Continuing with our discussion on how a loss situation is handled by an Islamic bank, we shall first learn exactly how Shariah principles command the relationship between risk and return. The following are two established Shariah canons on this aspect:
1. Al Ghunmo Bil Ghurm, which means the return is connected to the risk.
2. Al Kharajo Biddaman, which translates as the entitlement to revenue corresponding to the liability for loss.
Both these principles clearly convey one thing. If you wish to earn a profit from a certain trade or investment transaction built around Shariah principles, you should also be prepared to endure the loss.
As such, any intention to earn Halal and Tayyeb (permissible and pure) income from investing your funds with an Islamic bank should have the thought of a possibility of losing capital and income at the back of your mind, no matter how far back it may be. This is the reason that the Islamic banking account is aptly coined as the profit and loss-sharing account.
Let me try to clear a myth which is when you are carrying out a Shariah compliant investment, more often than not, be prepared to take the hit. When people talk in general terms, they believe entering into an Islamic financial transaction exposes them to a high probability of loss compared to a conventional financial transaction. This is nothing but a figment of the imagination.
God Almighty says in the Quran (Chapter 2 (Al Baqara), part of verse 275): “Whereas God has permitted trading and forbidden usury”. Based on this most important commandment, the believers are required to shun interest and indulge in trading activities.
This brings us to the fact that Shariah is pro-business and its principles support the earning of a profit through ongoing trading activities. If the trading would be packed with disastrous situations and losses, why would our Creator – who is the most merciful and most beneficent – persuade us to it with such a strong urge?
Nonetheless, when it comes to a loss situation in Islam, it is a rarity and not a routine aspect as the myth mistakenly conveys. The core purpose of every trading and investment transaction that takes place keeping the Shariah principles in view is to make a profit and not to incur a loss.
Having said that, loss is also a reality and a form of test from God Almighty as to one’s resoluteness in his or her beliefs. We are told that if one remains steadfast and accepts a loss in the same spirit as he or she enjoys a profit, he or she may be compensated by God Almighty many times more and from sources that may not even be in his or her imagination.
Moreover, Shariah principles have set a robust mechanism to analyze the loss in trading and investment scenarios. For example, by simply declaring a loss, a Mudarib (fund manager) cannot escape with the capital and expected profits due to the Rab Al Maal (fund provider).
In this situation, a Mudarib will have to prove beyond a reasonable doubt that the Mudarabah actually did suffer a loss. Moreover, he will have to justify that the loss did not occur due to his negligence but owing to a sudden situation that he did not envision despite his relevant industry experience, or which could not have been avoided – for example, a force majeure or acts of God such as earthquakes, fire, storms and floods, etc.
In the contemporary Islamic financing age, Takaful companies provide covers for such contingencies at a reasonable cost and, in the eyes of some Shariah scholars, by not benefiting from them can also be categorized as negligence by a Mudarib.
We discussed last week that on a daily basis, an Islamic bank receives funds from scores of depositors and deploys funds with a similar number of customers. At the same time, every day numerous placements mature and there is a possibility that some may not be paid.
In such a situation, an Islamic bank’s management is required to first find out the reason for non-payment which could well be genuine, such as loss of job by a retail customer or a situation where money is instantly needed such as illness, bereavement, accident or any other extraordinary family need. In case of a business customer, there could be a delay in the realization of receivables or a loss of inventory due to theft, fire or floods, etc.
If the situation is found to be genuine, the Islamic bank must be tolerant in light of Quranic verse number 280 in Chapter 2 which reads: “And if the debtor is a man in hardship then give him time till it is easy, and to remit the debt fully is better for you if you know.”
Applying the first part of the verse in the modern sense shall require the Islamic bank to extend or reschedule the debt payment – of course without any increase in the debt amount. As for the last part of the verse, the debt should be waived off in extreme situations such as a disability of the debtor resulting in the loss of a regular livelihood or his or her death.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Next week: We shall conclude the subject of loss management by an Islamic bank.