Extracts from authentic writings on Islamic Banks use of fake Murabaha and Bai Muajjal and earning disguised

interest.

1. Introduction to Islamic Finance' by M. Taqi Usmani: It should never be overlooked that originally Murabaha is not a mode of financing. It is only a device to escape from interest and not an ideal instrument for carrying out the real economic 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 think that the price of time which appears in the form of a higher price is lawful because the transaction is not that of a loan but of trade. In trade, both the parties are free to agree to transact a business at any price provided they agree to it by their free will. In this case, goes the 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 cash price. But this argument leaves out of focus the shariah condition that the price should be agreed by free will of the two parties. We understand that in this case there is a hidden coercion. Why would a person like to pay a higher price if he can buy a certain thing for 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 is allowed since the shariah recognizes bai' muajjal by aconsensus. In fact this argument is misplaced. Bai'muajjal means that the sale can take place on the condition that the buyer will pay the price later on. It does not necessarily mean that the seller has a right to sell the commodity 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 practice the modes like mark-up, bai salam, buy back, murabaha etc in a way that fulfils the Sharia conditions. But in order to make themselves eligible to a return on their operations, the banks are compelled to play tricks with the letters of the law. They actually do not buy, do not possess; nor actually sell and deliver the goods; but the transaction is assumed to have taken place. By signing a number of documents of purchase, sale and transfer they might fulfill 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 the conditions on which murabaha or bai muajjal are permitted. What is being done is a fictitious deal which ensures a predetermined profit to the bank without actually dealing in goods 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 'markup' under the PLS operations it would represent a change just in name, rather than in substance. 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 this technique, though not prohibited according to Hanafi and Hanbali schools of Fiqh and that too in exceptional circumstances, it is being misused in its widespread use which is not permissible as the mark-up does not differ, in essence from the interest system. A prominent 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 methods altogether. Even if we concede its permissibility in legal form we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to Bai Muajjal in order to save interest-free banking from being sabotaged 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 it for them with the commitment to buy it from the bank at a higher but deferred price. The mark-up will naturally tend to be higher, the longer the period of time involved. The banks will have guarantee of receiving back the price they actually pay plus a predetermined return as mark-up'. For practical purposes it will be as good for the bank as lending on a fixed rate of interest. It should, therefore, be abundantly clear that if the banking system is to be Islamized mark-up is no solution and some way has to be found which preserves the financial character of the banking institutions and steers clear of interest which is prohibited by 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 there is a value of time in murabaha based finance which leads, albeit indirectly, to the acceptance of the time value of money. It has been conveniently ignored that accepting the time value of money logically leads to the acceptance of interest. Accepting time value in murabaha transactions (which as has been shown in this chapter, is scarcely any different from a purely monetary transaction, and then rejecting the same in monetary transactions appears to be inconsistent and illogical. If Islamic law can allow murabaha financing as it is practiced under Islamic banking then the question is, "is there any moral basis for not allowing 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' interest substitutes." 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 and had no relevance whatsoever with a transaction of financing. In view of the difficulties and risks 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 a mode 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. It must therefore be appreciated that under Murabaha, a trading transaction is being transformed into a mode of finance just to meet the Shariah requirements.While referring to the alternate modes of financing based onMurabaha and Ijara (Leasing) etc Justice Taqi Usmani observes that if designed to fulfill the Sharia requirements, these codes can be adopted as transitory measure. He however cautions that"- - - there should be a gap between purchasing the commodity and selling it to the customer and the risk of owning the 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 at the premises of the client. The bank thus does not in fact assume any risk including even the risk of the goods, during the short period, the bank is supposed to own and possess these goods. The banks however get a return at a pre-determined fixed rate, which is not dependent on the operational results of the entrepreneur. This in any case does not appear to be in conformity with the requirements of Shariah. Taqi rightly observes:a) Islamic banks are using the Instrument of Murabaha and Ijarah within the framework of the conventional benchmarks like LIBOR etc, where thenet result does not differ much 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 ie Murabaha 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 Islamic banks is the same as was in the transactions of conventional banks, they become sceptical towards the function of Islamic banks. It therefore, becomes very difficult to argue for the case of Islamic banking before the common people, especially before the non-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 Mruabahafinanced goods and services are independent of the profitability of the enterprise unlike profit-sharing, thus exposing it to the charge being inequitable as in the case of debt financing. At this point it is important to mention that Maududi observes:- " Islam says in clear terms that the lender is not justified in earning a fixed rate of profit, irrespective of the operational results of the business." It therefore, appears that, in most cases, the fixed returns charged by banks on transactions which are financial in nature are not permissible simply by providing them a cover of Murabaha or the like modes which are in fact transactions of sale. Hasan Uzzaman says."- - The ghost of interest is haunting banks to calculate a fixed rate percent 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 with prevalent rate of interest and as far as possible, avoid losses which otherwise could

