Studying Islam

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[quote]Raushan,

I feel, after a little deliberation I have done on this subject, that Charging a predetermined, fixed, rate of return, in a given time, on a loan.....

means that the borrower is forced to assume:

i) a risk which is additional to the natural risk of the business he is doing (incase of a commercial loan)

ii) a risk which is additional to the natural risk of not being able to recover the money which he borrowed for his consumption (incase of a consumer loan)

this is called financial risk in Finance. Now this risk (uncertainty/resultant variation in the earnings) is what is exploitative according to Islam. There can be following criticism on what i wrote:

1) How is it 'exploitative', when the transaction happens with mutual consent and at a competitive rate? My thoughts are that same can be said of prostitution, its a transaction of mutual consent, happens a competitive rate, still we consider it worng.

2) Incase of commercial loan, one can do a business of larger size by taking a loan, so whats wrong with it? Yes, but it can be shown statistically that chances of default increases as uncertainity rises.

Current efforts of Islamic Banking in Pakistan atleast have been mostly (approx. 80% of times) relying upon Murabaha Financing. It is basically a credit sale where a physical asset is first bought by a bank at certain price and then sold at a markup which is predetermined, fixed, and linked with time. So firstly Murabaha doesnt solve the problem. Secondly, it is very very easy to fool this system by showing a 'ghost' asset in papers submitted to the bank, so that the transaction would become exactly identical to a loan transaction. Through my experience with an Islamic Bank here, I can confidently say it can happen quite frequently!

So the subject still requires a lot of research to come up with products which are more in conformance with Islamic Law.[/quote]

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