Investors: With savings to invest, the Islamic way

Q296 :Investors: With savings to invest, the Islamic way


A296 : The question of lawful investment and the attraction of interest continue to trouble many a Muslim who have small savings to invest but are unable to determine which way to turn. They have learned that bank interest is forbidden and find it difficult to choose an alternative. Islamic banks which operate in a few countries have their appeal which they derive from conforming to Islamic law, but they have also received criticism which is often unjust. That sort of criticism, however, has disturbed many people who do not have the time or knowledge to follow the debate concerning Islamic banking. An educated Muslim may have been aware of only a few articles written here and there, and he may still have some doubts about these Islamic banks. People of this type continue to ask scholars for a definitive ruling on how to invest their small savings. They also turn to Muslim economists for advice. Mr. Israrul Haq of the Embassy of India School in Jeddah has sent me a letter deploring the lack of such definitive rulings. To my mind, this is something that should be achieved through a joint effort by Muslim scholars and Muslim economists working hand in hand. The forces that work against a practical Islamic alternative to the banking system are enormous. Therefore, the Islamic banks will continue to have serious problems as long as the Muslim community throughout the world continues to suffer the effects of paying little attention to God's instructions. However, the problem of a wage earner who is looking for the best way to safeguard the real value of his savings continues to be acute and in need of an immediate solution. Fortunately, I have received a letter from Dr. Umar Chapra, a senior economic advisor in the Saudi Arabian Monetary Agency which addresses this very question. It provides expert advice from an Islamic perspective. I am indebted to Dr. Chapra for his learned contribution, which I am publishing in full. Is it possible for such a busy, unsophisticated wage earner to safeguard the real value of his savings by placing them in interest-earning deposits in conventional banks? Probably not! The rate of interest that these banks pay, particularly to their small depositors, is paltry and is generally not sufficient to protect the real value even when the prime rate of interest is significantly higher than the rate of inflation. Nevertheless, if one is satisfied with the kind of return that the conventional banks offer, then why not choose Islamic banks for one's deposits? This would not only help one earn a return which is halal, but also get a reward in the hereafter for supporting the development of an Islamic financial system. Some people may not find this palatable for two reasons. Firstly, a number of the Islamic financial institutions are not regulated by a competent central bank. Thus they may not inspire the necessary confidence. Secondly, there is a hovering suspicion that some, though not all, of these institutions resort to investments that are different from interest only in name. One could respond to the first reason by saying that even conventional banks now have Islamic funds or counters and it is possible for the saver who wishes to avoid interest to place his deposits with them. With respect to the second reason, one could say that an unsophisticated depositor who has entrusted his savings to an Islamic bank or to the Islamic counter of a conventional bank, has no way of knowing whether the rules of the Shariah are being observed or not. Only the central bank, or the Shariah Board of the bank concerned, can determine this. He may not, therefore, be accountable before God, because "God does not burden anyone more than what he or she is able to bear" (Qur'an 2;281). If he has entrusted his savings to these institutions in good faith and if they do not live up to their obligations, then there is a breach of faith and the bank management, the central bank and the Shariah Board are accountable before God. If we choose to be critical of Islamic banks, we must bear in mind that most of these banks are operating in an inhospitable environment without support systems, and their task of totally avoiding interest is not easy. This will be possible only gradually with the Islamization of the economies and financial systems of Muslim countries. Since an Islamic financial market does not exist, it is difficult for Islamic banks to employ all their surplus funds in an Islamic way. It is also difficult for them to have access to liquidity when they face a liquidity squeeze. Most central banks are not ready to act as lenders of last resort in the case of Islamic banks. Therefore, they are forced to maintain greater liquidity than conventional banks have. This reduces their profitability. To make matters worse, auxiliary institutions do not exist to provide information on the credit-worthiness of clients, to evaluate the various projects, and to audit accounts with the objective of determining accurately the profit of clients referred to them by banks. No one expected these difficulties to be overcome in a short period. It is not possible for individual Islamic banks or their association to remove difficulties that require the establishment of an Islamic economic and financial system without the coordinated effort of the whole Ummah. What the persistence of these difficulties has done, however, is to slow down the progress of Islamic banks in the direction of the classical modes of mudharabah (speculation) and musharakah (partnership) financing. They have been forced to confine their financing primarily to the less risky modes of ijara (leasing), murabaha (sale against a specified profit margin), salam (sale against advance payment for future delivery of tangible goods), and ijarah wa iqtina (hire purchase). In all these modes, the financing is linked to the provision of real goods and services and the rate of return is agreed in advance. Hence, two steps need to be taken. Firstly, it is necessary to fulfill the conditions that the Shariah has laid down to ensure that the lender does not shift the entire risk to the borrower and that these techniques do not degenerate into pure financing devices resorted to with the intention of circumventing the prohibition of interest. Do the Islamic banks abide by these conditions? They give assurances that they do and their assurances are certified by their Shariah Boards. There is no reason why an unsophisticated depositor should doubt these assurances. An important question that arises here is whether a small saver should remain contented with the return that deposits earn in conventional or Islamic banks. Empirical evidence indicates that the rate of return on deposits tends to be significantly lower than that earned by businesses and corporate shareholders. Hence, it may be preferable for him to invest them - in business, if he finds an honest businessman to accept them on the basis of mudharabah, real estate and shares of joint stock companies. He may also resort to mutual funds related to equities, real estate and trade finance, which are now available in most Muslim countries. In a truly Islamic economy, there would probably be a number of institutions to guide a small investor. Even though such institutions do not exist, it may be possible to seek the help and guidance of knowledgeable friends. However, if he invests in shares or real estate, he should get in when the prices are low and then not worry about short-term fluctuations. He should look at the long-run prospects. I wish to give here the example of a friend of mine who says that about ten years ago, he faced all kinds of difficulties - illness in the family, accidents, and job problems. Upon introspection, it appeared to him that these might be due to the interest he was earning. After all, he was at "war with God and His messenger". He, therefore, decided to give away all the interest earned in charity and gradually invested his savings in Islamically permissible assets. He had neither the experience nor the time to do this. He, therefore, took nearly two or three years to complete the process. Some of his investments suffered losses while others realized gains. However, he says that his net assets are now worth about five times the original investment and all his problems have also disappeared. If he had invested his savings in deposits or other interest-earning instruments, their value may not have risen more than 60 percent in ten years. Someone may resort to saying that he was very lucky. This may be true, but then his success may also be due to barakah (God's blessing). Why cannot we also seek barakah by looking for opportunities and at the same time praying to God to help us take the right investment decisions? Let us remember that "To God belongs all the treasures of the heavens and the earth" (Qur'an, 63;7). He can bestow the same barakah on everyone as He did on this friend without any decline in His treasures.


Our Dialogue ( Source : Arab News - Jeddah )