Basically the industry of banking arises out of men’s desire to protect and safeguard their money. When men have acquired so much money in cash, it is a natural desire of men to protect the money. It was a practice in olden days, in order to protect their money; they deposited their money with someone they trusted. The work of the trustworthy man was only to keep the money and whenever those men, wanted their money back, the money was always available. In other words banking system had been existed for a very long time. It had existed even at the time of Prophet Muhammad saw. During the time of Prophet saw, many peoples kept their money and other valuables with the Prophet Muhammad saw. At that time, Prophet saw was regarded as the most trustworthy person in Mecca. Beside Prophet Muhammad saw saw, there are few others, whom the peoples trusted and deposited their money and valuables to. At the same times in Mecca, there are also many Jews and Arabs, who were doing business on money lending. With a certain amount of money they give loan to others and they will charge a certain amount of interest. They were known at that time as money lenders. Money lenders are persons who want to make more money out of their money. They lend their money to the poor persons who are in need of money and they charge interest or riba on whatever amount of money they lended to others. In this way these money lenders will make more money, out of their money. During the time of Prophet Muhammad saw, the money lenders were mostly the Jews and because of money lending business, many of the Jews who lived in Mecca and Medina were very rich.
After the demise of Prophet saw, there is one companion of the Prophet saw by the name of Hazrat Jaafar, who was also trustworthy and many peoples had also deposited their valuables and money to him. Hazrat Jaafar wanted to spend the money which was deposited to him on the poor and the needy. He told to the depositors to regard him as the person who had borrowed their money. He also told them that they can obtain any amount of their money or valuables, at any time they wanted. Whenever any of the depositors came to him to withdraw back their money or valuables, Hazrat Jaafar will pray to Allah to give him the amount of money, he wanted to give to the depositors. When Hazrat Jaafar was about to passed away, he passed on his work to his son, Abdullah and he told his son, Abdullah to pray to his Master, who is Allah, whenever he had any problems paying to the depositors. During the time of Prophet Muhammad saw, a trustworthy person such as our Prophet Muhammad saw or the shrewd Jews who practice money lending with interest which are similar to the practice of our present conventional banking system, will acts as the bank for peoples to deposit their valuables. The current philosophy of our banking system is probably similar to the philosophy of the shrewd Jews during the time of Prophet Muhammad saw who uses money in order to make more money and help only those who have money. Our current banking system encourages people to deposit their money in the banks, so that with the high interest rate, offered by the bank the person who deposited their money with the bank will be able to make more money. Our current banking system allows only the rich to borrow money from the bank, because in order to be able to borrow money from the banks, all banks including our current Islamic banks require collateral. Only the rich can provide collaterals to the banks. Collaterals act as a guarantee to the bank, in case the person, who borrows money from the bank, cannot pay back the loans to the bank. Who has collateral? Only those who are rich can provide collateral to the banks and because they have collateral, they are able to secure loans from the bank. Where the poor will go, in order to obtain loans? The poor will have to go to the money lender or in Malay, along or Chattier in Tamil, who will charge the poor with much higher interest rate than the banks? More often that not, many of these poor peoples are not able to pay back the loans and become the criminal victims of these along.
Nowadays, banks are like the rich Jews at the time of Prophet Muhammad saw, who used money in order to makes more money. Even today, the owners of many great banks of the world belong to the Jews. A person who charges interests on the amount of money borrowed from him is known in Islam as a person who practices the system of riba and it is forbidden in Islam. Allah allows business transaction without riba but Allah forbid business transactions that involve riba or interest. Whoever eat foods with the money obtain through riba or interest are eating foods which are haram. Whatever the name maybe given, it is riba or interest when it works on the principle; when you borrow money, you have to pay more than the amount of money that you have borrowed. When the amount of money which is paid to a person is more than the amount of money which is borrowed, the money is called riba or interest.
