The debate whether money can be treated as a commodity and hence whether the rules of buying and selling can be applied on it was convincingly settled by two prominent scholarly sources who happened to be far apart from each other besides having a time difference of over 800 years between them.
One was the great Islamic economic scholar, thinker and philosopher known as Imam Ghazali who died in 1111AD in Tous (part of Khorasan-Iran) and the other consisted of members of the 1933 Economic Crisis Committee of the Southampton Chamber of Commerce in England which was constituted to investigate the worldwide financial crisis of early the 1930s (also known as the ‘Panic of 1930’).
First, I append the following valuable quote from Imam Ghazali:
“When a person having money is allowed to earn more money on the basis of interest, it becomes easy for him to earn more money without bothering himself to participate in real economic activities. This leads to hampering the real interests of humanity, because the interests of humanity cannot be safeguarded without real trade skills, industry and construction.”
And now the finding of the Economic Crisis Committee for the causes of the 1930 financial crisis:
“In order to ensure that money performs its true function of operating as a means of exchange and distribution, it is desirable that it should cease to be traded as a commodity.”
Isn’t it amazing that whenever men of intellect sit down to ponder hard over complex economic issues, no matter how far apart they may be in time and place, they reach the same conclusion. I believe this prophetic guidance toward the right approach is inbuilt in us as human beings.
Nevertheless, at the same time, we are also programmed to demonstrate short-lived memory of our grave errors which we tend to repeat from time to time. We did not learn any lesson from the Panic of 1930 which resulted in the ‘mother of all’ financial crisis of 2007/08 – paradoxically both emanated from the world’s biggest economy, the US. It is hard to believe that we will not see any other financial crisis in future as we continue to walk on thin ice which can break at any time, plunging us into cold waters one more time.
Returning to our subject of comparing the treatment of deposits by an Islamic bank, firstly this is important to note: unlike conventional banks, Islamic banks do not treat the money as a commodity and hence refrain from buying and selling it.
So, when a customer approaches an Islamic bank with an intention to place a term deposit of US$200,000 for a year and asks the bank about the prevalent rate for a one-year deposit, the staff shall inform him that the Islamic bank does not quote any pre-determined rate since it does not know how much profit the bank will make in the next one year by deploying the customer’s funds along with the funds received from other depositors.
The document presented to the customer for placement of the deposit shall not be a deferred payment contract as we learned in article 15 but a fund management arrangement called the Mudarabah agreement.
By virtue of the Mudarabah agreement, instead of selling his money, the customer shall merely hand over its possession to be managed by the Islamic bank while retaining ownership to the money. The relationship thus formed by the Islamic bank with the customer shall be of a fiduciary or trustee in nature, rather than of a buyer of the customer’s money.
The customer’s money shall become part of a greater pool of funds comprising monies received by the Islamic bank from scores of depositors with varying maturities. This huge monetary pool shall be deployed by the Islamic bank by using different Islamic financing and investment products, suitable to clients’ situation of requiring funding for their respective needs.
An Islamic bank receives funds from customers through their current accounts, investment savings accounts and term deposit accounts. The current account funds do not attract any profit, and hence are excluded from the Mudarabah arrangement. These are funds loaned by customers to the Islamic bank and enjoy the privilege of having the safe return guaranteed by the bank. Therefore, these are considered senior debt on the bank and do not stand pari passu with the Mudarabah participants.
A golden Shariah principle is not to allow combining the guarantee with the return. This is the reason that Islamic banks are allowed to guarantee the current account funds since they do not provide any profit on them.
On the other hand, since holders of investment savings accounts and investment deposit accounts (term deposits) are part of Mudarabah and hence are paid a profit on their funds, the Islamic bank is not allowed to guarantee these funds.
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.
Sohail Zubairi is the projects advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected].
Next week: Explanation of the full cycle a customer’s deposit in an Islamic bank goes through.