LET US GROW UP
By Ardeshir Cowasjee
courtesy: The Dawn internet, March 31, 2002

The federal minister for zakat, ushr and religious affairs, the venerable Dr Mahmood Ahmad Ghazi, interacting with the press people in Faisalabad last week held forth on the subject of what he terms 'Islamic banking', based on the elimination of 'Riba'.

The State Bank is apparently at work formulating a 'new charter' under which an 'Islamic bank' will be set up. The House Building Finance Corporation is one institution which has already adopted the sharing rather than the interest based loan system, and in a major and innovative move forward, Pakistan's banks are soon to be equipped with 'Islamic Windows' designed to eventually lead to the 'Islamic' system of banking.

At the heart of the dispute over the Islamization of the economy is the meaning of the Quranic word 'Riba', the literal meaning of which is an increment or an increase. There are many who are of the opinion that what is actually forbidden by Islam is usury, i.e. the charging of exorbitant rates of interest. We need to go back in time to try and sort out exactly what the Islamic injunctions signify in today's world.

At the time when Islam was born, it was not uncommon for rates of interest of 100 per cent or more to be charged, and it was this excess that was strictly prohibited. In fact, over the centuries every civilized society has prohibited usurious loans. Jesus Christ threw the money-lenders out of the temples in Jerusalem, loans bearing exorbitant rates of interest also being prohibited by Judaism (although in mediaeval times the Jews became famous for specializing in this branch of trade). The British government in India prohibited usurious loans as far back as the year 1918. It is a fallacy to think that the prohibition of usury is confined to Islam.

The 'Riba' dispute really needs to be examined against a backdrop of internally acceptable practice. One point of view is extremely rigid and totally prohibits any rate of interest whatsoever. This means that even in cases in which the rate of inflation in the country is, say, 10 per cent, there is a prohibition against even recovering this amount from a borrower. In other words,<B> if a man borrows Rs100,000 on January 1 and on December 31 the true value of the amount is Rs90,000, it holds that the lender can only recover Rs90,000 (in real terms) and must suffer an effective loss of Rs10,000.

Now, the holy Quran specifically affirms the right of a lender to recover the full amount he has lent, so he cannot be denied his right of full recovery if during the loan period the value of his money has decreased. There has to be an appropriate modality to ensure economic justice to both the lender and the borrower. In accordance with the tenets of Islam, the more liberal view is that the lender must not be penalized - after all, lending money to a needy person is not a crime - and the lender should be entitled to at least recover the real value of the loan.

However, this view has not been accepted by the Federal Shariat Court or the Supreme Court, and most strangely, the view of the Supreme Court is more rigid than that of the institutions in other Islamic countries where different types of lending are permissible. For example, a bank may engage in Islamic banking, in which it lends money on the basis of profit sharing and at the same time an option can be given to enable lending on the basis of a fixed rate of return. The question is whether Pakistan will introduce rigidity into its banking system or fall in line with the banking practice in the rest of the world.

Experience proves that our financial institutions which have entered into profit sharing agreements with business houses have generally suffered most adversely. Sadly, we have a plethora of companies which maintain false, or inaccurate, books of accounts to ensure that the banks are denied their fair share of profits. Some mechanism will have to be evolved whereby companies will not be able to maintain false accounts and claim that they have suffered losses when in fact they are operating profitably.

Why should our banks be denied their profits, or even lose the principal amounts loaned? After all, bank loans are funded by the deposits of ordinary citizens. It is imperative that no injustice, violative of Islamic injunctions, is done to small depositors. They should never be faced with a situation in which they are informed that the hard earned money deposited by them in our banks will not be repaid in part or in whole because it has been lent to rich companies falsely claiming losses.

Now, let us take the lenders of today's world as opposed to those of the 7th century when usury was the norm. Traditionally, the borrowers by definition were those in need, often dire need, whose weak bargaining position meant that they were in danger of being exploited by the limited number of people who controlled wealth and capital, and who drove hard, unfair, inequitable bargains by virtue of their superior bargaining position. In time, laws were passed to prevent money lenders from charging usurious rates of interest.

The introduction of the banking system has inverted the traditional lender-borrower relationship. The lenders today are not a small number of very rich people who monopolize wealth. They are the millions of middle class people who deposit their life's savings in banks to meet the future needs of their families and it is this money which is passed on by the banks to the borrowers, the bulk of whom are corporate or business entities, many of which are very large and very wealthy.

Thus is it that it is now the lenders and not the borrowers who require protection? Is it right that the borrowers should receive interest-free loans which they may or may not repay? Should the rich grow richer and the poor poorer? This is far from being in conformity with the spirit of Islam.

And another thing - the proposed plan that in time all our banks should resort exclusively to the traditional Islamic methods of financing, such as mudarabas or musharika arrangements, similar to profit sharing, could easily lead to a mass deprivation of the savings of the poor depositors - it will vastly enhance the exploitation of the poor, that is, the lenders, while the field will be left open for the borrowers, already wealthy, to reap even vaster fortunes.

However, all things being equal, there must be a safeguard for the genuine needs of the borrowers. They cannot borrow without any charge, nor can they be saddled with exorbitant bank charges, for if they are the economic activity of this country, already in the doldrums, will grow even slacker making it increasingly difficult for the nation to emerge from the poverty trap in which it is locked.

The cost of bank borrowing is not simply a fairness issue between the bank and the borrower; it has a critical level of importance to the functioning and growth of the economy as a whole, leading to price increases, inflation, a fall in exports and a greater dependence on foreign loans at high interest rates.

It is a fallacy that interest-free banking is risk-free banking. All lending entails risk. Apart from the fact of the risk that a loan may not be repaid, there may be an economic slump, or recession, leading to a high level of business failures. We have our fair share of sick industries, desperately in need of bank loans for their mere survival. Obviously, the profit sharing system is no answer to their predicament.

Our Islamization experts in the banking area need to give the matter of the elimination of 'Riba' a long hard look. Rather than destroy the present banking system in the name of interest-free banking, why not merely reform it? The banking system is integral to the functioning of the country's economy and an unrealistic decision will surely lead to highly adverse consequences.

Restructure the system in the light of Islamic tenets but do so in a manner that leads to an improvement in efficiency rather than the devastation of the economy. The process of Islamization must be for the economic betterment and moral redress of the people of Pakistan, not as a regressive measure for their impoverishment.

The laws and rules of Islam were all set and made on a practical basis, in conformity with the norms of the day. Islam is neither a stagnant nor a rigid way of life. It was known, in the days of its greater glory, to move in line with the times.