Ebtihaj's Encyclopedia of Economics Wiki
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Question[]

Is the word interest substituted by profit in Islamic Finance? How Islamic is Islamic Banking, when all the profit or ijara instalments are based on conventional banking tables?


Answers[]

  • Before answering to this question, we need to understand how interest is derived versus profit. The islamicism of Islamic banking lies on the WAY it derives its gains, income, commission, profit, rent etc.
Islamic economic theory stresses on the form rather than the substance ( though it is hot debated issue in some quarters). Therefore, evenif we all get the same results from a certain economic activity by using conventional amortization tables, the halal or haram of the activity will depend on HOW you got the results.
To elaborate let me give you an example, conventional banks are in business of lending money for a return which may be USD 10 from its customers. Islamic banks are in business of selling carrot (goods or usufruct) among other for a return of USD 10 from its customer. The first is impermissible way to gain a return because money per se has no intrinsic value no reward in Islamic economic perspective, however, carrot has intrinsic value and thus entitled for a reward. However, it is more than that, since there are also different risks between the two businesses.i.e money and carrot bness. The carrot example simply used to convey a point that that islamic banks trade commodities like cars, machinery, equipments with their customers through credit sale or operation/financial leasing or contributes those commodities to form part of their joint venture contribution.
  • Firstly we have to clearly define interest and profit.Allah has Allow business in form of trade.so if we do a business that generate economic activity, there is no harm in it..as for as Tamleek is concerned it is one way or other the form of riba.For ijara ul Ashya, we have to keep in mind the selling place the warehouses of particular commodities. the most important thing is that we have to keep in mid Al kharaj o bilzaman . In case of car example everything is pre- planned for selling.banks have already made agreements with sellers and most important thing profit is linked with KIBOR.There is need a model buildding..we are just trimming the conventional banking system..we need shariah based banking system not shariah compliants.
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