Islamic banking practices a scam

There must be something terribly wrong with Islamic banking policy adopted by Malaysia where it turn borrowers into deep debtors.

COMMENT

Poverty has a negative multiplier effect on the economic, racial, religious and social fabric of a nation, and Malaysia is no exception.

Hence it must be addressed by the incumbent government as a priority issue.

Since 1981 until today, poverty has never been a priority issue for the federal government and the Sarawak state regime.

Instead the nation’s wealth and that of Sarawak has been misused to enrich the Umno political elite through the implementation of mega economic projects at inflated prices.

The federal projects have been monopolised by Umno cronies while in Sarawak it is used to expand the business empire of Chief Minister Taib Mahmud.

In Semenanjung Malaysia the Indians and rural Malays form the core of the poverty group while in Sabah and Sarawak it is the rural natives and Malays.

Poverty can be defined as the deprivation of the necessary needs of a good quality of life of the people.

The standard needs are sufficient personal earnings, decent homes, access to good public infrastructure and modern transport and communications system, creation of sufficient employment opportunities for job seekers of all categories, quality education especially at the tertiary level, quality medical and health facilities, a strong currency and cheaper cost of imports.

Hence the ability of the people to improve their personal economic well-being and the role of the government as a provider must complement one another in efforts to eradicate poverty.

To this end, a banking system can play a major role in enabling the people to acquire socio-economic stabilities.

Islamic banking
The concept of modern banking is primarily the lending of money as a profit-making business. Borrowers have to pay interest for the loans which is profit to the lender.

And though the banking system does provide financial assistance, it does not offer it cheap. Growing interest charges eventually makes this financial assistance a liability.

Many companies and even nations go bust because of this accruing interests.

Hence very often such banking system benefits the lender and the borrowers are on the losing end.

On the other hand the Islamic principle of financial assistance is to provide loans without making a profit from it.

The Islamic lending concept has two objectives – provide financial assistance to those in need and maintain a low-cost of acquiring these goods and services.

Under the true Islamic banking system, lending in any form is not classified under the business category because the lender is merely giving financial assistance and not involved in any business transactions with the borrower.

Trade or business involves activities such as purchases and sales, export-import, construction, manufacturing, property development, renting and services.

Therefore the earnings from lending which is defined as riba (interest) is not a business profit and hence is haram (prohibited ) under the syariah law.

The responsibility of the borrower is to return the principal sum to the lender plus minimum services charges, which then enables the lender to re-lend it to those in need.

Wrong interpretation of Islamic banking

The Quran is correct in defining that lending is NOT a business.

It is stated in Surah Al Baqarah verse 275, where among others God permits trade/business but prohibits ‘riba’, i.e profit/interest from a loan.

This means that lending activities just like zakat (alms to the poor ) is not a business but an obligation to help those in need.

The current Islamic banking system that is operating in Malaysia and the Islamic world for that matter tries to do away with the Western concept of banking.

However due to their wrong interpretation of the Islamic lending principle or hypocrisy they rebrand the Western lending concept and presented it as Islamic.

Take for example the housing loan under the murabahah concept and the western banking system.

Under the latter, if the price of a house is RM100K, the bank will charge another RM100k interest for 20 years for a 100% housing loan.

The total cost of the house is now RM200k. The banks will make a 100% profit over the 20-year period.

Now under the current Islamic bank system, the housebuyer will still pay RM200k.

How does this happen? The Islamic bank whilst circumventing the interest charges on a housing loan will (still) make its profit through a buy and resell method.

The bank will first buy the house (that the housebuyer has identified) from the seller/developer at the market price of RM100k.

It will then resell it to the housebuyer at RM200k making a similar 100% profit from a markup price higher than the seller price.

At the end of the 20-year period either way the buyer has to pay back the full loan at RM200k.

There is no difference in the cost of borrowings between the western banking policy and Islamic murabahah concept.

The ‘real’ Islamic banking concept

Under the real Islamic banking concept, lending to those in need is a virtue. But charging interest on the capital loan is unlawful.

So how do the Islamic banks survive?

An Islamic bank is also a financial entity. What differentiates an Islamic bank from a non-Islamic bank is the concept of lending.

The rest of the bank functions are similar to the western banking system. The bank gets its funds from shareholders’ capital and the depositors.

The bank can apportion part of the funds for lending, and use the rest for investment in all kinds of business activities and services such as construction, development, export and imports.

The borrowers have to pay the principal loan only with a minimum administrative charge and without added interests.

In this way many people can acquire these good and services at cheaper costs .

At the same time the Islamic financial institutions can make money through many business activities.

The shareholders and depositors are paid dividends from the bank’s business activities but not from the interest charges.

Debt free Malaysians

Therefore the Islamic banking system if practiced correctly is a win-win formula for all Malaysians.

The people can borrow to finance their homes, personal cars, children’s education or invest in their business enterprises at minimum costs.

They just settle the principal loan and do not have to worry about the growing debt problem!

The Pakatan can use this issue for the general election and if elected can implement the true Islamic banking system, which may be adopted by Muslim countries all over the world later.

Awang Abdillah is a political analyst, writer and FMT columnist.