Discussion on Current Islamic Banking

Islamic banks are capable of earning high profits and this has been the experience in the Faisal Islamic Bank of Sudan. In fact our bank is earning a profit to the point of embarrasement to us. This is so because traditional banks only lend money. They do not invest their money. Islamic banks invest their money, and, therefore, get more profit than what the traditional banks get. Islamic banks should give interest-free loans (qard-hasanah) to the needy people. The objective of Islamic banks should be to wipe out poverty from the society.

Dr. Fuoad Abdul Gadir Agabani

Islam’s stand on usury is decisive and unequivocal. Interest and riba are one and the same thing and they are prohibited in every form. Islam is a comprehensive system in which ethics is integral and not a supernumerary part.

Equity participation or direct investment by Islamic banks in socially desirable projects that meet the Islamic ethical criteria as indicated by the need of society as a whole will have to be taken into account before providing profit to individuals.

While the riba-hee system is the distinguishing feature of the Islamic banks, it is not easy for them to extricate themselves from an international banking system based on the practice of usuary. The experience of the existing Islamic banks which are operating successfully can be used for mutual benefit.

The booklet entitled“One Hundred Questions and One Hundred Answers on Islamic Banking” which covers a large number of issues, should be translated into English and distributed to the banks in Pakistan.

Dr. Taufiq Al-Ammar

Brother Agabani has mentioned that they had excess profit which became embarrassing for them. The question that comes to my mind is whether Faisal Islamic Bank of Sudan is thinking in terms of profitability as their only objective or are they also thinking of social allocation of resources.

Mr. Monem al-Ghousi

Dr. Fahim Khan brought a subject" during his presentation about the use of Zakah for covering the loans given to widows and orphans or the needy peopld and he is of the opinion that the Islamic bank may also collect Zakah for this purpose.*^ wonder if this is advisable. Zakah is .Ibadah whereas a bank is a commercial enterprise. Zakah, therefore, should not be mixed up with the commercial venture. If there are individuals who have suffered losses in business and they have become poor and have difficulties in repaying their loans they can of course, resort to Baitul Mai which will be operated by the state. The banks should not be allowed to administer Zakah because if they do this then there is likelihood of misuse of the funds. There will be a conflict of interest in this case.

Dr. Umer Chapra

I confess that I have not been able to go through the Report of Dr. M. Fahim Khan but from the presentation which he has made, a couple of points arise in my mind. He has made a comparison between the interest-free bank and the conventional bank. I do not know whether he did not clear it or did not touch upon the point as to how a depositor sharing in the interest-free bank compares with the depositor in the conventional interest-based bank. He has emphasised the point that most of the interest-free banks working in the Muslim countries have tried to make quick returns. This was also corroborated by the point raised by Mr. Agabani that the profits are embarrassingly high. Dr. Fahim Khan has mentioned that the loans are given mostly for trade and real estate business. It is true that we want to avoid the institutions of interest but at the same time we have to do the things which are in the best interest of the national economy of the countries themselves. If the interest-free bank, in order to accelerate, depends on such businesses which help in distorting the allocation of the resource then this will not be desirable as this will be against the basic philosophy of Islam. If we want to choose only a limited number of loans where there is no risk of loss or almost no risk of loss and deliberately avoid such an allocation of funds which are in the longer interest of the economy then this, too, would not be desirable. He has mentioned also the points regarding the old people, widows and so forth and he has given an impression that in the interest-based system they are the gainer. Perhaps they might have been in the good old days. However, since the advent of the phenomenon of inflation, interest-oriented income at a fixed percentage always leaves the old people and widows at a disadvantage as compared to any other mode of investment. The solution in my opinion, as far as the old people and the widows are concerned, would be that these interest-free banking institutions could incorporate in their operations what is described in the United States as trust banking. Trust banking aims at providing a secure, safe and convenient source of income to the widows and the old people. These banks invest in shares and securities on behalf of these people. I think we may like to think of this possibility. 1 was very much impressed by Agabani’s sense of humour; which is not very common.

Dr. Muhammad Uzair

It seems that Dr. Fahim Khan has been utilizing the efficiency criterion while comparing the performance of Islamic banks with the riba-based banks. This is not fair. We have to devise an Islamic criterion for the evaluation of Islamic banks which would reflect all the externalities arising out of these banks for Muslim Ummah.

Dr. Omar Zubair

To my mind it is not very clear as to why we should be embarrassed by the high profits made by the Islamic banks. These banks are simply sharing the fabulous profits which are arising in these economies that are not really functioning on pure Islamic lines. If you see the composition of depositors and borrowers, you would see that the depositors are small savers whereas the businessmen are the net debtors to the bank. The businessmen do not have credit balance. In this system, if the Islamic banks are earning good profit then they are performing a socially useful function because these profits are then passed on to the small savers. This does not happen in the case of interest-based banks who give a very small return to the depositors. The interest-based banks are increasing income inequalities whereas Islamic banks, by sharing profits, are simply distributing a part of the profit of big businessmen to the small depositors. From this point of view, I do not find it embarrassing at all that the Islamic banks are earning high profits.

Of course, in an ideal situation, there should not be such pockets of high profitability, but to achieve the ideal, as was said in the morning speeches, we have to think in terms of the totality of the system.

Dr. Fahim Khan has perhaps been rather too harsh in evaluating the performance of the Islamic banks by saying that they are not taking long-term projects and that they are taking projects of quick return etc.

