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New Book on Islamic Finance from Zamir Iqbal & Abbas Mirakhor

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Points of Essence:

  • Yet another book on Islamic Finance from Abbas Mirakhor with Zamir Iqbal. See Abbas Mirakhor’s other books here. It’s unfortunate that I didn’t have a chance to actually read the book but from the commentaries made available in the websites, the book offers an introductory concept of Islamic finance which perhaps, a beginner in Islamic finance may find useful. Read the related commentary made by the International Herald Tribune here.

BOOK REVIEW: Islamic banking has arrived! -by Khaled Ahmed

An Introduction to Islamic Finance: Theory and Practice
By Zamir Iqbal & Abbas Mirakhor;
Vanguard Books Lahore 2008;

It is not enough for an Islamic banker to appear on TV sporting a beard; he must be immaculate in his transactions. That is the only way he can compete with the highly developed but now not so honest conventional banking. The market will be the final arbiter

Islamic banking has arrived and this book is clearly the best introduction to it. Objections to the ban arose at the outset, and Al Azhar in 2002 decided to declare riba Islamic because 99 percent of the banks in Egypt practised conventional banking. Today the western banks are earning great profits from their Islamic banking sections, The Economist saying recently, ‘Compared with the ethics of some American subprime lending, Islamic finance seems virtuous as well as vigorous’.

If Islamic banking was bad, Lloyds TSB, Britain’s fifth-largest bank, wouldn’t be involved in it, seeing its accounts growing by 12 percent annually. The UK is at the top with hardly 1.5 million Muslims, and France with 5 million is girding up to net the pious money. In Pakistan, Islamic banking is getting set to become dominant in the years to come, but it is Saudi Arabia, Iran and the UAE who lead the flock so far. Other Muslim states like Turkey and Malaysia are fast converting because of the Islamic upsurge.

Muslims account for 20 percent of the world’s population, but Islamic finance, for less than 1 percent of its financial instruments – so there is opportunity there for everyone. And the banks in the Islamic world may soon have to compete with the Western banks out in the market to trawl Muslim savings.

The amount of Islamic assets under management stands at around $700 billion; but rating agencies thinks the bankers could be vying for $4 trillion of assets held by the industries. Islamic terms are becoming familiar in the world. There is sukuk for bonds, mudaraba for investment partnership, musharaka for equity partnership, and riba for interest.

Finally it is the people who decide and the banks that serve them, not the state, through a fiat. The Supreme Court of Pakistan did not succeed in banning modern banking but Islamic banking has come in competition with modern banking and is doing nicely.

The only way to go is cater to the people’s piety and their resolve to transact honestly. And if Islamic banking takes off it might face the next theological debate: should it let the non-Muslims with their tainted money come in too? Zakat is only for the Muslims. What if an honest non-Muslim wants to pay zakat? Flexibility is the name of the game and Islamic banking is practising it with the help of Islamic scholars.

The book explains the concept of riba better than any earlier book. It says the term riba is not an economic theory and there is nothing in the Quran and hadith to make us believe that it is so. The Quran prohibits riba but is not clear about what constitutes riba. Later exegesis was needed and Muslim jurists have decided that any money begetting money is wrong and no transaction in which the lender doesn’t share risk with the borrower is guilty of riba.

Riba is still to find its right expression in English. Literalism hounds us when we take a Quranic verse and don’t rationalise it through context. The book hazards that either riba was not common in society at the time of Revelation or too rampant to explain.

Early jurists who pronounced on riba were of course not familiar with modern banking and would have been troubled to see a poor widow lending to a bank and surviving only because of the fixed return, but here we are talking of finance and the debate has become reasonable, not because of any state fiat against riba, but because the Muslims want Islamic banking.

The book offers the following definition of riba: ‘According to sharia, riba technically refers to the premium that must be paid by the borrower to the lender along with the principle amount as a condition for the loan or for an extension in the duration of loan.

At least four characteristics define the prohibited interest rate: It is positive and is fixed ex-ante; It is tied to the time period and the amount of the loan; its payment is guaranteed regardless of the outcome of the purposes for which the principal was borrowed; and the state apparatus sanctions and enforces its collection.’ (p.56)

It is clear that the city-state of Madina had the same sort of problems from the money-lenders as the city-state of Athens because Plato railed against interest as did Aristotle whose dictum ‘money will not beget money’ was taken literally centuries later by Muslim jurists. Democracy in Athens was derailed because power passed from the Assembly to the money-lending oligarchs. The borrower, not the lender, had to be protected. On the other hand, today it is the savings account-holder who should be defended by the State Bank against malpractices of the borrowing bank of both sorts, conventional and Islamic.

There is an observation in the book in this regard that must be quoted. It refers to a ‘weak argument’ dismissing riba as applicable only on borrowing for the purpose of consumption: ‘Charging of riba on the lendings for consumption was deemed unfair unjust and exploitative and therefore like other traditions Islam also prohibited it’.

It goes on to explain that riba ban applied also to productive borrowing. This is correct because the traders of Athens borrowed to finance their shipments across the Dardanelles. Islam stood for banning the exploitation of the borrower. The Prophet himself was a trader and borrowed for his business!

It is for the reason of protecting the individual lender that the book has a chapter on the regulation of the institutions doing Islamic banking and another on the corporate governance of an Islamic bank. It is not enough for an Islamic banker to appear on TV sporting a beard; he must be immaculate in his transactions. That is the only way he can compete with the highly developed but now not so honest conventional banking. (Even the ATM machines are being manipulated these days!) The market will be the final arbiter. *



Written by Suapi Shaffaii

November 10, 2008 at 12:11 am

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