What is Islamic Banking?
Islamic banking is defined as banking system which is in consonance with the spirit, ethos and value system of Islam and governed by the principles laid down by Islamic Shariah. While Islamic banking has a broader scope and meaning, it is generally referred to the transformation of conventional money lending system into Asset-backed financing transactions conducted by the Financial Institutions.
What is meant by Shariah/Islamic Law?
Shariah lexically means a way or path. In Islam Shariah refers to the divine guidance and laws given by the Holy Quran, the Hadith (sayings) of the Prophet Muhammad (Sallalahu Alaihi Wassalam) and supplemented by the juristic interpretations by Islamic scholars. Shariah embodies all aspects of the Islamic faith, including beliefs and practices. Islamic Shariah or the divine law of Islam is derived from the following four sources:
- The Holy Quran
- The Sunnah of the Holy Prophet (Peace Be Upon Him)
- Ijma’ (consensus of the Ummah)
- Qiyas (Analogy)
What is the philosophy of Islamic banking?
The philosophy of Islamic banking takes the lead from Islamic Shariah. According to Islamic Shariah, Transactions involving interest/riba, Gharar and Maiser are prohibited. Moreover, they cannot deal in any transaction, the subject matter of which is invalid (haram in the eyes of Islam). Islamic banks focus on generating returns through investment tools which are also Shariah compliant. Islamic Shariah links the gain on capital with its performance. Operating within the ambit of Shariah, the operations of Islamic banking are based on sharing the risk which may arise through trading and investment activities using contracts of various Islamic modes of finance.
Riba, Gharar & Maiser
Riba: An increase stipulated or sought over the principal of a loan or debt and implies any excess compensation without due consideration (consideration does not include time value of money). Gharar: Excessive level of uncertainty or ambiguity created due to the lack of information or control in a contract Maiser: Game of Chance or speculation
“O those who believe; fear Allah and give up what still remains of the Riba if you are believers. But if you do not do so, then be warned of war from Allah and His Messenger. If you repent even now, you have the right of the return of your principal; neither will you do wrong nor will you be wronged.”
It is reported by Harith ibe Abi Usamah in his Musnad that Sayyidna Ali Radi-Allahu Anhu reportedly referred that the Holy Prophet S.A.W. said:
“Every loan that derives a benefit (to the lender) is riba”.
Does interest/Riba is related only to consumption loans or it applies to commercial loans also?
The interest is prohibited whether it is consumption loan (loan for meeting day to day human needs) or commercial loan (loan for business purpose). There are quite a number of ahadith which clarify that in the days of Holy prophet, people not only borrowed for consumption purposes but also for productive purposes. A few of the ahadith are given as follows for reference:
(i) Ibn Saad has reported Hazrat Umar (Radi-Allahu anhu), wanted to send a trade caravan to Syriya. He borrowed four thousand dirhams from Sayyidna Abdurrahman ibn Awaf (Radi-Allahu anhu), for this purpose. (ii) Ibn Jarrir has reported that Hind, daughter of Utbah and wife of Abu Sufyan borrowed four thousand dirhams from Sayyidna Umar (Radi-Allahu anhu), for the purpose of her trade. She invested this money in purchasing goods and selling them in the market of the tribe of Kalb.
This is an ample testimony that the commercial loan was in practice when Quranic verses on Riba were revealed and the term Riba covers not only consumption loan but also the commercial loan.