Riyadh, Asharq Al-Awsat-In theory, Islamic banking is based upon the concept of making financial profit by taking risks through financial speculation, financial partnerships and other financial transactions that are permissible under Islamic law whilst at the same time avoiding incurring debt that represents a high risk both to the individual and to the market in general.
Such debts leads to wealth being amassed by the privileged few who are capable of offering sufficient guarantees of financial solvency whereas the overwhelming majority of middle class professionals and small and medium enterprises cannot afford to incur such debts and are therefore unable to finance their own projects and achieve the desired growth and development. This type of debt would in any case suffocate the majority of small and medium businesses and ultimately lead to serious financial loss.
Small and medium businesses account for around 90 percent of companies worldwide, as well as providing between a reported 40 and 80 percent of employment. According to a study published by the Arab Orient Centre for Strategic and Civilization Studies, small and medium businesses account for around 85 percent of Britain’s gross domestic product [GDP] and around 51 percent of America’s GDP. In addition to this, between 1979 and 1995 around 75 percent of employment in the US was in the small and medium business sector.
Financing designs and products by continuously incurring debt will also ultimately kill off the spirit of creativity and inventions [by doing away with the concept of competition and financial solvency]. Financing is the umbilical cord that nurtures this, and since [much] financing is now obtained by taking out loans and thereby incurring debt, money inevitably end up with the privileged few when this umbilical cord is severed.
This manner of financing is warned against in the Holy Quran, “What Allah has bestowed on His Messenger (and taken away) from the people of the townships – belongs to Allah- to His Messenger and to kindred and orphans, the needy and the wayfarer; In order that it may not (merely) make a circuit between the wealthy among you. So take what the Messenger assigns to you, and deny yourselves that which he withholds from you. And fear Allah; for Allah is strict in Punishment.” [Chapter Al-Hashr; Verse 7].
However the practical application of Islamic Banking has violated this, changing from a financial system founded on partnership to one based on debt. In some Islamic Banks, assets from Murabaha constitute as much as 92 percent of the overall financial portfolio. The Islamic banking system has also switched from operating via [Shariaa-compliant] rates of profit and has adopted interest rates, something that brings the Islamic Banking system closer to the conventional banking system. Islamic banking tools are also now used in risk management and credit policies; this makes the system vulnerable to the economic defects that are inherent in such practices in precisely the same manner as the conventional banking system.
Islamic banking has therefore ceased to be a safe haven for investors. It has become exposed to the risk of bad debts as the system is set up only to offer loans to a small number of individuals with substantial financial solvency as well as large corporations who are able to provide financial guarantees. These loans are provided without really examining the feasibility of the projects being funded or even knowing whether this financing is granted via Tawarruq or Murabaha. These kinds of financial practices do not occur when financing is provided via partnership or speculation.
Sukuk have also become vulnerable as a result of failures in meeting their financial obligations as a result of the legislative chaos that the Sukuk market is currently encountering and also because in many cases the assets being transferred to Sukuk-bearers are not genuine. In addition to this, Sukuk companies are now also including a contract where in the case of financial default the customer is obliged to immediately pay the value of the Sukuk in full. This only serves to increase the rate of default on Sukuk, and has therefore raised the risk that Sukuk bonds are exposed to. Islamic Banking has also become more liable to risk from individual bankruptcy as a result of the expansion seen in granting consumer credit based upon Tawarruq.
Islamic Banking has moved away from the values and principles that it was originally based on, and the Muslim community is no longer reliant upon this financial system to contribute to its progress and development. The damage caused by debt on the Islamic Banking system is therefore clear for all to see. Islamic Banking is no longer a system built upon partnership in profit and loss coming from actual financial activity that creates job opportunities and genuine products. Unfortunately, Islamic Banking is no longer a financial system that can make a difference to the world. Islamic Banking has crossed the line.