My Say : When risk is a four-letter word
Written by Zahid Aziz Monday 17 January 2011
This article appeared in Forum page of The Edge Malaysia, Issue 841, Jan 17-23, 2011
The objection of Islamic Syariah to riba has never been about the size of the interest charged. It is also not confined to consumption loans; it is prohibited also to investment loans.
Investment loans, isn’t that a misnomer in the first place? How could an investment be a loan, and how could a loan be an investment? That is the objection of Syariah to riba, an investment cannot be a loan, and a loan cannot be an investment. But we have accepted the fraud and spun it that a loan is an investment without question. For how else could we have agreed to a guaranteed return to someone who has lent us capital?
How else could we have agreed to a full undiminished return of his capital at the agreed time without consideration of the underlying success or failure of the business? Someone used to say, tell the lie a thousand times and it will be accepted as the truth. In riba the axiom seems to be, practice it for a hundred million times and people will no longer question its injustice.
It becomes a fact of life that we are numbed to its injustice. We are numbed to its injustice because it is not us who bears the direct brunt of the injustice. The UN sponsored Study by the World Institute for Development Economic Research reported that in the year 2000 there were one billion people living on less than USD1 per day.
The per capita GDP (total national output divided by the population)- the difference in income between the world’s richest countries and the world’s poorest countries - is now 267 times, from 22 times in 1913 1% of the world’s population now own 40% of the planet’s wealth.
"The study emphasised that economic growth is, by itself, no fix: How the gains are distributed is just as important. In China, Romania, Sri Lanka and many Latin American countries, swiftly expanding economies have improved incomes for many, but the benefits have been limited by a simultaneous increase in economic inequality, putting most of the spoils into the hands of the rich and not enough into poor households..." This is the tragedy of the riba driven economy, delivers economic growth but with much inhumanity.
But it is not our problem because we are not amongst the one billion people mentioned above. And so we continue with our life. We have a form of Islamic banking. Some of us are no longer practicing riba banking; really? As outlined above isn’t the objection to riba based on the risk aspect where all manner of risks are transferred by a lopsided contract to the other party? Isn’t the objection to riba about the owner of money disattaching himself from all manner of risks whilst expecting a guaranteed return at the same time?
How do we measure against this requirement? No measure of akad (contract or agreement) will make a transaction riba free until we address the risk aspect. Risk is indeed a four letter word when we have not yet shed our riba drenched clothes.
Amongst the parameters of an Islamic Economic system is the prohibition by law of riba and an economy driven by qirad or mudarabah. Banks will take deposits on Mudarabah and extend financing in the form of Mudarabah and Musyarakah. Banks will remould themselves as true Investment Banks and bankers remould themselves into equity investment managers.
In order to allow the Banks to operate freely as true equity managers of money, the nation’s payment system will in most likelihood be decoupled from them and run by specialist Debit Banks who will honour cheques much in the way debit cards operate. In other words cheques only for amounts in current accounts and processed by banks who are unable to extend credit. Thus the exposure of the investment banks and any failures in their financing will not collapse the nation’s payment system.
The environment is set now for the banks to extend capital on Mudarabah (trustee profit sharing) and Musyarakah (joint venture profit and loss sharing), thus truly transforming the banks into equity investors and rewriting the risk formula into what is natural for business. No more fixed returns on capital extended, and no more guaranteed full return of capital notwithstanding outcome of business.
Banks extend capital on equity basis and absorb business losses as is only equitable. Things are now back into natural equilibrium and risk is no longer a four letter word. Risk is assumed in the correct proportion by all component parts of the economy and serves its function as the oil that runs the economy.
The only people who will object to this will be the riba financiers who have it their way all this while, and of course some of the professionals they enslaved who can no longer see the woods from the trees.