Islamic banking
Mu' meneen Brothers and Sisters,
As Salaam Aleikum wa Rahmatullahi wa
Barakatuh. (May Allah's Peace, Mercy and Blessings be upon all of you)
one
of our brothers/sisters has asked this question:
Asalam-u-alakum,
There are a few questions about Islamic banking that have been confusing me for
quite some time. If we lend our money without any interest, we end up losing
because of inflation. If we charge interest, we are deviating from Islam as
well as being unfair to the borrower. And if we lend on a profit and loss
basis, we have to take a risk. Is there any way around this problem? I understand
that the only Islamic way to make a profit is to share the risk of loss with
the borrower. But if I am not interested in profit and only want to protect the
amount that I am lending, how do I protect myself from inflation without
charging interest?
A second confusion is that if an Islamic country decided to prohibit interest,
wouldn't its economy be hit? I certainly believe that the Islamic system is
practical but what if a substantial portion of the people start taking their
money out of the Islamic banks and start putting it in interest based banks in
some other country due to their lack of faith in the system? If there is such a
risk, what should the government do? Should it go ahead and implement the
interest free system anyway and risk a total collapse of the banking system?
I will really apreciate it if you answer these questions. Thank you
(There may be some grammatical and spelling
errors in the above statement. The forum does not change anything from
questions, comments and statements received from our readers for circulation in
confidentiality.)
Answer:
In the name of Allah, We praise Him, seek His help and ask
for His forgiveness. Whoever Allah guides none can misguide, and whoever
He allows to fall astray, none can guide them aright. We bear witness that
there is no one (no idol, no
person, no grave, no prophet, no imam,
no dai, nobody!) worthy of
worship but Allah Alone, and we bear witness that Muhammad (saws) is His
slave-servant and the seal of His Messengers.
Your comment: But if I am
not interested in profit and only want to protect the amount that I am lending,
how do I protect myself from inflation without charging interest?
Islamic economists have written volumes explaining the
concept of Islamic Banking, and it would be almost impossible to address your
questions in detail in this short answer.
Thus, we will try to just outline the basic principles in light of the
Holy Quran and Sunnah.
In Islam, if one is lending money, it will be considered
that he is helping his brother in distress, and it will be assumed that the
main reason he loaned the amount was to earn the pleasure and reward of Allah
Subhanah.
But, if one is lending money to earn interest, then the
transaction will be considered an investment, because the intention of the
lender is not to help someone or earn the pleasure of Allah, but rather to
increase his wealth; albeit, in a haraam manner.
Thus, in reality, it is an irony and a distortion of the
truth to say that the lender is not interested in any profit, but only wants to
protect himself from inflation! If the
inflation rate is negative (deflation), will the lender offer to pay the
borrower any money for using the funds?
Or if the inflation rate is zero, will the lender offer to lend the
money without any interest? The truth
is that whoever puts his wealth on interest, is interested to increase his
wealth, but does not want to take any risk.
In Islam, the hoarding of wealth, just for the sake of
hoarding, is not considered a virtue.
Islam encourages that one invests the money, so that the economy of the
whole nation will prosper. The principles of Islam states that money should
only grow when one puts hard work, planning, time, effort, etc. along with the
invested capital. Islam has termed it
unjust if one party should put in all the hard work, planning, time, etc. and the other party simply takes a fixed
return, whether the work of the first
party is successful or not! To be
fair, the sharing of risks and rewards should be the responsibility of both
parties.
Q-2: A second confusion is
that if an Islamic country decided to prohibit interest, wouldn't its economy
be hit?
The problem is that all the people of the world are so engrossed
and in-tune with the conventional and unjust interest-based banking system of
the ‘so-called’ modern world, that even the thought of an alternative and just
economic system is scary! The issue
with the wealth in the world, both with nations and with individuals, is that
some have too much, and some don’t have enough to survive. With this current interest-based economic
system, the rich nations and people of the world get richer, and the poor
nations and people of the world get poorer!
Islam encourages the people to invest and rotate the money
into their economies, so that not only the investor, but the whole nation would
benefit from this renewed economic activity.
Islam absolutely discourages that people and nations hoard the wealth,
just for the sake of hoarding; and thereby lend this hoarded wealth on their
terms to the distressed and poor nations on interest, thus pushing them deeper
into debt and destitution!
The biggest evidence and benefit of an interest-free
economy can be seen from the current economic recession in the world. The Federal Reserve of the USA have cut
interest rates at least 8-10 times this year alone. Why? Because by reducing interest rates, the people who had put
all their money on interest will not be getting enough returns on their wealth;
and would thus be forced to take out the money from the interest-bearing
accounts and put them to work in the actual economy…. And the authorities hope
that this influx of the hoarded wealth into the system will invigorate and
revitalize the stagnant economy!
In an interest-free economy, everyone will perpetually be
encouraged to invest his wealth in the economy, instead of simply hoarding it;
which will obviously help the economy of the nation. Thus, instead of the fear that the economy will be hit if the
nations turned to Interest-free banking, the truth is that it would rather help
the economies, and there will be a just and fair distribution of wealth in the
nations of the world.
Interest based banking helps the rich nations and
individuals of the world get richer, and the poor get more destitute! It is devised and based to help these few
rich nations suck the blood of the poor nations of the world…. Whereby these borrower nations are never
able to come out of the interest based trap; and more often than not, the
interest paid by these poor nations over the years to the IMF and the World
Banks is more than the capital they had borrowed in the first place! Is it any wonder, that through this current
interest-based economic system, 2% of the rich
control 90% of the wealth of the world!
The fact of the matter is that the current interest based
economic system is catered for, and addresses the needs of the wealthy, but is
a curse and burden for the poor! It is
an unjust system, and Islam wants to replace this unjust interest based system
with a just, righteous, sharing, and fair for all system of interest-free
economics.
Having said that, one must also understand that any
government which implements the concept of Islamic Banking, will only be able
to bear its fruits and see its blessings, when all the other political, social,
moral, civil, and personal system of Islam and Shariah are practiced. But if one tries to implement only one of
the systems of Shariah into their lives or nation, without supplementing them
with the others, he will not be able to reap the whole benefits.
Whatever written of Truth and benefit is only due to
Allah’s Assistance and Guidance, and whatever of error is of me. Allah Alone Knows Best and He is the Only
Source of Strength.
Your brother and
well wisher in Islam,
Burhan
