In response to:
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Salam (peace) and greetings to all.
Mr. David Loundy wrote:
"Are
you willing to vote with YOUR dollars and make the same challenge that Dr.
El-Gamal has made? Iowa is not on our list of approved states. I
also cannot yet offer a musharaka. However, I am willing to work on
figuring out how I can offer a true profit and loss sharing musharaka in
Iowa, your choice of rents tied to an interest index-- you pick the index--
LIBOR, Prime, U.S. Treasuries-- or you can use our rental index which ties
rents to a national approximation of rents. ... I _may_ even be able
to offer you the equity hedge that I designed to respond to Dr. El-Gamal and
his challenge. I hope to be able to do this before the end of 2007.
If I can get all of this in place, which I am going to disclaim now may not
be possible, is this, in one of its variants, your ideal product, and
will you refinance with such a product? If not, why not? Want to
personally be a proof of concept of the viability of an alternative to
murabaha? This is a serious offer."
Well, so far I
see many a participants on this forum interested in scoring some points.
Now, we are also seeing interest in scoring some dollars.
Interesting
proposition. However, before I can respond to this offer in yes or no, let
me clarify some pertinent aspects.
Mr. Loundy
wrote:
"Do
you have any support for your emphatic assertion that conventional banks are
so attracted to murabaha because it is indistinguishable from conventional
loans except in form? In my admittedly limited experience, your
emphatic assertion does not match what I see in the marketplace."
My observation was not about just murabaha,
rather it was about all mark-up type financing transactions, including murabaha,
ijara, bai muajjal, etc. This is what I wrote: "It
should be noted - and emphatically - that the reason conventional banks are
so easily attracted to the Islamic mode and also so easily can
accomodate SUCH MODES, not because they are persuaded by any superiority or
distinctiveness of Islamic banking/finance, but because in its current
dominant practices, they do not find any distinctiveness relative to
the conventional banks, except only in form."
Readers might recall the ongoing context of my
comments in this particular message. Islamic banks (IBs) that by their own
charters (or in countries, where the entire monetary and banking system is
supposed to be on an interest-free basis) have clearly shied away from PLS
modes that originally have been invoked as the distinct normative modes of
Islamic finance. These IBs have comfortably settled for mark-up type
financing modes, with PLS mode either marginalized or offered only as a
cosmetic portion of their portfolio. Currently, based on the practice of IBs,
that's the "Islamic mode" I referred to in my comments. "SUCH
MODES" that conventional banks are easily attracted to and can easily
accommodate are mark-up type, non-PLS modes (once again, murabaha, ijara,
bai muajjal, etc.).
It is an established fact that conventional
banks in the Muslim-majority countries that have taken interest in Islamic
banking or have been mandated to offer alternative/parallel Islamic
window have merely adopted the predominantly mark-up type modes, including murabaha.
Mr. Loundy might have misunderstood my position
that I myself regard PLS modes as normative from the Islamic viewpoint and
am interested in such PLS modes. So, he thought that my observation is that
conventional banks, such as Devon Bank, HSBC, etc. are merely turning toward
murabaha because they find it easy and convenient, while ignoring
meaningful and established demand for PLS modes. So, Mr. Loundy is now
willing to score some dollars by placing before me an offer of such a PLS
mode and see if I am willing to take him up on that.
Well, as far as your offer of a PLS contract,
you are offering it to the wrong person, Mr. Loundy. I will not get into any
true PLS financing for my residence. As a Muslim (and also as a Muslim
economist), I am not convinced at all that PLS (mudaraba, musharaka)
represent normative/Islamic modes. The traditional argument in favor of
PLS is that risk and return are not fairly distributed/shared among the
participants in a transaction, when it is interest-based (or based on fixed
return for the lender, without the lender taking any risk.) However, this
traditional argument does not adequately take into account the borrower's
side. For example, in case of residential mortgage, if any buyer treats it
as an investment and seek positive return, it is primarily from the market,
when asset is sold, but not from the financing itself. In contrast to
commercial/business investment, as someone interested in a mortgage, my
primary concern is whether I am able to afford the payment for the contractual
period. For this, I want fixed rate as a borrower to protect my interest,
especially in a low inflation, low-interest environment.
