By : Ust Hj Zaharuddin Hj Abd Rahman *
Note : This article was published in NST ( 24 August and 7 Sept 2005)
It is well known that the main difference between Islamic Bank and Conventional Bank is the existence of Riba. Therefore, this writing will briefly discuss on Riba and the stand of Islamic banks on this issue.
Among the frequently asked questions regarding Riba are:
· What exactly is Riba in the current practices of the Banks and why is it prohibited in Islam?
· What is meant by the coercion and duress resulting from Riba? Practically, nobody in this matter would feel the coercion, indeed the customer would be benefiting from the interest charged.
· How would a bank gain profit without Riba(usury)? Consequently, how would a Bank attract customers without profit?
This writing will try to respond to all the questions raised.
Firstly, one must have in mind that Allah, the Most Merciful, has stated clearly in the Quran:
Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say : Trade is just like usury; whereas Allah permittteth trading and forbiddeth usury ( Al-Baqarah : 275 )
According to the Shariah, Riba can occur in the following situations:
a) The First Riba
The first is when there is a loan contract between two parties (bank and borrower). For example, in todays Banking practice: Bank A approves a loan of RM 50,000 to customer B, but the bank fixes the interest rate e.g 10 per cent a year, thus enabling the customer to have the required amount of money in his possession. However, one must realize that the amount accrued from the interest might be compounded to an unknown amount e.g. in the event where the customer is in default.
The practice is regularly done using products such as Car Loan, Home Loan, Personal Loan, Term Loan and etc. That is what we called as Riba. This kind of Riba is categorized under both Riba al-Fadl (interest in excess) and Riba an-Nasiah (increases due to time), which according to Shariah is prohibited.
The next question then will be; why is it prohibited? What is wrong on charging interest on the customers loan?
The answer is that:
· Revenue resulting from the interest is actually received as a result of exploiting the difficulty faced by the customer i.e. only a dire need person would go to a bank to get a loan in order to settle his/her financial problems. Unfortunately, the bank on the other hand is charging an additional amount of payment (interest) for the loan. This is why Riba leads to injustice and duress on the customer part. In addition, in the case of failure to settle the monthly payments as fixed by the bank, the customer would then be imposed a penalty, which is compounded.
Whereas, In Islamic Banks practice, the Banks sell the goods to the customer at a fixed selling price and it cannot be higher than what has been fixed. If there is a default in the payment, he/she is only been charged a compensation, which is very small just enough to cover the administrations cost. If any excess occurs it will be distributed away as a charity.
Thus, readers should be able to differentiate between compensation imposed by Islamic Banks with the penalty imposed by Conventional Banks.
· Charging interest will diminish a mans good conduct or discourage him from lending a hand to others in society. At the same time it encourages selfishness, egoism in the rich and a trait built on putting pressure on the poor, needy and those in difficulty. It actually eliminates good characteristics in people such as willingness to helping each other. Moreover, it will create ill feelings among people and lead to tension in community.
Riba will also encourage laziness in the rich or inefficiency in the bank its employees will not have to work hard to gain profit through trade and take risk. Consequently, they will start finding easier way to gain profit i.e. by giving loan and charging interest on the loan. In a riba-based economy the possessors of capital will not only remain permanently rich, since they eliminate the possibility of suffering losses, but they will grow constantly richer, since they will be sucking the wealth which belongs to others.
Islam on the other hand prohibits profit-gaining activities, which are independent of any labor or effort, or the assumption of any risk. Islam deliberately accepts the other way, which is: Al-Kharaj Bid Dhaman meaning Profit is by taking risks. Allah, the Most High, has unambiguously declared that nothing can be had without effort or labor (6:85, 11:85, 26:183, etc.).
· The only discipline approved by the Shariah in loan contract is giving loan without imposing any additional amount on the repayment. This is inline with what stated in the Hadith: Every loan given which leads to a benefit on the lender part is Riba. In conclusion, no profit can be generated through the loan contract for the benefit of the lender. This is because loan is a process of helping each other voluntarily and in Islam; it is regarded as Qardh Hassan (Benevolent Loan).
b) The Second Riba
The second form of Riba (usury) occurs when customer deposits their money in any type of conventional accounts, such as: -
1) Conventional Fixed Deposit account.
According to the signed agreement, the account operator/Bank will pool the depositors money and invest in strong, well-established companies to gain profit.
Consequently, as a reward to the depositor, the Bank will fix an upfront interest rate (fixed interest). For example, 3% interest will be given to the depositor (as an addition to his/ her capital money) at a maturity period say between 1-12 months. According to Shariah, the 3% rate from the fixed deposit account is Riba Al-Qard, meaning Riba out of lending and borrowing. This kind of riba is the extra amount of money over and above the principal of the loan either imposed by the lender on the borrower in the contract or promised by the borrower in the contract.
