Understanding Islamic Finance - Doha Academy of Tertiary Studies

An Appraisal of Common Criticism 455The situation is not so simple. Most of the banks’ clients on the assets side are resourcefulbusinessmen. They do not pay their dues to the banks, while they continue their luxuriouslifestyles. In such cases, they are not covered under the idea of debtors in difficulty beingentitled to relaxation or waiver. While full and timely repayment of debts cannot be overemphasizedin Islamic economics and finance, we have to differentiate between wilful andactual default arising due to real economic problems faced by the debtors. As per Sharī´ahrules, wilful defaulters are like usurpers who are made to return any profit, along with theproperty, made by them on the usurped property.We also have to differentiate between Qard and Dayn, as the jurists have approvedimposing penalties in the latter case only. This means that, in the case of a loan (Qard),the creditor should give more time, while if the liability to pay has been created due to anybusiness transaction – sale or Ijarah transactions – and the client is delaying the paymentby resorting to negligent tactics, he can be required to pay a fine, which goes to charity,and even to compensate the bank for the actual loss (see Chapter 7, Section 7.13). In thisregard, the OIC Fiqh Council has resolved that penalty provision should become null andvoid when a client proves that his failure to meet an obligation was due to a reason beyondhis control, or when he proves that, as a result of his breach of the contract, the bank hasincurred no loss.Default in settlement of liabilities has become a socio-economic evil of the present age,due mainly to the unjust principles of the capitalistic and interest-based system and legalloopholes. In the Islamic framework, debtors are not given such latitude that while asset-wisethey are billionaires, they do not pay the liabilities on account of some legal loopholes.As Islamic banks have to work in the same overall environment, Sharī´ah scholars allowthem to impose penalties in case of default, as the default hits them more than it hits theconventional institutions. They cannot claim “cost of funds” or liquidated damages as theconventional banks can charge. As default is injurious to the deposit holders, IFIs need totake every possible step to minimize its possibility.17.4.5 Availability of Cash for Overhead Expenses and Deficit FinancingAnother criticism made of Islamic finance is that, if money has always to be linked to realassets, how will the needs of cash for overhead expenses and for deficit financing be fulfilled?Islamic finance has a number of modes/instruments on the basis of which liquidity needscan be properly fulfilled. Forward sales like Salam/Salaf and Istisna‘a are the best examples.A producer of homogeneous goods can genuinely sell his production in advance, and thususe the cash received for any consumption or business purposes. Needs of governments andthe corporate sector can be met by issuance of Shirkah- or Ijarah-based Sukuk. Therefore,this criticism is no longer valid.17.4.6 Socio-economic Impact of the Present Islamic Banking SystemLast but not least is the criticism that Islamic banking and finance in the present structureis not capable of achieving the socio-economic goals of an Islamic economy, as claimed intheory. Some of the pioneers have expressed their deep concern over the neglect of equitybasedmodes and the general prevalence of debt-creating modes. The concern is justifiableto the extent that if IFIs continue to work in the competitive environment without muchsupport by States, policymakers and the regulators, as is the case at present, they may not