Is Islamic Banking, in fact, Islamic?
I would appreciate if you could quote a reference from the Quran or Sunnah, prohibiting combining of these two contracts of sales. At least he has admitted that both of these contracts in original form are perfectly legitimate. It leads to the conclusion, that:
1. Selling goods on deferred payment basis is legitimate
2. Selling goods in cash at a price higher than the cost (Ribh) is legitimate.
If one accepts these two conditions, then every sane person would conclude that selling goods on deferred payment basis at a price higher than cost is also legitimate, which is done in modern Murabaha Muajjal by banks. I don’t know whether Dr. Zaheer wants to say that the banks should sell the goods purchased by them on deferred payment basis at cost only or whether they should sell these goods in cash on a price higher than their cost. I have yet to see a person who sells all his inventory at cost in all his business transactions and survives in business. The business of trading requires selling goods at a price higher than cost.
As regards difference between trading and Riba, I do agree that “normal intelligent persons” at the time of revelation of the Holy Quran also could not understand the difference and hence, came the Ayah 2:275:
“Those who devour Riba will not stand except as stands one whom the evil one by his touch hath driven to madness. That is because they say: trade is like Riba, but Allah hath permitted trade and forbidden Riba. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those who repeat (the offence) are companions of the fire: they will abide therein (forever).”
The paramount condition in this case is that the banks should conform to the principles of trading prescribed by the Shariah. If an ordinary person can earn profit from selling goods in cash, he is entitled to earn profit on deferred payment sales as well. Same goes with banks. I hope it clarifies the issue.
Thank you for asking some valid questions.
When you mention Murabahah in the original, classical sense, there is no mention of any delayed payment in it. It’s a transparent sales transaction wherein the seller gives an honest picture of his product to his prospective buyer. There is no mention of any credit deal nor an inflation in price because of credit. In case of Bai Mu’ajjal, it’s just a credit sale in the classical understanding with no mention of inflation in price
due to delay in payment.
You are right, that no sane trader would ever give a commodity on sale without adding a mark-up (ribh) on it. But adding mark-up as profit margin is one thing and adding it because of delay in time is quite another. What I called ingenious is the attempt to combine the two in which mark-up has been allowed to be added because the buyer is not in a position to pay cash immediately: His inability to pay cash has been exploited to force him to pay more at a later date. What else is riba? It is forcibly demanding extra amount for delaying the payment, whether the payer (borrower) is capable of doing so or not.
It is interesting that whenever this illegitimate hybrid of Murabahah and Bai Mu’ajjal is condemned by someone as un-Islamic, the Quranic verse 2:275 is presented in defence of the arrangement. The verse has nothing to do with the permissibility of Murabahah in its modern, illegitimate form. There are many reasons for it. I’ll give just one: The verse is condemning the understanding of some people who believed that trade and riba were similar. It is not defining what riba is. Had the argument of my friend been correct, then all trade should be permissible in Islam because no trade can be riba. My friend, I am sure, believes (although I don’t) that many forms of trade which many Muslims call riba al-Fadl are prohibited.
Even in case of the present form of Murabahah, my friend believes that although mark-up for delayed payment is allowed, mark-up on mark-up is not allowed. Why is it not allowed? Obviously, because, according to them, mark-up on mark-up is riba. My question is: How could it be riba from your point of view when it is being charged on trade? The obvious answer is that it is not the question whether a certain transaction is trade or not that decides whether there is riba in it or not. It is the question whether the
arrangement, trade or otherwise, forces the borrower to pay a definite amount in addition to the principal after a delayed time that makes it riba-ridden.
Many readers, I am sure, are familiar with (and I guess have internalized) the oft-repeated logic that Murabahah is not riba, because of two reasons:
i) In Murabahah, unlike riba, there is some real commodity involved, and
ii) In Murabahah there is no mark-up on mark-up involved.
The above logic has nothing to do with Islam. It is a logic that has been contrived after it was decided that the Murabahah/Bai Mu’ajjal hybrid is allowed in Islam, a logic supported by the peculiar understanding of verse 2:275. While point (i) above is refuted by the experts themselves when they declare many trade transactions as riba, the second condition is neither this nor that. It makes neither Islamic nor common sense. If you are
allowing inflated price for delaying price, it makes sense that the price should be further inflated if the delay is extended. An added confusion is that this logic of prohibiting mark-up on mark-up is supported by the mention of verse 3:30 which again has nothing to do with the question at hand.
It is the enormous confusion created by the above logic that has kept many people away from participating in the promotion of Islamic Finance, because they are not clear about even its very basics. That’s why I made a remark in my earlier message that it is the ideological commitment to the cause of Islamic Banking that inclines some well-meaning people to pursue the task of promoting it, despite problems in the understanding of its very basics. If you have doubts in the veracity of my statement, just to talk to a sightly ‘less committed’ employee of an Islamic bank in private.
While talking to the inaugural session of a two-day conference on Islamic Banking in Prato, Italy last year, Tan Sri Mohamed Yakcop, ex-Governor Bank Negara, Malaysia, lamented the fact that Islamic Banking hasn’t been able to attract the attention of intelligent young people. I told him later that the reason was that what is being presented in the name of Islamic Banking is not intelligible to an intelligent mind and there is a feeling that development of avenues in Islamic Banking is the exclusive domain of a select class whose decrees are to be taken as final, no matter whether they
make sense or not. How can you attract a free, sensitive, and intelligent mind to get involved in a process like that?