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Time Multiple Counter-loans

Another possible method of financing considered by the Council is the system of “time multiple counter-loans”. The concept of counter-loans, in essence, is quite simple and can best be explained with the help of an example: Suppose a small trader A wishes to borrow Rs. 100 from a bank B for three months free of interest. B may provide the required loan to A if the latter, simultaneously with receiving the loan, deposits a fraction of the loan for a proportionately longer period, say Rs. 10 for 30 months. After three months, A repays Rs. 100 to B but B would pay back to A his deposit of Rs. 10 after the expiry of 30 months from the date of the deposit. During this period B can use this deposit or “counter-loan” for profit-earning investment. However, just as A would not be required to share the income earned by him by deploying the loan provided by B, the latter would also not pay any additional amount when A’s deposit (counterloan) matures.

The Council is of the view that it would not be correct to use this method by way of a permanent alternative system to the interest-based system. However, if it is desired that provision may be made for providing personal loans to people of small means, then instead of the above stipulations the banks may adopt it as a principle that they would provide loans for personal and non-productive purposes only to those persons who already hold accounts with them. In laying down the repayment schedule and the amount of the loan, however, the banks may keep in view the amount of the deposit of the applicant for the loan and the period over which he has maintained his deposit with the bank. The Pakistan Banking Council may evolve the appropriate procedure and rules in this regard.

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Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.