occur". He adds that " they (second line techniques), have failed to do away with undesirable aspects of interest thereby they have retained what an Islamic bank should eliminate." It does not appeal to the mind that by simply assuming some risks by banks in financing through Murabaha and the like during shifting of stocks from the godown of the seller to the entrepreneur (party availing finance from the bank) which can also be practically avoided and ensuring a fixed return on financing while not sharing in the operational losses of the entrepreneur, which is the essence of Islamic banking, the objectives of the Shariah are met. It is obvious that the widespread and persistent use of the second line techniques has neither contributed in removing the injustices of the interest-based system as ordained by Holly Quraan (2:279) nor in securing the socioeconomic justice in the society. If Islamic banks persist with these modes for bulk of their operations, the cause of Islamic banking would never be fulfilled. Unfortunately these modes have been allowed to be perpetuated by Islamic banks. This is injurious to the cause of Islamic banking. During the last few years, a number of western banks, economists and journalists have posed to this writer a rather cynical question about what the real difference between the interest-based system and its Islamic counterpart as being practised by Islamic banks actually is. However, even they concede that the PLS system of Islamic banking, if practised in earnest, could ensure socio-economic justice across the globe. It is therefore, seriously apprehended if sad state of affairs is allowed to continue, even many innocent Muslims may develop doubts about the feasibility, practicability and usefulness of the' Islamic system of banking' notwithstanding that the fault lies with us and not with the system. To make the situation worse, some of the Islamic banks find it more feasible to divert part of their funds received from Muslims to multinationals and large corporations of the West. 7. 'Islamic Finance' by Rodney Wilson:Islamic finance is often approached from the perspective of the service provider rather than the needs of the client. The financial instruments have largely been developed from what is deemed practicable and convenient for the bank, provided they can be seen to be consistent with Sharia law. Often it has been a case of adapting and modifying conventional instruments so that they can be seen to be Islamically legitimate. Murabaha has become by far the most widely used Islamic financing instrument, accounting for over 80% of Islamic financing. The attraction is the low risk involved with this type of trade financing from the bank's point of view. The return is certain as the mark-up is written into the agreement, and the dates when the payment or payments will be made are also specified in advance. The only risk is of payments default by the purchaser, but when such trade financing is for relatively short periods, the risk is minimal. The probability of a significant change in the financial position of the typical importer seeking Murabaha financing is relatively small. Some Shariah boards have questioned the extensive use of Murabaha in view of the limited risks involved to the financier, and the similarity of the percentage mark-up to interest. The basic principles are different, however, but a number of Islamic financial institutions notably the Al-Rajhi Banking and investment corporation,

have attempted to respond to these criticisms by decreasing the amount of Murabaha financing and increasing the use of other Islamic financing instruments. 8. 'Islamic Banking and Finance' by Andrew Cunningham Islamic banking in practice is often very different from Islamic banking in theory. The majority of actual Islamic transactions involve disguised interest rather than genuine sharing of risk, profit and loss. 9. 'Islamic Finance Theory and Practice by Paul. S Mills and John R. Presley. The asset side of Pakistan's interest-free banks mirrors that of Islamic banks elsewhere. Approximately 80-90% of return-bearing assets have been devoted to trade related markup techniques with some participation in equity investment and musharika partnerships. The mark-up contracts used bear striking resemblance to interest-bearing trade credits. Conclusion: For their own good and good of others, Islamic bankers and their Shariah advisors are requested to give thoughtful consideration to the above writings and bring Islamic banking operations strictly in line with the letters and sprit of Islamic injunctions.

