Understanding Islamic Finance - Doha Academy of Tertiary Studies

An Appraisal of Common Criticism 447and bad professions. The Qur´ānic verses give the principle that “those who listen to theorder of the Almighty and desist from engaging in interest (in future), may keep theirpreviously received gains, their case being entrusted to the Almighty (for accountability inthe Hereafter)” (2: 275) and “if you repent (on taking interest), you have the right to get yourprincipal” (2: 278). This principle gives a clear line of action: income of an interest-basedinstitution can become the seed capital for an Islamic financial institution – a window, abranch, a full-fledged bank or NBFC. The only requirement is that its operations should beSharī´ah-compliant and totally segregated from the interest-based business. Further, in manycases, the whole capital of the bank would not be the interest income. Initially generatedcapital remains a part of it.A related objection could be that, as per the direction of the Holy Qur´ān, such institutionsshould altogether leave the interest-based business and transform their entire operationsto Sharī´ah-compliant ones. This is the ideal requirement and the policymakers/regulators,particularly in Muslim majority countries, must have the target of transformation of the wholesystem within a well-defined period. But this could have exceptions: a mega multinationalconventional financial institution cannot be expected to transform its whole operationsovernight; but it should certainly be encouraged to launch Sharī´ah-compliant business atwhatever level it can afford, as this would possibly be a driving force for promotion of theemerging system across the globe.17.4.3 Difference between Islamic and Conventional BankingThe most common criticism pertaining to the practice of Islamic banking is that there is noreal difference between the conventional and the Islamic banking operations. The objectionis raised on the following grounds: IFIs charge time value of money on the basis of referencerates, like the conventional institutions, to earn the same level of income; they do notactually deal in goods and only facilitate the purchase of goods and services by the clients,like their counterparts in the conventional system, and thus earn fixed income; they requirecollateral from the clients, penalize them in cases of default, give almost the same returnto the depositors and the investors and have never passed any loss to the depositors. Thefollowing sections consider these objections.Charging Time Value of Money as Conventional Banks ChargeIFIs cannot and generally do not charge the time value of money in the conventionalsense. They have to undertake trading or leasing, for which they can genuinely take intoconsideration the time factor for the purpose of pricing of goods or their usufructs, asdiscussed in detail in various parts of the book. But once the receivable is created uponexecution of any valid contract, they cannot add anything to the receivable, not only indebt-creating modes like trade and leasing but also in respect of the profits realized inMusharakah or Mudarabah. The “cost of funds” in terms of conventional opportunity cost isnot any consideration in Islamic finance. Time value of money is accepted for the purposeof pricing of goods/usufruct only and not for pricing of money or debts/debt instruments.Hence, the view that Islamic banks charge time value of money like conventional banks isa misconception.