Risk Management, the misguided subject that perpetuates the rule of riba.

Assalamu 'Alaikum

Risk Management, the misguided subject that perpetuates the rule of riba.

There is nothing wrong with risk management. As a concept it was promoted even by the Prophet s.a.w. when he says mafhum, “ Tie the camel first then place your trust on Allah” or tawakkal ‘alAllah. However it’s application out of context has perpetuated the rule of riba. However before we go any further let’s define riba in the most clear cut and easy to understand way. Most people understand riba as interest over a loan, which is correct. However a more exacting definition of riba is to define it within the context of injustice in the allocation of risk between two partners in a supposedly business relationship.

A key legal maxim in Islamic Muamalat is “AlGhunm bi alGhurm” meaning rewards comes with risk. This is the key principle in Muamalat which all Muamalat players are behove to observe. If we are in a maze the most clear cut view to solve our predicament is to be able to see the maze from a bird’s eye view. We will see where we are in the maze, where the exits are located and how to get there. Similarly doing Syariah compliant business in today’s business world we are in one mess of a maze.

This is not our business world, not our economic world. Islam lost that lead a long time ago and most Muslims in the modern age finds themselves engaged in a business world devoid and alien to Shariah demands, and yet we are trying to do Shariah business! In trying to do Shariah business we adopt and we adapt. While adopting and adapting sometimes we are not even aware the tools we used are the wrong tools meant to achieve results which are the antithesis to Shariah objectives.

What am I referring to? Risk management in Islamic Finance. First we need to take the bird’s eye view as to whether the Islamic Finance we are doing today is the Islamic Finance we are expected to do. Islamic Finance should be designed from scratch and done within the context expected by the Quran i.e. in an Islamic economy. If that cannot be achieved then Islamic Finance should at least be done in an environment where it is haram for Muslims to engage in riba and be customers of conventional banks. However if this basic prohibition of riba for Muslims is not done then the Islamic Finance that arise is more the end product of the environment it is operating in as opposed to what Islamic finance should be.

Then we are hardly surprised if the Islamic bankers are totally lost as to what tools they can and cannot use in Islamic finance. When Islamic finance is 99.9% debt financing we are hardly surprised if their debt risk management is all about recovering debts, at whatever human or economic costs to their customers.

Where do Islamic bankers place Surah AlBaqarah ayat 280?

“And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew.”

How may Islamic bankers practise or put into effect Surah AlBaqarah ayat 280? Is there a desire for them to put the verse into effect? Or is there a fear that putting the verse into practise will put their business in jeopardy? Will Islamic bankers give as charity since the Quran says is better for them if they but knew. If they can’t and they won’t then we have to acknowledge Surah AlBaqarah ayat 280 perhaps talks more of a qardhul hasan or a loan to ease the hardship of someone then a loan in trade.

Is there therefore a loan in trade, or debt financing as Islamic bankers are fond of referring them as?

If Ayat 275 specifically the part which says “….But Allah has permitted trade and has forbidden interest….” is the premise upon which Islamic debt financing is legitimised, can it be that five ayat later at Ayat 280 Quranic rules are no longer suitable to Islamic financing? One would expect Islamic financiers to embrace ayat 275 to 280 in toto, and not to pick and choose which ayat to observe and which to ignore. What is the hukm of denying one ayat in the Quran?

Hence it is hardly surprising that Islamic financiers practise risk management as if they are riba financiers. But do they realise that riba financiers move goal posts to ensure they win all the time? Can Islamic Financiers do the same? Are they allowed to do the same? Conventional lending is not a business. Conventional lenders place ridiculous rules to ensure they get their money back at all costs. That is because they practise money lending and make no pretense they are doing anything else. Islamic bankers are different; they declare they are not money lenders. They say they engage in trade and observe Islamic principles in all they do. If that is so why do they allow legal clauses that defeats the very basis of their akads?

In Musharakah Mutanaqissah why is abandonment of a project by the developer  a risk solely to be borned by the customer for which the bank is totally absolved? In a BBA housing facility when a developer  abandons a development half way, why is the customer forced to pay for a house he will never owned, regardless of the financial situation the customer is in? Where is the observance of ayat 280 Surah AlBaqarah? Why are Islamic bankers acting in exactly the same way as conventional bankers when they use the name Islam in their business? Is it not more Islamic to then set up an outfit or subsidiary to finish off the uncompleted housing development? Just because conventional banks do not do so do Islamic banks have to follow the position of conventional banks? Aren’t Islamic banks different, to act with fairness and justice at all times? Isn’t justice the third most oft repeated word in the Quran? Why do they use the name Islam if they are not to be guided by the Quran? Do we have the right people leading Islamic banking?