Need for Four-Pronged Effort: Riba Elimination
Elimination of riba requires four-pronged effort. First, the basic thinking on assessing and defining costs has to be changed. Secondly, existing practices and procedures have to be reviewed in order to strengthen the defence against riba. Thirdly, new transaction modes free from riba need to be developed. Fourthly, innovative steps to promote a riba-safe environment for exports and imports should be called for. Let us consider the four points one by one.
Costs and Their Accounting
Collection costs and income foregone on tied funds may be legitimate concerns of exporters. At present, these costs are claimed in the form on a per-period percentage of the sum involved. This approach needs some fresh thinking. Ahkam of riba make it amply clear that the creditors cannot claim collection charges. These charges are to be viewed as part of the entrepreneurial obligations of exporters — creditors in sales on deferred payments. The same principle should be observed for income foregone on tied funds. An exporter usually has a fair idea about the effort for recovering payment and duration of his financial commitments in an export deal. He should reflect the collection costs and opportunity cost of tied funds in his margin over other costs of the merchandise. But there is a catch here. If an exporter docs so, the importer will have no chance of reducing the size of credit through an early settlement of accounts on revised terms. This should not be a cause for concern. The mutually agreed product prices will automatically take care of this factor. What is crucial for practical purposes is that the agreed prices also accommodate compensation for banks consistent with their desired roles. The banks, in turn, can claim their rewards only in terms of fees.
Commercial credit risk of an importer, or any other party, is something which cannot be reduced through Shariah-sanctioned activities — as in the case of safe delivery of goods. In the end, such a risk has to be treated like entrepreneurial risk. That is, the modus operandi for commercial credit risks should be the desired profit margins of those concerned. No doubt, in the end market forces will result in acceptable risk- return tradeoffs for all.
Cost of loaning — as opposed to creating credit in a deferred payment sale — may be an area of concern. A popular view is that Islamic banks can claim “service charges” for loans from the borrowers. These charges represent, for example, costs of mobilisation of funds between branches, documentation of loans, salary of bank staff and other overhead expenses for maintaining records. This matter has to be seen in the light of the abrogation of interest liabilities against the debtors of Sayyidena Abbas by the Prophet (pbuh). It is usually noted, and correctly so, that the time value of money was being denied to Sayyidena Abbas. He was also refused the collection costs. But the point often overlooked is that the loaning act itself must have had some “costs” behind it — regardless of how insignificant those costs were. The case of Sayyidena Abbas and the Qur’anic ahkam on credit transactions in Ayah 282 of Surah al-Baqarah, therefore, yield the following principle for loan transactions: apart from pure documentation costs, all loan contracts must be cost-free to the borrowers. This rule implies that if two parties opt for a loan contract in the strict Shari‘ah sense, service charges apart from documentation costs should be conceded by the lender. Of course, the lender may even waive the documentation costs. However, if loaning is not an attractive proposition for someone, he has no option (of lending) but to seek a return through another permissible mode for “profitable” transactions, to be explained under point later.
Checks on Existing Practices and Procedures
All transactions in lieu of an export-import deal are eventually governed by a sales contract. Therefore, the problem of riba can be tackled at source by ensuring that sales contracts do not have any provision for interest-based payment terms and instruments. Procedural requirements for foreign countries can be accommodated with zero-rate-of-interest clauses, if necessary.
Drafts can remain negotiable instruments but with fixed face values. In this way, the costs of negotiation or discounting will be charged to exporters— the creditors.
The time lag between a draft and the obligation of the importer or local bank issuing L/C needs to be shortened. This can be done by maximum use of sight drafts or by making the tenor of usance bills according to the expected date the goods reaching their destinations. If there is any discrepancy between the tenor of a draft and the time when the importer is expected to reimburse the bank issuing L/C, the bank should rationalise its fees for L/C services accordingly.
Foreign banks can have reservations about interest-free terms when their funds are likely to be involved in a payment arrangement. Confirmed L/Cs and negotiable L/Cs encourage interest clauses in negotiable bills of exchange for this reason. This compulsion can be sidetracked by discouraging the use of negotiable L/Cs for imports altogether. As for confirmed L/Cs, expeditious transfer of funds by the L/C issuing banks with recourse in their favour is the only conceivable solution.
When a bank finances an export (import) operation in some form and provides funds collection (transfer) services to the same party, caution is warranted in the valuation of such services. For example, as a financier with no managerial role — rabbul mal in a mudarba arrangement — the bank is not obliged to participate in the running of the venture. It can, therefore, claim compensation for funds collection or transfer services at market rates. However, as a financier as well as party to management — musharik in a musharakah arrangement — the cost of collection or transfer services claimed by the bank should equal the market value of those services minus the margin for the bank’s “own” endeavours. The reward for the own services should be addressed through the bank’s share in profit (loss) of the enterprise; otherwise, riba can find a way through the back door. Notwithstanding these technicalities, if a bank chooses to act as a rabbul mal in a mudarba framework, the partner — the mudarab — should not be obliged to acquire funds collection or transfer services from the same bank, though he may. Because to do so will come close to having two conditions (and conflict of interests) in one contract, which is again discouraged in Shari’ah.
Dr Sayyid Tahir
Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.