Tuesday, February 17, 2015

Refocussing the Valid Criticism on Islamic Banking

Refocussing the Valid Criticism on Islamic Banking

There has been a lot of criticisms on Islamic banking but it has to be addressed correctly.

Criticisms of Islamic banking includes it being too expensive and just a mirror image of conventional banking.

To get credibility of the criticisms we must address the Shariah issues of Islamic banking whether Islamic banking in practise contradicts Shariah.

We cannot say Islamic banking is wrong because it is too expensive. It is a makruf (known) principle in Shariah not to interfere in normal market pricing. If that is our line of criticism we have to prove the point with statistics and be sure we are comparing like with like. For example are we comparing fixed rate Islamic finance with floating rate conventional finance? In which case is our conclusion conclusively proven with numbers to support?
We must also be cognisant that Islamic banking is not meant to operate in a dual environment and in a real Islamic economy it is haram for Muslims to frequent conventional banks. In today’s economy Muslims are allowed to also use conventional banks and conventional banks do not have to abide rules Islamic banks have to. This means Islamic banks by default have to be “like” conventional banks to survive and thrive.
In this case it is not appropriate to level criticism only at Islamic banks; the bigger criticism have to be levelled at the government for allowing conventional banks to continue operating at a distinct advantage over Islamic banks. Governments have also failed in their duty to prevent the Muslim ummah from using riba institutions.

If however the criticism of Islamic banking is because Islamic bankers do not take into account the fraudulent monetary system they are operating in then the criticisms is absolutely valid. It is valid because the Islamic bankers do not attempt to understand the monetary system they are in.
They do not attempt to understand the gharar and fraudulent fractional reserve banking system they are operating in where an amount deposited is lent and relent by the system creating new money out of thin air along the way. For example if RM10,000 is deposited in a bank, this amount, less the statutory reserves, can be lent and relent 25 times by banks if the statutory reserves is 2%. At the end of the day they will be 25 people holding cheque books believing they own some reducing portion of the original RM10,000 deposited. If the original amount of money deposited is RM1 billion the system can create money out of thin air to the tune of RM24 billion. When money supply balloons but goods and services do not this will create inflation in society and steals purchasing power to the detriment especially of those members of society on low and fixed wages. This is the reason why general price level increases is a permanent feature in today’s economy.

Another view towards unhealthy creation of thin air money by banks which is beginning to gain credence is that banks creates deposits when they lend money. This is confirmed by Mervyn King, Governor of Bank of England in 1994, Adair Turner, Chairman of Financial Services Authority of Britain in 2011 and Vitor Constancio, Vice President of the European Central Bank. At the end of the day the bank total up these newly created deposits with the actual amounts of deposits they actually have and borrow the difference from the interbank money market or the central bank as bank of last resort. The central bank will never fail to top up the shortfall in deposits needed by the bank for fear an insolvency crisis and bank run will develop at the bank. This allows banks to continue with this farce of creating money out of thin air to lend. Resulting in money being always equal to debt and resulting in the power to create money to be given to the private sector whose objectives do not sync with the public interest. Public wants money to go to the real economy where goods and services will materialise; banks wants the money to go to credit cards, housing mortgages and the securities market which does not create new goods and services but merely result in asset bubbles and inflation suffered by all.

They do not attempt to understand how fractional reserve banking creates inflation and steals from the poor. They do not attempt to understand how the combination of fractional reserve banking and debt based banking systematically transfers wealth from the poor to the rich. As we observed money being created out of thin air by the banking system this money is then lent in priority to people with collateral meaning the rich in society. This allows the rich the seigniorage of first use of the thin air money to spend in society. Since goods and services do not increase commensurate with the ballooning of the thin air money this creates inflation much to the chagrin of the poor. Thus we see the system systematically transfers wealth from the poor to the rich.

They do not attempt to understand how the banking system allows the same amount of money to be used in multiple BBA, Ijarah and Istisna’ akads and how if all the ahli akad demand to see the money at the same time all these individual akads will fail. In Islamic banking Shariah compliance is focussed only on the individual akad between the bank and its customer. The overall picture of the money not existing in the system is not benchmarked for Shariah compliancy. The issue of the money being not in existence is solved in the banking system by use of cheque books by the banks clients. Should all signatories to the akads demand the price to be paid in cash all these individual akads will fail because they is just not enough cash to meet the requests. In Shariah terms this is Gharar (uncertainty) of the highest nature; a gharar transaction of such degree is not Shariah compliant as the outcome of such akads are uncertain.

They do not attempt to understand all these and they do not attempt to make their Shariah Advisers understand all these. Now that is the valid and to the point criticism of Islamic banking.

What we want to see is a serious and consistent attempt to change to a new monetary and banking system. Refusal to try and continued validation of a defective domestic system, that ultimately supports a fraudulent international system, that perpetuates the wealth of the benefactors of the system who now threatens AlAqsa and Palestine, is the criticism that arrows to their hearts. Any Muslim who opposed efforts to change, will have to answer in the Hereafter. If they don’t understand the issues, then doesn’t the Quran enjoins them to think?


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