Episode 62      17 min 50 sec
Please Explain: Islamic Banking

Prof Abdullah Saeed explains the concepts, history and modern-day practice of banking and finance according to Islamic law. With host Jacky Angus.

"For the past 1400 years or so, Muslims have been debating this issue of what exactly 'riba' is. And the vast majority of Muslims have come to the view that riba equals interest." - Prof Abdullah Saeed




           



Prof Abdullah Saeed
Prof Abdullah Saeed

Professor Saeed is the Sultan of Oman Professor of Arab and Islamic Studies at the University of Melbourne.  He is also the Director of the National Centre of Excellence for Islamic Studies and Asia Institute at the University of Melbourne.

Professor Saeed is an active researcher, focusing on one of the most important issues in Islamic thought: the negotiation of text and context, ijtihad and interpretation. He is a strong advocate of reform of Islamic thought and is frequently asked to present at events both nationally and internationally. He also participates in training courses on Islamic issues to community leaders and government agencies in Australia and abroad. Of particular interest, given the current climate, is the promotion of inter-religious initiatives.  He regularly engages with the Muslim, Christian and Jewish communities at national and international symposia to enhance community understandings of Islam, Islamic thought and Muslim societies.

Credits

Host: Jacky Angus
Producers: Kelvin Param, Eric Van Bemmel and Jacky Angus
Audio Engineer: Craig McArthur
Theme Music performed by Sergio Ercole. Mr Ercole is represented by the Musicians' Agency, Faculty of Music
Voiceover: Paul Richiardi

Series Creators: Eric van Bemmel and Kelvin Param

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Please Explain: Islamic Banking

VOICEOVER
Welcome to Melbourne University Up Close, a fortnightly podcast of research, personalities and cultural offerings of the University of Melbourne, Australia.  Up Close is available on the web at upclose.unimelb.edu.au.  That’s upclose.unimelb.edu.au.

JACKY ANGUS
Hello and welcome to Up Close coming to you from the University of Melbourne, Australia.  I’m Jacky Angus.  This episode of Up Close features Islamic banking, a significant development in the world of finance today.  As one of the rapidly developing areas of the industry, Islamic banking practice today is responsible for over US$300 billion U.S. dollars and is expanding at the rate of 20 per cent per annum.  The global resurgence of Islam has brought with it greater awareness of the importance of Muslim values including the principles dictated by the Shia.  While Islam encourages trade and commerce it sets clear ethical limits to the use of finance and wealth.  Banking practises involving interest or usury - 'riba' in Arabic - is expressly forbidden in the Qur'an but in a global world where capitalism dominates and underpins social values, how is the riba to be avoided and what are the implications for profit and loss?  Given the current worldwide financial squeeze, is it time to consider a more ethical framework such as that offered by Islamic banking?  To discuss this topic with me today is Professor Abdullah Saeed, Director of the National Centre of Excellence for Islamic Studies here at the University of Melbourne, Australia.  Welcome to Up Close Professor Saeed.

ABDULLAH SAEED
Thank you for having me.

JACKY ANGUS
Well let’s start with the idea of social values in Muslim society.  What are the central social values that distinguish Islamic banking practices from the non-Muslim world?

ABDULLAH SAEED
Well there are a couple of concepts that I should emphasise - one is the issue of justice, or in Arabic, 'adl'.  Justice is a very important concept in Islam. In fact justice is there in Islamic law, in Islamic ethics, in Islamic banking and Islamic finance.  The second important concept is 'zakat' - it is compulsory spending.  A Muslim is expected to spend part of his or her wealth for the benefit of the needy and disadvantaged.  There is another aspect of spending and that is 'sadaqah'.  'Sadaqah' is really voluntary spending.

JACKY ANGUS
But Professor what are the actual principles behind Islamic banking that link up with these Muslim values?

