Is Islamic Banking a solution?

Recently a certain organisation applied to introduce an Islamic Bank in Malawi. The Reserve Bank of Malawi promptly turned it down because of some issues that Islamic banking entails. BRIGHT MHANGO went out to explore the pros of Islamic banking.

In a nut shell, Islamic Banking is a type of banking that is consistent with the principles of Sharia Law and its application is through the development of Islamic economics.

Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees (known as riba, or usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also haraam (“sinful and prohibited”).

So for example, you cannot go to an Islamic bank and get a loan to start a pig farm or a liquor store. However you can get some loans without most of the interests you meet at the banks that are permissible under the current act governing banking in Malawi.

The Reserve Bank of Malawi turned down Shari’ahh Investments Limited’s application for an Islamic Bank of Malawi on the grounds that Islamic banking had Sharia elements embedded in it.

Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. But that is not the sole purpose either. Adherence to Islamic law and ensuring fair play is also at the core of Islamic banking.

Azam Ahamed wrote in SriLanka’s Sunday Times in defending Islamic Banking that Islamic Banking is the way to go even for many non-muslims.

Wrote Ahamed: “The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur.

The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.”

Another important thing about Islamic banks, writes Ahamed, is the relationship with depositors.

Depositors deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors.

“Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate,” writes Ahamed.

He further said in an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments.

However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabahah

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent.

The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership.

At the same time, the borrower in the partnership entity also buys the bank’s share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity.

Islamic Banking would be like Halaal meat. It is a clean offer to the faithfuls and societies can rest assured that sin is not being funded.

Coming back home scholars Abdul Sheriff Kaunde and Abdullah Omar I. Mdala, authored a paper titled A Case for Islamic Banking in Malawi. They argued that Malawi may be missing on foreign direct investments by denying Islamic banking.

The current banking system is secular in orientation; the Islamic banks would not force anyone to go to them. Is denying Muslims a bank they can go to smiling not an infringement on their rights?