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Is it possible to carry on insurance business on the transactions between two Muslim States or a Muslim and non-Muslim State? PDF Print E-mail

Q: Is it possible to carry on insurance business on the transactions between two Muslim States or a Muslim and non-Muslim State?

A: Interest is not permissible on economic/financial transactions occurring between two Muslim countries. Muslim countries can eliminate interest from their economy provided they make sincere and serious efforts. What is needed is to muster the public confidence. When this is achieved, the Islamic state can realize more tax revenue through extra taxes as well as through interest-free loans and voluntary contributions. Then, there may not be any need to raise interest-based loans.

However, in cases of extreme needs, a Muslim country can seek interest-based loans for as shall amount and for as shorter period, as possible.

The Islamic state provides for risks of poverty, sickness or any other calamity from the Bait-ul-Mal, Zakat-based social security. Insurance administered by the State take care of incidences of this nature.

Insurance business can be organized in the private sector on the basis of the principles of cooperation and mutual security. The important thing is to ensure that the elements of Riba and gambling do not enter into the functioning of the insurance business. This can be done by forming mutual insurance companies where policy holders contribute to the insurance fund by way of gifts. The insurance fund may be invested on the basis of Mudaarabah and may also be available as Qarz-e-Hasana to the policy holders. The payment to a policy holder at the time of any calamity may be considered as a gift from the rest of the policy holders. The profits earned on the insurance fund may be distributed on the basis of the relative contributions to the fund.

The above-mentioned insurance scheme may be Islamically accepted as it is purged of the elements of gambling and interest.

Contemporary fatawaa

 
What would be the alternatives in the context of present day economic conditions to carry on domestic and foreign trade efficiently without availing of Banking facilities based on interest? PDF Print E-mail

Q: What would be the alternatives in the context of present day economic conditions to carry on domestic and foreign trade efficiently without availing of Banking facilities based on interest?

A: The scholars of Islam have suggested a number of financial instruments to facilitate internal and external trade. The most preferred are based on the principles of profit-loss sharing, like Mudaarabah and Musharkah arrangements. The other less preferred are: bai Muajjal, Ijara, Ijara wa iqtina and Bai-salam. They are defined as below:

Bai Muajjal (Cost plus trade financing): The bank enters into an agreement with his client to purchase merchandise for the client and then the bank sells them to the client on the basis cost plus agreed profit margin, repayable in instalments over a specified period.

Ijara (Lease or hire): The Bank acquires machinery/ equipment/building etc. for his client and charges a certain rental for their use.

Ijara wa Iqtina (Hire-Purchase): The Bank finances the purchase of equipment and the client uses them under a contract. The contract provides that the client will pay the cost of the instrument and a share in the net rental value of the equipment which is proportional to the outstanding shares in the total investment.

Bai Salam: The Bank enters into an agreement with the client for advance purchase of merchandise and makes the payment of the agreed amount at the time of agreement.

It is important to note that above mentioned techniques are less than desired because of their resemblance to the interest. Therefore, minimum use of these techniques will be made in Islamic banking.

Contemporary fatawaa

 
BANKS AND THE BORROWERS/INVESTORS: PDF Print E-mail

BANKS AND THE BORROWERS/INVESTORS:

Three situations can arise here:

i) Consumption loans: Bank will extend interest-free loans for genuine consumption purposes.

ii) Borrowing for Investment: The banks will enter into Mudaarabah and Mushaarakah agreements with the borrowers of the fund for investment purposes. The agreement will specify the proportions according to which profits/loss will be shared between the investor and the bank. After charging the administrative expenses, the bank will distribute the profits among the share holders and depositors according to the terms of agreement.

Q: 27- (i) Does the interest on loans floated by the Government to meet national requirements come under Riba?

(ii) What alternatives can be suggested for the banks in case they grant loans without interest for various requirements?

A: i) Yes the Qur'anic injunctions regarding the prohibition of interest is general. The interest is prohibited both in the public and private sectors and for all types of purposes. Any excess payment made over and above the principal amount is Riba and is thus Haram. For more details see the answer to the question(1).

ii) The Islamic Banks    will finance viable investment/production projects on the basis of Mushaarakah and / or Mudaarabah. As for the financing of genuine consumption needs on the basis of Qarz-e-Hasana is concerned, the following considerations will have to be kept in view:

a) The amount of loan cannot exceed reasonable limits.

b) Income accruing from the collateral security like land or house will be deducted from the amount of loan.

c) If the debtor is unable to pay back the loan or he dies and there is no known way to repay his loan, then Bait-ul-Mal will make payment of the loan to the Bank.

Contemporary fatawaa

 
Can, in the light of the Injunctions of Islam, any differentiation be made between private and public banking in respect of charging interest on banking facilities or services rendered? PDF Print E-mail

Q: Can, in the light of the Injunctions of Islam, any differentiation be made between private and public banking in respect of charging interest on banking facilities or services rendered?

A: Public and private banking institutions are treated at par in respect of the Islamic injunction of prohibition of interest. No interest is allowed on any financial transaction in both public and private banks. However, the banks both in public and private sector can charge service charges to take care of administrative expenses.

(i) Can the capital, according to the Injunctions of Islam, be regarded as an agent of production thus requiring return for its use?

(ii) Does devaluation of the currency affect the payment of loans taken before such devaluation?

(iii) Can inflation causing rise in the cost/ value of gold and consumer goods in terms of currency have any effect on the sum, borrowed?

A: The word capital is used in two meanings: Physical and financial.

-Physical capitol like machinery, building, etc. participating in the production process are allowed to claim their reward in the form of rental.

-Financial capital like money and near-money instruments taking part in the production process through Mudarba or Musharkah arrangement can participate in profit or loss. However, no fixed return is admissible for the use of money capital.

ii) The question is two dimensional. The first relates to the effect of devaluation on the internal loans. In such loans, the same amount of loan will be repayable as before the devaluation. In this case, Imam Istijabi reports the consensus of Fuqahah on the point that, if there is any change in the value of currency, then the same amount of currency units will be repaid as were loaned.'

As far as the payment of the external loans is concerned, the devaluation will involve extra payment proportional to the rate of devaluation on such loans.

iii) The answer here is essentially related to the above answer. A given sum borrowed before inflation will be repaid in the same amount, after the inflation. The inflation tends to reduce the real burden of the loan. From this angle, it tends to favour the borrower against the lender. To protect the lender, the indexation of loan is not allowed because the indexation while protecting lender, hurts the borrowers.

Real answer to the problem of inflation is the introduction of the Islamic Economic System in totality. An important feature of this system in the monetary sector is prevalence of a relatively constant value of money.

Contemporary fatawaa

 
BANKS AND DEPOSITORS PDF Print E-mail

BANKS AND DEPOSITORS

Q: 26- Depositors can be of two kinds, Current Account and Saving Account holders. In the Current Account, the depositors want the bank to protect their savings for a short-time. The bank can accept such deposit (money) on Qarz basis. The bank will be bound to repay these funds when demanded by the depositors. In the Saving Account, the people want to invest their saving through banks. The bank can accept such deposits on the basis of Mushaarakah or Mudarabah. For this purpose, the bank draws up contracts specifying the conditions regarding the mode of investment, distribution of profit/loss of investment, etc. such contracts become enforceable when both parties agree to it.

Contemporary fatawaa

 
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