ABDULLAH SAEED
The starting point is that banks and financial institutions must be free from interest.  The reason for that is interest is considered prohibited under Islamic law and Muslims are not supposed to engage in interest - dealing with interest, paying interest, accepting interest - because of the Qur'anic prohibition against what the Qur'an calls 'riba' which is interpreted to be interest.
The second principle is that any business one is engaged in, where there’s a bank or financial institution - must be based on the idea of permissibility in Islamic law.  For instance there are certain businesses a bank or financial institution that a Muslim should not engage in, for instance, gambling which is prohibited in Islamic law, prostitution - prohibited again, alcohol, wine-related industrious businesses and businesses that are harmful to the community which is a very broad category.  Of course the community decides what is harmful, what is not harmful.

JACKY ANGUS
And there is a long tradition of this sort of discussion isn’t there in Islamic 'fiqh' - in jurisprudence in the tradition of Islamic thought?

ABDULLAH SAEED
Of course in Islamic law these debates are there.  Any text on Islamic law would have chapters and chapters and chapters on these issues - how do you do business, how do you trade, how do you buy and sell, what are the kinds of things you should avoid and what are the rules and regulations that you should actually follow?  Whether you’re buying or selling when you’re involved in business, you have to act ethically and morally and you should not just look at yourself - you should look at the community, you should look at [the] community’ interests and the rights of the needy and disadvantages - a sense of fairness and justice - these are all very important principles whether you’re doing business or doing anything else.

JACKY ANGUS
Well how does it actually work - how does the bank function as a business and make a profit?

ABDULLAH SAEED
Let us look at two aspects of an Islamic Bank - one is as far as the depositors are concerned, the depositors actually put their money in the bank expecting a profit - Islamic Bank doesn’t give interest.  When you put your money in the bank, Islamic Bank invest that money and if there is a profit the profit will be shared between the bank and the depositor.  On the borrowing side, when you go to the Islamic Bank to borrow some money they will say well we don’t lend money as such.  If you have a particular proposal for investment we’ll look at the investment proposal and if you’re comfortable with that - if you’re happy with the way that the proposal is structured etc. - then we’ll be partners with you.  It’s more or less profit and loss sharing.

JACKY ANGUS
So that’s investment - what if I actually want to buy something like a car and I go to the bank and I ask for a loan, do I pay interest on that loan or how does it work?

ABDULLAH SAEED
Well if you want to buy a car you go to the Islamic Bank and you say well I want to buy this car would you lend me, say, $20,000?  The Islamic Bank will say well we could buy the car for you and sell it to you at a profit.  The Islamic Bank is involved in buying and selling in this case.  It is not investing its money in a particular project.  This is one of the businesses the Islamic Bank could get involved in.

JACKY ANGUS
So in a sense what’s happening here is that it’s interest but it’s not usury - would that be right?

ABDULLAH SAEED
No, no.  Islamic banking is based on the idea that it is free from interest.

JACKY ANGUS
But, still, the bank actually charges - I mean in the case of the car for example - if it’s selling to you at a profit in a sense you could say that the bank’s actually charging you in order to sell you the car?

ABDULLAH SAEED
The Bank’s argument would be this:  we are not involved in lending money at interest.  We are simply selling you a product that you want.  Well in buying and selling under Islamic law you can make a profit - whether it is five per cent or two per cent or ten per cent - as long as the buyer and seller agree on that then that’s permissible but that is...

JACKY ANGUS
So it’s a contract?

ABDULLAH SAEED
...quite different to interest where you simply borrow money and pay interest or you lend money and pay interest.  In the case of the car, the Islamic Bank would argue that it is not lending you money as such; it is simply selling a product that it has to you at a profit.  Buying and selling are accepted under Islamic law.

JACKY ANGUS
So you see that as quite different - it’s not just semantics?  Well in terms of buying shares and dividends and bonds and all that doesn’t that imply that it’s a bit of a gamble really because I know that Islam is against lotteries and games of chance?

ABDULLAH SAEED
There are two issues here - dealing with bonds and dealing with shares, Islamic banks do not actually buy bonds and get interest on that.  There are Islamic bonds but they function on a very different basis.  Buying shares is considered to be perfectly acceptable under Islamic law and Islamic finance and banking, so buying shares in a company which deals with things that are considered permissible under Islamic law is considered perfectly acceptable.