Let take an example of a person name Abu who is in need of a car and he wanted to buy a car using a loan from a bank. In order to buy the car, Abu needs to borrow from the bank, the amount of money of about RM 58,000.00. With such amount of loans, and taking into account the interest rate of 5.9% Abu would have to pay back to the bank, a monthly installment of RM 826 for 9 years. Abu has to borrow from the bank the amount of only RM 58,000 because Abu has paid to the bank in cash the amount of RM 7,000 and the actual price of the car is about RM 65,0000. Although the price of the car is only RM 65,000 but in 9 years, Abu will be paying to the bank the amount of RM 89,208 and plus the amount of RM 7,000 which Abu had paid previously in cash to the bank, Abu is actually paying to the bank the amount of about RM 96,208. The cost of the car is only RM 65,000, but because of interest, the cost of the car has become to about RM 96,208. Because of interest, Abu has to pay to the bank an extra amount of money of about RM 31,208 and this extra amount of money, which is paid by Abu to the bank is call riba or interest. Our current Islamic banking system named the extra amount money paid by Abu to the bank as profit. Many Muslims are in the opinion, when we change the names of something which is not Islamic to an Islamic names, it will become Islamic. Other than the names, the principles used by both conventional and Islamic banking systems are the same. In order to understand better the different between Islamic banking and conventional banking system, we can take the example as follows; a conventional bank will sell a car to you at the price of RM 58,000 but with a yearly interest rate of 5.9% and you have to pay back to the bank for nine years with a monthly installment of RM 826. However an Islamic bank will sell the same car to you at the price of RM 89,208 and you also have to pay back to the bank for nine years with a monthly installment of rm 826 which is the same amount to be paid to conventional banks. In reality both conventional and our current Islamic banks are the same. Both are using the same interest rate except in Islamic banks, instead of charging interest on your loan, the Islamic banks sell the car to you at prices which already include the same amount of interest money as charged by conventional banks. Our current Islamic banks are different from the conventional banks only in names but in principle both of the banks are the same. Both banks are using the same principle of making money out of lending money to others and this principle is not an Islamic principle. However, many Muslims including Dato’ Nik Aziz, Menteri Besar of Kelantan, Mursyidul Am of Pas, regards our current Islamic banks as truly Islamic.
What is so special about our current Islamic banks other than the name Islam? Outwardly or cosmetically our Islamic banks appear to practice Islamic principles. Instead of using the term interest, our Islamic bank uses the term profit. The amounts of profit obtained by Islamic banks are very high and this is not Islamic. Islam does not allow us to have such a high profit on selling such crucial commodities such as cars which are in reality in this modern era have become needed commodities to everyone. In Islamic banks, the profit is very high, because in calculating the final price of the commodities, Islamic bank takes into account, the interest rate which is almost the same rate as in conventional banking system. Many think in Islam, we can have as much profit as we want as long as both parties agree with the price. This is not true, particularly on commodities such as cars which have become a need to everyone in this modern era. On commodities which have become a need to everyone the maximum profit margin in Islam, in my opinion should only be 10%. In Islam, the more the commodities are needed to be used by everyone, the cheaper should be the price of the commodities sold to the peoples. In the case of our current Islamic banks, the buyers of the car have no power at all in deciding what would be the most affordable price of the car to the buyers and to a certain extent buyers are forced to accept whatever price offered by the bank. If that is the case, our current Islamic banks have committed an act of exploitation towards the buyer of the car and this is not Islamic. In my opinion, both conventional and the current Islamic banking systems are oppressive and exploitative. It is highly important for Muslims in all over the world to develop a truly Islamic banking system which exercises fairness and justices to both customers and the bank. As I had written and explained previously, the word Islam means peace and a truly Islamic banking system, will certainly gives peace to both the banks and the customers.