Abdul Wadood Khan P.O.Box 62380, Riyadh 11585, Saudi Arabia Tel. +966-1-4644915 25/1 Street 15 Cavalry Ground , Lahore Cantt. Pakistan . Tel. +92-42-6610678, 6676678 Email: aw_khan@hotmail.com www.realislamicbanking.com www.geocities.com/aokhan2/index.htm

BASIC DEFICIENCY ISLAMIC BANKS AND THE REMEDY

AND

DEFECTS

IN

Note : It is a commentary on IDB-IRTI occasional paper no. 4 Islamic Banking: Answers to some frequently asked questions authored by Dr.Munawar Iqbal, Dr.Mabid Ali Al-Jarhi and Dr.M.Umer Chapra. The comments relate mainly to the opinions and proposals which, though well-intentioned, are faulty and detrimental to the cause of elimination of interest. The comments are forthright made in right earnest and should be taken in that spirit. However, I offer my apologies if any comment hurts the feelings of any of the respected authors. Helpful response, queries and reasoned criticism will be gratefully received. UNANSWERED QUESTIONS: Following challenging questions in a published article written by a highly placed bureaucrat in Pakistan trying to prove that Supreme Court order to eliminate interest cannot be implemented, remain unanswered.

(i)

Is there any single bank in the Islamic or Non-Islamic world which is truly run on an interest-free basis? Can a Central Bank conduct its monetary policy without a norm of interest? Are not the practices of Islamic banks a queer blend of interest-based modes of finance carrying a faade of Islamic names? What are exactly the Islamic compliant instruments of finance? Can these instruments meet the myriad and diverse needs of modern trade, finance and banking? When and where have these instruments been applied and with what degree of success? Does the Islamic Development Bank as the model Islamic bank operate on interestfree basis? If that is the case why did it offer to extend a loan to the government of Pakistan after nuclear detonation at an interest rate of 5% above LIBOR? By what mechanism can Islamic banks undertake financial intermediation

(ii) (iii)

(iv)

(v)

(vi)

(vii)

which is the primary function of all commercial banks throughout the world? I have brought these questions to the attention of many Islamic economists pleading that these can be satisfactorily answered by inception of an interest-free lending instrument (TMCL) in Islamic banks. My several repeated appeals have remained un-replied. Whilst Islamic economists are keeping silent the advocates of interest have succeeded in getting one year

extension in the period fixed in the Supreme Court order for eliminating interest and now they are trying to have the Supreme Court order set aside or shelved. THE DEFICIENCY: The paper limits Islamic modes of finance to carrying out of investment and / or the purchase of goods, services and assets. These modes cannot meet the financial needs of very large number of cost-conscious privately owned firms keen on protecting their independence and ownership structure. Such firms form large source of productive manpower employment and they cannot be ignored. Their financial needs in Islamic financial system can be fulfilled only through interest-free lending. Hence to satisfy the financial needs of all sectors of the economy interest-free lending must be included in the Islamic modes of finance. THE DEFECTS: For meeting their own short-term needs of liquidity Islamic banks take loans on interest from conventional banks and almost all Muslim governments also do the same. Muhammad Taqi Usmani who is chairman / member on Shariah Supervisory Boards of a dozen Islamic banks and financial Institutions, in his book INTRODUCTION TO ISLAMIC FINANCE writes The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces the Islamic banks to turn to the conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged Interest. The paper places modes of financing used by Islamic banks in two categories advancing funds on a profit-and-loss sharing basis and financing the purchase / hire of goods (including assets) and services on a fixed-return basis. The paper mentions the share of profit-sharing modes in the total financing by Islamic banks is very small. Most of the financing is provided on a Murabahah basis. Murabahah which is permissible inShariah is a sales contract at a price markup between buyer and seller. In fake Murabahah transactions Islamic banks do not actually buy or sell and they simply provide finance to buyers in a round about manner through proxy buying and selling and use this mode only to legitimize fixed-return on capital which virtually is the same as interest earned by conventional banks. Following excerpts from an article written by Arshad Zaman and Asad Zaman published in April 2001 issue of Islamic Economic Studies support this contention. Thus in principle interest-based transactions have been replaced by those based on Murabahah, leasing and some Musharakah all of which are permissible under Shariah. Appearances are deceiving, however, and only the form of the transactions have changed with no change in the underlying transactions. Another issue of importance to consumers is the financing of loans . These can easily be handled via the instrument ofMurabahah . There are virtually no differences between it and the conventional interest-based financing. The paper acclaims (i) Islamic scholars and practical bankers took up the challenge and have made commendable progress in the last 25 years in providing a number of such instruments. (ii) Another manifestation of the success of Islamic banking is the fact that many conventional banks have also started using Islamic banking techniques in the conduct of their business, particularly in dealing either with Muslim clients or in predominantly Muslim regions. However, borrowing on interest and earning profits akin to interest by Islamic banks show that

