The most significant feature of a truly Islamic economic
system should be that it ought to be fair. Interest has been condemned by the
Qur’ān because it jeopardises that ideal. The practice of demanding security
from borrowers while lending is also viewed by many Muslim scholars as
unacceptable. However, even if modern banks are somehow able to get rid of these
important -- though not vital -- tools of operation, banking would still survive
and yet remain almost as unjust as ever before because, as we shall see, unfair
lending is in-built in the nature of its operations.
The following is one of the most unequivocal, though
honest, statements on the lending policy of banks:
...it would be irrational for lenders to be willing to
lend as much to the impecunious as to the rich members of society, or to lend
the same amounts on the same terms to each. (Mishan, E. 1972).
Such an apparently unethical policy statement has not
necessarily been initiated by an unscrupulous mind. It has been prompted by the
fact that banks, like other business enterprises, are more concerned with their
commercial interests and they lay no claim to be regarded as substitutes ‘for
charity houses’ (Ahmad S.M. 1989, 141). An important reason why banks are mostly
prepared to lend to the already prosperous business concerns is that they
believe that it is not their function as lending institutions to find capital
for the customer's business; they believe that the major stake should be that of
the proprietor himself (Mather 1979, 21). Therefore, it is no exaggeration that
it ‘seems to be easier to borrow $5 million from a bank than $50,000’ (Clarke
Aleem, in his attempt to study the rural credit markets in
Pakistan, reports the following:
The chances of getting a loan in [the findings of] our
study were directly related to the amount of land owned ... Thus a farmer owning
more than 100 acres was virtually certain of getting a loan if he wanted one.
At the other end of the scale the chances of a farmer owning less than 12.5
acres ever being able to get a bank loan was less than 50%. (Landless tenant
farmers were not eligible for institutional loans at all). (Aleem 1985, 224).
The criticism on the banking practice that the banks are
hesitant to extend loans to applicants who are unable to present collateral
security is often dismissed by a claim that banks do sometimes lend even without
requiring security. However, even when that is done banks make sure that they
are charging more interest for the higher risk they are taking up. The general
banking principle is:
Where the safety of any advance is unquestioned because
the borrower and/or the security is undoubted, the rate of interest will often
be somewhat lower than that charged for accepting a higher risk or perhaps for
advancing for a less acceptable purpose. (Mather 1979, 18).
This, in other words, means that the more wealthy people
are required to pay lower rate of interest and the less-privileged have to --
because they are not wealthy -- pay more for borrowing from the banks!
The bankers, moreover, do not make any secret of the
principle that even if, on occasions, a wealthy customer requires loan for a
purpose deemed unsuitable by them, it is better to avoid disturbing the valuable
connection ‘or incurring the wrath of a wealthy if turbulent customer, whose
security margin commands respect’ (ibid, 23).
As a natural consequence of the policy of favour for the
rich, the less rich and the poor are ignored and avoided. The same institutions
which offer millions of dollars to the rich are, as a matter of strategy,
extremely weary of those less wealthy salaried officers with slender resources,
for example, who are short at the end of each month and who, therefore, may
start relying upon the bank regularly to make up the deficiencies if no
objections are raised to their excess drawings in the previous months (ibid,
33). Ironically, however, it is these small depositors, at least in case of
commercial banks, whose ‘slender resources’ together accumulate in the bank
vaults to make the huge pool of funds that are later diverted towards the rich.
We now turn to a question which is crucial to the future
of banking in the Islamic societies: If relative richness is not an acceptable
criterion for the disbursement of bank funds, what else is? Most Muslim
economists and bankers devoted to the cause of interest-free banking are quite
convinced that the most predominant, if not the only, principle banks should
follow while lending should be the possibility of efficient employment of funds
(Ahmad, Z. 1991, 46 ) i.e. banks , at the time of lending, instead of looking at
the wealth and security of the applicant, should consider ‘the profit potential
of the concern’ (ibid).
Despite the fact that the efficiency criterion seems to be
much more rational, two questions still remain to be answered before it is
approved as Islamically acceptable as well: Is it possible to apply that
criterion objectively and, even if that is possible, is that principle fair from
the point of view of Islamic teachings?
As regards the first question, it could be claimed that it
is not impossible to devise fairly accurate project evaluation techniques based
on the information supplied by the applicants for funds to find out which of the
projects deserve to be helped by the limited funds available with the banks. In
fact many modern financial institutions do already undergo some form of
objective project evaluation process before finally responding to the
The vital question is whether the most objective of those
criteria could be fair as well from the Islamic point of view. We have to get
clear answers to three important questions before the efficiency criterion is
considered Islamically acceptable: 1) What is the nature of the financial
resources made available by the process of pooling the depositor's funds? 2) On
what principle of social justice should the more efficient be privileged with
additional funds? 3) If the principle of helping the efficient is followed, what
are the possibilities for the slightly less efficient to get funds?
1) Banks are able to pool huge funds as a result of the
fact that people have an inclination to deposit their funds with them for
various reasons. It is quite certain that the depositors are not directly
involved in deciding the avenues their own funds should flow into. The decision
is left in the hands of the bankers. Had the funds belonged to the bankers or
had the depositors been involved in deciding the fate of their funds, few
objections could be raised .
