OPINION: Islamic Banking: A Financial System with Ethics

Due to the global economic crisis and failure of the prevailing financial system of the world, economists, financial experts and industrialists around the world are looking at Islamic finance and the economic system with sheer optimism.

Kashif Khan

Islamic financial system has turned a frequent discourse in most of the universities, research centers and debates in various western and European countries. Attractiveness of Shari’ah compliance financial services to non-Muslim investors seeking “ethical” investment and banking practices is the best example to prove its credibility.

If courses on Islamic banking are introduced in universities, a new chapter of hope will open to a large chunk of students to learn a banking system based on ethics.

I remember the days when my mother would teach me etiquette and would punish me harshly if I behaved against her taught lessons. But that is now a bygone exercise as we have reached new excellences and do not feel the necessity of ethics; be it in business, finance or other engagements.

At present, in this professional business world, we hope to take up new deals in all future endeavors; there is hardly anybody so value ridden and ethically cognizant, who can teach us the ethics and etiquette related to our new deals. The blame can’t be laid down upon the teachers of finance because of the reality of the system. The system has been developed in such a way where it is taught that profit is the only goal which needs lifelong endeavors, and not a single chapter exists from which the concept of moral values or ethics can be learned.

Under the finance nomenclature, only efficiency and wealth creation have become the key concepts. Capitalism creates a mind-set which impoverishes the moral authority of so many institutions. According to Christovan Baroque – a well known Brazilian economist and a former rector of the University of Brasilia: the failure of capitalist financial system lies in ignoring social and ethical values.

Another author by the name James Robertson says, “It must be recognized that because human beings are moral beings the basic question about economics are moral questions.”

Man’s goals may include not only economic well being but also ethical values and socio-economic justice, sanctity of life, property and individual honor as well as social harmony.

When I recall my past, I hardly remember a single chapter of economics and finance where moral values were discussed, the result of which is that we started turning capitalist unconsciously and our perspective of looking at everything got completely changed and to started to judge things in terms of our own benefit rather than thinking of giving benefit to others.

Coming back to Islamic banking, it is the fastest growing sector of the banking industry today; yet very few city boys know much about it and hardly any finance student is being taught in the discipline.

The Islamic banking system is based on profit-and-loss-sharing and there is no place for Riba (interest). Despite being dependent on profit-and-loss-sharing, the industry is doing very well. According to some estimates, the industry is growing at 15% to 20% annually; and it is not restricted to Islamic countries. It is spreading wherever there is a sizable Muslim community.

In the recent past, it has also caught the attention of conventional markets. Since Riba (interest) is Haram (prohibited) in Islam, Muslims do not want to be caught in the conventional financial system that is based on Riba. Muslims have to abide by the ethical system of Islam in their way of life.

The world financial system has to look for structural changes. A plausible option is Islamic finance to be established at the grass-roots level to achieve long-term goals. Its ultimate objective includes the maximization of social benefits, as opposed to profit maximization through the creation of healthier financial institutions to serve the needs of the masses, rather than just a handful of people.

In the initial days, this industry may face some hurdles which are apparent in nature, but effective research would be very fruitful.

The world economy is undergoing rapid financial revolution dominated by the stock market rather than productive investment in agriculture and manufacturing activities. Such an unhealthy situation has led to an increase in the rate of unemployment in the western world, and is inflicting its social consequences on their own societies. In these economies (and through the speculation in the stock market), the elite in the corporate sector have suddenly become richer through gambling in order to acquire quick profits.

If the culture of speculation and manipulation dominates the minds of people rather than physical labor and hard work, then indeed, the western world is in a real crisis; not only economically and financially but socially as well.

Whereas the Islamic framework of business norms includes several elements such as justice, fair dealing, fulfillment of covenants, payment of liabilities, mutual cooperation, removal of hardship, fair pricing, generosity, detriment and truthfulness.

[Kashif Hasan Khan is a doctoral scholar on Islamic Banking and Finance in the Center for West Asian Studies. He can be reached via email at: kashif_islamicfinance[at]yahoo.com]

About Kashif Hasan Khan

Kashif H. Khan is a contributing writer and a doctoral scholar on Islamic Banking and Finance in the Center for West Asian Studies. He can be reached via email at: [email protected]

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    Some Muslim scholars use their Ijtihad to argue that life insurance ( as well other forms of insurance)is haram for Muslims as it involves interest and gambling. As a Muslim living in a secular nation like India where Muslims live as minorities, I beg to differ on this argument.

    This is the most unwise sort of contention that adds fuel to the insulting accusation of Islamic Fundamentalism in the West and gives a long stick to Hindu radical parties like BJP to beat the Muslim leaders with.

    Having said that let me quickly add that Islamic fundamentalism is a fact because Islam is defined by fundamental articles of faith: monotheism, Prophet-hood, infallibility of the Quran, day of Judgment and very many other uncompromising principles.