the financing modes in their use bring prosperity to them and attract conventional bankers, having no ideological preference for Islamic ways, to open Islamic windows only to exploit religious sentiments of Muslims, but these modes cannot pave the way to Islamise the financial system. It is a matter of serious concern for committed practical bankers and hierarchy in IRTI who should either devise a new financial intermediation mechanism for getting the Islamic and conventional banks rid of interest or give serious consideration to accept the way shown by late Professor Sheikh Mahmud Ahmad. Upon my taking up the problem of shortcomings in Islamic banks personally with IDB President during Fourth International Conference on Islamic Economics and Banking held in UK in mid-August 2000 I received the following encouraging response from IDB: REFERRING TO THE DOCUMENTS SUBMITTED TO H.E. THE PRESIDENT OF ISLAMIC DEVELOPMENT BANK (IDB) ABOUT YOUR OBSERVATION ON THE ISLAMIC BANKING MOVEMENT, WE APPRECIATE VERY MUCH YOUR GOOD EFFORTS AND INSIGHTS. THE ISLAMIC BANKS' OFFICE OF IDB WILL TRY TO DO ITS BEST TO COMMUNICATE TO THE ISLAMIC BANKS THE SHORTCOMINGS THAT YOU HAD MENTIONED IN YOUR DOCUMENT. Unfortunately further to the above advice, nothing appears to have been done by Islamic Economists and Bankers towards eliminating interest from the banking system. DESCRIPTION OF ISLAMIC BANK given in the paper needs to be modified to include interest-free lending and borrowing in the scope of activities and to exclude fixed-return on capital akin to interest. Without these modifications Islamic banks cannot qualify to be Islamic nor can they meet the financial needs of all sectors of the economy. THE REMEDY: Interest-free lending and borrowing can remedy the deficiency and defects in Islamic banks and eliminate interest from the banking system. Hence the need for an interestfree lending instrument. Wide spread practical use of Islamic concept of Qard Hasan i.e. interest-free lending for productive purposes is highly commendable and deserves to be encouraged as according to a Hadith reward for lending is eighteen times. There are several authentic examples in Islamic history of staunch Muslims investing loaned sums in trade. It is a gross misconception that Qard Hasan is meant only for the poor and disabled whose needs are fulfilled through zakah and sadaqaat in Islamic economic system. It is a pity that nowhere in the paper under discussion interest-free lending is mentioned although it is the most useful and commendable means for economic development. The paper mentions Monetary economists insist that a zero nominal interest rate is a necessary condition for optimal allocation of resources, when this matter was investigated within general equilibrium modes it was found that a zero interest rate is both necessary and sufficient for allocative efficiency, those studies have shown that a system which is based on profit-sharing is not only viable, but also carries with it many advantages which make it superior to interest-based ones. No doubt profitsharing mode of financing is far superior to interest-based lending, but due to moral hazard profit-sharing on large scale has proved to be impracticable. In these circumstances it is necessary to put in use another zero interest rate mechanism i.e. interest-free lending as a mode of finance. Interest-based lending, though exploitative, has played a major role in the enormous economic development by providing finance freely and widely to industry, commerce and agriculture. Interest-free lending being commendable as a rewarding mode

