Q296 :Investors: With savings to invest, the Islamic
way
A296 : The question of lawful investment and the
attraction of interest continue to trouble many a Muslim who have small
savings to invest but are unable to determine which way to turn. They
have learned that bank interest is forbidden and find it difficult to
choose an alternative. Islamic banks which operate in a few countries
have their appeal which they derive from conforming to Islamic law, but
they have also received criticism which is often unjust. That sort of
criticism, however, has disturbed many people who do not have the time
or knowledge to follow the debate concerning Islamic banking. An
educated Muslim may have been aware of only a few articles written here
and there, and he may still have some doubts about these Islamic banks.
People of this type continue to ask scholars for a definitive ruling on
how to invest their small savings. They also turn to Muslim economists
for advice. Mr. Israrul Haq of the Embassy of India School in Jeddah
has sent me a letter deploring the lack of such definitive rulings. To
my mind, this is something that should be achieved through a joint
effort by Muslim scholars and Muslim economists working hand in hand.
The forces that work against a practical Islamic alternative to the
banking system are enormous. Therefore, the Islamic banks will continue
to have serious problems as long as the Muslim netmunity throughout the
world continues to suffer the effects of paying little attention to
God’s instructions. However, the problem of a wage earner who is
looking for the best way to safeguard the real value of his savings
continues to be acute and in need of an immediate solution.
Fortunately, I have received a letter from Dr. Umar Chapra, a senior
economic advisor in the Saudi Arabian Monetary Agency which addresses
this very question. It provides expert advice from an Islamic
perspective. I am indebted to Dr. Chapra for his learned contribution,
which I am publishing in full. Is it possible for such a busy,
unsophisticated wage earner to safeguard the real value of his savings
by placing them in interest-earning deposits in conventional banks?
Probably not! The rate of interest that these banks pay, particularly
to their small depositors, is paltry and is generally not sufficient to
protect the real value even when the prime rate of interest is
significantly higher than the rate of inflation. Nevertheless, if one
is satisfied with the kind of return that the conventional banks offer,
then why not choose Islamic banks for one’s deposits? This would not
only help one earn a return which is halal, but also get a reward in
the hereafter for supporting the development of an Islamic financial
system. Some people may not find this palatable for two reasons.
Firstly, a number of the Islamic financial institutions are not
regulated by a netpetent central bank. Thus they may not inspire the
necessary confidence. Secondly, there is a hovering suspicion that
some, though not all, of these institutions resort to investments that
are different from interest only in name. One could respond to the
first reason by saying that even conventional banks now have Islamic
funds or counters and it is possible for the saver who wishes to avoid
interest to place his deposits with them. With respect to the second
reason, one could say that an unsophisticated depositor who has
entrusted his savings to an Islamic bank or to the Islamic counter of a
conventional bank, has no way of knowing whether the rules of the
Shariah are being observed or not. Only the central bank, or the
Shariah Board of the bank concerned, can determine this. He may not,
therefore, be accountable before God, because “God does not burden
anyone more than what he or she is able to bear” (Qur’an 2;281). If he
has entrusted his savings to these institutions in good faith and if
they do not live up to their obligations, then there is a breach of
faith and the bank management, the central bank and the Shariah Board
are accountable before God. If we choose to be critical of Islamic
banks, we must bear in mind that most of these banks are operating in
an inhospitable environment without support systems, and their task of
totally avoiding interest is not easy. This will be possible only
gradually with the Islamization of the economies and financial systems
of Muslim countries. Since an Islamic financial market does not exist,
it is difficult for Islamic banks to employ all their surplus funds in
an Islamic way. It is also difficult for them to have access to
liquidity when they face a liquidity squeeze. Most central banks are
not ready to act as lenders of last resort in the case of Islamic
banks. Therefore, they are forced to maintain greater liquidity than
conventional banks have. This reduces their profitability. To make
matters worse, auxiliary institutions do not exist to provide
information on the credit-worthiness of clients, to evaluate the
various projects, and to audit accounts with the objective of
determining accurately the profit of clients referred to them by banks.
No one expected these difficulties to be overnete in a short period. It
is not possible for individual Islamic banks or their association to
remove difficulties that require the establishment of an Islamic
economic and financial system without the coordinated effort of the
whole Ummah. What the persistence of these difficulties has done,
however, is to slow down the progress of Islamic banks in the direction
of the classical modes of mudharabah (speculation) and musharakah
(partnership) financing. They have been forced to confine their
financing primarily to the less risky modes of ijara (leasing),
murabaha (sale against a specified profit margin), salam (sale against
advance payment for future delivery of tangible goods), and ijarah wa
iqtina (hire purchase). In all these modes, the financing is linked to
the provision of real goods and services and the rate of return is
agreed in advance. Hence, two steps need to be taken. Firstly, it is
necessary to fulfill the conditions that the Shariah has laid down to
ensure that the lender does not shift the entire risk to the borrower
and that these techniques do not degenerate into pure financing devices
resorted to with the intention of circumventing the prohibition of
interest. Do the Islamic banks abide by these conditions? They give
assurances that they do and their assurances are certified by their
Shariah Boards. There is no reason why an unsophisticated depositor
should doubt these assurances. An important question that arises here
is whether a small saver should remain contented with the return that
deposits earn in conventional or Islamic banks. Empirical evidence
indicates that the rate of return on deposits tends to be significantly
lower than that earned by businesses and corporate shareholders.
Hence, it may be preferable for him to invest them – in business, if he
finds an honest businessman to accept them on the basis of mudharabah,
real estate and shares of joint stock netpanies. He may also resort to
mutual funds related to equities, real estate and trade finance, which
are now available in most Muslim countries. In a truly Islamic economy,
there would probably be a number of institutions to guide a small
investor. Even though such institutions do not exist, it may be
possible to seek the help and guidance of knowledgeable friends.
However, if he invests in shares or real estate, he should get in when
the prices are low and then not worry about short-term fluctuations. He
should look at the long-run prospects. I wish to give here the example
of a friend of mine who says that about ten years ago, he faced all
kinds of difficulties – illness in the family, accidents, and job
problems. Upon introspection, it appeared to him that these might be
due to the interest he was earning. After all, he was at “war with God
and His messenger”. He, therefore, decided to give away all the
interest earned in charity and gradually invested his savings in
Islamically permissible assets. He had neither the experience nor the
time to do this. He, therefore, took nearly two or three years to
netplete the process. Some of his investments suffered losses while
others realized gains. However, he says that his net assets are now
worth about five times the original investment and all his problems
have also disappeared. If he had invested his savings in deposits or
other interest-earning instruments, their value may not have risen more
than 60 percent in ten years. Someone may resort to saying that he was
very lucky. This may be true, but then his success may also be due to
barakah (God’s blessing). Why cannot we also seek barakah by looking
for opportunities and at the same time praying to God to help us take
the right investment decisions? Let us remember that “To God belongs
all the treasures of the heavens and the earth” (Qur’an, 63;7). He can
bestow the same barakah on everyone as He did on this friend without
any decline in His treasures.
Our Dialogue ( Source : Arab News – Jeddah )