Written by Muhammad Hisyam Bin Mohamad. Posted in
The basic objective of Islam is to emancipate people from every kind of material and doctrinal slavery and uphold social justice. In the economic field and particularly in finance industry, Islam also has paid due attention to all the factors which restrict the freedom of action and lead to material and intellectual bondage (Behechti&Bahonar, 1990). In this regard, the Quran has formulated rules one of which has been deemed as one of the vision of the Quran and becomes the main thrusts of Islamic economic and finance i.e. the prohibition of riba.
The prohibition of riba in Islam is clearly outlined in the Quran. The following verses with clear cut terms prove that Islam is very serious when it comes to the issue of riba :
Those who swallow down usury cannot arise except as one whom Satan has prostrated by (his) touch does rise. That is because they say, trading is only like usury; and Allah has allowed trading and forbidden usury. Allah does not bless usury, and He causes charitable deeds to prosper, and Allah does not love any ungrateful sinner.
To show that the practice of riba has a very bad implication on human welfare, Allah s.w.t has declared wars against those who refuse to leave practising riba. Verse 278 and 279 of Surah Al-Baqarahstate :
O you who believe! Be careful of (your duty to) Allah and relinquish what remains (due) from usury, if you are believers. [2.279] But if you do (it) not, then be apprised of war from Allah and His Apostle;
In one of his hadith, the Prophet s.a.w mentions: “The wrath of Allah is on the taker of riba, its giver, its writer and its two witnesses.”
In regard to financial transactions, riba is defined as any contractual increment in a loan or debt due to the time element. The aforementioned is exactly what we know today as interest (Kahf, 2006). To understand why riba violates the principles of property rights in Islam we need to revisit the basic concept of debt.
According to Kahf, a debt is an inter-personal relation that is a liability on one party and an abstract asset to the other. By its nature and in real life a debt is not liable to increase or decrease; it is not able to produce increments because it has no intrinsic utility other than being an ingredient of wealth. Additionally the amount of an increment in a debt is also assumptive; it depends on the conditions and externalities in the imaginary market that we create for debts.
Interest based debt contracts have two major characteristics. First they are instruments of risk-shifting, risk-shredding and risk-transfer. Second characteristic of interest based contracts is that upon entering into this contract, the creditor attains property rights claim on the debtor, equivalent to the principal plus interest and whatever collateral may be involved, without losing the property rights claim to the money lent. Therefore it is very obvious that, the practice of charging of riba is an act of injustice because it violates the Islamic property rights principles.
With regard to the present Islamic finance industry, the vision of uplifting society through the concept of justice, social equity, brotherhood, charity and cooperation is still far from the target underlined by the founding fathers of the industry. As a matter of fact, the Islamic banking and finance industry (IBF), which is now deemed as the only manifestation that represents an Islamic economics alternative to mainstream economics, seems to have grown as part of the conventional financial sector (Zaman &Asutay, 2009).
There are two major points highlighted by most Islamic economists with regard to the IBF’s failure. First they said the IBF is economically not feasible for being more costly and less accessible to those in need. In fact very little of the large amounts of wealth associated with it have actually reached the most needy in Muslim societies. Instead it circulates amongst large corporate interests in oil rich states (Zaman &Asutay, 2009).
Second, they also criticised the process of reengineering financial products to make them Shariah compliant whereby only the actual validity of the fiqh (jurisprudence) is involved. Some sceptics, such as El-Gamal (2006), have expressed unease at the fact that Shariah scholars who authenticate such contracts are themselves employed by the industry, while others like Zaman &Asutayhave claimed that such contracts are designed to circumvent Shariah laws and so violate broader principles, or maqasid, associated with the prohibition of riba.
With regard to the IBF, the reason for failure of the institution should be searched within the proposed multi-dimensional and tawhidi development process. This is because by having solely relying on the prohibition of riba and at the same time operating on the conventional system framework, Islamic finance industry–instead of growing as an establishment that promotes justice and equity–would only converge and becomes part of its mainstream counterpart.
As asserted by Zaman and Asutay, only the Islamic political economy can respond to this failure, not the neutral Islamic finance or even Islamic economics. For any system to be fully realized it must have several necessary elements. Such elements include framework paradigm, value system, foundational axioms, operational principles, specific methodology and functional institutions. As such the actualization and realization of the objective of Islamic Finance industry depend to some extent on the identification, support and propagation of the specific indigenous institutions of Islam associated with the original vision underlined by the Quran.