CAIRO: The idea of Islamic banking is based on a misconception of what both riba (usury) and banking are all about, as interest is certainly not synonymous with riba and Islamic banking actually does not avoid interest, said Yasser Abou Ouf, associate investment officer at the International Finance Corporation (IFC).
During a lecture at the headquarters of Nahdet El Mahrousa NGO on Wednesday, Abou Ouf refuted the arguments of several sheikhs who claim that regular banks break the laws of Sharia and are to be avoided by “good Muslims altogether.
“Some scholars believe that interest is the modern application of a common transaction that used to take place in the Arabic Peninsula before the rise of Islam, namely Riba Al Nasi’a, he said, where a wealthy man would lend merchants in need of cash a sum of money in return for an agreed-upon markup to be paid in addition to the loan amount after a certain period of time, a practice which was condemned by the Quran in several instances.
“We have to look at the underlying logic in banning such a practice, Abou Ouf added. It was not banned simply because it entailed a fixed profit, because if we apply that principle, even renting property would be a sin. Whether you are renting a tangible commodity or the actual medium of exchange – money – the concept remains the same, because money is also a utility for which you have to pay.
“Instead, riba was banned because it entailed deceit, coercion or monopoly and because the muraby (creditor) did not have the system banks have today to ensure that the debtor has the capability of paying back the loan, Abou Ouf commented.
According to Abou Ouf, interest makes a fair transaction because LE 100 today and the same amount a year later do not have the same value.
Putting the whole riba vs. interest argument aside, Abou Ouf went on to explain how the practice of Islamic banking reveals the fundamental inconsistency at the very heart of the idea, because it does not actually avoid riba.
In practice, Islamic banks do not avoid riba, said Abou Ouf, The most common form of Islamic banking, murabahah [cost plus], where the bank makes the purchase of an asset on behalf of the client and claims ownership over this asset until the loan is fully paid in addition to a profit margin agreed upon prior to the purchase.
Abou Ouf explained that this profit margin is only a different name for interest, and its value is, in fact, determined by market interest rate.
Other forms of Islamic banking, such as mudarabah [profit loss sharing], do avoid interest. In mudarabah, the bank bears all the losses while in the case of profit, it is shared with the entrepreneur. However, these forms constitute an insignificant amount of the bank’s investments. Abou Ouf told Daily News Egypt.
“Unfortunately, a lot of people run to Islamic banks just because of the name, he told Daily News Egypt, They do not try to dig into how these banks work, because if they did, they would understand that Islamic banks abuse both the depositors and debtors and are much less [Islamic] than regular banks.
At the end of the lecture, Abou Ouf explained how Islamic banking has its repercussions for both individuals and the economy. The depositors end up bearing the entire risk of all the bank’s investments, he said, and to avoid losing its depositors, the bank focuses its investment on short-term projects with minimum investment, thus not contributing to the overall well-being of the economy.
