Mazi Aduba:
Thanks for your efforts in educating us about the nuances of Islamic Banking
and about the perceived similarities and differencess vis a vis traditional banks.
I wish to state clearly that I had little knowledge about the operations or the underlying
principles of Islamic Banking until the controversy over its proposed introduction in Nigeria hit the
listserv about one month ago. What I have done since then was to familiarize myself with the topic
by reading through the postings, CBN guildelines and any other materials
I could lay my hands on. I am therefore far from being an expert on any form of
Banking not to mention an exotic one such as Islamic Banking that is governed
by some religious guidelines from the Sharia and the Holy Quran.
I have also learnt alot from your own contributions and those of others including those
who oppose Islamic Banking and those who support its introduction in Nigeria.
The purpose of this particular intervention is to respectively submit that despite
your good intentions as a teacher (Madiba) imparting knowledge about Islamic
Banking to the audience, you have also unintentionally muddled up some of the
basic principles of Islamic Banking.
Almost every thing I have read about Islamic Banking starts with the basic distinction
about the prohibition of the act of receiving or payment of Interest either by the bank to the customer
in the case of a borrower or the customer to the bank in the case of depositor.
The Sharia refers to what we call Interest as Riba or Ribah--which is forbidden
in Islam. This is based on the belief that money itself has no intrinsic value.
Thus if Mazi Aduba decided out of his mercy to write a cheque of $100,000 dollars
to assist my poor self, Ola Kassim in buying or building a home or starting a business, he should
not expect me to pay him back any more than $100,000.00 at the end of the term of the loan
unless he takes active ownership in whatever I purchased with the money.
Mazi Aduba on the other hand is allowed under the Sharia Law
underlining Islamic banking to take a percentage equity in my home or business.
If lets say I bought the house for $500,000. 00--with $100,000 interest free loan from Mazi
Aduba and $400,000.00 from my own funds--I would own 80% of the house and
Mazi Aduba would have 20% equity on the property. If after 10 years I sold the house
for $1Million dollars, Mazi Aduba would redeem $200,000.00 before accounting
for any periodic payments I could have made during the term of the loan. He would have
made $100,000.00 in profit--not in passive guranteed Interest. On the other hand if the economy had sowered
during the term of the loan and the propery is now worth $400,000.00 Mazi Aduba will also share in the loss. Thus he would only have a returnof only $80,000.00--after taking a $20,000.00 loss plus depreciation in the value of his investment.
In your own attempt to blur the difference between Islamic Banking and Traditional
Banks you seem to be muddling together what is normally considered as a PROFIT
from a transaction with what is commonly referred to as INTEREST in the banking
and broader financial industry.
I found the following definitions for INTEREST (financial term) in the dictionary:
Definitions (3)
the credit risk of the borrower, and the inflation rate.
Here, interest per year divided by principal amount, expressed as a
percentage. also called interest rate.
2. The return earned on an investment.
3. Partial or total ownership in an asset.
2. The return earned on an investment.
3. Partial or total ownership in an asset.
As you can see from the above definitions, you seem to have taken a broader and all inclusive
definition of Interest--that encompasses #1 to #3, even though in strict financial terms
the term INTEREST is usually limited to the first.
Definition #2 of Interest as a return on an investment is nominally referred to as PROFIT in the
banking and financial interest while Definition # 3 is nominally referred to in the industry as
EQUITY--even though in regular conversation on might say that "my interest in that property
or other investment is 50%" for example when what one really means in financial lingo is
"my equity in that property or investment is 50%" or "I have 50% ownership interest in that
property or investment."
What I have been able to surmise is that what is forbidden in Islamic banking relates
to the interest defined in #1 while whatever is earned in number #2 or #3 is considered
is permitted.
In an earlier submission I also artificially divided what is forbidden in Islamic Banking
as Interest as in gains or 'profit' earned through PASSIVE INVESTMENT e.g. on funds
that are deposited in a Savings Account or money used to buy Treasury Bills and
GICs, in which the amount gained or payable over the term of the transaction--deposit
or loan resopectively is guaranteed and the the depositor has no particular interest
or risk in what ever the bank does with the deposited amount of money and in the case
of a loan, the bank grants the loan based on the credit worthiness of the individual or business
after assuring itself that the borrower has the ability to repay the amount plus interest.
