The Islamic Banking Industry And Its Dubious Claims
During the month of Ramadan last year, an advertisement campaign was launched over TV channels in Pakistan by what is known as the “Islamic Banking Industry”. The advertisement in question was usually followed by or preceded by a similar advertisement, which was bank specific, by different Islamic banks that were apparently members of this industry.
The claims made in the advertisement could be divided into two categories. The first category of claims included a statement that halal or lawful income was one that was free of riba (interest), hoarding and gharar (speculation). The second part of that category of claims pertained to the type of lawful income being made available through Islamic banks – in other words, that the practices prevalent at these banks were fully in accordance with the Shariah.
The second category of claims consisted of statements made by religious scholars. These scholars attempted to justify, as Islamic, the legality of different aspects of such banking. As compared to this, all transactions undertaken by conventional banks are regulated by law that is known to the public. Thus, there are laws that govern negotiable instruments, commercial papers, guarantees, indemnities, bailments, letters of credit and so on. Furthermore, the ways in which banks implement these laws are available openly to the public in the form of specimens and forms. There is no such law for Islamic banks nor are the various instruments and products used by these banks available to the public so that they can be sure about what they are going to deal with.
Shariah is law too, a law that is not to be taken lightly, nor is it to be tampered with, especially when the public is being asked to contribute funds. Thus, all transactions undertaken by Islamic banks must be declared legal, in detail, through an Act of Parliament or individually by the courts. This has not been done so far. The matter has been left to the directives of the State Bank and the rulings of the Shariah Boards of Islamic banks. These bodies, or others like them, have no authority to legislate where the Shariah is concerned, just like they cannot legislate for the transactions practised by the people and by conventional banks. The position and status of these bodies can only be similar to the position of muftis. The rulings of muftis are not binding on anyone. People follow them in cases when the ruling concerns a personal matter, and the interests of another are not involved. When one is seeking funds, legislation is required.
All transactions undertaken by Islamic banks, starting with the opening of bank accounts, the granting of loans, the discounting or otherwise of negotiable instruments, the provision of guarantees, the issuing of letters of credit, pledges, mortgages, and so on, must become the subject of prompt legislation so that the Islamic forms of these transactions become known. It is only then that Islamic banking will begin to acquire a form that is Islamic. In other words, Parliament must specifically approve every Islamic form of these transactions. Once legislation has been passed, Islamic banks must publish specimen instruments, contracts, guarantees and other documents that have been implemented in compliance with such legislation. Finally, all specimens must be available for reading and downloading on the websites of these banks. This will not only make the transactions implemented – and the banks, Islamic – but will also generate confidence, thus eliminating the need for meaningless and suspicious advertisement campaigns. Without such steps, Islamic banking can have no legal authority. If it is continued the way it is practised today, then all other private investment schemes offered to the public must be permitted, on the analogy of the current framework of Islamic banking.
The issue discussed in the two preceding paragraphs is crucial from another aspect. If Islamic banking law can be allowed to function on the basis of the rulings of muftis and scholars, then the law of the whole country, which is supposed to conform to Islamic law, must be based on this uncodified law of Islam. In fact, this is how this law has been applied for the last fourteen centuries. The rulers cannot have their cake and eat it too. The two hundred million people of this country will be happy if this unwritten law is applied in all spheres of life in the whole country forthwith.
The scholars have taken turns to appear in the advertisement campaign to claim that the whole practice of Islamic banking with its array of transactions is truly Islamic. Thus, one scholar has claimed that the deposit side as well as the investment side of Islamic banking, both are truly Islamic. He does not give any detail. All that is said as justification is that it is undertaken under the supervision of well-known Islamic scholars. With no detail, and no elaboration of the basis on which deposits and investments are made, it is difficult to entrust funds to such banks. Realizing the need for such elaboration, a question was raised in the advertisement and then answered by a scholar. The advertisement asked: what is the nature of the savings account opened with an Islamic bank? The question was answered by a scholar none other than the learned Mufti Muneeb-ur-Rahman.
We are all familiar with him due to the sighting of the moon on different occasions. The learned scholar claims that the account is opened on the basis of “mudarabah”. The bank then employs this investment in trade, he claims, and the profit earned is then distributed according to an agreed-upon ratio. Anyone having minimal knowledge of modern banking knows that ever since modern banking commenced in the United States, courts declared all accounts to be “loans” given to banks by the clients and, therefore, the banks guarantee repayment of the amount. In a layperson’s terms, we call them deposits, but they are loans in reality. Any deviation from this position by Islamic banks will not be tolerated by the international banking community.
If the account is based on the Islamic contract of mudarabah, then several consequences follow:
- First, the bank becomes the agent of the client and the principal will be liable for the acts of the agent.
- Second, the agent does not have permission to trade.
- Third, if the bank says that the money invested for the client was lost, the client cannot get the money back.
- Fourth, and this is most important, the clients will have “unlimited liability” for all the debts of the bank; these debts will be recovered from the personal assets of the clients.
- Fifth, the bank will have no liability for these debts.
We can point out more things, but this should be enough. Consequently, the statement made by Mufti Muneeb in the advertisement campaign was incorrect and misleading. The amount given to an Islamic bank by way of a savings account is a loan and not mudarabah. The statements in that campaign by other scholars were no better. We now understand why the State Bank of Pakistan insists that scholars qualified to give rulings must have a dars-i-nizami certificate, which is somewhat less than a BA degree.
It is our sincere recommendation that the state should legislate in this area as has been indicated above. This will make investment in Islamic banking products safe as well as legally valid. The legislation must cover all investments and products offered by these banks. Without such legislation the legality of such transactions is difficult to accept and remains dubious at best. The question about bank interest being riba or prohibited interest must also be decided by the Federal Shariat Court. In the alternative, if legislation is not undertaken as suggested, the unwritten law of Islam as laid down by its jurists must be allowed to take over all aspects of life in the entire country.
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any organisation with which he might be associated.
I highly appreciate the writer’s insightful and critical way of highlighting the Regulators’ (SBP, SECP etc.) empathy toward an important and rapidly flourishing sector of the country’s economy which also has a close nexus with the religious beliefs of the countrymen. It is absolutely correct that if such a critical area can be run just on the basis of the Fatwas and rulings of religious scholars without having any legislative/regulatory framework then why not all the codified laws related to rest of the spheres of life that have been passed/enacted by the legislature be abolished for the sake of uniformity and consistency “The two hundred million people of this country will be happy if this unwritten law is applied in all spheres of life in the whole country forthwith”. The Govt should act swiftly to protect and secure the interest of public which may be compromised because the so-called Islamic Banks are concealing facts about their business operations and misleading regarding their Shariah complaint products by (mis)using the spiritual/reference power of renowned religious scholars.