Perspective: How Muslims Take an Interest in Banking; Banking Has Always Been Problematic for Muslims as the Paying or Taking of Interest Is Contrary to Their Religious Beliefs. as Part of Islam Awareness Week, Ifzal Akhtar Explains How to Get around This Seemingly Serious Problem
Byline: Ifzal Akhtar
Did you know that the world's largest Islamic finance deal, worth pounds 886 million, was handled by two UK law firms? Did you know that the UKnow has its first stand-alone Islamic law compliant bank, called the Islamic Bank of Britain and that its headquarters is in Birmingham?
Did you know that the UK has a Muslim population of over two million?
Knowing these facts, it is not surprising to see why in recent years Islamic finance has taken off in the UK.
For those not familiar with Islamic finance it is desirable from the outset to lay down the axioms.
The first axiom is that for Muslims interest in all its forms is prohibited. The second axiom is that the devout Muslim is genuinely interested in eliminating interest and sincerely desires to introduce a system of interest free banking, not as a supplement to, but as a substitute for the conventional system of banking.
For Muslims any return from an investment that is based solely on the time use of money (as opposed to the use of the actual asset) is susceptible to be unlawful.
The fundamental principle is that money should be used for a proper economic purpose and that it is not acceptable for money to be treated as a commodity on which a return can be generated (ie interest) just by reference to passage of time.
Unearned gain and risk (in Arabic 'Gharar') are twin evils in the ethical principles underlying Islamic law. Therefore the bottom line for Muslims is that interest is unlawful and therefore Muslims cannot invest their money in anything which offers interest.
Muslim academics have over the centuries developed a wide variety of Islamic financing instruments. The financial instruments most commonly used today in the modern commercial world are: Mudarabah - Partnership/ or joint venture n Musharakah - Venture capital finance
Murabaha - Trust financing
Ijara - Leasing arrangements The word Mudarabah literally means 'agent on earth'. It has been so named because the 'Mudarib' (user of other's capital or management trustee) qualifies to get a share of the profit on account of his endeavours and work. The management trustee participates in the profit as well as having the right to use the capital, and strive according to his discretion.
In a modern commercial setting the lender will combine with the management trustee who, instead of capital, will employ his skill and expertise in the management of the investments. The solicitor will draft the agreement which will describe the rights and authorities of the management trustee but once they have been fixed, the management trustee is fully authorised on his own responsibility to act in managing the investment(s) without any interference from the lender. The return the management trustee receives is to be a fixed share in the profits. However there is nothing prohibiting the management trustee to be paid a fee based on profits exceeding a target.
Under this arrangement losses will be entirely borne by the lender. In such circumstances and in line with some banking set ups the management trustee may not receive his return. This is however, the limit of the management trustee liability.
At the end of the period agreed for the loan, the lender has the right to withdraw its capital, in which case the management trustee may seek another financier. Under the Mudarabah arrangement the lender cannot interfere with the management of the investment. The commitment is to simply supply capital for a specified period. All this capital is potentially at risk, this being what justifies the return. Under a Musharakah contract the lender and the client agree to establish a new partnership, with both parties subscribing a share of finance and sharing in any profits proportion to their initial subscription. Losses are also shared, so the potential liability of the client are greater than in the case of a Mudarabah contract. …