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Monday, 4 November 2013

Riba: An effortless profit

Friday, November 01, 2013 - Riba is a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed. The literal meaning of interest or Riba as it is used in the Arabic language means to excess or increase. In the Islamic terminology interest means effortless profit or that profit which comes free from compensation or that extra earning obtained that is free of exchange. Allah the almighty say in Surah Al-baqarah (verse 275) “Those who devour usury will not stand except as stands one whom the Satan by his touch has driven to madness. That is because they say, “trade is like usury”, but Allah has permitted trade and has forbidden usury”.

Interest is not a subject without trade and commerce. Islam recognises trade and commerce not only as a lawful profession but also as a moral duty. Islam has laid down a complete set of rules for trade. The reason for these rules is to specify what halal earning is. There are many traditions (Ahaadith) concerning halal provision that can also be found in the books containing the traditions of the prophet (peace be upon him). Actually, Islam has encouraged men to earn their own provision and to provide it to their families. Islam is a complete code of life which offers its own social, political and economic systems to guide human behavior in all spheres of life. 

History has recorded that the economic system of Islam, for the first time in the world had established social and economic justice during the period of al-Khilafah al-Rashidah. In any ideal Muslim society, socio-economic justice is considered as one of the most significant characteristics for the social, political, economic as well as all realms of human interaction. Exploitation and any source of unjustified enrichment in Islam is prohibited. 

The Holy Qur’an has emphatically instructed Muslims not to acquire each other’s property wrongfully. Islam is not an ascetic religion. It takes a positive view of life as the natural outcome of the belief that human beings are the vicegerents of Allah. The goals of socio-economic justice and equitable distribution of income and wealth are integral parts of the moral philosophy of Islam. However, one of the socio-economic reforms made by Islam was the prohibition of Riba (interest).

Riba is prohibited in Islam as it appears explicitly in the Holy Qur’an. There is complete unanimity among all Islamic schools of thought regarding the prohibition of riba. Since the Qur’an is the undisputed source of guidance in Islam, there is unanimous agreement on the fact that Islam has forbidden the practice of riba. The debate on whether riba is interest or usury has been settled. The ulama have made crystal clear that both interest and usury fall within the domain of riba. The modern banking system is organized on the basis of a fixed payment called interest. That is why the practices of the modern banking system are in conflict with the principles of Islam which strictly prohibit riba. 

Islam is opposed to exploitation in every form and stands for fair and equitable dealings among all men. To charge interest from someone who is constrained to borrow to meet his essential consumption requirement is considered an exploitative practice in Islam. Charging of interest onloans taken for productive purposes is also prohibited because it is not an equitable form of transaction. In several verses of the Holy Qur’an, Allah has mentioned the consequences of riba. The Qur’an did not declare the prohibition of riba in the early stage of revelation, rather we find that the complete prohibition of interest came sequentially. In the Qur’an Allah says: “That which ye lay out for increase through the property of (other) people, will have no increase with Allah: But that which ye lay out for charity, seeking the countenance of Allah (will increase): it is these who will get a recompense multiplied”. (30:39). 

Islam gives in detail the punishment for those involved in interest and narrates the condemnation of interest in different manners in different places. However, in connection with the condemnation of interest in one place it comes very close to giving a rationale. The Qur’an says: “Allah has permitted trade and prohibited interest”. The implication of this is that the principle of interest is quite opposite to that of business. This shows Islam does not consider lending on interest as a business in the real sense.

It is not Islam alone which has prohibited interest. Other major religions like Judaism, Christianity and Hinduism have also done the same. The Bible disapproves of interest severely and makes no distinction between usury and interest. Allah the almighty has mercifully given guidance to humankind for all aspects of life. This guidance covers not just acts of worship but everything from economics and business ethics to marital relations, international relations, ethics of warfare and so forth. People who accumulate most of the society’s wealth are the hostile towards the rest of the people, therefore, the institution of interest leads to a highly unstable society. 

Moreover, conventional economy today is debt-based, and only does risk transfer. Islamiceconomy in contrast is asset-based, and does risk sharing. It is all about fairness to all parties. Where a riba-based market fails, Islamic financial institutions do not suffer the same consequences since the risk is shared by both parties. Lenders will be more careful, as they also share the risk of losing money if the borrower cannot pay back the original sum. Given all the problems that riba creates, it is no wonder Islam prohibits such a detestable act. 

