Islamic Banking – difference of opinions!

By Muhammad Ali Nadeem

The concept of Bank and banking is always in practice since when first coin was coined. In last 100 years conventional banks have taken ground and the trend of evolvement continues from coin to paper currency[1]. Then, conventional banks globally have transformed themselves from custodians of peoples’ money to Business Centers[2]. They not only keep deposits (cash) but utilize deposits in various business (after careful evaluation of risks) transactions[3] to make profit and continue to progress. This money management is either through various accounts[4] options or public funds offerings.

At the other end, Islamic banking assets continued double-digit growth in 2009, even as conventional bank growth stagnated due to recession, according to The Banker’s world-renowned Top 500 Islamic Financial Institutions survey. The assets held by fully Shari’ah-compliant banks or Islamic banking windows of conventional banks rose by 28.6% in 2009 to $822bn from $639bn in 2008[5].

Differences among the religious scholars are always blessing for Muslim Ummah. There were differences of opinion among the companions of Holy Prophet (peace be upon him) hence that paved the way towards the formulation of various schools of thoughts (primarily fiqha). Imam Shafi[6] had formulated his school of thought by disagreeing with Imam Abu Hanfia[7] over certain issues and hence a new line of Fiqha is formulated with thought process that had emerged as new horizon of knowledge understanding. Same is the case in newly born Islamic Banking world where many learned research scholars have contributed a lot and this trend continues with various approach towards better understanding of Islamic finance. On coming pages we will discuss few major differences among Islamic Finance research scholars.

From Islamic perspective, saving[8] accounts have one main issue of bearing interest. In Pakistan, Profit & Loss Sharing (PLS) accounts introduced during the era of late General Zia ul Haq (as part of making the banks or economy compliant with Shari’ah in early 80s) made no difference, hence “the PLS account at the moment is not compatible with Shari’ah because the amounts deposited in this account are used for interest bearing transactions and income derived there from is paid to the account holders as profit[9]” writes Justice Taqi Usmani.

Dr. Monzer Kahf, a writer and a prominent Muslim economist says, “PLS accounts are different. They are accounts with the banks on the basis of sharing in the activities of the bank. In other words, an owner of a PLS account makes the bank an agent to invest the money put in the account and share with this agent the result of this investment. There is an implicit condition here that the bank must use this money only in permissible transactions. If the bank invests the money in prohibited matters, certainly the income accrued from such prohibited contracts is also prohibited despite that the PLS account is correct, permissible and valid. Assuming the bank uses the funds in permissible contracts such as Murabahah, Mudarabah and leasing, the profit distributed to owners of PLS accounts is permissible. Notice though that such distribution cannot be determined in advance because it depends on the amount of profit the bank makes. Further, the principal of such account cannot be guaranteed too, because guaranteeing it contradicts the principle of sharing the profit and losses[10].”   

The qualitative approach towards these two statements would be as “if conventional banks utilize the money in permitted business transactions (avoiding gambling, pornography, pork, Music channels investment) and agree to distribute profit basis on actual P&L basis, could tend PLS account be within the line of Shari’ah. In country like Pakistan, this is not a dream[11] for major local banks to comply with!

Likewise, funds management is also an area where difference of opinion exists among Muslim scholars. Al Azhar’s Shaikh Tantawi in 2002 had created a stir among the religious circles when he redefined the concept of “lending or investing” in conventional banks. He argued that, “Those who deal with […] or any other banks, thus forwarding their funds to a bank to act as their agent in permissible investments, in exchange for profit distributions that are pre-specified by mutual consent … This transaction in this form is permissible without any suspicion, since no Canonical Text in the Book of Allah, or the Prophetic Sunnah forbids such a transaction in which profits or returns are pre-determined, so long as both parties consent to this transaction form[12].”

Referring to investment portfolios, he has highlighted that the profit or interest earned over investments are in line with Shari’ah principles. Answering to the critics of pre–determined profits, prior to the transaction: either bears profit or loss, he further explained his statement that, “there is no doubt that mutual consent of the two parties to pre-determine profits is permissible both in Islamic Law (Shari’ah), as well as logically, in order for each party to know its rightful share. In this regard, it is well known that banks pre-determine those profits or returns for their customers only after careful and detailed study of global and domestic market and economic conditions, the specific circumstances of each dealing, its type, and its average anticipated profitability[13].”

This is a major change from the original stance of Islamic jurists they say that “all scholars whose opinions were preserved are in consensus that silent partnership (qirād (loan) or mudāraba) is invalidated if one or both partners stipulate a known amount of money as profit. In this regard, consensus of religious scholars is a legal proof on its own,[14]” since ages that fixed-profit is termed as Riba and prohibited in Islam.

