The phenomenon of Islamic finance has been on the rise and the vast majority of the general public especially, in Ghana does not know about it. But at least, they know that Islamic finance is an interest-free type of banking and finance. This is it! So today, we have decided to delve into some interesting questions usually asked by people about the phenomenon. They are as follows:
(i) Is Islamic banking truly Islamic, or is it cosmetic and just does what the conventional banks do?
Even though there are pretenders and charlatans in the Islamic banking industry, we can easily determine the truly Islamic banks by observing how they actually work in practice. Also increasing market regulation and equipping customers with the right information will ensure that those truly shariah compliant lead the industry. By learning the basics about these banks, individuals will be better able to stand their ground when not-so-Islamic bankers push non-shariah-compliant instruments in the name of Islam. Also, it is very important to note that just because an Islamic product and a conventional product are identical, renders the Islamic product impermissible. This is very important because it is a kind of argument Islamic banking detractors use to discredit the industry. What differentiates Islamic instruments from conventional instruments is actually nothing more than a set of processes that are called the validating processes. So, for example, two couples, one married and the other unmarried may look the same, but the agreement of a simple marriage contract makes the one Islamically valid and the other not valid. So too, two financial products, one Islamic and the other not are distinguished by a set of steps.
(ii) There was no Islamic bank during the prophet’s time so Islamic banking sounds like a bid’a (innovations)
The prophet (s.a.w) only forbade us from engaging in blameworthy innovations that would contravene the Islamic Sacred Law (Shariah) and not from new things that possess no intrinsic blameworthiness. The bid’a is in the blameworthiness and not in the newness. Meaning that innovation is only allowed in muamalaat (financial transactions) and not in ibadaat (acts of worship). Owing to this particular question, we should all understand the limits of our own unqualified ijtihad when declaring something as a bid’a.
(iii) Don’t Islamic banks simply change labels, by replacing the word “interest” with profit?
The easiest way to find out the truth of this question is to ask the Islamic bank if the profit amount and not the percentage amount, is fixed, or if the customer profit is declared before the bank’s actual profit is announced. If either of these questions is yes, then their profit is another kind of riba. The additional charge over the loan principal is the cost of using money or the cost of borrowing and it is strictly forbidden in Islam, whether given or taken, at a low rate or high rate, to a Muslim or non-Muslim, whether in Muslim land or not. The main problem with exchanging one amount of money for a larger amount of money at a later date is that there is no underlying asset or service transacted. Profit, rent and markup, on the other hand, are asset and service-backed, and permissible in Islam. It is also important to note that even though a fixed rate of return on profit is not permitted in Shariah, rent on property and profit on trade can be fixed in Islam.
(iv) Why does Islam forbid interest when money is just another commodity that comes at a price?
Fiat money has no intrinsic value, unlike gold. Banks use interest to create money from nothing. (Fractional Reserve banking system). By doing this, we bloat economies with asset-less, service-less pieces of paper. This causes the supply of money to exceed the demand in an economy, and in turn, causes inflation. Inflation also reduces the purchasing power of our money because too much money is chasing fewer goods in the market. The treatment of money as a commodity is partly responsible for enhancing world poverty by forcing poor countries to allocate increasing amounts of capital away from social services, like healthcare and education, toward debt servicing and increased market volatility (by widening the gap between the supply of money and the creation of real assets). It is often asked how we would live in a world without interest. We must instead begin asking how we should be expected to live in a world with interest.
(v) Is charging a penalty on late payment allowed?
Interest is haram so the shariah does not permit taking interest in the form of a penalty. However, in order to protect Islamic banks from defaulting customers which may cause liquidity problems to the bank, a penalty is charged to such customers to be utilised for charity purposes only, and the bank cannot add these monies to its profits as bank incomes.
These questions are the most common on the lips of people who have an inquisitive mind about Islamic banking and finance. This is all about introducing and educating the Ghanaian youth about Islamic banking. I believe strongly that with this the youth will be equipped with at least some basic knowledge that could enable them to identify some practices of Islamic banking and finance in Ghana. And Allah knows best!
This write-up was done with the help of Ethica Institute of Islamic Finance learning materials, and am grateful for that.
YAHAYA ILIASU MUSTAPHA
The writer is an Islamic Banking and Finance patron and advocate in Ghana.
Email: yahaya0246873726@gmail.com
Facebook account: facebook.om/Yahaya.iliasu.94
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