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Tuesday, June 29, 2010

Comparison - Islamic and Convention Banking - Islamic banking worst

by Syed Akbar Ali


I recently attended a talk on "Contemporary Islamic Finance". The speaker was a young man with a PhD in Islamic Banking and Finance (UK). He was from an outfit linked to INCEIF ( International Center for Education in Islamic Finance).

Islamic banking or Islamic finance exists because the religious folks have succesfully inculcated the idea that bank interest is riba and therefore haram. The Quran states clearly that riba is haram but nowhere can we derive the injunction that bank interest is riba. The two are not the same.

Anyway the religious folks have created 'islamic finance' and 'islamic banking'. To cut a long story short there really is no such thing. Islamic finance and Islamic banking are just arabised versions of conventional banking. There is nothing islamic about it. Neither is there anything un-islamic about conventional banking either.

If you take a housing loan from a conventional "haram" bank you pay a monthly instalment. If you dont pay, the bank will auction your property. If you go to an 'islamic bank' you still have to pay monthly instalments which can be more expensive than the conventional bank. If you dont pay your instalment, the islamic bank will still auction your property too. What is so islamic or unislamic about that?

The conventional 'haram' bank will charge you interest say 10% a year. The 'islamic bank' charges you what they call a 'profit rate' which will also be 10% or more a year. Kira-kira semua sama, tapi ini halal, itu haram. This is called pulling the wool over peoples' eyes.

Talking about the pricing of his Islamic banking products, the young man with the PhD in Islamic banking made no bones about it. He said it quite loudly and clearly 'we want to be the same as the market'.

I discovered this islamic banking trick years ago when we were handling the earliest stages of Islamic banking in Malaysia . At that time we called it an 'Islamic window' - Maybank did not yet have a full fledged Islamic banking license. But three months Islamic Bankers Acceptances (IABs) were priced exactly the same as three months conventional BAs. And so on. Tak ada beza pun.

A colleague who wore a kopiah to work had volunteered to go and work in the Islamic banking part of the bank. After a while he became even more confused. He said the calculations were all the same. In Islamic banking you add an 'Al' prefix to everything. Al Wadiah, Al Murabahah, Al Mudharabah, Al this and Al that. Other than the 'Al' its all the same.

Then the speaker dropped a bombshell. There is a famous case where an Islamic bank was suing a borrower for non payment of a housing "loan". According to Islamic banking the bank does not give you a "loan". The bank first buys the house from you at the market price. Then it sells the house back to you at a higher price over the period of the "loan" say 10 years, 15 years etc. Its just a deferred payment scheme with a 'profit rate' factored in.

The Islamic bank determines the selling price by compounding the "profit rate" (say 10% - copycatting the conventional banking system - 'we want to be the same as the market') for 10 years or 15 years. For those of you who have financial calculators (and if I still remember my financial computations), this is just the Future Value (FV) of an annuity at 10% starting with Present Value (PV) being the price of the house today and going forward 10 years, 15 years, 20 years etc. The Casio calculator will give you the 'islamic' answer in seconds. Does that make Casio 'islamic' too?

In a conventional 'haram' bank, if you default on your 20 year housing loan say after just three years, the conventional bank will ask you to pay back the principal amount of the loan plus 10% interest compounded for three years. The islamic bank cannot do that. The islamic bank will ask you to pay the full selling price of the house (based on 10% for 20 years) - even though you defaulted only after three years.

This is what the Islamic bank was claiming. However the very wise judge of the High Court Abdul Wahab Patail, the brother of our present AG, made a landmark decision. He ruled that the Islamic bank cannot charge the borrower the full amount for the full tenure of the "loan" when the borrower had defaulted just a few years into the "loan".

This decision by Justice Abdul Wahab Patail still stands until today and it has not been overturned. It also destroys a huge chunk of Islamic banking because the Judge has essentially ruled that the islamic banking system in Malaysia is actually unjust. It is worse than riba.

So how does INCEIF and the Islamic bankers handle this situation? This is where the speaker dropped the bombshell - and with a great big smile too. He said "the Muslims dont know" about Justice Abdul Wahab Patail's decision. Well dear Muslims, I hope that now you know. Please do spread the word quickly.