Late Shaikh Tantawi differs this with argument that “Funds given to a bank cannot be considered a form of loans (qard), since the bank is not in need, and loans are only requested by those in need. Thus, if the transaction is not a loan, the bank-customer must be viewed as an investor who intentionally goes to the bank seeking profits (banks advertise rates of return that they pay, and customers choose to go to the one they like.)” However, with this approach he doesn’t permit the validity of saving accounts, their interest would remain be the fold of Riba.

The other opinion is that “instead of a fixed return tied up with their face value, they must carry a prorate profit actually earned by the Fund. Therefore, neither the principle nor a rate of profit (tied up with the principle) can be guaranteed[15]” writes Justice Taqi Usmani.

The core of the conflict is that “The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund[16]” says Mufti Taqi Usmani while countering this argument Shaikh Tantawi says, “Non-fixity of profits [as a percentage of capital] in this time of corruption, dishonesty and greed would put the principal under the mercy of the agent investing the funds, be it a bank or otherwise[17]”.

This is quite a valid reason presented by Shaikh Tantawi and other scholars have to mitigate this risk – especially for those who are willing to invest their life-long earnings (pensions, provident funds, old age benefits funds) and wanted to earn profits in line with Shari’ah and with peace of mind. They shall not be put under the will of an agent[18] or mercy of investment manager!

Faith or confidence is a major pillar in terms of customer satisfaction especially when wealth is associated with it. “This is your money, you can withdraw it any time, anywhere using any channel-manually or electronically in any continent!” is the prime slogan of Private Banks for wealthy individuals around the globe. Confidence gets more value when individuals willing to invest their life-long earned investments[19] in a secured[20] way regardless of market volatility.

Similarly, present day credit card case is having – multiple opinions; hence various Islamic Credit Card products are available. Credit card is having three major elements:

  1. Obtaining the credit card by proving your eligibility in terms of your financial market standing, number of outstanding loans on to you, and your life-obligations
  2. Utilizing credit card and paying its monthly full amount without any financial rotation
  3. Cash advancement through credit card (obviously paying some high mark up)

The risk of Riba (interest) in item 2 and 3 is mitigated by “the best way to avail of the services of a credit card company is to have a direct debit arrangement with the issuer of the card. It means that as soon as an amount is due on the card holder the issuer receives it by debiting the card holder’s account with it or any other bank. This is to eliminate the chances of the accrual of any interest on the payable amount in case of delay in payment. However, if direct debit arrangement is not possible for any reason purchasing through a credit card is permissible only when the card holder is fully confident that he will pay the bill to the issuer within the due date and there is no apprehension that any interest will accrue with delay in payment. Drawing cash from a cash machine provided by the credit card company is allowed if no interest is charged for the cash drawing. The company may charge some reasonable lump sum amount for providing the services of the machines provided that it is not made an excuse for charging interest[21]” writes Justice Taqi Usmani.

While the prevalence and popularity of Islamic credit cards is high it is also noted that Islamic Credit Card “customers have reported that they were surprised to learn about the charge fees required to obtain the credit cards offered by some banks as ‘Shari’ah-compliant’ and which have been approved by the Shari’ah committees of the banks in question. Many of the complaints revolve around the fact that despite the cards being Shari’ah-compliant, they end up deceiving and exploiting customers[22].”

Few scholars went on to saying that, “the credit cards currently offered by banks entail usury and even resort to interest in some transactions. They added that this practice sometimes meant that charges exceed the interest rates employed by conventional banks for traditional credit cards.[23]

This difference of opinions among the religious scholars or Shari’ah Committees within the banks that approves or rejects the Islamic products, now requires some standardization. Islamic Fiqh Academy (IFA) launched a sharp attack[24] against the banks that had approved and endorsed these Shari’ah compliant Credit cards during its session held in Muscat in 2008.

Beside above, it is noted that differences of opinion among scholars have seen some financial products deemed un-Islamic in certain centers but permissible in others, creating uncertainty in the industry.[25] This is where AAOIFI[26] should standardize the product formation process and a new level of compliance shall be achieved prior to its launch globally. Where foreign banks have opened their Islamic banking window – within their conventional platform- and numbers of religious scholars (especially from Pakistan) are onboard with their Shari’ah Advisory board, it gives a new opportunity to find out ways to look at our financial system with new approach.

The fifth pillar of Islam, Hajj, was performed even before the advent of Holy Prophet Muhammad (Peace be upon him). Holy Prophet, after the advent of Islam, re structured it, performed corrective action to isolate it from the rituals[27] of pagans (Kuffar) and then asked Muslims to act as per his guidance (Sunnah) and the need (Quran) of Creator!

