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Extracts From Authentic Writings on Islamic Banks

Extracts From Authentic Writings on Islamic Banks

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Published by: rehanq on Mar 01, 2012
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Extracts from authentic writings on Islamic Banks’ use of fake
Murabaha and Bai Muajjal and earning disguised interest.
‘Introduction to Islamic Finance' by M. Taqi Usmani:
It should never be overlooked that originally Murabaha is not a mode of financing. It is onlya device to escape from
and not an ideal instrument for carrying out the realeconomic objectives of Islam.
2. 'Elimination of Riba from the Economy' by Prof. Khurshid Ahmed:
The confusion has arisen only from the fact that in case of a credit sale, some people thinkthat the price of time which appears in the form of a higher price is lawful because thetransaction is not that of a loan but of trade. In trade, both the parties are free to agree totransact a business at any price provided they agree to it by their free will. In this case, goesthe argument, both the parties agree at a price, which may be higher than the cash price.Therefore, there should be no objection if the credit price is higher or lower than the cashprice. But this argument leaves out of focus the shariah condition that the price should beagreed by free will of the two parties. We understand that in this case there is ahidden coercion. Why would a person like to pay a higher price if he can buy a certain thingfor a lower price? In this case he agrees to do so because he does not have ready cash.Some people have tried to argue that the difference in the cash and credit prices isallowed since the shariah recognizes
bai' muajjal 
by aconsensus. In fact this argument ismisplaced.
means that the sale can take place on the condition that the buyerwill pay the price later on. It does not necessarily mean that the seller has a right to sell thecommodity at a price which is higher than the price he is charging for a cash sale.It emerges that practically it is impossible for large banks or the banking system to practicethe modes like mark-up,
bai salam
, buy back, murabaha etc in a way that fulfils the Shariaconditions. But in order to make themselves eligible to a return on their operations, thebanks are compelled to play tricks with the letters of the law. They actually do not buy, donot possess; nor actually sell and deliver the goods; but the transaction is assumed to havetaken place. By signing a number of documents of purchase, sale and transfer they mightfulfill a legal requirement but it is by violating the sprit of prohibition.Unfortunately, the current practice of buy-back on mark-up is not in keeping with theconditions on which
bai muajjal 
are permitted. What is being done is afictitious deal which ensures a predetermined profit to the bank without actually dealing ingoods or sharing any real risk. This is against the letter and spirit of Shariah injunctions.
3. Federal Shariat Court Judgment of 14-11-1991
There is a genuine fear among Islamic circles that if interest is largely substituted by 'mark-up' under the PLS operations it would represent a change just in name, rather than insubstance. PLS under the mark-up system is in fact the presentation of the old system of 
interest under a new name. The concept of Bai Muajjal is sale on deferred payment is of thistechnique, though not prohibited according to Hanafi and Hanbali schools of Fiqh and thattoo in exceptional circumstances, it is being misused in its widespread use which is notpermissible as the mark-up does not differ, in essence from the interest system. Aprominent Muslim Economist, Dr. Najatullah Siddiqui while commenting on 'mark-up'system writes as under:-" I would prefer that Bai Mujjal is removed from the list of permissible methodsaltogether. Even if we concede its permissibility in legal form we have the overriding legalmaxim that anything leading to something prohibited stands prohibited. It will be advisableto apply this maxim to Bai Muajjal in order to save interest-free banking from beingsabotaged from within"(Money and Banking in Islam by Ziauddin Ahmed)"Those needing finance for purchase or import of inputs would approach the banks to buy itfor them with the commitment to buy it from the bank at a higher but deferred price. Themark-up will naturally tend to be higher, the longer the period of time involved. The bankswill have guarantee of receiving back the price they actually pay plus a predeterminedreturn as mark-up'. For practical purposes it will be as good for the bank as lending on afixed rate of interest. It should, therefore, be abundantly clear that if the banking system isto be Islamized mark-up is no solution and some way has to be found which preserves thefinancial character of the banking institutions and steers clear of interest which is prohibitedby Islam.
4. Studies in Islamic law & Society: Islamic Banking and Interest by Abdullah Said :
