Where It Started?

This post still related to my previous article “Fed Up With Your Banks? Try Ethical Banks”, which offered an alternative form of banking compare to usual/conventional banks.  Still in the spirit to find alternatives other than bank that can give you experience like those scandals with Citibank (see related articles).  Now, I’m looking into Islamic banks.

Although the term is Islamic banking, it does not require you to become Muslim to use its service, it called Islamic for describing that the system is build according to the guidance setup by Islamic law, a law according to the Holy Book of Islam, the Quran, and sayings of the prophet of Islam, Muhammad.  Therefore, if through out this writing there will be a lot Islamic teaching coming up, it’s just to give this kind of banking a proper description.

 

How They are Different?

A lot of people, and also advertisement from Islamic banks themselves said that their main difference is they don’t implement interest.  They are “interest-free”.  There’s no interest whatsoever in Islamic banks.  Although this is not wrong, but the main difference actually that Islamic banks is not a pure financial intermediary institution who just lend customer’s money deposit to them to bank’s credit customers.

At its basis, Islamic banks is regulated by the principle of Islamic financial system directed by Islamic law that it is absolutely prohibited for any payment or receipt to have any predetermined, guaranteed rate of return. As God commands in Quran that the only way to gain wealth is through profitable trade but each trade can make profit or suffer loss, and it is God alone who can decide the outcome of any trade.  Good, well-planned business can go wrong overnight and business which seemingly disastrous today, go very well the next morning.  So, in Quran and sayings of the prophet, God commands that all of us must do our best and prepare for the worst.  Therefore, speculative behavior is discouraged but enterpreneurship is promoted, and risk-sharing contracts and its sanctity is a must.  Sanctity is manifested that upholding contractual terms and fair information disclosure by all parties involved in a business is a sacred duty.  In every business, no matter how well you plan, you must be prepared that still two things can happen, either success or failure.  Any of them should happen, all parties participated in business must proportionally enjoy success together and, if failure happen, suffer losses together.

That’s why, usually after describing that Islamic banks is interest-free, they tell you that they do “profit-sharing” instead.  That term is a shortened form of that long description above.

Also, as this is a banking system guided by Islamic law, business related to any prohibited goods or activities by Islamic law will be denied for financing, such as any business dealing or related with gambling, any products or services related to non-Halal substances, etc.

Your money may not multiply as much compare if you deposit them in conventional banks, but if you deposit your money in Islamic banks you encourage fair business practices.  You empower banks who don’t act simply as a party who cannot loose in any business deal, you empower banks who are forced not only providing money but also implementing tight control upon the business that uses the money (our money).

And don’t worry, they distribute your money over a spread of various investment, statistically, it’s very rare that all business collapse (and also rare that all business make great profit) together at the same time.

 

Resiliency

Islamic banks resiliency in financial crisis is proven during Indonesian financial crisis at the end the 90s.  That time almost all conventional banks were in trouble or totally went bankrupt, however, all Islamic banks were not only survived but triumphantly growing.

Why? because all credits are based on real savings. Money flows arise from profit from sales of goods and services and transit through the banking system for payments or investment purposes. They do not arise within the banking system and then transmitted to real activity. Islamic banks do not compete to issue loans to borrowers for liability management purposes arising from mismatched maturities between assets and liabilities; they compete only for real investment opportunities; their resources are reinvested in real activities.

Maybe this ethical banks and Islamic banks can make banking system a better place.

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