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SHARIAH LEGITIMACY OF ISLAMIC BANKING Is This Banking Really Islamic? Dr. Mohammad Tahir Mansoori Dean Faculty of Shariah & Law IIU Shariah Advisor, Askari.

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Presentation on theme: "SHARIAH LEGITIMACY OF ISLAMIC BANKING Is This Banking Really Islamic? Dr. Mohammad Tahir Mansoori Dean Faculty of Shariah & Law IIU Shariah Advisor, Askari."— Presentation transcript:

1 SHARIAH LEGITIMACY OF ISLAMIC BANKING Is This Banking Really Islamic? Dr. Mohammad Tahir Mansoori Dean Faculty of Shariah & Law IIU Shariah Advisor, Askari Islamic Bank

2 Background On August, 29, 2008, A Fatwa was issued by a group of religious scholars declaring the present Islamic banking unIslamic and inconsistent with the principles of shariah. This presentation aims to analyze the objections and misgivings expressed in the Fatwa, to see whether the current interest- free banking is shariah compliant or otherwise. We will deal with some major objections expressed in the Fatwa.

3 Objection No. 1 Murabaha and Ijarah are mere legal devices (Heelah) not real alternatives to the interest. Real alternatives are Musharakah and Mudarabah.

4 Analysis of Objection 1. Quran has declared sale and trade as alternatives. Murabahah is a kind of permissible sales. 2. Murabahah is in line with Shariah principle: Entitlement to profit depends on liability for loss 3. Risk and liability involved in Murabahah i. Risk of breach of promise by the customer. ii. Destruction of goods before their sale to the client. iii. Risk of Defect. iv. Risk of default/ Late payment.

5 Liability of Lessor in Ijarah 1. Ownership related risk are borne by the bank major maintenance, accidental repairs, risk of destruction) 2. In case the insurance claim is rejected, the loss will be borne by the bank. 3. In case the asset is non-functional, the lessor cannot charge rent for that period.

6 Is Mudarabah/ Mudarabah Real Alternative? 1. Bank as Mudarib is a custodian and trustee of depositors. A trustee is bound not to invest in highly risky transactions. 2. Musharakh/ profit and loss sharing is workable in an environment of honesty and requires high moral standards in the society. 3. Mudarabah already exists on liability side. 4. Mudarib is not bound to undertake sub- Mudarabah.

7 OBJECTION NO. 2 Islamic Banking is based on pick and choose from various schools of thought. Scholars involved in Islamic banking choose from different schools that which suits their interest. (Ruling on the issue of compulsory charity, binding nature of promise, freedom from liability of defect, non-disclosure of agency, Arbun etc are taken from different schools). This attitude is a sort of following whim and caprice.

8 Analysis of Objection Classical Muslim jurists have allowed moving between schools under need and consideration of general good. Hanafi jurists many times gave fatwa according to Shafi or Maliki viewpoint. Shariah ruling on Islamic banking and finance are a product of collective ijtihad. They are not issued by few individuals. Collective ijtihad is stronger than individual fatwa.

9 Objection No. 3 Islamic Banking is constructed on hybrid contracts while Shariah prohibits from combination of contracts (Baitan-fi-Bayah).

10 Analysis Meaning of Combination. Combination of Sale and loan prohibited. Contingent / Conditional Sale. Inconsistent Mutually Consistent. In Ijarah, sale is not a part of Ijarah. Execution of Contract in different time frames.

11 Objection No. 4 Islamic banking is constructed on the concept of limited liability of company which is against shariah. It violates the principle: al- kharaj bil Daman. The principle suggests that a person is entitled to the profit on his investment to the extent of his liability of loss. If his liability is limited to certain extent, the his profit should be limited proportionately.

12 Meaning of Limited Liability Limited liability in the modern and economic terminology is a condition under which a partner or shareholder of business secures himself from bearing a loss greater than the amount he has invested in a company so if the business incurs a loss, the maximum a shareholder can suffer, is that he may lose his entire original investment. But the loss cannot extend to his personal assets.

13 Analysis of Objection Concept of limited liability does not affect the legitimacy and Islamicity of Islamic banking. Principle of limited liability is applied only to the case of bankruptcy. It does not have any effect on the liability of Rabb-ul-Mal and Mudarib. Any loss caused by the bank, by its negligence, fraud, will be borne by the bank and its liability in that case would be unlimited.

14 All current account holders (creditors of bank) are guaranteed by the state bank, so the concept of limited liability does not have any effect on creditors of Islamic bank. Concept of limited liability does not exempt directors from the liability arising from acts of fraud.


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