Misconception Number Two: An Islamic Loan is But a Hidden Ribawi Loan
Islamic banking. We continue our series on common misconceptions about Islamic banking. After publishing an article about what an Islamic bank is, we’ve now come up with this one about the Islamic loan.
Islamic Banking. We continue our series on common misconceptions about islamic banking. After publishing an article about what an islamic bank is, we’ve now come up with this one about the islamic loan. Just like for the previous article, Mouhammad Patel from Acerfi and Boubkeur from Aidimm have decided to clear up a particularly persistent misconception.
‘Ribawi loan’ means the regular loan, the one that bears interest.
Misconception Number Two
An Islamic Loan is but a Hidden Ribawi Loan
That’s untrue. Let’s start with something very simple: the fact that two things resemble each other or that two actions apparently bring about the same result doesn’t mean that they are of the same nature or, as in an islamic legal analysis (fiqh), that they have the same ruling. So if we take the example of a steak, from what you see you can’t tell whether it’s been slaughtered according to islamic rules or not. However, eating the first one is permissible (halal) for Muslims, whereas eating the second one is not: the fact that they look alike or taste the same doesn’t change anything about that.
We have to keep this in mind when comparing islamic and Ribawi loans. By ‘islamic loans’, we mean the financial arrangement in which an islamic bank purchases an item at a P price and sells it at P+M price, M being the margin generated by the bank when it sells the item back to its client. This financial arrangement – purchase, sale with profit margin – which is very common amongst islamic banks, is called ‘Murabaha’.
The fact that Murabaha and Ribawi loans resemble each other and that they both apparently lead to the same accounting result does not justify them being considered the same. The moreso as this belongs to the transaction field, wherein the primary rule is permission. In other words, you can call a trade or financial transaction forbidden only if your point is based on a valid legal source in islamic law (the Quran, the teachings of Prophet Muhammad – sallallâhu ‘alayhi wa sallam -, consensus of renowned scholars…). Not based on superficial analogies with no legal force.
As it has been described in its original form by ancient Muslim scholars, Murabaha is a sale contract in which the seller and the buyer agree on the item’s price cost, and the seller’s profit margin. This simple transaction – which is without a doubt permissible – has now been adjusted and transformed into a funding tool: anyone who would like to purchase an item avoiding Ribâ can go to an Islam bank and ask it to purchase this certain item for them, and then sell it back to them later with an agreed upon profit margin (the payment is usually deferred, following a time-line determined by the two parties).
Hence, the margin generated by the bank is the result of a sale and cannot be compared to Ribâ in any way… unless one acts like the Quraysh of Mekka who used to say: ‘Trade is [just] like interest’, to which God replied: ‘But Allah has permitted trade and has forbidden interest.’ (Surah 2, verse 275) This has been the last verse revealed on the subject, thus clearly forbidding Ribâ.
It is also important to highlight that if the item were to be destroyed betweeen the purchase and sale, the bank (not the final client) would have to bear the loss, as the owner…
People sometimes question Murabaha’s permissibility based on the fact that the bank never actually has the intention of keeping the item for itself: rather, its goal is to sell the item back to the final client, and generate profit by its intermediation. Which makes its attitude resemble that of a regular bank whose one and only goal is to make profit by offering loans. We will respond to this by simply stating that, in islamic law, a purchased item does not have to be destined to personal use only, in order to be permissible. Otherwise, we would have to question all businesses’ activity since they are simply buying goods in order to sell them…
Another criticism against Murabaha is that this operation is but a trick in order to bypass the prohibition of Ribâ. Our religious references severely condemn these bypass methods… Regarding this point, it is important to outline that there is a difference between:
- – Using a trick in order to transgress, by bypassing something which is prohibitted. This practice has indeed been condemned in several Quranic verses and the Sunnah. For instance, the story of the people of Saturday (Ashâb Us-Sabt).
- – Using a practice that is allowed so as to achieve a lawful goal, and avoiding something which is forbidden. This attitude – which actually motivates the use of Murabaha to avoid a Ribawi loan – is in no way a sin. Rather, if we go back to the hadiths, we can see that the Messenger of Allah (sallallâhu ‘alayhi wa sallam) has sometimes tought a similar practice himself:
Once Bilal brought Barni (i.e., a kind of dates) to the Prophet (sallallâhu ‘alayhi wa sallam) and the Prophet asked him, ‘From where have you brought these?’ Bilal replied, ‘I had some inferior type of dates and exchanged two Sas of it for one Sa of Barni dates in order to give it to the Prophet (SAW) to eat.’ Thereupon the Prophet (sallallâhu ‘alayhi wa sallam) said, “Beware! Beware! This is definitely Ribâ! This is definitely Ribâ! Don’t do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money.’
Murabaha is a very widely used funding tool amongst islamic financial institutions and banks. It has developed so much because it is relatively easy to set up, regarding law and taxes. That being said, other more complex tools have risen these past few years, thanks to experts and Muslim scholars. They based themselves on well-known principles such as Ijara Muntahiyah bit Tamleek, which resembles a rent-to-own agreement or Musharaka Mutanaqissa, a diminishing partnership in which the client and the bank purchase an item together. Then, the client gradually buys the bank’s shares until he becomes the only owner of it. This solution is much closer to Muslim ethics , and more reassuring to non-familiar clients, in a way.
However, the Ijara Muntahiyah bit Tamleek and Musharaka Mutanaqissa’s set up is more complicated from a legal and tax point of view (and it is even more difficult in non-Muslim countries). For instance, if the law system is not adjusted, islamic finance services may be heavily taxed and very expensive. In Europe so far, only our UK neighbors have managed to adjust their legal and tax systems, which enabled islamic finance to become as competitive as Ribawi finance, and sometimes even more competitive than the latter.
In France, a process has begun with the publishing of the Tax Instructions for Murabaha in February 2009. Even if they are not perfect yet, they are a good start… and you’ve got to start somewhere. Finance, law and Shariah experts are working side by side with the scholars of ACERFI in order to support this development.
[Translated from French ‘Idée reçue n°2 : le crédit islamique n’est rien d’autre qu’un crédit ribawi déguisé’ by Mouna M.]