Mechanism of Islamic Banking

There is no point of discussing whether Riba (interest) is Halal or Haram according to Islamic teachings. Majority of Islamic Scholars around the world has declared conventional banking against Shariah and there are many Fatwas given by Muftis around the globe. Below are some excerpt taken from couple of articles to explain the mechanism of Islamic Banks and practically how they are operating within the boundaries of Shariah.
The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba(usury). Common terms used in Islamic banking include profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijarah).

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments. However, the bank’s profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. This arrangement is called Murabaha. Another approach isEIjara wa EIqtina, which is similar to real estate leasing. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid).

An innovative approach applied by some banks for home loans, called Musharaka al-Mutanaqisa, allows for a floating rate (interest ratethat changes on a periodic basis) in the form of rental. The bank and borrower form a partnership entity, both providing capital at an agreed percentage to purchase the property. The partnership entity then rents out the property to the borrower and charges rent. The bank and the borrower will then share the proceeds from this rent based on the current equity share of the partnership. At the same time, the borrower in the partnership entity also buys the bank’s share of the property at agreed installments until the full equity is transferred to the borrower and the partnership is ended. If default occurs, both the bank and the borrower receive a proportion of the proceeds from the sale of the property based on each party’s current equity. This method allows for floating rates according to the current market rate such as the BLR (base lending rate), especially in a dual-banking system like in Malaysia.

There are several other approaches used in business transactions. Islamic banks lend their money to companies by issuing floating rate interest loans. The floating rate of interest is pegged to the company’s individual rate of return. Thus the bank’s profit on the loan is equal to a certain percentage of the company’s profits. Once the principal amount of the loan is repaid, the profit-sharing arrangement is concluded. This practice is called Musharaka. Further, Mudaraba is venture capital funding of an entrepreneur who provides labor while financing is provided by the bank so that both profit and risk are shared. Such participatory arrangements between capital and labor reflect the Islamic view that the borrower must not bear all the risk/cost of a failure, resulting in a balanced distribution of income and not allowing lender to monopolize the economy.

 

Source:

http://www.islamicmortgages.co.uk/index.php?id=269

http://www.gamji.com/article6000/NEWS7908.htm

http://www.islamweb.net/emainpage/index.php?page=articles&id=135434

 

The Notorious IMF Bailout Plan

Whenever we are criticizing IMF bailout plan, we have never reached to a conclusion that whose incompetency has put us in situations to go for bailout.  When we try to blame any government, dictator or political party, discussion becomes political and ends without any conclusion. We watch such drama everyday on each news channel when every talk show, on any topic, ends without conclusion. Unfortunately, I do not have guts to label any Government “responsible” for today’s situation that is why I am only criticizing IMF bailout plan.

Shifting from “conspiracy mode” to “realistic mode”, IMF has been criticized heavily throughout the world for its policies. It has been observed in the past that IMF has failed in understanding the ground realities of the borrowing country and applying same economic policies. For instance, for some countries, devaluation of exchange rate could help, but it is not necessary that you apply the same formula in every case. In a same way “free market policies” and “privatization” is not beneficial for every situation and you cannot go for privatization in every country. It can lead private monopolies which will exploit customers, in the end. In 1997, during Asian crisis, IMF insisted on deflationary fiscal policy (which means cutting in spending and rise in taxes) and higher interest rates. The policy created minor crisis into an economic recession and unemployment rate shot upwards in Thailand, Indonesia and Malasia. Chief economist of the World Bank, Joseph Stiglitz blamed higher interest rates for Thailand’s recession.

IMF has failed number of times in understanding and learning the economic atmosphere of the borrowing country. In 1990’s, during the intervention in Kenya’s economy, IMF applied its conventional policy and made the Central Bank remove controls over flow of capital. The policy gave an easy passage to corrupt politicians to transfer their illegal money out of the economy.

Jamaica has blamed IMF for taking the ability to decide their national policy. IMF intervenes and dictates the policy and the elected body of the country is forced to follow the ideology and interests of developed countries. The head of the Harvard Institute for International Development, Jeffrey Sachs, said: “In Korea the IMF insisted that all presidential candidates immediately “endorse” an agreement which they had no part in drafting or negotiating, and no time to understand. The situation is out of hand…It defies logic to believe the small group of 1,000 economists on 19th Street in Washington should dictate the economic conditions of life to 75 developing countries with around 1.4 billion people.”

Same is the scenario with Bailout plan of Pakistan. IMF is implementing its conventional strategies or the strategies of its own interest. Like Asian crisis on 1997, interest rates or taxes are high and the whole burden is on general public. Same like Jamaica, we cannot have our own policies with our national interests. Like Kenya, state bank do not have control in flow of capital and what was done in Korea, we, 1.4 billion people are dictated by only 1000 economists.

Bureaucrats- the Silent Scavengers

“Bureaucrats do not change the course of the ship of state. They merely adjust the compass.”

Initially this statement was taken from a site just to update the facebook status but I just realized that statement is tailor made for our Pakistani bureaucratic structure. In this media warfare one thing should be noticed that we have completely forgotten the bureaucracy which is even more responsible than our fraudulent political structure. Our political elite have a reason for their failure, corruption and incompetency that democracy has not got a appropriate time to prosper but do we have any explanation for corruption in bureaucracy? Out of sixty three years, politicians were on the picture for only 16-17 years but bureaucracy has ruled for sixty three years. These bureaucrats are the most competent people, trained after spending millions of tax-payers money but they are also unable to direct the managerial ship in the right direction, despite of equipped with the necessary tools and capacities. The very obvious reason is  lack of commitment, lust of power and increased corruption. The postings and promotions are not made on the competence and past record and there is a heavy shuffle among departmental heads, soon after change in the governing body of the country and desired officers are installed on key positions, depending upon the political needs not where they are fit or required. This is a fact that no “Minister” can make money without the mutual conspiracy with its departmental secretary or the other top guns of the department.

The question is why only ministers are being stripped on the media and in the discussions among the general public. Media and Chief Justice are shouting on NRO and other corruption cases on the politicians but they never made an outcry for any bureaucrat (yes there are some bureaucrats who were convicted in the past and their names are in NRO as well but here I mean the attention given to those are comparatively very less than their crimes and very few cases were brought to the scene).

They were never depicted as the root cause of the corruption and only few of them were convicted on corruption cases because of political motives. They fled away because of their strong lobby and network. But this put a big question mark on un-biasness and freedom of media and judicial system. For last few years nation has been deceived with the slogan of free media and now with the romantic idea of free judicial system. But in reality judiciary is still biased and media is the biggest mafia of this country which has sole objective of making money. Media will always high light only those controversial issues which will help them in making quick money and increasing the viewership than issue in national interest. It has been used by the establishment and it is still being used by the establishment to fulfill their motives and unfortunately the term establishment is still vague. Bureaucracy could be a part of this term “Establishment”.