What is the truly Islamic banking system? Before we go further into the discussion of the topic, let us discuss first the concept of borrowing money in Islam. Love of money is the basis of all evils. All men love money and love to have more money and fear to loose money. It is easy for men to borrow money than to give away money or to pay men’s debts. It is easier for men to have debts than for men to pay their debts. It is hard for men to pay their debts because in order to pay their debts, men need to give away the money that men love. It is easy for a person to borrow money because when a person borrows money, that person will have more money and all men love money. In Islamic banking system, these principles are to be observed; Money can be given to a person as a loan, when the person is a good pay master and he has the capability of paying back the loans and no interest should be charged on the person who borrows money. According to Islamic principle, when an interest is charged to a person who borrows money, it means the person has been exploited by the person who loans him the money. Secondly in Islam, money should not be given as a loan to a person who is not a good pay master and who does not have the capability of paying back the loans. Only with the two above conditions Islamic banks are allowed to give loans to the peoples. Certainly there will be no banks which are able to gives loans to peoples with the above said conditions. Banks are not a charitable body and therefore banks with the above two conditions cannot give loans to anybody. One of the most difficult conditions to be followed by the banks is to give loans, without interest. Without interest the banks would not be able to make money, out of money. However in Islam, the aim of giving loans to anybody is to lessen their financial burden. Allah does not allow us to give loans and to charge interest rate on the loans as done by the Jews and the conventional banking system. In Islam this practice of charging interest rate is considered exploitative and Allah forbids us from exploiting others. As Islamic banks are not charitable bodies, Islamic banks are not allowed to give loans to anybody. Since Allah allows us to do trading and the Islamic banks, instead of giving loans with interest as conventional banks, can do trading with the peoples. With trading the Islamic banks can earn profit and to earn money through profit is allowed in Islam.
Many low income earners want to buy cars and houses but they do not have sufficient money to buy them in cash. Cars and houses are not luxuries but are necessities of our lives. In our modern era, almost everyone needs to buy a car in order to go to work. Similarly everyone needs houses of certain standard, in order to protect themselves and their families from the sun and the rain. How would they obtain all these necessities of life, when they do not have so much money? Who would help them in buying cars and houses? Houses, cars, and foods are all needs or necessities of our lives. In order for their needs to be fulfilled, banks should help them. Which bank will help them to obtain their needs? In my opinion the true Islamic banks should help them to obtain their needs and the intention of helping them is only to please Allah and not to gain exuberant amount of profits. How the banks would help them to obtain their needs and at the same time obtain some profit? Allah allows us to do businesses but Allah does not allow us to associate our businesses with the practice of interest or riba. Allah allows us to do business and to obtain some profit out of our business. The amount of profit on commodities that have become a need to everyone should not be more than 10 % of the cost price. Let us take one example of a person named Ali who is a teacher and receives a monthly salary of RM 5,000. Ali needs to buy a car which cost about RM 68,000. How Islamic bank would help Ali to obtain the car? Islamic bank can help Ali to obtain the car if Ali has the record of a good pay master and Ali has the ability to pay back the loans on installment basis.
Islamic bank will buy the car from the manufacturer at the price of RM 65,000 and then sell the car to Ali at a price of only RM 71,500. With this price of RM 71,500 the bank would obtains a profit of about RM 6,500 which is about 10 % of the cost price. Islamic bank will allow Ali to pay to the bank on a monthly installment of RM 662 per month and the payments will take the period of about 9 years. With Islamic banks, Ali needs to pay a monthly installment of only RM 662 but with conventional bank, Ali needs to pay a monthly installment of RM 826. Islamic banks will be more customer friendly than the conventional banks. Islam means peace and everyone is at peace with Islamic banking system. A truly Islamic bank should be established in Malaysia in order to help both Muslims and non-Muslims. Our current Islamic banking system is not truly Islamic and is unable to help even the Muslims to fulfill their needs with peace. To be continued in the next article in PART 2
Prof. Dr. Nasoha Saabin
July 2012
Dean of Faculty of Optometry
Twintech International University College of Technology
Kuala Lumpur, Malaysia