Islamic banking has grown reasonably fast in the last decade in Pakistan. People invest religiously trusting the fatwa of the so-called Sharia boards of these banks.

Are these financial instruments really riba-free (interest-free)?

Do these instruments conform to the juristic and ethical frameworks laid down by the Quran, the Holy Prophet (PBUH) and the imams of the leading schools of thought?

If the analysis shows otherwise, then why not do ‘modern’ banking instead of labelling riba-infested products as ‘Islamic’ and selling them as halal and riba-free?

The theoretical problem arises out of our inability to comprehend the meanings of two words ‘riba’ and ‘ba’ah’ used in the Quran to strictly prohibit the former and clearly permit the latter. There are two verses in the Quran which deal with the concepts of riba and ba’ah and adjudicate reasons for their subsequent prohibition and permission.

The Quran clearly refers to the inherent psychological nature of men, which ordinarily thrives on boundless greedy profiteering and moneymaking without personal labour and effort. So the Quran clearly describes in a verse this human weakness and declares that those who approve of riba are “possessed by Satan” (2:275). It is strictly forbidden and instead one should engage in ba’ah which requires personal labour and effort.

The second verse of the Quran explains the economic rationality of riba and declares that it is forbidden because it leads to profiteering and moneymaking in a multiplication mode of economic exchange (3:130) which does not involve labour and effort by the owner of the economic resources.

Therefore, one should engage in socially and ethically permissible economic activity of ba’ah. On the other hand, the practice of riba leads to unprecedented social and economic inequalities which create an unjust society, which the Quran and the Prophet disapprove of in manifest words.

Ba’ah is permitted because it is based on rational, ethical and mutually agreed contracts of economic exchange, sharing risks, benefits and liabilities and profit (land, labour, capital, commodity or intellect). The law of riba and ba’ah applies equally and universally to both tangible and intangible economic resources. In simple terms, riba is an irrational, exaggerated, labour-less and unethical accumulation of wealth in a multiplication mode, while ba’ah is a rational and socially and ethically agreed economic exchange of labour and money.

The actual labour and work done by a person is weightier and considered a sacred trust, for according to a hadith the worker is a friend of God.

Now let us illustrate by an example to show what it means to accomplish a riba-free economic exchange. I own one acre of land and I give it for cultivation to a peasant on mutually agreed terms. A riba-free land-tilling agreement between me and the peasant would be something like this: the owner of the land should provide the water, seed, fertiliser and protection in case of natural calamity hitting the crop and distribute ushr forthwith.

The peasant would cultivate the land with honest labour, take care of the field, protect the crop against dangerous animals, sell it at a fair market price and distribute the profit equally with the owner of the land. This land modaraba and the transaction thereof will be a completely riba-free economic activity. The peasant shall be duly compensated for his labour in case he opts out of the transaction before the maturity of the crop.

Let us now analyse a so-called Islamic financial product offered by Islamic banks in Pakistan. The product is known as ‘car modaraba’. The Islamic financial product is a nomenclature shift from the routine banking sector offering the same product as ‘car-leasing facility’. All terms and conditions of the modaraba contract are analogous to the car-leasing agreement, favouring the Islamic bank rather than the end-user. It is a misnomer to call it modaraba because the Islamic bank is not the first owner (in this case the car maker/manufacturer is the true owner).

The Islamic bank thus does not fulfil the qualification of ownership required to enter into a ba’ah with the buyer (in this case end-user of the car). The bank is not a seller in principle, rather a supplier of the car as a middleman and making profit in a multiplier exchange mode from a product which is produced by another party in the first place.Now this Islamic bank imposes all sorts of conditionalities to secure this so-called modaraba contract with the car buyer — in fact a consumer of the car, not a worker as per Islamic framework. This includes car price, car rent (another term for mark-up), takaful (name change for insurance), processing fee, binding contract and capping on further usage of the car. Is this modaraba transaction fair to the parties, free of multiplier mode of economic exchange, sharing liabilities and benefits? The answer would be an emphatic ‘no’.

An economic transaction would be considered riba-free if it avoids multiplier mode of moneymaking, profit-taking and capital-creation. According to Islamic economic rationality, labour is mightier than capital because it creates economic value. On the contrary, Anglo-Saxon liberal economics rests on the reverse proposition (adhered to by banks in Pakistan, both ‘Islamic’ and ‘modern’), which holds that capital creates value and therefore the worker must lay in bondage to capitalistic domination.

The vicious cycle of capital accumulation is perpetuated by multiplier mode of economic exchange. No sector of the economy is exempt from this multiplier effect and hence infested with all the attributes of riba.

The writer is a social scientist and teaches at the University of Management and Technology, Lahore.

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