(Pakistan Observer / 01 Nov 2013)

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A centre for sukuk

“I WANT London to stand alongside Dubai as one of the great capitals of Islamic finance anywhere in the world,” David Cameron, the British prime minister, told 1,000 delegates at the ninth annual World Islamic Economic Forum in London on October 29th, where he announced plans to issue sovereign sukuk, or Islamic bonds, as early as next year. Not so long ago, such a declaration would have been seen as a bold political stroke. These days, it represents little more than the logical next step in Britain’s embrace of Islamic finance. A host of London landmarks, including the Shard (the skyscraper pictured above), the Olympic village and Harrods, have been financed by so-called sharia-compliant investments in recent years.
The convention this week—attended by heads of state from Jordan, Afghanistan, Pakistan and Malaysia—marks the first time the event has been held outside the Muslim world. That is a testament to the rising global clout of Islamic finance, which adheres to sharia principles such as a ban on interest, offering depositors a stake in investments instead. It is growing 50% faster than conventional banking and weathered the financial crisis far better than its traditional counterparts. Islamic finance is a $1.2 trillion market; this is expected to rise to $2.6 trillion by 2017 as more people in the Muslim world obtain bank accounts. 
In the Middle East, the Gulf states have been at the forefront of the boom. What was for years a sleepy industry has been jolted to life by economic growth in the region, coupled with the demand for sharia-compliant banking. Islamic-banking assets in Saudi Arabia account for more than half the market. Roughly $21 billion in sukuk were issued in Gulf Co-operation Council (GCC) states in 2012, three times as much as 2011. Investors in these countries are increasingly looking to put their money to work overseas. Fahed Faisal Boodai, the chairman of Gatehouse Bank, one of five sharia-compliant banks in Britain, reckons that the GCC accounts for 60-70% of investment in Gatehouse. Other countries are emulating the Gulf model. Recep Tayyip Erdogan, Turkey’s prime minister, has emerged as a leading champion of Islamic finance.
The prospects in the wider Middle East, however, are less clear. Plans by the Muslim Brotherhood when it was briefly in power in Egypt to raise desperately needed cash by selling sukuk foundered in the face of political opposition. In Libya, post-revolution pressure on banks to issue only sharia-complaint loans has stalled conventional lending. Mr Boodai thinks the Arab spring has been a godsend for business. Spooked by the turmoil in large swathes of the region, investors have diverted assets from those places to safer shores. Despite Islamic finance’s being the toast of the town in the City of London this week, the struggle to make it work in the heart of the Muslim world continues.
(The Economist / 01 Nov 2013)

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London: Harmonise Islamic finance standards: World Islamic Economic Forum

London:  The Islamic financial institutions across the world need to reduce cost of financing, harmonise standards and develop a range of new products to achieve a rapid growth of the industry, according to central bank governors who gathered here for the World Islamic Economic Forum.

"Given the lead and nimble footedness of standard banks, Islamic banks need to be equipped with a range of products and services. This can come only through user-friendly approaches," said Hamoud Sangour Al Zadjali, executive president of Central Bank of Oman.

"It is not sufficient for markets to focus on sukuk only, but we must focus on small and medium enterprises (SMEs). Greater consensus is required before the system can mature," added Al Zadjali, while talking at a panel discussion on harmonising global standards on Islamic finance, along with several other central bank governors.

Echoing a similar view, Sultan bin Nasser Al Suwaidi, governor of Central Bank of the United Arab Emirates, said: "We need to reduce the cost of financing. Prior to the growth of the industry, there was a feeling that Islamic finance would be provided at a lower rate to conventional banking and what we see is the opposite. Our practice has been to look at the product."

"The United Arab Emirates has always been open so there is no set of written rules for products. It is done on a case-by-case basis. We look at all products," added Sultan bin Nasser Al Suwaidi.

"In order for Islamic finance to become a force, it has to develop deep and liquid markets. But if you have markets based on buy-and hold investors, they are not normally liquid. We need higher frequency traders — I think this is acceptable — but we need to think about a wider participation for sharia products," opined Dr Paul Fisher, executive director for Markets, Bank of England. 

"There is a need to standardise not just regulations but accreditations for Islamic scholars involved in banking."

He said products do not have to be identical; but the legal basis underlying all of those must the same, so people don't have to worry. Getting consistency over what is sharia complaint would reduce basis risks. People also want to see benchmark rates.

Sharia rulings
Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia, noted that there has been an exponential growth in the Islamic financial system. "We are also more significantly seeing cross-border transactions. Harmonisation of global standards is key. We must distinguish between market practices and global standards. Sharia rulings in transparency and rationale will remain important," she added.

"I don't think harmonisation is about one-size fits all policy. I think there are structures that have been put in place that have broken down some of the barriers that are mostly communication and understanding based," added Mallam Sanusi Lamido, governor, Central Bank of Nigeria.

"For us in Nigeria, we take the position that we want to move the market forward… The conversation has to move beyond scholars but to populations – we must get out of this mindset. Each year there are circumstances without exact precedent. As long as we accept a need for pragmatism and balanced rules, we'll find a way forward," noted Lambido.

The World Islamic Economic Forum entitled 'Changing the world', which was organised by WIEF and the governments of Malaysia and the United Kingdom, was attended by over 2,700 delegates from over 128 countries across the world.

(Times Of Oman / 03 Nov 2013)

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