JACKY ANGUS
Are dividends permissible?

ABDULLAH SAEED
Dividends on shares are permissible, yes.  Now interest on bonds is not, but dividends on shares are fine.  Basically the idea is when you buy shares you’re actually trading in something real and tangible - it’s a real asset behind that.

JACKY ANGUS
Now can I ask you is the Bank then paying 'zakat' for its profit?

ABDULLAH SAEED
All the Muslims - individuals and of course Muslim institutions - Islamic institutions - must pay 'zakat'.  The Islamic Bank also pays its share of 'zakat', and the 'zakat' usually is handed by the bank or a subsidiary of the bank to distribute to the community to the needy and disadvantaged.

JACKY ANGUS
I’m interested in this concept of usury because what usury implies or what it literally was in the middle ages in the Christian world was an excessive kind of interest - a sort of ethic-free interest - and I know that for 1700 years it was forbidden actually in the Christian world for banks to charge interest.  Then there was the sort of rationalisation process - am I right - that people like Jeremy Bentham argued that oh no - that in fact the banks have a perfect right to actually charge an interest which didn’t concern itself too much with ethics.  Now is that reflected in the Muslim world?  Now I know that you say that there’s no interest, but there presumably are fees.  Now do fees escalate in some banks or is that tightly controlled as well?

ABDULLAH SAEED
The fees are quite a different issue.  For the past 1400 years or so, Muslims have been debating this issue of what exactly 'riba' is. And the vast majority of Muslims have come to the view that 'riba' equals interest - any addition over and above a loan which is to be paid to the lender is considered interest - interest is considered riba for the vast majority of Muslims.  So, this idea that we can actually make a distinction between interest and usury, and usury’s prohibited and interest is okay is not an idea that’s accepted by the vast majority of Muslims. But it is certainly an idea that is entertained by a number of contemporary Muslims as in scholars, but Islamic banking certainly does not accept the idea that any form of interest is permissible and it could be accepted.

JACKY ANGUS
Now I gather that Islamic banking is in fact doing very well and it’s expanding in many, many Muslim countries.  Can you give us some idea of how that’s developed and perhaps its historical beginnings?

ABDULLAH SAEED
Islamic banking is relatively new.  It began in the 1950s and ‘60s and in fact the very first Islamic financial institution, which was really a village bank, was set up in Egypt.  It was based on the idea that our banks should not charge interest and should not pay interest and banks should be based on profit and loss sharing.  The project is successful but it didn’t continue.  In the 1970s a number of Islamic banks were established - some of them were commercial Islamic banks such as the Faisal Islamic Bank, Kuwait Finance House, Dubai’s Islamic Bank and also a major international Islamic bank which is the Islamic Development Bank based in Jeddah.  This is supposed to be an Islamic international development bank.  All Muslim countries actually participate in that.  The vast majority of shareholding is by the oil producing Gulf countries. And since then Islamic banks have been established right throughout the Muslim world.  Today you wouldn’t find any Islamic country without some form of engagement in Islamic banks and financial institutions.  Islamic banks are also established in western countries - the UK for instance.  Islamic financial institutions do exist in the US, Canada, Australia and the like.  So basically what you’re seeing is a phenomenon that has gone from a very modest beginning in the 1960s to a major international activity by 2008.

JACKY ANGUS
So, what’s interesting is there’s been an effort to incorporate Islamic banking in Britain - I think it was 2002 - so there is a sense in which you could say that mainstream banking is being influenced by the ideas generated by the Islamic banking - would that be a fair assumption?

ABDULLAH SAEED
A lot of mainstream banks that are based on interest are now heavily involved in Islamic banking.  They’ve opened Islamic windows to attract Muslim customers and they’re involved in financing Muslim institutions which are not dealing with interest.  Islamic banking is very mainstream now, in a sense. And you can see this now with major western banks - Bank of America, Citigroup - they are involved in Islamic banking.  Western countries are trying to attract Islamic banking financial institutions.  London is trying to become a major host for Islamic funds, financial institutions and the like. And for that, they’re also developing frameworks, rules and regulations.  The point is there’s quite a large number of Muslims in the world with lots of money and wealth who are not interested in dealing with interest, who consider interest to be prohibited and therefore mainstream banks - western banks and other banks - are trying to attract those customers and that can be done only if they can develop appropriate instruments.