in Shariah will definitely bring economic development to an extent far greater than that brought by interest-based lending and what can be expected from wide spread use of profitsharing which is permissible in Islam but not as rewarding as interest-free lending. PLANNED GRADUALISM: The paper claims gradualism in implementing the Shariah injunctions is well-recognised. It is a misconception because each and every Divine command was fully implemented immediately upon revelation. There is not a single instance of any sinful act being permitted to persist for any duration. The juristic rule quoted in the paper what cannot be attained in its entirety should not be left entirely applies to attainment of good and not to shedding of evil. Allahs laws are all for the good of mankind at all times and in all circumstances. It is inconceivable that elimination of interest even if it is done abruptly could bring any harm because Allah assures in Quraan those who act upon My instructions will have nothing to fear nor will they be sorry. It is therefore wrong to contend as is done in the paper that it is not advisable to carry out transformation from a conventional to an interest-free banking system abruptly, as this may subject the banking system as well as the rest of the economy to needless shocks. The paper does not specify what are those needless shocks to the economy and banking system which need to be avoided at the cost of earning Allahs wrath by maintaining interest in the banking system. Gradualism is understandable and can be acceptable for transforming the whole economic system to Islamic System. However, gradualism in eliminating interest cannot be acceptable in any circumstances because giving up of interest is condition of Iman and Quraan declares war from Allah and His Rasool saws against perpetrators. Interest must, therefore, be eliminated forthwith and not gradually. No doubt every system has its own institutional requirements but these come into being through constant evolving process which goes on side by side with the expansion and development of the system. However, elimination of interest must not be delayed on any account. HYPOTHETICAL PLAN TO APPLY THE ISLAMIC MONETARY SYSTEM AS PER TABLE 5 IN THE PAPER indicates universal + Islamic banking in the first two-year phase, no commercial banking during the second two-year phase and only Islamic banking in the third two-year phase. The plan states Obviously, switching to universal banking and adapting to Islamic banking must be done within a specified time limit. A period of four years, extending to the end of the second phase would be reasonable. The plan suggests a period of four years for adapting to Islamic banking without defining actual practical steps for achieving these objectives. The plan implies that interest will persist for at least four years from the day any establishment decides to implement Allahs Will or in other words it will take four years to bow to Allah! Allahs laws are enforceable at all times and in all circumstances. The paper does not indicate what are the obstacles in the way of eliminating interest removal of which will require as long a period as four years. The obstacles if any in eliminating interest will be either imaginary or man-made as there can be no real obstacle in the way of eliminating interest forthwith as Allah declares in Quraan He has not produced any obstacle for you in (the way to follow the edicts of) the religion and also whosoever fears Allah, He makes for him way out (of difficulties) and

provides to him from (sources) which he cannot imagine and whosoever depends on Allah sufficient is He for him. DOCTRINE OF NECESSITY AND INTEREST-BASED FOREIGN BORROWING: The paper suggests interest-based foreign borrowing can only be resorted to in case of compelling need for development purposes which amounts to necessity as determined by the Ulama. Doctrine of necessity can be invoked only in cases where Allah Himself has allowed some concession like eating pork for saving life. It cannot be invoked for continuing interest for which Allah has not allowed any concession whatsoever. Ulama cannot permit what Allah has prohibited. For Muslims nothing can be more compelling a need than desisting from committing a planned sinful act amounting to rebellion against Allah and His Rasool saws. Islamic countries can get rid of interest-based foreign borrowing by setting up a Central Depository-cum-lender of last resort for receiving deposits from Islamic banks and countries having surplus funds and advancing loans to other Islamic countries and banks needing funds for development. Central Depository will use same interest-free lending and borrowing mechanism as suggested for Islamic banks. The Central Depository will invest surplus available funds in profitable Islamic modes of business. PUBLIC DEBT: The paper suggests in the first phase the country must seek debt-relief (debt forgiveness as well as rescheduling) through active and energetic contacts with donors forums. The fact that it is embarking on serious and rigorous financial and structural adjustment program would go a long way in persuading donors to provide debt-relief. So-called donors are in fact lenders of money on interest and they are no friends of the borrowers. Their recent behavior clearly shows that they want to dictate the borrowing countries. It is a mistake to expect them to do anything to help the borrowers to come out of the debt morass and become independent of them. Instead of begging for debt forgiveness or debt rescheduling Islamic countries must build self-sufficient interest-free financial system capable of clearing current debts and providing interest-free loans in times of need. These objectives can be very well achieved by utilizing interest-free lending and borrowing mechanism as suggested for Islamic banks. NOVEL IDEA OF PRACTICAL APPLICATION OF QARD HASAN IN BANKING was presented by late Professor Sheikh Mahmud Ahmad applauded in Supreme Court of Pakistan judgment in Riba case as our countrys most outstanding economist and researcher and a leading thinker--had devoted considerable part of his life in the study of the theory of interest. He devised interest-free lending instrument which he named as Time Multiple Counter Loan TMCL consisting of two simultaneously exchanged interest-free loans between two parties such that the multiple of the amount and period of one loan equals the multiple of the amount and period of the other loan. It facilitates interest-free loaning of large sums against counter-loans of smaller sums advanced for proportionately longer periods. For example an entrepreneur requiring a loan of $10.0 Million for one year can get interest-free loan of $10.0 Million (against collateral as usual) for one year by advancing an interest-free counter loan of $1.0 Million to the bank for 10 years. Thus TMCL fulfills the clients need of funds for the required period and also enables the bank to earn profit from long-term investment of counter-loan money.