Murabaha finance and the higher credit price involved therein has clearly shown that thereis a value of time in murabaha based finance which leads, albeit indirectly, to theacceptance of the time value of money. It has been conveniently ignored that accepting thetime value of money logically leads to the acceptance of interest. Accepting time value inmurabaha transactions (which as has been shown in this chapter, is scarcely any differentfrom a purely monetary transaction, and then rejecting the same in monetary transactionsappears to be inconsistent and illogical. If Islamic law can allow murabaha financing as it ispracticed under Islamic banking then the question is, "is there any moral basis for notallowing fixed interest on loans and advances?"
5. Kluwer Law International
Islamic Law and Finance.
Islamic banks have survived not on profit and loss principles (mudaraba) but via mark-up(Murabaha) transactions some of which have beencondemned as 'synthetic' interestsubstitutes."
6. Islamic Banking: True Modes of Financing by Dr. Shahid Hassan Siddiqu.
Murabaha in ancient Islamic connotation reffered to a particular kind of simple sale andhad no relevance whatsoever with a transaction of financing. In view of the difficulties andrisks visualized in adopting PLS system of Islamic banking on a large scale, in recent times,the Murabaha for all practical purposes was transformed from the sale transaction to be amode of financing.There are however, serious reservations to the widespread use of murabaha technique as a mode of finance where the bank purchases the commodity only
after the customer has agreed in principle to purchase it from the bank at profit mark-up. Itmust therefore be appreciated that under Murabaha, a trading transaction is beingtransformed into a mode of finance just to meet the Shariah requirements.While referringto the alternate modes of financing based onMurabaha and Ijara (Leasing) etc Justice TaqiUsmani observes that if designed to fulfill the Sharia requirements, these codes can beadopted as transitory measure. He however cautions that"- - - there should be a gapbetween purchasing the commodity and selling it to the customer and the risk of owningthe commodity during the period should be borne with all its basic components and all its
essential consequences” In actual practice, practically there is no gap as in many cases, the
bank makes the payment almost simultaneously or even after the goods are delivered atthe premises of the client. The bank thus does not in fact assume any risk including eventhe risk of the goods, during the short period, the bank is supposed to own and possessthese goods. The banks however get a return at a pre-determined fixed rate, which is notdependent on the operational results of the entrepreneur. This in any case does not appearto be in conformity with the requirements of Shariah.
Taqi rightly observes:-
a) Islamic banks are using the Instrument of Murabaha and Ijarah within the frameworkof the conventional benchmarks like LIBOR etc, where thenet result does not differmuch from interest-based transactions.b) By not even gradually enhancing the financing on PLS basis, the basic philosophy of Islamic banking seems to be totally neglected by the Islamic banks.c) The Shariah scholars have allowed the use of fixed return financing techniques ieMurabaha and leasing etc only in those spheres where Musharaka can not work.d) When the common people realize that the net result in the transaction of the Islamicbanks is the same as was in the transactions of conventional banks, they becomesceptical towards the function of Islamic banks. It therefore, becomes very difficult toargue for the case of Islamic banking before the common people, especially before thenon-Muslims who feel that it is nothing but a matter of twisting documents only.Najatullah siddiqui says:-"The payment obligations of the firms operating with Mruabaha-financed goods and services are independent of the profitability of the enterpriseunlike profit-sharing, thus exposing it to the charge being inequitable as in the case of debtfinancing. At this point it is important to mention that Maududi observes:- " Islam says inclear terms that the lender is not justified in earning a fixed rate of profit, irrespective of theoperational results of the business." It therefore, appears that, in most cases, the fixedreturns charged by banks on transactions which are financial in nature are not permissiblesimply by providing them a cover of Murabaha or the like modes which are in facttransactions of sale.Hasan Uzzaman says."- - The ghost of interest is haunting banks to calculate a fixed ratepercent per annum in many modes of financing including Murabaha (Bai-Mujjal mark-up)etc. The spirit behind all these contracts seems to make a sure earning comparable withprevalent rate of interest and as far as possible, avoid losses which otherwise could

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