Monday, March 26, 2012

Post Script : Looking at Islamic Banking in its Proper Context

 Questions and Answers Pursuant to the Article

To mcoba google
Subject : Re Looking at Islamic Banking in its Proper Context
zahid aziz (
Sunday, March 25, 2012 3:58:06 PM
mcoba google (

Such insightful questions! We cannot understand where we are today without understanding history. History will tell us there was a time when the world lives without riba. In the 15th century the Church was the government in Europe and the forbidden of usury in the Bible was implemented strictly. Then came the rise of the intellectuals in the likes of Martin Luther of Germany and John Calvin of England who led the movement to sack the Church and created the new religion called Secularism. In the wake, John Calvin wrote a treatise to justify riba and Christians no longer questions its practise. In the meantime rich families in the likes of Lombardy's came into being in Italy, and Jews they employ to conduct riba banking had their workbench called 'banco' giving birth to the name banks we know of today. In then Malaya this twin evil of riba and secularism was brought to our shores by the British so much so we embraced them as our own values. The fall of the Uthmaniah Caliphate or the Ottomans as the west are fond of referring to them, was the direct result of the last Caliph taking great debts from the Europeans. If you read John Perkins, Confessions of an Economic Hitman you will understand why the Quran says Allah and His Rasul will declare war on the practitioners of riba. Today there are over 30 countries who are debt slaves of America via the evil door of riba. The Islamic Empire during the rule of the Rightful Caliphs prospered without riba; the Caliphs that expanded the Islamic Empire later on also ruled Caliphates that prospered without riba. Our misery began with the collapse of the last Caliphate; we then became nation states and Muslims no longer have a Khalifah. We then began the journey to become the foams of the waves of oceans as described by the Prophet saw; plentiful in numbers but weak.

That is where we are today. We can reclaim our position by returning to the true teachings of Islam. And that means the willingness to abandon all systems borne of the west and alien to the God chosen Khalifatul Ardh that we are. The money system, the economic system, the financial system, the education system, the leadership system, must all be based on the commands of Islam. If we adopt all from the west the systems will work in tandem to destroy our faith. The leadership system encourages corruption, the education system perpetuate the secularistic sidelining of God and religion, the financial and economic system delivers wealth to the evil.

The choice is ours bro, How do we get there? You are part of the thought machine. Noone will be excused from being questioned thus in the hereafter.


Date: Sun, 25 Mar 2012 11:41:36 +0800
Subject: Re: [MCOBA:113525] Looking at Islamic Banking in its Proper Context

Bro Zahid

Thank you for your reply and information. The coming of Islamic Banking is indeed a great thing, it was only in the later half of my life. Before this Muslims had no way to seek capital for their enterprises except from western orthodox banks. One reason given for the decline of Muslim societies was the difficulty to raise capital. (It will be interesting to hear your views as an Islamic banker on this). A person having excess money will want to save - it has to be in a bank, not under his mattress. The bank gives him interest - this is riba. A bright person with ideas to set up a business will have to take a loan from a bank - the bank charges interest, again this is riba. A pious Muslim then is discouraged to set up business enterprises.

Now, there are Islamic Banks. The very topic of your discussion shows the difficulty of setting up what is an ideal Islamic Bank. The Quran and Hadith are guides to us, but we still have a long way to go to implement in a practical manner an Islamic institution. A lot of effort is needed by honest, learned people. This is what I had always been trying to say, do not be simplistic by just saying everything is in the Quran and Hadith, ask your ustaz or tok guru. The renaissance has indeed come to Muslim societies. Revival of learning means we have to learn from all sources, see where the west did right, where they did wrong.

On 25 March 2012 09:43, zahid aziz <> wrote:

You are absolutely right there is more to riba than just interest over a loan. Riba is actually any transaction where there is wholesale transfer of risk by one party to the other party. One party bears all the risk ; the other party just sits and waits for returns. One obvious example is interest based lending where all risks are placed on the borrower. A conventional bank will not agree if we say his lending is riskless, he says he has risks to manage; but what he does not realise is that his risk is money lending risk and not business risk. Money lending is not a justified transaction in Shariah. A valid business transaction in Shariah is one where both parties willingly exposed themselves to risk and reward. The operational legal maxim is AlGhunm bi alGhurm; meaning one is not entitled to reward unless one is willing to expose oneself to loss.
Obviously there is a lot more to riba. In fact different forms of riba arise each century and it is incumbent on the ummah to identify and defeat these new forms of riba. Unabated and unbacked creation of money by a nation is one form, and the fraud that is the US dollar is another. However it is beyond the scope of an email to delve into these.
With regards to your second point regarding the invisible hand and how it has brought economic growth to the world, what brought economic growth to the world was the free market system, not the invisible hand. The invisible hand concept says it is not important for us to be concerned with the poor as the crumbs from our economic wealth will reach them and keep them from starving. Allow me to quote from a previous article entitled “When Risk is a Four Letter Word” (The Edge Issue 841. 17 Jan 2011)
“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.”
Also allow me to quote from a noble laureate and well known economist, Joseph Stiglitz.
Joseph Stiglitz, Nobel Laureate, Former Chief Economist, World Bank
“ A growing divide between the haves and the have- nots has left increasing numbers in the Third World in dire poverty, living on less than a dollar a day. Despite repeated promises of poverty reduction made over the last decade of the twentieth century, the actual number of people living in poverty has actually increased by almost 100 million. This has occurred at the same time that total world income actually increased by an average of 2.5% annually.”
Is Islamic Finance the answer? Yes if we implement Islamic equity finance instead of Islamic debt finance. Secondly, we also need to implement Islamic Economics as our driving force.
Best regards and salam,

Date: Sun, 25 Mar 2012 08:30:33 +0800
Subject: Re: [MCOBA:113516] Looking at Islamic Banking in its Proper Context

Bro Zahid
I am a layman in this subject. This is one view of a layman. The short article is good, it highlights some of the problems of Islamic Banking at the moment. It will be great if the bank assumes the loss in an abandoned or delayed housing project. At the moment the individual consumer bears the burden. This is really a great stress financially and emotionally to the person. A bank will be in a better position to assess the viability of any housing project. When it gives out loans on a project, it is a declaration that the project is viable. The role of the customer is to repay the loan, the burden of the failure of the project is on the bank. The charges on the customer will be more, but when it can be seen that they are protected from failures, more people will opt for this system.

The definition of 'riba' will have to be explained by Islamic banks. At the moment most people only think that it is a fixed rate given to a savings or charge on a loan. There is a Hadith that false claim by a public servant on his expenses is also riba. Riba then constitutes many aspects of financial malpractices. It is a limited definition to think that it is only a fixed interest rate.

Islam does not believe in the invisible hand as believed by Western Economists to right economic wrongs. Islam demands proactive actions to uplift the plight of the poor and in the context of Islamic banking this translates into emphasis on Islamic microfinance.

The above idea of the invisible hand by Adam Smith in the 'The Wealth of Nations' had served mankind well. It brought prosperity, uplifted many from poverty. It even led the west to be more developed than the Islamic countries and to subjugate them. It is not a perfect idea as non of man's idea is perfect. The recent turmoil in the financial world has led to questions as to the limitations of 'free enterprise' or 'capitalism' as we know it. Will Islamic Finance be the answer?
Salaam, I don't intend any malaise by saying the above. 

No comments:

Post a Comment