The reality is that the huge banking resources, the way
they are, seem to bear some similarity to the natural resources like water, fire
and grass which belong to the entire community rather than any particular
individual. The Prophet (sws) is reported to have said: ‘All Muslims are
partners in grass, water, and fire’ (See Ahmad Z., 55). He is reported to have
decided the disputes of water distribution on the basis of proximity of land to
the source of water (See Khan, M.A. 1989, 59-61) i.e. the one whose land was the
nearest to it was given the right to use it first and then the second nearest
and so on.
Indeed water is needed for crops like funds for business
projects. In fact, water has never been an abundant resource in the
significantly parched soil of Arabia. But the Prophet (sws) did not distribute
this scarce resource on the basis of efficiency or the area of landholdings of
the farmers. If the analogy of the bank funds with natural resources is to any
degree reasonable, neither the principle of credit-worthiness nor efficiency
would appear acceptable to Islam.
The other analogy suggested to decide the status of bank
funds is that they are like Fay’ i.e. wealth attained by Muslims without effort.
If the analogy is correct -- and indeed it seems to be highly relevant -- then
bank funds should be distributed to the poor and the needy rather than the
wealthy or the efficient because neither of these groups is mentioned by Qur’ān
as deserving any share in the wealth of Fay (See 59:7).
2) If the principle of efficiency is to be implemented
strictly as the sole criterion for distributing funds, it would promote the most
efficient economic agents in the society; they will get abundantly rich while
all others would lag behind. To halt that tendency then would be as difficult as
it is now to narrow the rich-poor gap when the more privileged receive the
lion's share of the finances. It appears to be equally unfair. A few more
attempts to analogise financial funds with some other facilities would
facilitate the understanding of the point I am attempting to make.
If the availability of extra funds is equated with the
availability of educational opportunities, the case for efficiency criteria
appears weak insofar as the weaker students may arguably deserve more attention
than those who are better. If the good students continue to receive better
education that would certainly widen the literacy gap, as would the decision to
fund the more efficient economic agents increase the income disparity. In case
of higher education, however, better students deserve and do normally get more
attention. But can the availability of funds be reasonably equated with higher
If a justifiable comparison can be made between bank
finances to borrowers and training to workers in plants, then, in the latter
case, quite clearly the less capable appear to deserve more attention. Likewise,
they have to learn significantly more to be able to achieve the minimum level of
skills to work effectively. If we compare financial assistance with medical
assistance then, again, the less efficient borrowers deserve more assistance
just as the less healthy and the sick have a stronger claim on the medical
No matter how much we may stretch our imagination in the
pursuit of discovering a comparable case in the real life examples to justify
the efficiency criterion of distributing bank funds, it appears, we will always
encounter difficulties in our attempts.
3) Even if, by some inconceivable way, it is established
that efficiency criterion is a fair principle of distributing bank funds, there
would still remain the unsolved problem of distributing funds strictly in
accordance with that principle. Justice demands that if efficiency is a fair
principle of distributing bank funds, the most efficient borrowers should get as
much more funds as they are efficient and the slightly less efficient should
also receive funds commensurate with their ability and so on. However, this
principle would never be able to be applied because of the enormous
complications involved in the whole operation of finding the respective levels
of abilities of the applicants and distributing funds accordingly. The reason
for such apprehension is that the funds available to financial institutions are
always limited and it is not humanly possible, nor commercially viable, to
divide the available funds into the number of applicants, with each getting
according to ability.
To conclude, it appears that the criterion of efficient
employment of funds proposed by some Muslim economists to be used for
distribution of bank funds cannot be accepted as fair.
It may well be asked that if neither the credit-worthiness
criterion nor the efficiency one is relevant in the context of Islamic teaching,
what else is? The answer to that question is that criteria for distribution of
society’s funds are needed in economies where huge funds are allowed to
accumulate unnecessarily, as is done in modern societies by courtesy of banks.
In a society, where the savings of the people are arranged to be related to the
productive enterprise directly, no criterion will be needed to guide the
economy; the savers will decide for themselves where to invest on the basis of
not just the efficiency criterion, but also such factors as personal contacts
with entrepreneurs, their reputation and popularity, the nature of business
enterprise, its contribution to the ideals of the society etc. In other words,
the task of deciding how resources should be allocated ought to be fulfilled by
the market and not, as Robinson pointed out, ‘by the great corporations who are
in charge of the finance for development’ (Robinson 1977, 1337) in the existing
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Banking; Lahore: Institute of Islamic Culture.
2. Ahmad, Ziauddin (1991); Islam, Poverty and Income
Distribution ; Leicester: The Islamic Foundation.
3. Aleem, Irfan (1985); Information, Uncertainty and rural
Credit Markets in Pakistan; Oxford University; Ph.D.
4. Clarke, William M. (1980); Inside the City: A guide to
London as a financial centre; London: George Allen & Unwin.
5. Galbraith, J.K. (1975); Economics and the Public
Purpose; New York: New American Library.
6. Khan, Muhammad Akram (1989); Economic Teachings of
Prophet Mohammed; Islamabad: International Institute of Islamic Economics.
7. Mather, L.C. (1979); The Lending Banker; London:
Waterlow (London) Limited.
8. Mishan, E.J. (1972); Cost-Benefit Analysis: An
Introduction; London: George Allen & Unwin Ltd.