or remunerations and act as intermediaries in musharakah or mudarba contracts between the financier and the entrepreneur or trader. The subsidiaries of these commercial banks may come up where overseeing its financial assistance becomes necessary. That the financed firm retains its entrepreneurial freedom, protects its trade secrets and remains at liberty to take policy decisions in the larger interest of business, the role of financing institutions should not be that of an active partner but that of a sleeping partner. It should be allowed to intervene only when the firm adopts a policy that risks its finance. One of the reasons why the traders are not willing to accept partnership with banks is the fear of unnecessary intervention in policy matters by these banks. The government, in cooperation with the financial institutions and traders, should draft a law to define the rights and duties of such special sleeping partners.

S M Hasanuz Zaman

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.