One of the reasons IBs has not been able to
boost the PLS portion of their portfolio is not because they are irrational
and Islamically negligent or uncommitted. In my humble view, IBs have
not been able to go the PLS route because their lukewarm interest in
PLS due to high degree of asymmetric information and moral hazard is matched
by even greater lack of interest of the borrowers in PLS modes. Apart
from their own reluctance to push themselves beyond the role of
financial intermediation, IBs can't offer PLS if there is not
sufficient demand for these products. Munawar Iqbal and Philip Molyneux (the
first author is the Chief of Research in Islamic Banking and Finance at
the Islamic Development Bank in Jeddah, Saudi Arabia) informs us: "There
are many reasons why businessmen do not prefer PLS contracts." [Thirty
Years of Islamic Banking: History, Performance and Prospects, Palgrave,
2005, p. 126]
Sounds interesting, puzzling or shocking?
I just quoted one sentence because much more information is available in one
of my drafts "Partnership,
Equity-financing and Islamic finance: Whither Profit-Loss-Sharing?"
However, since it is being prepared for a refereed journal, until its
publication is ensured, I am not inclined to share it in public (especially
on the forum). If anyone is interested in this draft (with an intent to
share your candid feedback), I can be personally contacted at farooqm@....
Returning to the issues raised by Mr. Loundy, my
observations were not intended as a critique of conventional banks.
Traditional Islamic economics and finance (and the supporting fiqhi position) has
untenably idealized PLS as normative modes. This idealization stems from the
overly restrictive interpretation of riba, leading to a simplistic
and blanket equation between interest and riba.
At the level of practice, IBs have gravitated
toward non-PLS, mark-up type modes and that is rational and predictable for
a framework that is primarily meant for financial intermediation. However,
raising PLS as normative/Islamic to a dogmatic level, has created a
fundamental and irreconciliable gap between the rhetoric and reality. While
the literature calls for PLS, the practice is based primarily on non-PLS.
Thus, if IBs are held as per the standards and thresholds set by the experts
of Shariah and Islamic economics/finance, then this criticism is directed to
that glaring gap. Conventional banks are penetrating into this niche to
broaden their services, because they are easily able to adapt to the current
non-PLS modes that are still "Islamic" from the viewpoint of
Shariah-compliance.
However, as far as I am concerned, this glaring
and fundamental gap does not have to do with the presumption that IBs are
acting hypocritically or irrationally. On the contrary, I think the real
problem lies with the blanket and simplistic interest-riba
equation. The advocates of this simplistic and reductionist equation have
put greater emphasis on the protection of borrowers from exploitation by
lenders. Thus, they argue that lenders must fairly share risk. What they
have ignored or and continue to do so is that all borrowers are not
interested in sharing risk. That's reflected in the lack of demand of PLS
products. It is further attested by the following assertion by Mr. Loundy: "Our
customers largely want murabaha anyway."
Once we come to grips with the reality that
PLS mode should not have been granted its lofty normative/Islamic
status, it becomes easier to understand the problems with the simplistic
interest-riba equation.
"the State Bank of Pakistan had
suggested 12 modes of financing instead of interest, but the practical
situation on the ground is that out of all these 12 modes only 2 or 3 modes
are normally being used by the banks and financial institutions, the
foremost among them being mark-up. But the way the mark-up is used by the
banks today is nothing but a change of nomenclature of the transaction. Practically
what is being done is to replace the name of interest by the name of
mark-up." [see Section #190]
Mark-ups are merely interest-substitutes, except
in form. With no PLS, there is nothing essentially distinctive about
"Islamic" banking and finance. That's why this "facade"
of Islamicity needs to be addressed.
Mr. Loundy, if what IBs are offering is
"Islamic", the criticism I have offered does not apply to
conventional banks, it applies to IBs. I hope this helps you understand,
notwithstanding my criticism, I can't give you my business. If I have a
choice only between PLS and murabaha in regard to my mortgage, I will
choose murabaha, except that it is just one of the mark-up modes. As I
understand and see it, there is no essential difference between conventional
mortgage and Shariah-compliant mortgage for the latter to warrant
"Islamic" label.
Interest meeting at least the following
conditions - (a) in a competitive market, (b) operating in a regulated
environment, (c) based on mutual consent and (d) that is
non-exploitative or generally mutually beneficial - does not fall
BLANKETLY under the purview of prohibited riba. If these conditions
are not met, interest can be riba, which is categorically and most
sternly prohibited.
Best regards.