Current Approach to Interest-Free Financing

In judging the propriety of any participatory arrangement on the basis of sharing profit and loss, it should be borne in mind that according to the injunctions of Shari'ah, distribution of profits between the parties eoneemed, is a matter of mutual agreement based on which any ratio may be agreed upon by the parties while it is one of the principal obligatory conditions of such arrangements that loss, if any, shall be shared in direct proportion to investments of the respective parties. In our context, it is important to understand that eventually, it would be imperative for our entire system of banking and financing to be integrated with the deposits generated by banks and financial institutions on PLS accounts on the basis of profit-and-loss sharing in its true sense. In other words, it is the profit generated by banks and financial institutions from their efficient portfolio management, perhaps principally through equity financing and investment in mudarbas, that they are able to give an acceptable rate of return to PLS deposit holders.

The needs of present-day finances particularly in the corporate sector are both long term and short term. It is the financial needs of the industrial sector in particular which are being focused here because not only by the enormity of the funds needed by them but also by the complexity of corporate structure, management and operations, the mechanics of interest-free financing in that sector becomes if not impossible a formidable exercise.

One feature inherent in most of the existing interest-free financial arrangements conspicuously brings out the fact that banks and financial institutions participating in the arrangement appear to be apprehensive in outlook and approach and over-cautious in their conduct and dealings, as a consequence of which the existing legal arrangements do contain provisions, which in many instances, smack of terms and conditions identical to an interest-ridden arrangement. This kind of response to the process of Islamisation of economy apparently seems to stem from the hard facts of our commercial life in which the moral fibre of the society leaves much to be desired. But to wait for that time when all elements having economic interaction between them prove themselves to be totally honest and above-board would be a futile hope and, therefore, some form of beginning with necessary checks and balances has to be initiated. However, great caution and care is needed against overdoing it which may vitiate the entire spirit and objectives of the exercise.

My presentation would be confined to the corporate legal structure envisaged by the companies ordinance, 1984, within which a few principal interest-free modes of corporate financing, namely PTCs, TFCs and musharakah have been experimented. My exposition may be viewed more in the nature of an attempt to identify major issues rather than a blueprint of how to remedy those aspects of financial arrangement which are questionable or of doubtful interpretation.

Ebrahim Sidat

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