Even though the bank carries some risk, as there is always a possibility of a default,
the bank plays no active role in how the borrower uses the money.
Thus Islamic Banking forbids gains from PASSIVE INVESTMENT while permitting
GAINS from ACTIVE INVESTMENT-(-e.g. profits earned through active involvelent in a business transaction
or in the case of a would be homeowner in the property purchased with the advanced
funds.) An Islamic bank for example will not operate a regular type of Savings Deposit
nor sell or buy GICs or Tresaury bills where the end payment is guranteed based on
the prevailing interest rates. There fore ny deposits madeinto the bank would be automatically
converted as percentage shares of the total equity of the bank. Thus if at the end of the term
the bank had made a lot of profit, the depositors shares in the bank would have appreciated
and the depositor is then paid the difference betweenn the amount of the deposit and the future value
on the day that the deposot is redeemed (redemption day). Similarly the depositor can also lose money
if the banks did not do well during the period (.g. too many bad loans on its books).
Islamic Banks are not charitable institutions. They are in the business of making money
for their shareholders and would probably be just as equally aggressive in making .sure
that borrowers repay whatever amount they borrow plus their own equity in the businesses.
However, because they would also be part owners in the businesses or properties purchased
with advanced funds they would lily do more due diligence than traditional banks--who after
assuring themselves of the creeditworthiness of their borrowers simply secure their collaterals, advance
the funds and then sit back to recollect principal and interest on agreed terms over the life
of the loan.
Islamic Banks are allowed to also make money in all other ways that traditional banks do including
collecting a myriad of fees, account fees, ATM fees, Chequing fees, loan administration fees etc.
Some other differences betwen Islamic and Traditional Banks can be found on this link:
from which I have borrowed the following paragraphs:
Difference between Islamic and conventional banks
There are a number of key differences between the products and services offered by a conventional bank in comparison to an Islamic financial institution.
***Firstly, Islam is the back bone of interest free banking, moral principles and objectives play a more important role in its operations. As such it is organized on the basis of cooperation with each other as stated in the Quranic injuction: "Help you one another in righteousness and piety but help you not one another in sin and trasgression" (Quran, 5:2). The Quran also calls for trade "Eat not up your property among yourselves in vanities but let there be amongst you, traffic by mutual goodwill"(Quran, 4:29). Honesty and trustworthiness is so essential in business, thus the Prophet (Pbuh) had declared that dishonest transactions are illegal (reported by Bukhari).
***Secondly, no gain is accepted without either effort or liability. Islam forbids receiving a monetary advantage without giving a counter value, but is not opposed to profit or financial gain as long as an effort is performed or (partial) liability is accepted for the financial result of a venture.
***Thirdly, general conditions of a debtor should be evaluated genuinely. If one is in financial distress, and is not able to pay back the principal, one should be given an extension on humanitarian ground without any penalty. (Quran, 2:280)
***Fourthly, certain business transactions are considered unlawful in Islam and cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs, gambling or producing pornography are contrary to Islam.
***Fifthly, Islamic banks offer no interest-bearing products or services, and in its organisational structure and corporate governance, Islamic banks have Shariah board, to ensure that the bank practices are in conformity with the Shariah and do not oppress the disadvantaged client.
There are a number of key differences between the products and services offered by a conventional bank in comparison to an Islamic financial institution.
***Firstly, Islam is the back bone of interest free banking, moral principles and objectives play a more important role in its operations. As such it is organized on the basis of cooperation with each other as stated in the Quranic injuction: "Help you one another in righteousness and piety but help you not one another in sin and trasgression" (Quran, 5:2). The Quran also calls for trade "Eat not up your property among yourselves in vanities but let there be amongst you, traffic by mutual goodwill"(Quran, 4:29). Honesty and trustworthiness is so essential in business, thus the Prophet (Pbuh) had declared that dishonest transactions are illegal (reported by Bukhari).
***Secondly, no gain is accepted without either effort or liability. Islam forbids receiving a monetary advantage without giving a counter value, but is not opposed to profit or financial gain as long as an effort is performed or (partial) liability is accepted for the financial result of a venture.
***Thirdly, general conditions of a debtor should be evaluated genuinely. If one is in financial distress, and is not able to pay back the principal, one should be given an extension on humanitarian ground without any penalty. (Quran, 2:280)
***Fourthly, certain business transactions are considered unlawful in Islam and cannot be carried out in an Islamic bank. For example trading in alcohol, intoxicating drugs, gambling or producing pornography are contrary to Islam.
