INTEREST

Interest is forbidden in Islam in no uncertain terms.

Interest was forbidden in the Old Testament Deuteronomy23:19 "You shall not lend upon interest to your brother, interest on money, interest upon victuals [food or provisions], interest on anything that is lent for interest." However in verse 20 the prohibition was modified to allow interest from non-Jew "To a foreigner you may lend upon interest but to your brother you shall not lend upon interest."

ISLAMIC BANKING

When banking without interest was first proposed in the early 70's, the Western financial world scoffed at the idea. The idea of banking without interest was inconceivable even though it was well known among economists that the lower the interest rates the healthier the economy. But zero interest was never considered.

Today Islamic Banking is recognized as a leading financial institution and the vast majority of leading international banks (e.g. Citicorp, Deutshe Bank) have Islamic investment accounts and portfolios. These were not introduced mere to maintain their Muslim customers. If such accounts meant financial loss, the banks would not entertain them. On the contrary, they have been found to be very viable and profitable. Over 200 Islamic financial institutions worldwide are managing funds of over USD 150 billion. Even with its strict codes, Islamic banking is growing at a fast rate of 15 percent annually over the past decade. In recent years, Iran, Sudan, and Pakistan have banned traditional commercial banking and adopted Islamic banking models.

Islamic Banking is the response of the Muslim mind to the institution of commercial banking (71). It reorganizes the financial institutions on a basis other than interest. Money is not priced. Thus loans must be given free of charge. Islam does not want social relations to be organized on premises in which one person takes advantage of another {creditor-debtor relationship). Justice and fairness forms the basis of Islamic economic principles. On that basis, no reward is given for capital unless it is exposed to business risk.

The basic framework of Islamic financial intermediation is participatory in nature. The five main modes of Islamic financing all reflect this framework.

1) Muraabahah {Mark up or Cost plus financing). The client goes to the Islamic bank to get finance in order to purchase a specific commodity. The bank purchases the commodity on cash and sells it to the customer on a profit. Since the client has not money, he buys the commodity on a deferred payment basis. The two sale contracts should be separate and real transactions

2) Mushaarakah {Partnership). Two or more financiers provide finance for a project. All partners are entitled to a share in the profits or share in the losses resulting from the project in a mutually agreed upon ratio.

3) Mudaarabah {Profit sharing) is an Islamic contract in which one party supplies the money and the other provides management in order to do a specific trade. The profits in such an agreement may be shared in any proportion agreed between the owner of the capital and the agent before hand. However, the loss is completely borne by the former.

4) Ijaarah {Leasing) is a scheme by which the Islamic bank purchases an asset as per specification provided by the client. The period of lease may be determined by mutual agreement according to the nature of the asset. During the period of the lease, the asset remains in the ownership of the lessor {the bank) but its right to use is transferred to the lessee. At present many Islamic banks are experimenting with lease purchase agreements in which the lessee can purchase the equipment at the end of the lease period at a price agreed upon in advance.

5) Loans with service charge in which the fee is the actual expenditure and any excess to actual service related expenses is considered interest. The service charge can only be calculated accurately after all administrative expenditure has already been incurred {e.g. at the end of the year). It is permissible to levy an approximate charge, then reimburse or claim the difference at the end of the accounting period.

6) Oard Hasan (Interest free loans) signifies the benevolent nature of lending and is a service provided to the community. The banks vary in their policies of loans. Some provide them only to holders of investment accounts with them, some to all bank clients, others to needy students and the destitute, yet others to small producers, farmers and entrepreneurs who are not qualified to get finance from other sources.