Understanding Islamic Finance - Doha Academy of Tertiary Studies

An Appraisal of Common Criticism 439silver dirhams depreciated in terms of gold dinars even during the early Caliphate. 2 But wedo not find any reference in the whole literature on Islamic jurisprudence to the concept ofindexation on account of fluctuation in the value of money. Prohibition of Riba essentiallyrequires that all like-for-like exchanges be executed on an equal basis in terms of the relevantunits of exchange. If this does not suit someone, he is free to avoid such an exchange and topursue an alternative permissible course of action, like sale, lease or any partnership-basedarrangement. For example, through credit sale, a need of the buyer may be fulfilled, whileconcerns of the seller may be accommodated through the margin added in the deferred price.But, here again, the price, once agreed, has to remain fixed.Gold, silver and other monetary units like paper currencies are among the six commoditieswhose exchange must be like for like, equal for equal and hand to hand. If someone borrows100 dollars payable after one year, and this amount, after indexation, becomes 105 dollars,it falls into the category of Riba. As elaborated in Chapter 7 (Section 7.17), renowned juristslike Al-Kasani and Ibn Qudama have clearly expressed the view that the borrower shouldpay the same coins or currency as he took, irrespective of any increase or decrease in itsvalue.As per the Sharī´ah principle, a loan/receivable that seeks any increase involves Riba.In the case of inflation, the value of a currency decreases across the board; it makes nodifference whether a person has lent it or is keeping it with himself in liquid form. If he lendsit by indexing with gold, for example, in order to avoid a decrease in its value, this impliesthat he has drawn benefit from the loan, as the debtor would make good the deficiency tothe amount of lent money, while money kept in his own coffer would also lose its value.Drawing this benefit from the loan violates the Sharī´ah. The crux of the matter is that aloan is a nonremunerative contract; as such, it should remain noncommutative and not usedas a means for earning or getting compensation.Even in conventional finance, indexation is not normally used to make up for a lossoccurring due to inflation. Conventional institutions make a provision for a floating rate inthe agreements, keeping in mind the future inflationary pressures. As such, any new rate isapplied on the remaining period, while it does not affect the liability already accrued. Incertain modes/products, Islamic banks are also allowed to stipulate a floating or variablerate, as in the case of leasing, but this does not affect any debt liability once created. Forexample, in leasing, Islamic banks can charge rental at a higher rate, if already provided inthe agreement, for any remaining period of the lease; but the rentals for a particular period,once accrued, cannot be indexed.We come to the conclusion, therefore, that if the financial contribution takes the form ofa loan or a debt, it is to be paid back exactly in the same kind and quantity, irrespectiveof any change in the value of the currency in which it is denominated or the price of thecommodity lent or borrowed at the time of return of the loan.17.3.4 Time Value of Money and Islamic BankingSome people who believe in prohibition of interest criticize Islamic banking on chargingtime value of money through pricing, while some others are of the view that avoidinginterest means negation of time value of money; therefore, they argue that either Islamic2 See Maududi, 1982–1991, 1, pp. 382, 383 (4: 92).