2) Conventional Saving account.
By the same token, for this type of account, the Bank usually gives a fixed interest rate ranging from 0.1% to 1.5% per annum or higher. For this type of account, the Bank is regarded as borrowing the money from the depositor for the purpose of engaging in investments or providing loans. The depositor on the other hand, is regarded as imposing the fixed interest on the Bank. As a result, the Bank is required to pay an additional sum based on the interest rate regardless of condition (profit or loss). If the Bank gains high profit, it only has to pay the small fixed interest to the depositors. In contrast, if the Bank suffers a loss, it will still have to pay the fixed interest regardless of the loss. Thus, iniquity and injustice occurs, when the Bank has to pay the interest despite it being in a loss position or when the depositor receives a small income versus the Banks high profit.
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In an Islamic account, customers may deposit their money in either one of the following two types of accounts: -
a) Wadiah Yad Dhamanah (Savings Account-i )
Wadiah Yad Dhamanah is when the Bank pools and utilizes the fund. The banks responsibility is in the form of guarantee and therefore it is compulsory for the Bank to return the fund as and when requested by the customer.
The Bank may give Hibah (gift/reward) to the depositor. The Hibah depends solely on the Banks discretion and cannot be promised by the Bank.
In favor of the Banks high investment or financing projects profit, the depositor will usually receive a good/ high hibah (gift/reward) appropriate to the profit. On the contrary, in the event of loss, the Bank need not give any hibah (gift) to customers. Furthermore, the depositors money is still in custody and will not be reduced even though there is a loss. Therefore, justice prevails for both bank and customer because: -
· Customers may enjoy hibah (gift/reward), which is given by the Bank for their money in safe custody whilst not having to bear any investment risk.
· The rate or amount of hibah solely depends on the Banks discretion and the Bank usually gives away competitive hibah for profitable investment in order to attract customers.
· The Bank is not obliged to pay anything to the customers if there is no profit from investment. Therefore, the Bank will not be in a disadvantage position.
· There is no Riba involved in this account and the investment is Shariah compliant.
b) Wadiah with the concept of Mudharabah. (Investment account)
Means that customer desires to have their money in safe custody and at the same time also invest. Under this concept, customers are willing to bear the risk arising from the investments in order to gain higher profit. The percentage rate of the profit is determined in the first place, in the contract e.g. 70% for customer and 30% for the Bank or 80:20, 60:40 and etc.
Hence, in an Islamic account, what is imperative is that the accumulated deposit will only be invested in companies, which are Shariah compliant (Shariah approved companies with business activities which are in compliance with Shariah principles and all income generated are free from doubtful sources).
For instance, RHB Islamic Bank Berhad ensures that all the deposit received is invested in businesses or companies, which are clearly safe (free from unlawful activities in Islam).
Screening is carried out diligently, and its operation is done in a client-friendly environment, i.e. a very much transparent discussion takes place between the Bank and companies, which are targeted to be invested in to ensure that the companies are Shariah compliant. The discussion will take into consideration the assets and liabilities of the companies in which the deposits/funds will be invested, regardless whether it is public listed or not.
Generally, the following Shariah filter is used:-
i- Industry filtering (excludes companies whose primary business is related to prohibited products and goods)
ii- Primary Financial Filters (excludes companies having unacceptable levels of debts or impure interest income according to Shariah Committee guidelines)
In conclusion, the Islamic accounts differ from conventional accounts which are not confine to the Shariah laws and principles and only focusing on profit generating investments without considering the Shariah aspects. Obviously, this will mean that one depositing money into the Islamic accounts as supporters of the Islamic banking system and sponsors of Shariah compliant activities and profit generation.
As regards to the issue on how Islamic banks can gain profit without Riba (Usury), there are actually various permissible ways for generating profit in an Islamic Bank as well as the Islamic windows which are very much reliable and capable of income generation, and gaining high profit through the following Shariah approved selling and buying modes, such as:
a. Bai Bithaman Ajil (BBA) Deferred Installment Sale
b. Normal Ijarah (Leasing), Ijarah Muntahiyah Bit Tamleek (Ending with ownership) and AITAB (Islamic Hire Purchase)
c. Musyarakah (Joint-venture Profit Sharing) and Musyarakah Mutanaqisah (Diminishing Musyarakah)
d. Mudharabah (Trustee Profit Sharing)
e. Murabahah (Cost plus sale) and Three party Murabahah
f. Syndication services (Ujr)
Based on these varieties of Islamic selling and buying modes (there are a lot more), one should not have any doubt on the Islamic Banks capability in generating profit as well as benefiting societies for their financial needs.
· He holds a B.A(Hons) Univ Malaya; MA, Shariah (Hons), Yarmouk, Jordan; presently he is a Manager, Shariah Compliance Department, RHB Islamic Bank Berhad