Three situations can arise here :
i) Consumption loans: Bank will extend interest-free loans for
genuine consumption purposes.
ii) Borrowing for Investment : The banks will enter into Mudaarabah
and Mushaarakah agreements with the borrowers of the fund for Investment
purposes. The agreement will specify the proportions according to which
profits/loss will be shared between the investor and the bank. After charging
the Administrative expenses, the bank will distribute the profits among
the share holders and depositors according to the terms of agreement.
Q. (i) Does the interest on loans floated by the Government to
meet national requirements come under Riba?
(ii) What alternative can be suggested for the banks in case they
grant loans without interest for various requirements?
A. (i) Yes the Qur'anic injunctions regarding the prohibition of
interest is general. The interest is prohibited both in the public and
private sectors and for all types of purposes. Any excess payment made
over and above the principal amount is Riba and is thus Haraam. For more
detailes see the answer to the question (1).
(ii) The Islamic Banks will finance viable investment/production
projects on the basis of Mushaarakah / and or Mudaar- abah. As for the
financing of genuine consumption needs on the basis of Qarz-e-Hasana is
concerned, the following cons- iderations will have to be kept in view
:
a) The amount of loan cannot exceed reasonable limits. b) Income
accruing from the collateral security like land or house will be deducted
from the amount of loan. c) If the debtor is unable to pay back the loan
or he dies and there is no known way to repay his loan, then Bait-ul-Mal
will make payment of the loan to the Bank.
Q. Can, in the
light of the Injunctions of Islam, any differentiation be made between
private and public banking in respect of charging interest on banking
facilities or services rendered?
A. Public and privete banking institutions are treated at part
in respect of the Islamic injunction of prohibition of interest. No interest
is allowed on any financial transaction in both public and private banks.
However, the banks both in public and private sector can charge service
charges to take care of administrative expenses.
Q. (i) Can the
capital, according to the Injunctions of Islam, be regarded as an agent
of production thus requiring return for its use?
(ii) Does devaluation of the currency affect the payment of loans
taken before such devaluation?
(iii) Can inflation causing rise in the cost/value of gold and
consumer goods in terms of currency have any affect on the sum borrowed?
A. (i) The word capital is used in two meanings : Physical and
financial.
Physical capital like machinery, building, etc. participating in
the production process are allowed to claim their reward in the form of
rental.
Financial capital like money and near-money instruments taking
part in the production process through Mudarabah or Musharakah arrangement
can participate in profit/ or loss. However, no fixed return is admissible
for the use of money capital.
(ii) The question is two dimensional. The first relates to the
effect of devaluation on the internal loans. In such loans, the same amount
of loan will be repayable as before the devaluation. In this case, Imam
Istijabi reports the consensus of Fuqahah on the point that, if there
is any charge in the value of currency, then the same amount of currency
units will be repaid as were loaned.
As far as the payment of the external loans is concerned, the devaluation
will involve extra payment proportional to the rate of devaluation on
such loans.
(iii) The answer here is essentially related to the above answer.
A given sum borrowed before inflation will be repaid in the same amount,
after the inflation. The inflation tends to reduce the real burden of
the loan. From this angle, it tends to favour the borrower against the
lender. To protect the lender, the indexation of loan is not allowed because
the indexation while protecting lender, hurts the borrowers.
Real answer to the problem of inflation is the introduction of the Islamic
Economic system in totality. An important feature of this system in the
monetary sector is prevalence of a relatively constant value of money.
Q. What would
be the alternatives in the context of present day economic conditions
to carry on domestic and foreign trade efficiently without availing of
Banking facilities based on interest?
A. The scholars of Islam have suggested a number of financial instruments
to facilitate internal and external trade. The most preferred are based
on the principles of profit-loss sharing, like Mudaarabah and Musharakah
arrangements. The other less preferred are : bai Muajjal, Ijrara, Ijara
wa iqtina and Bai-salam. They are defined as below:
Bai Muajjal (Cost plus trade financing): The bank enters into an agreement
with his client to purchase merchandies for the client and then the bank
sells them to the client on the basis cost plus agreed profit margin,
repayable in installments over a specified period.
Ijara (Lease or hire): The bank acquires machinery / equipement / building
etc. for his client and charges a certain rental for their use.
Ijara wa Iqtina (Hire-Purchase): The bank finances the purchase of equipment
and the client uses them under a contract. The contract provides that
the client will pay the cost of the instrument and a share in the net
rental value of the equipment which is proportional to the outstanding
shares in the total investment.
Ba'i Salam: The bank enters into an agreement with the client for advance
purchase of merchandies and makes the paym- ent of the agreed amount at
the time of agreement.
It is important to note that above mentioned techniques are less than
desired because of their resemblance to the interest. Therefore, minimum
use of these techniques will be made in Islamic banking.
Q. Is it possible
to carry on insurance business on the transactions between two Muslim
States or a Muslim and non-Muslim State?
A. Interest is not permissible on economic/financial transactions
occurring between two Muslim countries. Muslim countries can eliminate
interest from their economy provided they make since and serious efforts.
What is needed is to muster the public confidence. When this is achieved,
the Islamic State can realize more tax revenue through extra taxes as
well as through interest-free loans and voluntary contributions. Then,
there may not be any need to raise interest-based loans.
However, in cases of extreme needs, a Muslim country can seek interest-based
loans for as small amount and for as sho- rter period, as possible.
The Islamic State provides for risks of poverty, sickness or any other
calamity from the Bait-ul-Maal, Zakat-based social security. Insurance
administered by the state take care of incidences of this nature.