Whatever gain or loss the bank earns comes from investment of counter-loan amounts which are actually borrowed sums and in Islam there is no bar on earning profit by investing borrowed sums. In interest-based loaning the lender always gains because he earns interest whereas the borrower may gain or lose from investment of the borrowed sum. Therefore interest-based loaning is inequitable and unjust. In TMCL transaction none of the two parties is a definite gainer and each one of them may gain or lose by investing the loan taken from the other party. Hence TMCL transaction is equitable and just. In TMCL transaction each party does good to the other party and as such TMCL-based loaning conforms with the Quraanic precept Hal jaza-ulihsaan illa al-ihsaan and the noble teaching of our Prophet saws that a favour done to any one should be reciprocated. As TMCL can perform Islamically all legitimate financial intermediation functions which are performed by interest, it can instantly and effectively replace interest without any disruption in the banking system. After switching over to TMCL-based loaning system the banks will continue to function as usual with the basic change that no interest will be paid or charged. All loans will be advanced against counter-loans and all transactions involving credit will be executed on TMCL-basis. Banks will continue to receive deposits and issue cheque books as usual. Account holders will have the option to keep their money in investment or demand deposit accounts. Investment account holders will share profit/loss with the bank on daily product basis. Banks will earn profits by investing counter-loan amounts and surplus deposits in Shariah-compliant modes like stock exchange, real property, musharakah, mudarabah, etc. Outstanding interestbased loans will be converted into TMCL-based transactions. Each borrower will repay only the principal amount of loan on due date or earlier and instead of paying interest the borrower will advance to the bank a counter-loan of the same amount as he took in loan and for the same period for which he availed the loan. Alternatively the bank and the borrower may mutually agree to a different amount of counter-loan for proportionately longer or shorter period on TMCL-basis. Interest-bearing bills and bonds will be encashed at their face value and the holders will receive appropriate counter-loan on TMCL-basis from the issuer. In the interest-free regime there will be no role of interest-based treasury bills and bonds etc. and all such documents will cease to be issued and no function involving interest will be undertaken by the Central Bank. Other functions not involving interest will be performed as usual. The Central Bank will set up a framework of Central Depository-cum-lender of last resort for mobilizing surplus funds of banks and federal and provincial governments and autonomous bodies and advancing interest-free loans to them in times of need. The Central Depository will receive deposits and advance interest-free loans on TMCL basis. For example, if a bank has a surplus of Rs. 5.0M for 1 month, it may deposit this sum for 1 month with the Central Depository and obtain an interest-free loan of Rs. 0.5M for 10 months. If a bank is short of liquidity and requires Rs. 10.0M for 1 week, it will obtain from the Central Depository an interest-free loan of Rs. 10.0M for 1 week by depositing Rs. 1.0M with the Central Depository for 10 weeks. Central Depository will also earn profits by investing surplus funds in Shariahcompliant businesses.

Adoption of TMCL as loaning instrument by Islamic banks will bring the following benefits to Islamic banks and the Muslim ummah as a whole. 1. It will open for Islamic banks the vast field of loaning to reliable and capable cost conscious entrepreneurs who want to remain independent and in full control of their enterprises and do not accept any sharing of profit or outside interference. Without providing loans to this big class of loan seekers, Islamic banks will not be able to compete with western banks who have started capturing business in Islamic investment field. It will facilitate inter-bank interest-free loan transactions and Islamic banks will not have to turn to western banks for meeting their short-term needs of liquidity. It will facilitate setting up of a central depository for mobilizing surplus funds of Islamic banks and governments on TMCL-basis and advancing to them in times of need TMCLbased interest-free loans.