Like Hajj, could we transform our current financial system into a full fledge system compliant with Shari’ah needs in near future!!!

[1] OR
[2] This trend continues to an extent that the Service Units such as Contact Centers are now being transformed into Profit Centers by performing X-Sell or other financial products sales
[3] For example it is reported that Emirates Airline (UAE) has obtained financing from Citibank with ECA backing for delivery of six A380 planes. Interesting to note is the following sentence: "The $1.13 billion package is for the two A380s due this month, plus another four in 2010." $1.13 billion at 80% Loan to Value (LTV) would give a price of $235 million per aircraft. (
[4] Current or saving accounts
[6] OR see
[8] Checking + or Current accounts bear no interest
[11] Pakistani Economist Dr Shahid Hassan Siddiqui refers to this and ask conventional banks to pay due profit to their account holders
[12] The English translation of Al Azhar’s Fatwa is adapted from “The recent Azhar fatwā: Its logic, and historical background” by  Mahmoud A. El-Gamal Rice University 2003 pp 3
[13] “The recent Azhar fatwā: Its logic, and historical background” by  Mahmoud A. El-Gamal pp 6
[14] Al-Mughannī by Ibn Qudāmah  Volume 3, p.34
[15]  p 2
[16] p 2
[17] The recent Azhar fatwā: Its logic, and historical background” by  Mahmoud A. El-Gamal pp 13
[18] M/s T.J. Ibrahim & Company, a partnership concern, was formed in 1979-80 under the patronage of one Pir Haji Mohammad Usman (late) who induced his followers to deposit their savings with the company and another firm, M/s Alliance Motors in order to comply with Islamic finance rules as per Shari’ah by avoiding Conventional banks fixed term deposits. About Rs3.57 billion were collected by as investment from 48,250 depositors on the promise of attractive profits. The money was, however, diverted to the relatives, friends and close associates of the accused.
[19] The case of M/s Alliance Motors Company & M/s TJ Ibrahim & Co in 1988 when number of Pakistani residents, especially retired elderly persons & widows invested their life-long savings in the name of Islamic Finance (avoiding Riba of conventional banking investment portfolios) in hope of safe & higher returns (as much as 25-30%) end up to run from pillar to post to get their money back when State Bank of Pakistan declared such business illegal being tantamount to parallel banking. (
[20] This forced people to move back to National Saving Schemes or other non-Islamic investment opportunities that earned fixed monthly or annual profits backed by government regulators at a lower rate. See State Bank of Pakistan Offerings
[22] The Islamic Credit Card Controversy!
[23] The Islamic Credit Card Controversy! Daily Asharq Alawsat 27th August 2008
[24] See also Justice Taqi Usmani remarks about bonds and sukuk
[27] After building the Kaaba, Ibrahim (AS) would come to Makkah to perform Hajj every year. After his death, this practice was continued by his son.  Gradually, with the passage of time, both the form and the goal of the Hajj rites were changed.  When idolatry spread throughout Arabia, the Kaaba lost its purity and idols were placed inside it.  Its walls became covered with poems and paintings, including one of Jesus and his mother Maryum.  Eventually over 360 idols came to be placed around the Kaaba. During the Hajj period itself, the atmosphere around the sacred precincts of the Kaaba was like a circus.  Men and women would go round the Kaaba naked, arguing that they should present themselves before God in the same condition they were born.  Their prayer became devoid of all sincere remembrance of God and was instead reduced to a series of hand clapping, whistling and the blowing of horns.  Even the Hajj call was distorted by them with the following additions: “No one is Your partner except one who is permitted by you.  You are his Master and the Master of what he possesses.” Sacrifices were also made in the name of God.  However, the blood of the sacrificed animals was poured onto the walls of the Kaaba and the flesh was hung from pillars around the Kaaba, in the belief that God demanded the flesh and blood of these animals. Singing, drinking, adultery and other acts of immorality was rife amongst the pilgrims and the poetry competitions, which were held, were a major part of the whole Hajj event.  In these competitions, poets would praise the bravery and splendor of their own tribesmen and tell exaggerated tales of the cowardice and miserliness of other tribes.  Competitions in generosity were also staged where the chief of each tribe would set up huge cauldrons and feed the pilgrims, only so that they could become well-known for their extreme generosity. Thus the people had totally abandoned the teachings of their forefather and leader Ibrahim (AS).  The House that he had made pure for the worship of God alone had been totally desecrated by the pagans and the rites which he had established were completely distorted by them.  This sad state of affairs continued for nearly two and a half thousand years until Prophet Muhammad (Peace be upon him) came and brought Hajj back to its original spirit!