Islamic banks working with "Profit" not with "Interest"
Some Islamic banks do just that
Some Islamic banks do just that. And here is the easiest way to find out the truth: ask them if the profit amount (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 is the case, their "profit" is just another kind of riba (usury or interest).
Interest, the additional charge over the loan principal, is the "cost" of using money, and is strictly forbidden in Islam, whether given or taken, at a low rate or a high one, to or from a Muslim or a non-Muslim, whether in Muslim lands or not. The 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 mark-up, on the other hand, are asset and service backed, and permissible in Islam. Profit is earned on the sale of goods and the provision of services. Rent is charged on the usufruct of property. Mark-ups are added to the cost of an asset. The most common financing products that an Islamic bank will use in order to earn profit are musharakas (partnership finance) and mudarabas (investment finance).
In a musharaka, two or more partners (even thousands of shareholders) commit risk capital and share profit based on an agreed upon percentage, enduring loss in proportion to their in- vested capital. Modern corporations, like those listed on the New York Stock Exchange, are a kind of musharaka.
In a mudaraba, an investing partner brings capital and a working partner brings time and effort to share in profits and losses agreed upon beforehand. Venture capital firms, such as the ones that financed much of Silicon Valley's growth, are a kind of mudaraba.
Unlike with interest, which is charged on a borrower whether the business succeeds or fails, in a musharaka and a mudaraba the investor profits only when the business profits and therefore the investor fully shares in the business risk. Some might argue that an interest- based lender also shares risk: the risk of whether his money will be returned or not. But this is not a business risk, it is a credit risk. The difference is substantial: a business risk only risks the business; a credit risk will risk both business and borrower (by forcing repayment, in extreme cases through personal bankruptcy).
Frequently asked questions:
Why does Islam forbid interest when money is just another commodity that comes at a price?
Unlike an actual commodity (like gold, which has traditionally been the standard of measure for currencies), money has no intrinsic value. It derives its value from something other than itself, namely, market demand. So interest actually creates nothing. By creating money from nothing, we bloat economies with asset-less, service-less pieces of paper. And we all know what happens when the supply of anything, even money, exceeds its demand. Its price drops. And when the "price" of money drops, we get inflation: the money in our pocket becomes worth less today than it was yesterday. However simplified and stylized this description, it accurately illustrates the macroeconomic debilitation of interest. Because interest serves the interest (coincidence?) of capital owners like banks, governments, "development" agencies, corporations and wealthy individuals, it is unlikely to go away.
The treatment of money as a commodity is partly responsible for burgeoning 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 might instead begin asking how we should be expected to live in a world with interest.
Islamic banking doesn't adequately address the inflation problem and you say interest banking is forbidden. If today's $1is going to be worth 90 cents next year because of inflation, why can't I charge interest to compensate for the loss?
The short answer: because interest is still wrong. Charging interest to compensate for inflation is analogous to terrorizing civilians to compensate for global injustice: two wrong do not make a right. Far too many Muslims, sincere practicing ones no less, have somehow reconciled the taking of interest with their personal definition of what the Qur'an and Sunna say about the matter. But compensating for inflation is still no excuse for taking interest, no matter how noble one might feel at taking money from a conventional bank. In order to compensate for inflation, Islamic banks provide plenty of instruments that mimic the security and liquidity of an ordinary savings account while also providing a reasonable interest-free return (Meezan Bank's Monthly Musharaka Certificate is just one example, but all the major banks, including non-Muslim banks that sell permissible Islamic products, offer basic consumer accounts).
If making a long-term personal loan, for instance, one might consider denominating the amount in gold (e.g. An individual lends $100 cash today and tells the borrower that he would like the gold equivalent amount back in 3 years;$100 buys x grams of gold today; at the time of repayment 3 years later, x grams of gold buys $120; the borrower returns the lender $120 cash).
If Islam forbids fixed-income interest, what's wrong with floating-rate interest? Doesn't it also rise and fall like profit?
Islam does not forbid fixation. It is permissible to fix profits (in percentage, not absolute, terms), prices, rents and installment plans, to name a few measures. But it is forbidden to exchange money for a larger amount of money (unless the currency is different, in which case it is permissible at spot). The unlike exchange of like moneys creates riba. But exchanging assets or services for money and money for assets or services is entirely permissible. So the problem does not relate to whether an interest rate is fixed or floating, but to the interest itself.
I don't have enough money to buy factory equipment (a car, or a home or pay for an education)? How do I avoid interest and still fulfill my short-term financing requirements?
Murabaha (mark-up financing) is an example of an Islamic instrument that funds short-term capital requirements. Because it is the most easily confused with interest-based financing, it is worthwhile going through the basic steps in a murabaha execution:
A customer approaches an Islamic bank with a request to purchase an item, promising to pay at some later date. The bank assesses the product and the customer's collateral (collateral is an Islamically acceptable method of securing a financial obligation) and agrees by making the customer its agent. The customer goes to the market and selects the product. The bank pays the vendor, charges the customer a mark-up, and the customer takes the product agreeing to pay later.
This is analogous to a friend buying some- thing on your behalf, charging a little extra for the time and effort, and selling it to you with an expectation that you will repay him at some later date. This is instead of giving you cash to buy it now, and asking for the cash at some later date, charging you interest in addition to the loan amount.
In a murabaha, the bank provides financial intermediation entirely free of interest, and be- cause the bank buys and sells an asset, even if at a profit, the transaction is Islamically permissible. The difficulty people have in differentia- ting a murabaha from a simple short-term loan is by not appreciating the importance of the seemingly insignificant intermediate step of the bank owning the item by paying the vendor directly. What this does is satisfy the very basic Islamic requirement of backing the transaction with an asset. The mark-up is no different from the profit any business makes for having provided a legitimate service.
For home purchases, diminishing partner- ship schemes (or "diminishing musharakas") also provide the buyer with a financing alternative. In a diminishing partnership arrangement the buyer approaches the bank with a down payment. The bank pays for the rest of the property and the buyer begins living in the property while paying the bank rent. Over time, the buyer buys back the bank's equity in the house and reduces his monthly rent in proportion to his increased ownership of the house. Eventually, the buyer becomes the sole owner. The import- ant point is that the Islamic bank participates in the customer's ownership risk.
Islamic banks working with "Profit" not with "Interest"
By: jonathangreat
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