2.

3.

It will facilitate utilization of the financial resources of the Muslim ummah in developing Muslim countries through the Central Depository, instead of being diverted to western financial markets. UNJUSTIFIED BIAS AGAINST TMCL: Unfortunately mainstream thinking among Islamic economists and bankers mistakenly favours gradual elimination of interest whereas use of TMCL can eliminate interest forthwith and perhaps that is why they do not treat inception of TMCL in banking with the vigour and rigour it deserves. Following are three specific examples of unjustified bias against TMCL. In his book Towards a Just Monetary System Dr.M.Umar Chapra writes The method of Time Multiple Counter Loans could be adapted for small-scale financing particularly within the framework of co-operative institutions. For commercial banks, it would be of limited applicability. He does not give any reason for putting limitations on the use of TMCL which can perform all functions as are performed by interest in the modern banking system. The Blue-print Of Islamic Financial System Including Strategy For Elimination Of Riba published by International Institute Of Islamic Economics, International Islamic University, Islamabad includes short comment on TMCL: One may argue that TMCL instrument offers an ingenious solution to the problems of Riba, gharar and having two mutually exclusive conditions in one contract. But its viability is questionable for several reasons. Some of these are as follows. Counter loans would be liability of the banks. Therefore, while the sum generated might be used to meet their operating expenses it would not be distributable as profits among their share holders or depositors who provide funds on partnership basis. This will compel the banks to turn to trading, leasing and other profitable options. It is also possible that clients may use loans from banks, whether directly or indirectly, to give, the counter-loans. This, in turn, casts further doubts on the usefulness of the TMCL option. Last but not the least, a recourse to TMCL is not advisable because the ensuing credit expansion is likely to fuel inflation.

Obviously the above cursory remarks on TMCL have been made without taking into account the following important points. The sum generated by counter-loans will be invested in long-term profitable business. The profits earned by the banks will be shared with the depositors in investment accounts. There is no harm in the banks turning to shariah-compliant trading modes as is done by all Islamic banks. Every loan will be advanced against collateral and will have to be returned on due date. There is no reason why any sensible person will use the loan from bank to give counter loans for further loans instead of utilizing it in meeting his business requirements. Credit expansion will be controlled by raising or lowering the time multiple ratio in TMCL just as it is controlled in the present system by raising or lowering interest rate. During question and answer hour at the end of a session at Fourth International Conference on Islamic Economics and Banking I raised the question as to why TMCL was not used for getting Islamic banks rid of interest and enhancing economic co-operation among Islamic countries. Dr.Najatullah Siddiqui answered every other question raised by the audience but he completely ignored my question and did not say a word about it. SUCCESS, FAILURE AND THE RISK: Islamic scholars and economists won the battle against interest and Supreme Court of Pakistan settled once for all in Dec 1999 that interest is Riba and ordered its elimination by 30th June 2001. Soon after the Supreme Court Order was passed advocates of interest began striving to render the order ineffective. UBL filed a review petition in the Supreme Court which came up for hearing in June 2001 at which time UBL succeeded in getting one year extension in the date for elimination of interest on the plea that there was no viable interest-free banking plan available to replace the existing system. Eight months have passed since the extension was granted and still the above plea remains un-repelled. If on the next hearing of UBL review petition, any day before 30 th June 2002, a viable interest-free banking plan to replace the existing system is not presented, then there is grave risk of Supreme Court Order being set aside or shelved. If, God forbid, it so happens it will be highly tragic as it would bring to naught more than half a centurys strenuous efforts of dedicated Muslims to get the curse of interest banished from the country. APPEAL AND PRAYER: To avert the tragedy of Supreme Court Order being shelved, Islamic economists are urgently required to either present their own viable interest-free banking plan or actively support the proposal to replace interest by TMCL in the banking system. I earnestly request them to rise to the occasion and do whatever they can to frustrate the efforts of advocates of interest. I wish and pray that Islamic economists will not let it be said that champions of Islamic economic system did not prove equal to the task to show practicable way to implement Allahs Law to eliminate interest and the way for Islamic countries to retain / gain economic independence. Wassalam.