Tapping into Islamic banking universal principles

MANY believe that the universal principles of Islamic banking are confined to the prohibition of riba, the prohibition of gharar and the prohibition of maysir. It is worth noting that the Islamic banks¡¦ deposit and financing are transacted on the basis of trade, fee-based income and on the profit and loss sharing basis, excluding the three prohibitions.

The development of Islamic banking in Malaysia was pioneered by the incorporation of Pilgrims Savings Corporation (Perbadanan Wang Simpanan Bakal-bakal Haji), operated on 30 September 1963, which later converted to the Pilgrims Fund Board (Tabung Haji), facilitating savings to assist muslims perform the pilgrimage to Mecca. The notion of the organisation was departed in December 1959 when YM Prof. Diraja Ungku Aziz presented a paper work on 30 September 1959 to the Government entitled “A Plan To Improve The Economic Position of Potential Pilgrims”.

He proposed a body that can manage the well-being of the pilgrims to Mecca, resulting to the formation of The Pilgrims Welfare Committee. His plan was only be implemented in 1962 when Sheikh Mahmoud al-Shahltut, Rector of Al-Azhar University, Cairo visited Malaysia. The plan was approved after his positive examination to claim that the plan is Islamically acceptable where the benefits were huge to muslims. Consequently, Pilgrims Savings Corporation was incorporated on in 1962 and operated on 30 September 1963. In 1969, the corporation was merged with Pilgrims Affairs Office (Pejabat Urusan Hal Ehwal Haji), operating since 1951 in Pulau Pinang. Hence, Lembaga Urusan dan Tabung Haji (LUTH) or the Pilgrims Management and Fund Board launched under Act 8, The Pilgrims Management and Fund Board Act 1969.

This myriad success story of Tabung Haji has leeway to a new introduction of Islamic banking that is Bank Islam Malaysia Ber had (BIMB), which was registered in 1983. Later, Islamic Banking Scheme (IBS) was introduced on 1 December 1998, occurred in the era of Asian Financial Crisis 1997. To cut a long story short, three foreign bank introduced in Malaysia beginning year 2005, in which Kuwait Finance House is the first bank that was granted a licence under the Islamic Banking Act 1983 (Malaysia), followed by a consortium on 28 November 2005. The consortium is led by Qatar Islamic Bank (66.67%), RUSD Investment Bank (16.67%), Tadhamon International Islamic Bank (10%) and Financial Asset Bahrain (6.67%). Later, Al- Rajhi Bank in 2006.

Although these institutions differ, but what they have in common is their share belief on Islamic banking universal principles. As such, this week I draw your attention on the principles. Three questions are addressed. Question #1 - What are discrepancies between the universal principles? Question #2 - What are examples of the reversal of the principles in conventional finance? Question #3 - Are Islamic bank dealt with them partially?

Riba is interpreted as a predetermined excess over the loan received by the debtor conditionally in relation to a time. It is broken down into riba al-buyu (exchange) and riba alduyun (loan transaction). Gharar is inferred as uncertainties in the contractual obligations that lead to ambiguities. Typically, it is classified into gharar fahis and gharar yasir. The latter is small and acceptable but the former is big and not acceptable. Conversely, maysir is best described as a game of chance. Zero-sum game captures the term, denoting one person’s gain is equivalent to other’s loss, so the net change in wealth is zero.

In conventional banks, interest rate is tantamount to riba that is forbidden out of unjustified excess to the principal borrowed. Interest charges for conventional home loans are riba al-nasiah because they are charged in relation to the time given to repay the loans. In a simplest form, the unjustified increment in borrowing money, above the amount of loan - riba alduyun. I am wondering why some laymen associate the interest with profit rate. Should Islamic banks be re-labelled as an ‘Islamic Trading Bank’ to accommodate the fallacy? Trade and riba are two different things.

Pertinent to gharar, it is usually observed within derivative transactions, such as forwards, futures and options. The reason for the first two in that it involves uncertainty in the future delivery of the underlying asset. The reason for the third in that it involves uncertainty in the execution of the option. Islamic banks are forbidden to involve in such activities. The banks locate the significance of transparency and availability of counter values. Instead, maysir is epitomised in the case of ¡§traditional insurance¡¨ when a person pays a little sum with the hope to claim a huge amount in the event of a single claim. On the same note, it can be a case when a person loses the premium paid where the insured loss (the insured asset) does not occur. In this case, I refer it to a zero sum game - implying one gains is equalised with one loses. Maysir is also known as gambling as prescribed in the Quran as follows, “They ask thee concerning wine and gambling. Say: In them is a great sin” (2:219)

In short, both gharar and maysir lead to hostility and hatred, of which unethical practices are upheld at the expense of justice and well-being. Beyond, “traditional insuranc” is not only comprising maysir (i.e. from demand and supply stances) but also leads to gharar (i.e. the benefits earned are uncertain among customers) and riba (i.e. investing significant portions of the funds generated in government bonds that earn interest incomes).

In the context of Islamic banking, however, the ¡§implications¡¨ brought by the prohibited elements can be found. I am wondering why? Perhaps the reasons are of two. The first one is related to the addition that can be found in the BBA mortgage that is greater than that of its peer. The second one is related to the investment products introduced where the element of lucky draw or its bad lottery is upholding. Likewise, BBA has been criticised for promoting a sale where incomplete ownership by a customer departs. It is, somewhat, permissible out of darurah. Moreover, tawarruq personal financing is a case that has a gharar¡¦s element in the application stage (e.g. unknown metal types and quantities involved). The selling price is also unknown during ijab but is solved during qabul (i.e. the signing of Acceptance of Purchase).

All in all, the three universal principles have a greater impact for an improved performance and public trust. These golden principles must go together with other elements like ethical bankers, translucent procedures and Islamic debt policy, to mention some, to address the Islamicity of Islamic bank. With better approaches, Islamic banks can slowly promote Shariah-based transactions where the soul of Islamic business philosophy is not only shared by the banks but also by their customers, at least.

*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163). He can be contacted at hanudin@ums.edu.my