The speaker said that 'Islamic banking can still go on in our country because the Muslims dont know the decision by Abdul Wahab Patail'. In other words the islamic bankers are not going to tell the Muslim borrowers either. They will keep it quiet. Shhhhh ! ! And this is Islamic?

Then I learned something else too. While the speaker was talking about murabahah (one method of islamic financing), the Chairman at the talk was getting quite agitated. The Chairman was a foreigner from the Middle East and is an internationally acclaimed Islamic scholar himself. Suddenly he interrupted the speaker and made a clarification. He said that according to the Hanafi madhab (I think he is a Hanafi) murabahah was riba. Meaning murabahah was haram.

He then said that the Islamic banking practised in Malaysia was according to the Shafie madhab. Madhab means sect. Only then did it dawn upon me that in Malaysia we dont have generic islamic banking. It is "Shafie banking", according to the Shafie madhab.

A Muslim friend with a PhD from Cambridge later explained that this is partly the reason why there cannot be an "international Islamic capital market". One madhab's murabahah is another madhab's riba. One madhab's al bai al bithaman ajil is another madhab's riba also.

When a borrower defaults (or prepays) a 20 year housing "loan" say after just three years, the islamic bank can do what is called 'ibrar'. (In the old days they called it muqassa - I dont know why the change). 'Ibrar' means to refund the balance owing but not yet due. In other words 'buah belum masak lu jangan kira lah'. But there is no fixed or detailed idea about 'ibrar' among the islamic bankers.

So defaulting borrowers have no choice but to fight it out in the Courts with the Islamic banks. The speaker said that todate there are 3,500 unresolved cases of islamic banking BBA housing loans (Al Bai Al Bithaman Ajil) being disputed at the Courts in KL. And one judge, a Dato Rohana, has been assigned to handle all these cases. Well good luck Justice Dato Rohana. She will become an expert in Al Bai Al Bithaman Ajil calculations - maybe faster than Casio.

If it is a conventional housing loan, all these 3500 cases can be resolved by a Casio calculator. (Ya Allah, why do the Muslims like to create all these strange things and end up tying themselves in knots?)

During the talk, the speaker put up a slide that had the arabic word 'zulm'. Zulm in Malay is zalim, meaning oppressive. The meaning was that Islamic banking should not be zalim or oppressive like the 'conventional' banking system with its interest based practises.

But how is the islamic bank less oppressive than the conventional bank? You charge the same rates - quite unashamedly saying 'want to be the same as the market'. The terms and conditions are the same except when the 'loan' turns bad. Then the islamic bank can become worse than Shylock the Jewish moneylender. They want their pound of flesh. And the conventional bank is still 'haram'?

There is another danger lurking. Talk is some ignorant do gooders are thinking of legislation where Muslims will be barred from using the conventional banking system. They can only go to the Islamic banking system. That is how we end up in the Club of Doom.

3 comments:

Rose said...

Hi,

As I see in your post there is lots of good information available on Islamic finance. Islamic finance has change a lot in the recent few years. Rest of the world specially American and European countries want to get advantage of these change in there own interest. Innovation of sukuk also one of the big reason that non Islamic countries look on the Islamic finance market.

Sukuk is an alternate way of investment where the investor get the benefits of investment and its treated as rent on investment, to avoid the interest on investment which is strictly prohibited in Islam.I have write on same topic check my post : http://portfolioanalyst.blogspot.com/2010/09/islamic-debt-bond-market.html, http://portfolioanalyst.blogspot.com/2010/09/sukuk-bond.html,http://portfolioanalyst.blogspot.com/2010/10/how-big-is-sukuki-bond-market-and-what.html.

I want to write one guest post for your site .If you agree than contact me at roseanderson26@gmail.com

Anonymous said...

Sir,please do investigate more on Islamic finance before you comment further on it.

to put it 'Islamic banking' simpler terms, you see 2 pieces of meat. It looks the same,weighs the same, tastes the same if cooked. What makes it different is the way the meat was slaughtered. One is in a halal way. The other is haram.

Anonymous said...

So anon. feb 29, what are you implying? Can you explain further?