Wednesday, 29 September 2010

Another argument on Islamic banks

Islamic Banks and other Islamic financial institutions are today lending money on interest through the back-door by disguising a loan as a sale on credit. They call it murabaha! But it is most certainly not murabaha! It is Riba! What the bank does is to offer an item on sale in a credit transaction with a price substantially higher than the cash price. While credit transactions are Halal, since the blessed Prophet (sallalahu ‘alaihi wa sallam) himself engaged in such transactions, there is no evidence that the credit price in such transactions was ever higher than the cash price. When credit price is higher than cash price then the implication would be that time has value. And the essence of Riba is that money grows over time. When a client wishes to purchase something, but does not possess the cash with which to purchase it, the so-called Islamic bank enters into the fiction of purchasing the item at its cash price and then selling it to the client on credit. The interest charges are added to the selling price thus making a credit price for the item substantially higher than the cash price." (This is taken from another website which criticises Islamic banking)

Generally the author is trying to emphasise that Islamic banks uses (time=money) in deferred payments. This is actually not the case (theoratically). If the price has been agreed between the client and the Islamic banks the price has to be settled even if the client wants to finish it earlier. For example a car is £5000, and it is being sold by the bank to the individual for £7000 after 3 years. I've explained earlier in my previous entry that it is not wrong in Islam to gain profit. The author admits that credit transactions are halal. So the problem here is that when time effects the final price of the product.

An individual who bought the car for £7000 in 3 years wishes to finish the payment in 2 years instead. Usually with conventional banking that individual will get a discount for finishing his/her payment earlier than the agreements. To simplify it, the individual has to pay £6000 if he/she finishes his/her payments in 2 years. In Islamic banking however, this is not the case. Even if a person wishes to finish the payments earlier, it will still be £7000 because if the bank gives discount than, the Islamic banks does involve the final price of the product (time=money). Therefore if it is still £7000, time does not have any effect on the final product (which means time does not = money). But I happened to know a few "Islamic banks" in Malaysia which gives discount. It has been a while since I've interacted with any Islamic banks so I'm not sure if they have changed their conduct. The Islamic banks in Malaysia are too worried of competition with the conventional banks therefore they have made it permissible to give this discount. As I've said before it is up to us, the users of Islamic banks to make sure that the Islamic banks are actually conducting Islamically.

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