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September 2005 Riba (Usury) : Its Practical Form and The Reason Behind Its Prohibition (Part 2 ) By : Hj Zaharuddin Hj Abd Rahman * Consequent to the previous article, you will now be familiar with the practical form of Riba’ (usury) in terms of loan products. The second form of Riba (usury) occurs when customer deposits their money in any type of conventional accounts, such as: - Conventional Fixed Deposit account. According to the signed agreement, the account operator/Bank will pool the depositors’ money and invest in strong, well-established companies to gain profit. Consequently, as a reward to the depositor, the Bank will fix an upfront interest rate (fixed interest). For example, 3% interest will be given to the depositor (as an addition to his/ her capital money) at a maturity period say between 1-12 months. According to Shariah, the 3% rate from the fixed deposit account is Riba Al-Qard, meaning Riba out of lending and borrowing. This kind of riba is the extra amount of money over and above the principal of the loan either imposed by the lender on the borrower in the contract or promised by the borrower in the contract . Conventional Saving account. By the same token, for this type of account, the Bank usually gives a fixed interest rate ranging from 0.1% to 1.5% per annum or higher. For this type of account, the Bank is regarded as borrowing the money from the depositor for the purpose of engaging in investments or providing loans. The depositor on the other hand, is regarded as imposing the fixed interest on the Bank. As a result, the Bank is required to pay an additional sum based on the interest rate regardless of condition (profit or loss). If the Bank gains high profit, it only has to pay the small fixed interest to the depositors. In contrast, if the Bank suffers a loss, it will still have to pay the fixed interest regardless of the loss. Thus, iniquity and injustice occurs, when the Bank has to pay the interest despite it being in a loss position or when the depositor receives a small income versus the Bank’s high profit. In an Islamic account, customers may deposit their money in either one of the following two types of accounts : - Wadi’ah Yad Dhamanah (Savings Account-i ) Wadi’ah Yad Dhamanah is when the Bank pools and utilizes the fund. The bank’s responsibility is in the form of guarantee and therefore it is compulsory for the Bank to return the fund as and when requested by the customer. The Bank may gives Hibah (gift/reward) to the depositor. The Hibah depends solely on the Bank’s discretion and cannot be promised by the Bank. In favor of the Bank’s high investment or financing projects profit, the depositor will usually receive a good/ high hibah (gift/reward) appropriate to the profit. On the contrary, in the event of loss, the Bank need not give any hibah (gift) to customers. Furthermore, the depositors’ money is still in custody and will not be reduced even though there is a loss. Therefore, justice prevails for both bank and customer because : - Customers may enjoy hibah (gift/reward) which is given by the Bank for their money in safe custody whilst not having to bear any investment risk. The rate or amount of hibah solely depends on the Bank’s discretion and the Bank usually gives away competitive hibah for profitable investment in order to attract customers. The Bank is not obliged to pay anything to the customers if there is no profit from investment. Therefore, the Bank will not be in a disadvantage position. There is no Riba involved in this account and the investment is Shariah compliant. Wadi’ah with the concept of Mudharabah. (Investment account) Means that customer desires to have their money in safe custody and at the same time also invest. Under this concept, customers are willing to bear the risk arising from the investments in order to gain higher profit. The percentage rate of the profit is determined in the first place, in the contract e.g. 70% for customer and 30% for the Bank or 80:20, 60:40 and etc. Hence, in an Islamic account, what is imperative is that the accumulated deposit will only be invested in companies, which are Shariah compliant (Shariah approved companies with business activities which are in compliance with Shariah principles and all income generated are free from doubtful sources). For instance, RHB Islamic Bank Berhad ensures that all the deposit received is invested in businesses or companies, which are clearly safe (free from unlawful activities in Islam). Screening is carried out diligently, and its operation is done in a client-friendly environment, i.e. a very much transparent discussion takes place between the Bank and companies, which are targeted to be invested in to ensure that the companies are Shariah compliant. The discussion will take into consideration the assets and liabilities of the companies in which the deposits/funds will be invested, regardless whether it is public listed or not. Generally, the following Shariah filter is used:- Industry filtering (excludes companies whose primary business is related to prohibited products and goods) Primary Financial Filters (excludes companies having unacceptable levels of debts or impure interest income according to Shariah Committee guidelines) In conclusion, the Islamic accounts differ from conventional accounts which are not confine to the Shariah laws and principles and only focusing on profit generating investments without considering the Shariah aspects. Obviously, this will mean that one depositing money into the Islamic accounts as supporters of the Islamic banking system and sponsors of Shariah compliant activities and profit generation. As regards to the issue on how Islamic banks can gain profit without Riba (Usury), there are actually various permissible ways for generating profit in an Islamic Bank as well as the Islamic windows which are very much reliable and capable of income generation, and gaining high profit through the following Shariah approved selling and buying modes, such as: Bai Bithaman Ajil (BBA) – Deferred Installment Sale Normal Ijarah (Leasing), Ijarah Muntahiyah Bit Tamleek (Ending with ownership) and AITAB (Islamic Hire Purchase) Musyarakah (Joint-venture Profit Sharing) and Musyarakah Mutanaqisah (Diminishing Musyarakah) Mudharabah (Trustee Profit Sharing) Murabahah (Cost plus sale) and Three party Murabahah Syndication services (Ujr) Based on these varieties of Islamic selling and buying modes (there are a lot more), one should not have any doubt on the Islamic Banks’ capability in generating profit as well as benefiting societies for their financial needs. He holds a MA (Hons) In Shariah from Jordan He is a Shariah Compliant Manager, RHB Islamic Bank Berhad  |
