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Wednesday, 27 April 2011

Islamic Banking and Profit Fairness

Islamic finance is a moral financial model based on divine principles, one of the the most important aspects is justice. There are many Quranic verses and Hadiths that deal with this, such as:
"We sent aforetime our messengers with Clear Signs and sent down with them the Book and the Balance (of Right and Wrong), that men may stand forth in justice," [Surat al Hadid; Verse 25].
There is also: "And the Firmament has He raised high, and He has set up the Balance (of Justice)" [Surat al Rahman; Verse 7].
God Almighty also said, "Allah commands justice," [Surat al Nahl; Verse 90].
In a Hadith Qudsi the Prophet [pbuh] narrated the word of God, saying "My servants, I have forbidden injustice for myself and I have made injustice forbidden to you. Do not be unjust to one another." Renowned Islamic scholar al-Izz Ibn Abdul-Salam said that Verse 25 of Surat al Hadid represents the essence of Islam.
 It is therefore just that profits should not be inflated to the point that this would invalidate the satisfaction [of the customer]. This is the crux of the matter in Islam, and can be seen in the Quranic verse: "O ye who believe! Squander not your wealth among yourselves in vanity, except it be a trade by mutual consent" [Surat al Nisa; Verse 29] and this is regardless of whether the inflated profit [made by the seller] is known to the buyer such as in the event of purchasing from a monopoly, or whether this increase [on the original price] is not known to the buyer, if the seller conceals the original price of the product.
There are several Hadith that prohibit sellers making large profits on the original price of items or services. In the Sahih Muslim collection of Hadith, it was reported that the Prophet [pbuh] said, "No one hoards but the sinner." Muslim scholars explained the term "hoard" in this instance to mean the hoarding of a commodity that people need in order to sell it later at a higher price. This is something that is forbidden in Islam as it restricts the necessities available to the public.
In addition to this, Prophet Mohammed [pbuh] also said, "Any Muslim who transgresses against another Muslim and is unjust then he is the sinner." In another Hadith, the Prophet [pbuh] is quoted as saying: "Injustice of a buyer is riba [usury]."
Religious scholars had different opinions with regards to the amount of profit that is permissible to make. Some of them define this precisely, while others judge this according to local customs [and other factors], which is more reasonable. Therefore Islamic finance should operate in a just manner with regards to profits, and avoid outrageous [profit] inflation, particularly with regards to long-term financing.
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Recipients of Zakah (zakat)

In Al-Quran surah At-Taubah verses 60, Allah said: "As-sadaqaat (here means zakah) are only for the fuqaraa (poor), and al-masaakin (poor) and those employed to collect (the funds) and to attract the hearts of those who have been inclined (toward Islam), and to free captives, and for those in debt, and for Allah's cause (i.e. for mujahiduun - those fighting in a holy battle) and for the wayfarer (a traveller who is cut off from everything); a duty imposed by Allah. And Allah is All-Knower, All-Wiser".
Thus, it is clear that there are eight groups (asnafs) of rightful recipients of zakah (mustahiq):
  • Fuqaraa and al-masaakin
  • The main purpose that these groups are being the recipients is to eradicate poverty and scantiness within the ummah. According to a wellknown mufassir (a person who understands the meaning of Quran) Tabari, fuqaraa means needy people but can help themselves not to beg, whereas al-masaakin means people who are needy and beg.
  • 'Amil zakah
  • The third target group is 'amil zakat, which are those who perform all the zakah administration. This includes collecting zakah, account them, and distribute them.
  • Muallaf
  • Muallaf are people whose hearts are expected to inclined to Islam or whose believe to Islam is expected to increase, or people whose bad intension to muslims is to be prevented, or people who are expected to be of benefit to or help muslims from their enemies. There are several groups of people that are qualified as muallaf:
    • People who or whose groups or family are wished to be muslims
    • People who are worried to do crime if not helped
    • People who just become muslims
    • Muslim leaders or public figures whose friends are kufur
    • Muslim leaders or public figures whose believe is not yet firmed
    • Muslims who live in fortresses or in the front of enemy line
    • Muslims who need help in enforcing the collection of zakah from reluctant people
  • Riqab (slaves)
  • There are two ways to free slaves. Firstly, is to help mukatab. Mukatab is slaves who have agreements with the master to be released once they can present certain amount of fortune. The second way is to buy slaves and then free them from their own zakah or from the collected zakah by a government.
  • Gharimun (debtor)
  • According to ibnu Humam in al-Fath, gharim are debtor who are trapped with their liabilities to fulfill basic need. Mazhab Imam Syafi'i argued that this asnafs deserve to be given zakat to pay their liabilities with some preconditions, which are: they have no wealth to pay their liabilities; they do not perform sin or illegal activities; the payment of liabilities has reached its due date. They deserve to get the amount of zakat which is as much as their liabilities. But if the creditors release them from their obligation to pay the liabilities, they have to give the share of zakat back to Islam. There are two groups of debtors. One is those who are in debt for their own wellbeing, such as for living cost, clothing, or treating sick people. Another group is those who are in debt in the effort to solve conflicts or to perform social obligations, such as care for orphans, provide health services for fuqaraa and orphans, etc.
  • Fi sabilillah
  • Fi sabilillah means in the path that conveys Allah's ridha in terms of aqidah or deeds. Syeh Rashid Ridha in Tafsir Al Manar explained that zakah for this asnaf can be used for the public benefit (maslahah of ummah) with regard to the establishment of aqidah of ummah.
  • Ibnu Sabil
  • According to jumhur ulama, ibnu sabil is an expression for musafir. Musafir are people who are travelling. Although an ibnu sabil has living means, he can receive zakah if he has trouble in accessing his means during travelling.
Other parties than these 8 groups are not qualified as the recipients of zakah. However, they can be recipients of infaq. Thus, the recipients of zakah are more specific than the recipients of infaq.
(Portal Infaq)

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