STRATEGIC DIRECTION OF ISLAMIC BANKING
SYED ALAMDAR ALI, Hailey College of Banking & Finance Lahore
June 23 - 29, 2008
Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah, known as Fiqh al-Muamalat (Islamic rules on transactions). The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba (usury). Amongst the common Islamic concepts used in Islamic banking are profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah). Islamic banking is actually based on the principles of Islamic economics - an economic framework in accordance with Islamic law (Sharia'h).
There are two types of Islamic economics:
* Caliphate, the Islamic form of government representing the political unity and leadership of the Muslim world (Islamic political framework).
* Assuming the political framework is non-Islamic, therefore, seeking to integrate some prominent Islamic tenets into a secular economic framework.
Caliphate is the absolute Islamic rule, thus the economy focuses on distribution of resources in order to meet the basic and luxurious needs of individuals in society, and the state has a clear role in policing, taxation, managing public assets, and ensuring the circulation of wealth. Such a political framework in its true form does not exist in today's world. Assuming non-Islamic political framework simply proposes two main tenets: no interest can be earned on loans and socially responsible investing. This is the way conventional banking is Islamized-the first step towards an Islamic economic framework.
Modern day Islamic scholars and academics have developed various modes of Sharia'h compliant financing that are designed to work within the prevailing capitalist economic framework. In order to achieve this balance State Bank of Pakistan has also made some effort to formulate policy guidelines for financial institutions. The intention behind making these guidelines is to encourage the evolution of this type of alternative system. These guidelines put emphasis on the appointment and role of Shariah Advisors to be appointed by the Financial Institutions for ensuring that all products and services and related policies and agreements of IBIs are in compliance with Shariah rules and principles and according to the guidelines formulated by the State Bank of Pakistan.
An eminent Islamic Economist Mr. Mohammed Obaidullah in his research article published in International Journal of Islamic Financial Services has explained the Norms of Islamic Financial Ethics that also form the basis of any financial transaction under Islamic Umbrella:
FREEDOM TO CONTRACT: Islam provides a basic freedom to enter into transactions. The holy Quran says: Allah has made trade lawful. (2:275). Further, no contract is valid if it involves an element of coercion for either of the parties. The holy Quran also says: let there be among you traffic and trade by mutual goodwill (4:29). However, this basic norm does not imply unbridled freedom to contract and may be sacrificed when there is a trade-off with other norms requiring specific injunctions.
FREEDOM FROM AL RIBA: All forms of contracts and transactions must be free from riba. This implies that there is no reward for time preference and under conditions of zero risk. The question of ribahas been addressed in a large body of literature and there is a general consensus about the meaning and implications of riba.
FREEDOM FROM AL GHARAR (EXCESSIVE UNCERTAINTY): All forms of contracts and transactions must be free from excessive gharar. This implies that contracting under conditions of excessive uncertainty is not permissible.
FREEDOM FROM AL-QIMAR (GAMBLING) AND AL-MAYSIR (UNEARNED INCOME): Contracting under excessive uncertainty or gharar is akin to gambling (al-qimar). And uninformed speculation in its worst form is also akin to gambling (al-qimar). The holy Quran and the traditions of the holy prophet explicitly prohibit gains made from games of chance which involve unearned income (al-maysir). Here it may be noted that the term speculation has different connotations. It always involves an attempt to predict the future outcome of an event. But the process may or may not be backed by collection, analysis and interpretation of relevant information. The former case is very much in conformity with Islamic rationality. An Islamic economic unit is required to assume risk after making a proper assessment of risk with the help of information. All business decisions involve speculation in this sense. It is only the gross absence of value-relevant information or conditions of excessive uncertainty that makes speculation akin to a game of chance and hence, forbidden.
2.2.5 FREEDOM FROM PRICE CONTROL AND MANIPULATION: Islam envisages a free market where prices are determined by forces of demand and supply. There should be no interference in the price formation process even by the regulators. It may be noted here that while price control and fixation is generally accepted as unIslamic, some scholars, such as, Imam Ibn Taimiya admit of its permissibility. Such permissibility is subject to the condition that price fixation is intended to combat cases of market anomalies caused by impairing the conditions of free competition. It is a requirement that the forces of demand and supply should be genuine and free from any artificial element. Islam therefore, condemns any attempts to influence prices through creating artificial shortage of supply (ihtikar). Similarly, any attempt to bid up the prices by creating artificial demand is considered unethical. Such an action of bidding up the price without an intention to take delivery is termed as najas and is not permissible.
ENTITLEMENT TO TRANSACT AT FAIR PRICES: Prices that are an outcome of free play of forces of demand and supply without any intervention or manipulation are believed to be fair. However, in some instances, pricing is based on a valuation exercise. In such cases the difference between the price at which a transaction is executed and the fair price (as per the opinion of valuation experts) is termed as ghubn. The presence of ghubn makes a transaction unethical.
ENTITLEMENT TO EQUAL, ADEQUATE AND ACCURATE INFORMATION: Islam attaches great importance to the role of information in the market. Release of inaccurate information is forbidden. The concealment of vital information (ghish) also violates the norms of Islamic ethics and according to the traditions of the holy prophet; the informationally disadvantaged party at the time of entering into the contract has the option to annul the contract. The traditions refer to price information in the market as well as other information relevant for valuation of the commodity.