    But a ruling against life insurance by Indian Muslims is not an
    uncompromising fundamental article of faith but a matter of high controversy which requires a penetrating intellectual Ijtihad of top- class Muslim economists and scholars to deliberate deeply, interpret judicially and find more acceptable solutions.

    In the opinion of Muhammad Asad,” Every successive Muslim generation is faced with the challenge of giving new dimensions and a fresh economic meaning to this term( interest) which, for want of better word, may be rendered as usury.”

    So the pressing question is, “Are Muslim scholars dynamic in
    reinterpreting the concept of interest in order to find solutions to the problems arising in the modern contemporary world of advanced economics?”

    Should the Islamic world as a whole insist on accepting a simple ruling on the non-desirability of insurance by Muslims, as finality, we would find very many of even the so called fundamental Muslims crossing the floors and jumping into the band wagon of Americanized modern Islam. Do Indian Alims want this happen to very many Indian Muslims? The Christendom would warmly welcome and celebrate such an event.

    More knowledgeable Alims who have been well trained in both Islamic jurisprudence and in specialized fields of study such as economics, investment, insurance, banking, finance etc., should come forward and try hard to intellectualize the educational, marital, economic, financial, corporate, investment, banking, insurance and other mundane
    problems of the minority Muslims of India and the world.

    I am sure Islamic principles can not be as rigid as our conservative
    scholars expect us to believe. Please bear in mind that Indian Muslims are not governed by Wilayat-al-fiqih, but are governed by compromising secular laws, hence we can not apply Islamic jurisprudence in their finest details in Toto.

    The basic question to be addressed is:

    “Do the secular laws of India undermine the basic beliefs of Muslim minorities?” In accordance with the opinions of world renounced Imams like Sheikh Qartawi ,Tantawi and many others, Muslim minorities ought to live by the laws of the country where they live, as long as the laws allow Muslims to adhere to the basic Rukun Islam. This has been the position of millions of Muslims living in the U.S.A., U.K., France, Germany, Canada, Netherlands, Australia and in some of the Asian countries like China, Philippines, Thailand, Cambodia, Sri Lanka, Singapore etc


    If our Sunnat Jamah Alims do not agree with the above line of argument, how would they justify, the entire Muslim population of India obeying and following several sections of the Indian penal code which are secular and in very many parts derail the secondary line of Shariah laws.

    Is it religiously or politically possible in the Indian situation to
    force the Indian Government to enact Hudud laws, for instance?
    The answer is a definite “No”. Why then, we make an illogical ruling on insurance or buying homes on mortgage and similar interest based contractual financial transactions, and put the Indian Muslims at a very big economic disadvantage when their standard of living and per- capita income are several degrees far below the national average of the majority community.

    To take a case study, Malaysia has an excellent Islamic banking and Islamic Insurance( known as Takaful). Islamic bankers and insurers operate on financial rewards to the depositors and the insured, charges on the borrowers, protection to the insured and rewards for no-
    claim and eventual lump sum repayment based on both endowment and whole-life assurance policies. The terminology varies but the basic principles remain very much the same.


    Now, my question is: Do Indian Muslims have the resources, caliber, organisation, corporate mindset and honest business ethics to set up similar slamic principle based institutions that exist not only in Malaysia but even in very many Western countries catering for the economic needs of Muslims?

    ( Even Dow Jones has its Shariyah based share index, so does London FT index) The answer is again, a definite “No”.

    A few years back, Milli Gazette did an excellent research on the pathetic dishonest situations of very many interest-free based Muslim financial institutions. It washed real dirty linen in public vividly indicating how the Muslim financial institutions had cheated the several thousand innocent investors’ hard earned savings by their greediness, dishonesty, corruption and financial mismanagement.

    So my assertion is that, until we are ready to set up clean and excellent financial institutions (Shariyah friendly),comparable to that of Singapore and Hong Kong based ones run by non-Muslims, there is no meaning in making a firm stand preventing Indian Muslims
    investing in life assurance and similar interest based institutions run by more honest non-Muslims. Simply because, there are no such institutions competently, efficiently and honestly run by Muslims in

    Well some may argue that, after all the interpretations differ.
    Opinions can vary. Indian Muslims do not have to follow a particular interpretation and so on. But on the other hand, very many innocent and less-educated Muslims consider the stand of our Alims as powerful and by not following them they commit a big sin. How do they know that
    Allah SWT can never be Dzhalim under any circumstances. What more can we say, about the tricky and uncertain Indian situation?


    Life assurance is a method of self-imposed savings similar to an ordinary Bank savings account. There is no gambling here. When a person buys a lottery ticket, he loses the money if his number does not hit the jackpot, ( this is gambling) but the insured person is assured of getting back his premium whether the insured event ( death ) does or does not happen. There is a guaranteed repayment.

