The Concept of Riba & Banking in Islam

Shariah, the body of law that governs all aspects of Muslim life, forbids riba, a word in Arabic commonly interpreted as "interest," though it also means usury and all forms of unearned income. However, modern banking is established on the basis or riba, or paying interest to depositors and charging interest to borrowers. Islamic banking attempts to provide modern financial services that are permissible in Islamic jurisprudence.

USURY AND INTEREST

Ancient civilizations and major religions since pre-Biblical times have tried to define the difference between the charging of interest on loans and usury. The former is seen as an acceptable fact of commercial life, while the latter, or excessive interest, is frowned upon because it is an extortionate charge for money and regarded as exploitation. The concept of riba as either interest, usury or both is one of the most hotly debated topics among Muslim scholars.  Islamic scholars came to a conclusion that both interest on loan and usury are Haram (prohibited). 

OTHER SHARIAH PROHIBITIONS

In addition to prohibiting riba, Shariah also forbids “gharar,” meaning deceit, uncertainty, hazard and risk. The aim of the ban is to protect individuals against unexpected losses through exploitation by others. Islamic law also forbids “maysir,” or all forms of gambling and easy acquisition of wealth by chance. As an example, a conventional bond issued by a Western bank is “haram,” or sinful, in Islam because the issuer stipulates a predetermined interest rate (riba), to compensate for as yet unknown future circumstances (gharar), in order to make money from his money (maysir).

MUDARABA

Mudaraba is the oldest form of Islamic banking. It’s a partnership between a bank and a borrower. The bank uses depositors’ funds to invest in a project, which may be a real estate development or an industrial plant. It distributes the profits from this investment to the depositors according to a pre-agreed, fixed ratio. The bank, or other capital provider, carries any losses the investment may make.

MUSHARAKA

In Musharaka banking, the bank and its depositors share in both the profits and losses of the investment. They agree in advance how to share the profits and losses. The depositors may also participate in the management of the investment, but are not obliged to do so.

MURABAHA

Murabaha is a form of costs plus financing, and is the most popular form of Islamic banking. The bank buys a product, often a commodity cargo such as oil or wheat, on behalf of a client. The bank resells the commodity back to the client at an agreed markup that includes an agreed sum for the bank's costs as well as a profit margin. This setup effectively charges the client for the use of money, but not through interest. The markup, or fee, does not increase if the client fails to make a payment on time, but remains as pre-agreed.

(Opposing News / 25 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Malaysian capital market posts record performance in 2012

KUALA LUMPUR: The Malaysian capital market rose by 16.4% to RM2.5 trillion in 2012 from RM2.1 trillion a year earlier despite challenging market conditions, Securities Commission Malaysia (SC) chairman Ranjit Ajit Singh said.

All market segments, including equity market capitalisation, debt securities outstanding, asset under management and Islamic capital market recorded double-digit growth of between 14.1% and 22.6%, he said.

At a press conference on the 2012 SC annual report here today, Ranjit said the Islamic capital market rose 22.6% to RM1.4 trillion with Malaysia maintaining its position as the leading sukuk market.

“The year 2012 was also a year of strong assessment outcomes in terms of market regulatory framework,” he said, adding that this achievement is the highest among countries that recently underwent the assessment.

He said last year sealed Malaysia’s ranking as the world’s biggest sukuk market, the fifth largest IPO destination globally and the fourth most active in Asia for corporate bond issuances.

Key indicators such as corporate bonds and the sukuk market exceeded the RM1 trillion mark for the first time and positioned Malaysia as the third largest bond market in Asia.

It was also a record year for IPOs with issuers raising a total of RM22.1 billion, increasing equity market capitalisation by 14.1 per cent to RM1.5 trillion, while the benchmark index FBM KLCI ended the year 2012 at a record high of 1,688.95.

Fund management posted a significant expansion of 19.2% in assets under management valued at RM505.1 billion, while net asset value of the unit trust industry rose to RM294.9 billion.

“Islamic assets under management accounted for about 16% of the industry’s total assets under management or RM79.6 billion,” Ranjit said.

He said the Islamic capital market, at RM1.4 trillion, has enjoyed greater internationalisation through wider participation of foreign sukuk issuers from Singapore, the UAE, Bahrain and Kazakhstan.

On supervisory and enforcement efforts, Ranjit said the SC filed seven criminal charges for insider trading while a company director was convicted on four charges for furnishing false information on a company’s unaudited financial results.

In addition, eight administrative sanctions were imposed against licensed intermediaries for improper business practices, while an investment bank was reprimanded for failure to carry out proper due diligence in a corporate exercise, he said.

Meanwhile, Ranjit said the Malaysian capital market’s set of standards in terms of regulatory and supervisory framework was accepted by the International Monetary Fund and the World Bank.

“The independent assessments acknowledge the strong regulatory regime in Malaysia, which has validated the SC’s approach to regulation that is approximately benchmarked to global standards,” he said.

(F.M.T News / 14 March 2013)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com