I think, we have to be very clear about the environment in which these Islamic banks are working. They are on trial. The whole world is watching them. They have to go a long way. They cannot take all types of activities in one go. Also you have to see that they are working in an environment which is full of hostility towards them. We also find that the central banks in these countries are not actively helping these banks. For example, in a situation of liquidity shortage the other interest-based banks can always get loans from the money market or from the central bank. This facility is not available to the Islamic banks. We have got results only for a year or two from these banks. We should not be impatient in complaining about their performance. The Islamic governments of these countries have a responsibility to make the Islamic banks progress and for that reason they will have to think in terms of changing their own legislation. They can be made subject to the inspection by the central bank as the other commercial banks are but they should be provided assistance in time of need on the basis compatible with Shari‘ah.

Dr. Ziauddin Ahmed

I think the author has a lot of important points. I, however, want to mention that while evaluating the performance of the Islamic banks, it is important to take into account the composition of the beneficiaries of these banks. Our experience has shown that the loans are normally given to rich people of the poor country. These things are not expected to be repeated by Islamic banks. In his next evaluation, I think, Dr. Fahim Khan would take into account this aspect.

Dr. Fahim Khan has rightly pointed out the problem with the markup and service charge. Though there may apparently be no un-Islamic elements in these instruments, the same need to be thoroughly examined. Such instruments are likely to become another name of interest.

Now coming to the high profits earned by Islamic banks, which were termed as embarrassing by brother Agabani and hence defended by Dr. Ziauddin Ahmed, I would like to mention that these profits are likely to be in the nature of monopoly profits because other financial institutions are not allowed to compete by law. If these banks have assumed the character of monopoly then their profits do not give a good picture. Of course, if the monopoly is for the poor or in the greater interest of the community then it is a different issue. Such considerations need to be taken into account while evaluating the performance of Islamic banks.

Dr. Mohammad Abdul Mannan

First, one brief observation about the exhorbitant rate of profit in an interest-free banking system. The rate of profit must be high and this must be so by definition, because the system offers conditions for the auction of credit to the highest bidder and, given that, the rate of profit made in the interest-free banking system must, by definition, be higher than the one made under the interest-based banking system. Next Dr. Fahim Khan has made a very important central point. He has pointed out that if we are operating on a dual system of banking, a part of which is on interest-free basis and another part is based on interest- bearing operations, then the interest-free segment of banking is placed in a disadvantageous position to compete away the deposit from the other segment of the system which is functioning on the basis of interest. I think this a very vital point which Dr. Fahim Khan has made. The question arises as to what can we do to enable the interest- free banks which require a competitive edge over other banks which are operating on the basis of interest and this is to my mind the question to which Dr. Fahim Khan had tried to address himself. I would like to make the suggestion that perhaps it will do some good by eliminating first of all interest from the asset side. What, in Pakistan, we appear to be doing perhaps is that we are trying to eliminate interest from the liabilities side first. The question in that when you first eliminate interest from the liabilities side you face the problem of how to sustain the confidence of depositors, who have been accustomed to a guaranteed, predetermined return on the deposits. I would suggest that the interest be eliminated from the assets side first continuing with interest-bearing liabilities in the transitional phase. The result will be that when you eliminate interest fr«m the assets side you create conditions in which the banking system will train itself with respect to the required managerial efficiency to improve the quality of advances and to create conditions in which the profitability will prevail. Side by side this will also enable them to sustain the confidence of depositors because you are continuing with the interest-bearing liabilities side. It will then be possible for you to switch over to interest-free basis on the liabilities side also without much difficulty. But if the solution adopted is just in reverse that first you eliminate interest from the liabilities side, then you are likely to run into the problem of how to motivate depositors to hold accounts with you.

Dr. Mahfooz Ali

There is nothing wrong if the Islamic banks are making high profit because they have to face difficult times also. They can build up reserves in good times to face the bad times.

Dr. Abidin Ahmed Salama

It is no good saying that the Islamic Bank is a good bank because it makes a lot of profit. The idea is that you do not wish to replace interest or riba by higher profits because the whole idea about abolishing interest is not to exploit the borrower. What is the point of replacing one riba with another riba.

Dr. M. M. Metwally

Brothers, I am sorry that we have very short time here and there are many points which have been raised. I am very much impressed by the general discussion that has taken place and I wish I could comment on a good number of these points. Unfortunately because of very short time, I am going to comment on two or three points. First of all, I discuss the service fee or the service charge on the loans which the bank gives to the member countries. We believe that this service fee is justified because the bank incur the expenses in this respect and it is not against the teachings of Islam. I do not think there is any doubt about that. The Islamic Development Bank in the beginning had a higher percentage of liquidity. They were not anxious at the beginning to get deposits. At the beginning the Bank was very reluctant to get any deposit but now the situation has changed and now the programme is to accept deposits from institutions, from governments and even from the individuals but we have a minimum which is equivalent to 250,000 dollars. We utilize this money in financing foreign trade between the member countries. Before six months they will not share any profits but if their deposits remain with the bank they would share the profits realized from the foreign trade financing. Now, I want to thank my brothers for their valuable papers, writings and contributions from the floor of this House. The discussions were very constructive and I am not saying this out of exaggeration but I am sure that it will serve a very useful purpose. The discussions were very important and valuable and it is important that you should continue these discussions. I thank you very much and I am also grateful for the hospitality of the people and the Government of Pakistan and thank His Excellency the President of the Islamic Republic of Pakistan for all the comforts that they have provided us.

Dr. Ahmad Mohamad Ali

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