    At one instance, insurance becomes gambling, if an individual insures something without insurable interest . For example, if a person takes out a fire insurance for say US$ 50 million against the Delhi Red Fort, paying an annual premium of say Rs 25, 000, expecting to get US$ 50 million, should the Red Fort be destroyed by fire, that involves gambling, because the proposer has no insurable interest on the
    building (the property does not belong to him) and moreover he loses the premium if the event ( fire) does not occur.

    Where as in the case of life assurance, say, a person takes out an Endowment Policy for Rs 3 lakhs and agrees to pay a monthly premium of say Rs 940 over a certain period. At the end of that period he or his dependents will receive back Rs 3 lakhs plus some profits. He does not gamble. His primary intention is not to leave his dependents without sufficient financial resources should he die prematurely and /or to
    have sufficient savings to rely on when he retires from active
    employment without expecting anything from his grown up children, because in the present day economic rat-race, many earning children have become indifferent towards their parents welfare. For instance who will come forward and pay 2 lakhs for a coronary by-pass operation, or a lakh for an angioplasty if he unfortunately required one at the age of 58.
    A life insurance cover can incorporate emergencies of this nature particularly for lower income people. There
    is nothing illogically or overtly Haram about this.


    The concept of interest is one of the most complicated in Islam. The Prophet received the revelation condemning riba only a few days before his Wafat and so the companions had no opportunity to ask Rasulullah (SAW) for the fullest implications of the order. Even Sayyidina Umar ibn al-Khattab had said, “The last revelation of the Quran was concerning riba and the Apostle of Allah passed away before explaining the full meaning of the passage to us” ( Ibn Hanbal, on the authority of Said ibn al-Musayyab).

    The exploitation of the economically weak by the strong is a form of oppression. Hence, attaching profits (riba) on the personal loans obtained by those who are really poor, downtrodden and debt-laden is a disgrace and is condemned as haram by Islam. There can never be two conflicting opinions on this.

    But not all interest-bearing financial transactions fall within this category of exploitation by the economically strong. Life assurance and buying houses on mortgage are two examples of contractual financial transactions which fall outside this category of exploitation. To quote Muhammad Asad again,” the question as to what kinds of
    financial transactions fall within the category of riba is, in the
    last resort, a moral one”. It is impossible to give an outright judgment in a non-Muslim country banning on all kinds of interest-bearing financial transactions, in a rigid and once-for-all manner putting the economically weak Muslim minority in India at a greater economic disadvantage. The interpretation of Islamic scholars must not ignore the changes to man’s environment on his social, economic and technological development.

    That is the adoring beauty of the Quran. It is Islam’s biggest
    miracle. People living the third millennium may read the same Quran without an alphabet having been changed, but will see totally new light, new messages, new interpretations and new discoveries that go beautifully and logically cognizant of the socio-economic- technological environment of that time that we people living in the second millennium never ever dreamt of. Hence my simple assertion is that, our traditional Alims should not apply the first century Hijrah definition of Riba to solve the most complicated economic problems of
    the 21st century.

    One other point that is worth mentioning here is that, during the time of the Prophet(SAW) the value of money was constant and inflation was non-existent and hence Riba ( as the sort practised by Abbas-RAA )was haram because the lender even after a year of waiting will get the
    money that he lent whose purchasing power had not diminished at all.
    But in our country the annual rate of inflation is about 10 to 15%. In such a condition of rising prices, is it fair to expect a person depositing his money for safe-keeping ( or lending to another trader who makes profits) with a bank to withdraw the same amount without any additions, say after a period of 12 months. Should the Alims give a fatwa that bank interest on deposit is haram, the depositor will get
    back the same amount whose purchasing power has fallen by 10 to 15%
    This is one of the angles (there are many others) from which we should aim for a new definition of riba.
    Nothing from me except with the help of Allah
    P.A.Mohamed Ameen

  2. Please answer a question, if u give some money to your friend then would u charge him any interest? the answer is No na. If you charge interest than your friend will not be friend he/she will become stranger. May be you may forgot the money that u had lended for sake of friendship.
    So this interest free system is there in India from a long time, long before the Islamic era. This sytem of money is very new in the Indian sub continent. Previousely we used to follow the barter sytem, where there is no question of Interest. Also what i believe that kashif what u calling Islamic banking is not Islamic banking, it will be wrong to call it Islamic banking, this concept is there in Indian sub-continent from thousand of year, where people use to pool their resources to help each other, the englishman had ended this system by creating Societies Registration Act, 1863, which unfortunately is still in function. I will call it normal banking system, instead of islamic banking, as it is there in the world from the starting of the Human civilisation, helping other without expecting profit for help of the socities is there in the human race since lakhs of year ago. it should be called as Banking for people or Banking to to help etc.

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