Insurance business can be organized in the private sector on the basis
of the principles of cooperation and mutual security. The important thing
is to ensure that the elements of Riba and gambling do not enter into
the functioning of the insurance business. This can be done by forming
mutual insurance companies where policy holders contribute to the insurance
fund by way of gifts. The insurance fund may be invested on the basis
of Mudaarabah and may also be available as Qarz-e- Hasana to the policy
holders. The payment to a policy holder at the time of any calamity may
be considered as a gift from the rest of the policy holders. The profit
earned on the insurance fund may be distributed on the basis of the relative
contr- ibutions to the fund.
The above-mentioned insurance scheme may be Islamically accepted as it
is purged of the elements of gambling and interest.
Q. Does interest
accruing on the provident Fund or Saving Bank Account come under Riba?
A. The interest accruing on the saving bank account can be considered
as Riba if the income earned by the proceeds of this account do not qualify
in terms of profit-loss sharing conditions. For instance, if the return
from the saving bank account is linked to the return of any single government
undertaking. The reason is that the proceeds of the saving account become
a part of the general government budget. However, if the return from the
saving bank account are specifically earmarked, are used in a specific
undertaking and the account-holders share in the profit/loss of such undertaking,
then the resulting income become Islamically legitimate.
In the light of Islamic injunctions, the interest earned on the provident
fund does not fall within the definition of Riba. The reason is that the
employee does not own the amount of the fund. During the period in which
the interest has been earned. Therefore, the excess amount earned over
the actual amount deposited cannot be considered Riba. Here, the Fuqaha
make two suggestions: One is that the government departments have added
the excess amount without the written appr- oval of the employee. In this
case, accumulating excess amount are Riba free. In the seccond case, the
employee himself can ask the government to treat his fund as interest-based,
then the excess amount resembles Riba.
In the light of Islamic injunctions, the interest earned on the provident
fund does not fall within the definition of Riba. The reason is that the
employee does not own the amount of the fund, during the period in which
the interest has been earned. therefore, the excess amount earned over
the actual amount deposited cannot be considered Riba. Here, the Fuqaha
make two suggestions: One is that the government departments have added
the excess amount without the written appr- oval of the employee. In this
case, accumulating excess amount are Riba free. In the second case, the
employee himself can ask the government to treat his fund as interest-based,
then the excess amount resembles Riba.
Q. Can the payment
of prize money on Prize Bond or other similar Schemes be regarded as Riba?
A. The Payment on prize money or prize bond resembles gambling
(Qimar). The income earned through prize is generated without participating
in any real economic activity. Therefore, the payment on prize money is
illegitimate from Islamic point of view.
Q. Would it
be lawfulunder Islamic law to differentiate between business loans on
which interest may be charged and consumption loans which should be free
of interest?
A. The business activity will be financed through legitimate
means, like Mudarbah and Musharakah and also some of the other instruments
outlined in the answer to question. The consumption loan will be available
as Qarz-e-Hasana through Islamic backing system.
Q. If interest
is fully abolished, what would be the inducements in an Islamic Economic
System to provide incentives for sav- ing and for economising use of capital?
A. It is very well recognised that interest is not the primary
or otherwise an important factor for the saving. The overall savings in
the economy primarily depend upon the level of income. Some of the basic
motivating factors for saving are: a) meeting future exigencies, b) providing
for old age, and, c) bequests.
Since these factors will remain even after the elimination of interest,
therefore, it is most likely that the overall rate or level of seving
will not be affected significantly (after the abolition of Riba from the
economy).
Muslim economists have suggested a wide range of saving instruments which
will be available to the potential savers in an interest free economy.
These instruments vary in terms of liquidity, risks and returns so as
to match preferences of the savers. Apart from existing profit-based instruments
like shares of joint stock company, N.I.T. Units, ICP Mutual funds and
investors deposit account and participation term certificate, new saving
instruments compatible with Shariah, can be brought into being. Among
them, Mudarabah bonds floated by the Government as well as by the private
concerns can play important role. Similarly, a variable dividend security
issued by the state bank can serve as an important instruments. The holders
of this security will participate in its profits. This will provide a
low risk medium of investment for the private investors. Also, it can
serve as a substitute for Government Bonds and Treasury Bills for Investment
of the surplus funds of the banks and other financial institutions.
Lastly, the Government Bonds bearing no interest can be issued when the
holders may enjoy tax concessions.
As regards the role of interest as a discounting factor, it is pointed
out that even in the Western countries, the pure rate of interest is considered
to be an inadequate measure as a discount factor. It is usually adjusted
for a risk-premium.
In an Islamic Economy, the rate of return on real investment can play
the role of discount factor. Practically, it can be app- roximated by
the return on NIT Units.
Q. Can an Islamic
State impose any tax on its subject other than Zakat and Ushr?
A. There has been two views among the scholars about this question.
The first view explicilty recognizes the sanctity of private property
and therefore does not allow an Islamic state to use taxes other than
Zakat and Ushr. The second and more dominant view is based on the recognition
that an Islamic state has to perform many socio-economic functions of
Amar Bil-Maaruf Wa Nahi-An-al-Munkar, and defence. Among these functions,
alleviation of poverty, economic growth, social welfare services and social
justice are important. Achievement of these goals may necessitate more
revenue than can be available from Zakat and Ushr. Therefore, an Islamic
state can impose other taxes to be able to perform its multifarious functions.
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