***Fifthly, Islamic banks offer no interest-bearing products or services, and in its organisational structure and corporate governance, Islamic banks have Shariah board, to ensure that the bank practices are in conformity with the Shariah and do not oppress the disadvantaged client.
Bye,
Ola
---- Original Message ----
From: BENJAMINA <baduba54@aol.com>
To: OmoOdua@yahoogroups.com
Sent: Wed, Aug 3, 2011 11:36 am
Subject: [OmoOdua] CURRENT FALLACIES ABOUT ISLAMIC BANKING
From: BENJAMINA <baduba54@aol.com>
To: OmoOdua@yahoogroups.com
Sent: Wed, Aug 3, 2011 11:36 am
Subject: [OmoOdua] CURRENT FALLACIES ABOUT ISLAMIC BANKING
CURRENT FALLACIES ABOUT ISLAMIC BANKING
The debate over Islamic Banking and Sharia Banking guidelines have produced a few misleading statements about this group of banks. The original error occurred because of the official name of the people charged with regulating this kind of banking. The team is known as Non Interest Financial Institutions. This is a misnomer. All banks including Islamic banks charge interest or they will not be in business for a second.
All banks including IBs have operations and overhead expenses. They have offices, personnel, computers and equipment, chairs, desks, rents, electricity bills, etc; they pay on a daily, weekly or monthly basis. They are able to make these payments from the interest they collect on the loans they make to their customers. If I deposit $100.00 in an IB after a year I would expect to get more than $100.00 and would usually get it. If I go to my IB and borrowed $5000.00, when the money is due, I must pay back more than $5000.00. The difference between what I borrowed and what I paid back is called profit, interest, (interest received, to the bank; interest paid, to me) or whatever name I choose to call it. The difference between what I deposited and what I got back is also called interest (interest paid, to the bank; interest received, to me) or my profit or whatever I want to name it.
It is no more than what happens in other business that Muslims are involved.
A Muslim in transportation business who buys a vehicle and uses it to transport goods and services is in that transportation business for profit as is a farmer who raises cattle. They are all involved in profit making which is allowed by Islamic tradition. The difference is mere semantics. What IBs reject is what is what some people call obscene profits in US and Canada. If you take a look at the financial statements of major US banks you will see billions and billions of dollars in profit and if you look at the SEC filings of these banks especially if you look at the section that requires the disclosure of the top 10 compensation earners you will see a long list of managers who made as high as $50 million in a year. That is what an IB would not have. It allows for modest return which is required to pay a living wage to its personnel, keep the lights on, and pay interest (oh! that di rty word again) to its depositors and to pay dividends to its investors.
The second myth is that IBs would not finance some businesses like pig farmers. This is also not true. IBs finance any business that has the potential to pay it back. The difference with the traditional banks here is that the traditional banks would accept to have a security interest in the inventory purchased with the loan it makes. Thus a pig farmer can offer pigs as security to a traditional banker and it would be accepted an IB would like you to pledge your house or car or something merchandisable as security to its loan for pig farming. If you default it would sell your house or what ever you pledged while a traditional banker would sell your pig inventory. You can borrow money from IB, pledge you cattle and use the loan to raise pigs. You would not be violating anything except your Islamic conscience which forbids consumption of pork. One can borrow money from a bank pledge his ships and use the mon ey to buy and sell humans, as in slave trade, done during the slave trading era.
A banker is more interested in your ability to pay back your loan (as proved by your income submissions) and in your willingness to pay your debts (as proved by credit history) and should everything else fail in HIS ability to recover his commitment (as proved by your pledged asset). Once you meet these requirements, ability to pay, willingness to payback, and worthwhile valuable pledged asset, his money is yours and what you do with it is your business.
Comprehendi?
So when my friend Mr. Ola Kassim writes:
- 5) The only differences between Islamic Banks and Traditional banks
are that:
a) Islamic Banking (IBs) forbids payment or receiving interests.
b) IBs may lay more emphasis on ethical practices than traditional banks.
He is only partly right. IBs abhor obscene profits or usury (by the way the Christian bible is not in favor of usury either).
Benjamin Obiajulu Aduba
Boston, Massachusetts
August 3, 2011
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