JACKY ANGUS
Well, I can understand it’s very attractive to the person that wants to borrow money or invest not to have an interest, but I’m wondering whether these banks - the Muslim banks - the Islamic banking practise - how are they managing to survive?  I mean presumably it’s a cut-throat world isn’t it and I imagine that the Islamic banks that operate under the shared profit and loss sometimes lose.  Is that true?

ABDULLAH SAEED
Of course.  These are businesses that are supposed to be based on profit and loss sharing.  In an economic environment where things are going wrong Islamic banks could be affected badly too much like any other business.  That’s a natural part of this.  Yes, certain Islamic banks have had difficulties, but the vast majority of Islamic banks are functioning pretty well. In fact, they’re quite successful.  If you look at the record of Kuwait Finance House, for instance, or Faisal Islamic Banks in various countries, these are very successful banks.  In fact they are the dominant players in their own countries.  It would be interesting to see what happens over the next 10 to 20 years.

JACKY ANGUS
Well I do understand that in some parts of the Muslim world, particularly in the ‘90s in Egypt, there were several Islamic banks that were in fact on the one hand not dealing with interest, but at the same time investing that money in interest raising ventures - that they themselves collected interest?

ABDULLAH SAEED
There are cases like that in Egypt.  There are cases like that in Pakistan.  These were, in the case of Egypt, what they call investment companies and not major Islamic banks.  Faisal Islamic Bank of Egypt for instance was not involved in that.  In the 1980s a whole lot of investment companies emerged in Egypt which cheated on their customers and lost billions of dollars and the same thing happened in Pakistan too. But I think we have to keep in mind that such institutions that cheat on their customers and the way they do business are not accepted by the mainstream Islamic banks and financial institutions.

JACKY ANGUS
Professor Saeed I’d now like to look at your role as a teacher.  Is there in fact an interest that’s been taken up at the university level to study this area?

ABDULLAH SAEED
We see quite a lot of interest from bankers, lawyers, financiers, accountants and students of banking and finance.  There’s a lot of money involved and there’s a lot of interest within the Australian community in Islamic banking.

JACKY ANGUS
Well I know that in the recent conference that you held here at the University of Melbourne, Australia - I think it was October 2008 - you had a very good turn up of bankers from all over Asia - South-East Asia in particular?

ABDULLAH SAEED
Yes, there is certainly a lot of interest and a lot of students who are doing PhDs in Islamic finance.  Courses on Islamic finance are being developed.  My sense is in Australia there’ll be quite a lot of academic activities in relation to Islamic banking and finance.

JACKY ANGUS
Well Professor Saeed thank you very much for a very interesting discussion.

ABDULLAH SAEED
Thank you.

JACKY ANGUS
We’ve just been hearing from Professor Abdullah Saeed, Director of the National Centre of Excellence for Islamic Studies at the University of Melbourne, Australia.  You’ve been listening to Up Close.  Relevant links, a full transcript and more information on this episode can be found at our website at upclose.unimelb.edu.au.  You may leave a comment on any episode of Up Close by clicking on the link at the bottom of the page.
Melbourne University Up Close is brought to you by the Marketing and Communications Division in association with Asia Institute at the University of Melbourne, Australia.  Up Close is created and produced by Eric van Bemmel and Kelvin Param.  Our audio engineer is Craig McArthur and our theme music was performed by Sergio Ercole.
I’m Jacky Angus.  Until next time thank you for joining us on Up Close.  Good Bye.

VOICEOVER
Welcome to Melbourne University Up Close, a fortnightly podcast of research, personalities and cultural offerings of the University of Melbourne, Australia.  Up Close is available on the web at upclose.unimelb.edu.au.  That’s upclose.unimelb.edu.au.  Copyright 2009 University of Melbourne.


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