By Fakihah Azahari New Straits Times
ISLAMIC banking has been presented as an alternative to conventional banking on the basis that is does not charge interest. Interest is perceived and understood by the public to be akin to riba, having been indoctrinated as such by conventional economists.
However, modern jurists suggest that riba does not merely refer to interest but encapsulates elements of oppression, uncertainty and exploitation. This suggests that Islamic banking activities (including lending) is allowed by Shariah provided riba elements are not present in financing transactions.
Islamic and conventional banking exist side by side within the same economic framework. Thus, both systems are subject to the same variables, such as the movement and rates of interest applicable to both types of operations. Despite that, each system is distinguishable in terms of basic structure and philosophy.
The Islamic economic system stipulates profit and loss sharing structures where sharing of risk is a primary basis of Islamic financing. Financiers who undertake the role of capital provider have to internalise the values of an entrepreneur to measure, assess and appreciate the experiences of risk sharing.
Profit and loss sharing structures according to Islamic principles are best exemplified by the practices (sunnah) of Prophet Muhammad (s.a.w.), who undertook business enterprise with capital provided by Siti Khadijah. The decision by Siti Khadijah to entrust her business ventures with Prophet Muhammad (s.a.w.) as her agent illustrate a culture of taking cognisance of a person’s character, integrity, goodwill, reputation and skill as a basis for investment.
It is a departure from the conventional banking philosophy of evaluating projects based primarily on the weight of the collateral provided and the credit worthiness of the partners in the business ventures.
The conventional finance framework provide opportunities for a certain class of people who have the means to support their credit requirement from the bank. Such a system could not cater to an aspiring entrepreneur who fulfills the aspects of good character, goodwill, reputation, innovative and skillful but lack capital to undertake a business venture.
To stay true to the Islamic economic framework, there could have to be a paradigm shift from a debt-based economy to one that promotes risk-sharing by way of jointly undertaking business ventures and partnerships. Risk-sharing is not merely a commercial activity, it is also an act of worship, a means of perfecting our faith as we learn to put our trust in Allah for all our undertakings that we decide to embark upon.
In countries that have a history of innovation, especially in technology advancement, the culture of providing opportunities to entrepreneurs brought forth alternative means of procuring investment or capital. Entrepreneurs tend to look outside of the banking industry for investment and find them instead in investment entities that match the needs of entrepreneurs and investors. Ironically, this form of alternative financing is more akin to Islamic economic system.
Islamic banking has the potential to develop into a financing intermediary structure, encompassing various forms of financing that extend beyond debt-based financing to include profit and loss sharing ventures. This requires a close examination of the ever expanding role of Islamic banks in the country’s and global economy.
It can explore its role to be that of an entrepreneurial institution engaging in risk-taking or profit and loss sharing ventures or focus on specialised areas of financing from agro-based industries to advance technology and innovation.
An Islamic economic system is a system unique on its own as it provides a real alternative to purely money lending activities.
It is a system that recognises someone who takes a risk in trying out new opportunities amidst uncertainties and celebrates innovation as a critical factor in the growth of an economy.
This is the last of a six-part weekly series on Islamic Finance, to probe into the actual meaning of riba (usury), how it occurs, its effects and alternatives.