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Islamic Banking
@ Halal | July-August . 2021
Interest Islamic banking ’ s pricing termed ‘ profit ’ is derived from a permissible ( halal ) transaction
BY DR NIK ABDUL RAHIM GHANI Member of Shariah Committee , Maybank Islamic Berhad
THE COMMON expression we often hear about Islamic and conventional banking is that both are the same . Why ? The most straightforward answer could be the rate pricing is similar . The only difference is that one is Islamic , and the other is conventional .
Such an assumption is utterly inaccurate as two similar things are not necessarily the same . As the saying goes , “ similar yet different ”. Let us take the example of chicken curry from halal and non-halal restaurants .
When comparing the outcome , both chicken curry is the same . However , the process is different as the halal restaurant must slaughter the chicken , whereas the
Profit vs non-halal restaurant does not have to meet such requirements .
The same goes for Islamic and conventional banking . They are two different entities but have similar outcomes . Even though the rate pricing appears to be the same , it is factually distinguishable .
Islamic banking ’ s pricing termed “ profit ” is derived from a permissible ( halal ) transaction such as a sale and purchase contract . In contrast , conventional banking ’ s pricing termed as “ interest ” is obtained from a direct loan contract . Thus , it is impermissible because it amounts to usury ( riba ).
Permissible Sale and Forbidden Riba
In the Qur ’ an ( 2:275 ), Allah SWT has recorded a similar expression by the people of ignorance on the prohibition of riba : “ Those who consume riba will not stand ( on the Day of Resurrection ) except like the standing of a person beaten by Shaytan leading him to insanity . That is because they say : sale is only like Riba .”
Are sales and riba the same ? Not ! Allah SWT has firmly and clearly explained the prohibition : “ Allah has permitted the sale and forbidden riba .”
Interest refers to an excess amount derived from a lending-borrowing transaction . To understand what is “ interest ” and “ profit ” respectively , let us take two situations .
For the first situation , Mr A applies for a facility from a conventional bank to help him purchase 10 tonnes of papers . The traditional bank will lend him RM100,000 for that purchase . In return , Mr A will pay back RM100,000 plus three per cent interest in six months . The total amount is RM103,000 , and the RM3,000 is the interest .
Meanwhile , in the second situation , Mr A seeks financing from an Islamic bank to help him purchase 10 tonnes of paper . First , the Islamic bank will buy the papers from Company X at RM100,000 and then sell the papers to Mr A at an agreed price comprising RM100,000 plus three per cent profit , payable in six months . The total amount is RM103,000 . Gain refers to the RM3,000 derived from a sale-based transaction .
You may be wondering the situations are similar but why a sale is allowed , but riba is prohibited when in both , a three per cent rate will result in Mr A paying a total of RM103,000 . Nonetheless , the first situation is impermissible , while the second one is permissible .
The primary contract between Mr A and the conventional bank is called a loan ( known as qard ), and Shariah prohibits any additional charge during the repayment .
Islam prohibits any additional charge in a loan repayment because it is considered riba , as mentioned by the Prophet , SAW hadith : “ Every loan that draws benefit is riba ”. The statement of the hadith includes such an additional charge in the lending contract .
In the Islamic banking system , every product offered has an underlying Islamic contract . One of the contracts that is being used extensively is a sale and purchase contract .
The second situation illustrated above is a sale and purchase contract known as bay ’ murabahah ( cost plus profit ). The profit from the second situation is derived from a sale and purchase contract , where the Islamic bank needs to buy the merchandise first , which is the 10 tonnes of paper . Then , the bank will sell to Mr A at a markup price .
Although Mr A needs to pay Islamic bank by instalment , the underlying contract is a sale and purchase . The profit gained from that valid sale contract is allowed and permissible , as mentioned by Allah SWT in the Qur ’ an .
Conclusion
In a nutshell , Islamic banking provides an alternative option for those who want to be free from riba transactions . Even though we may see similar outcomes between Islamic and conventional banking in terms of profit and interest rate superficially , the actuality is that both differ in the substance and the underlying contracts .
Profit is permissible and blessed , whereas interest is prohibited ; this is where the main difference between the two lies .
Dr Nik Abdul Rahim Ghani is also Senior Lecturer , Research Centre for Sharia , Faculty of Islamic Studies , Universiti Kebangsaan Malaysia