introduce ethical Islamic Banking

The Island-Features

THAT ORGY OF JUNK LOANS
introduce ethical Islamic Banking
By K. Godage

The current spate of financial scandals reminded me of the orgy of junk loans that had been given by the Peoples Bank in the period (if my recollection is right) 1992-93. I wonder as to whether any of that public money was recovered. Subsequently we had the Pramuka Bank scandal and three other scams including perhaps one of the biggest in the world have surfaced. As a concerned citizen, I am certain that I speak for thousands, we would like the Central Bank to inform us as to the action taken against those who obtained ‘junk loans’ and defaulted and also what action has been taken against those involved in the Pramuka affair?

In many respects the Central Bank has failed us as has the banking system as an instrument to assist in the development of the country. Should we not consider changing the banking laws, perhaps adopting some of the extremely good features of the Islamic Banking system which has an ethical orientation.

Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia). Sharia prohibits the payment of fees for the loaning of money (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden). While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

There are some features such as the non charging of interest (but only the imposition of administrative charges) which are not only commendable but should be emulated by people of all religions. There are also other features which could be adopted with advantage. What was most important of all, to mind, is that the bank which lends money for a project becomes a partner in the project; all project lending is therefore for joint ventures and the bank not only shares in the profits but has a stake in the project and would be on the board of directors and would seek to ensure its success. An Islamic tenet worthy of mention is that those with excess wealth are required to share with those less fortunate. The money deposited with a bank is placed as a trust to allow the bank to lend to those who have no resources to use such monies.

Considering the fact that the global financial crisis has been the result of reckless lending it does appear that the world has a thing or two to learn from Islamic banking. If the rules of Islamic financing had been in place, the mortgage crisis in the USA, which triggered the current financial crisis, could never have happened. If the details had been closely inspected, it would have been evident in many cases that the people taking out the mortgage would never been in a position to repay it.

Islamic law stipulates that all financing activities must be linked to a real economic transaction. "It is essential to know exactly what the transaction is based on. If someone wants to buy a house, can it be sold to him in installments? At first glance, it might look like a loan, but ultimately, it ensures that those involved know exactly what is happening,"

Similarly, instances - whereby money is earned not by selling goods or providing services, but by cleverly using capital to generate major profits would have been prevented.

The same can be said for earning interest: Islam forbids the faithful to "let money work". There are other strict rules in the system: businesses that are not compatible with the "Sharia", i.e. with the Islamic code of religious law, may not be financed. Naturally, it is forbidden to trade in pork, pornography, or gambling. Most unfortunately trade in hard drugs was not prohibited because such drugs or even hashish or cocaine was unknown. Those who indulge in the trade of drugs know that it is not in the spirit of Islamic law but they pocket their conscience because of the money involved. They stand cursed for they are in actual fact in violation of the law of Allah.

The ban on gambling applies not only to doing business with casinos, but certainly also to gambling-like behaviour on the international finance markets, where conventional rules of economics were abandoned and where "financial instruments" that were not even understood by many of those who were dealing in them suddenly appeared.

Sri Lanka has a few banks that indulge in Islamic banking but it is certainly time that the government appointed a new Banking Commission (the last such Commission was appointed in1934 during the days of the State Council—- the Commission was headed by Justice Pokinwala and the late N. U. Jayawardena was the Assistant Secretary of the Commission and functioned as the virtual Secretary of the Commission (as Prof. Das Gupta was unable to make himself available) to examine the state of our banking industry and to suggest ways of modernizing it. A new Banking Act which would ensure that no junk loans are given and that our banking system would play a positive role in the development of our country is an imperative.

The market value of the Islamic banking sector in Sri Lanka is estimated at LKR 70 billion to LKR 100 billion. Islamic financial services providers currently active include Amana Investments Limited, Ceylinco Islamic Investment in a Shariah compliant Corporation (CIIC), Muslim Commercial Bank (MCB), National Asset Management Limited (NAMAL), First Global Investments Group and ABC Investments

I am certain that there are experts in Islamic banking in this country; the government should include such specialists in the work of a new Banking Commission, they would be able to make an invaluable contribution to modernizing our banking system and bring it in line with our own requirements. Adopting some Islamic banking practises could also help this country to strengthen our relations with Saudi Arabia, Iran and Libya and the rest of the Islamic world in particular and of course ensure that no junk loans are granted at the instance of politicians.