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Salman Ahmed Shaikh

In some of his recent public lectures, Javed Ahmad Ghamidi has suggested that taking any form of loan for asset purchase from conventional banks is allowable in Islam. He contends that hire purchase agreements, finance lease and mortgage loans are all allowable in Islam. He maintains that asset finance using finance lease or mortgage loans does not involve any injustice. He thinks that it is a benevolent act on the part of the financier to facilitate asset ownership.

In response to this view, it is humbly stated that conventional banks only provide loans no matter whether the loan amount is used for purchasing assets or not. As far as repayment of debt is considered in conventional finance lease or mortgage loans, the interest is due from the very first date of sanction of loan till the very last. If the asset remains unusable during the conventional finance lease, the instalments including interest and principal repayment will continue without any break. If interest amount is not paid on time, then interest has to be paid on accrued interest along with financial penalties. Compounded interest can multiply exponentially.

Conventional banks do not themselves justify their charge of interest or mark-up as a form of rent. It is strange to see advocacy on their behalf when they are themselves not claiming to be interest-free. All finance practitioners and academics know that the instalments in finance lease and mortgages are computed by using present value annuity formula. Conventional banks have no concern with the value of the asset or property. Bank as a financial broker looks to get returns on its debt receivable with interest.

Islamic banks also do not exactly provide a plain vanilla operating lease where the client can use the asset and return it after the lease period. They also provide lease as a way of financing the purchase of asset by the client. However, they ensure that during the lease period, ownership rests with the bank as lessor in Ijarah. They also pay asset related costs directly. For the commercial sustainability and competitiveness of their financing product, Islamic banks charge rents keeping in view their costs incurred and an expected level of profit which will allow them to provide competitive returns to the depositors.

One may make an economic criticism on Islamic way of leasing as being similar in the eventual effects and outcomes. Nonetheless, it is inconsistent to criticize Islamic banking on the understanding that they merely use legal stratagems, while giving blanket permissibility to all modes of finance lease and mortgage loans offered by conventional banks.

One can say that the substance in Islamic banks from the monetary flows point of view is also no different. Indeed, this is highlighted extensively in Islamic economics literature. Nevertheless, the main scope of criticism is economic substance rather than Shari’ah compliance. Economic criticism is widely known and appears even from within the Islamic finance circles as well.

In his book, ‘Ghair Soodi Bainkari’ [Interest Free Banking], Mufti Muhammad Taqi Usmani has clarified that if Islamic banks underachieve redistribution objectives through their currently used products and services, then, it does not automatically mean that the currently used product structures are not Shari’ah compliant. It is because Shari’ah compliance rests on fulfilling the applicable rules of Shari’ah in each contract. 

Thus, these differences also need to be given due consideration in forming opinion about Islamic banking. It is incomprehensible that while discrediting Islamic banking, one would simultaneously sanction it legitimate to obtain any form of finance from conventional banks where the finance is needed to buy an asset.

In his book ‘Maqamat’, Javed Ahmad Ghamidi writes: “if things are being sold on instalments, then until these instalments are complete, the bank should remain a partner in the ownership of the sold item, fulfil the rights of ownership and receive rent on it”.

Ironically, only the practiced Islamic banks fulfil this condition. It is quite appalling that the author repeatedly complains about being misunderstood, but, here, he has vindicated conventional banking on a justification which they do not fulfil and which only Islamic banks ensure. It is quite strange that the author has shown reservations with practiced Islamic banking, but he approves taking finance lease and mortgage finance unconditionally from conventional banks.

Where the bank does not take ownership, possession and risk of the asset, the exchange of money at two different time period will fall within the ambit of loan of money and in such cases, difference in values in exchange will constitute Riba. In such transactions, it does not matter whether the Riba is small or large. Hence, both ‘interest’ as well as ‘usury’ (exorbitantly high rate of interest) are not acceptable in Islam.

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