Since its inception, Islamic finance has been soaring at remarkable growth (Shaikh, 2019). The Islamic banking (IB)industry was estimated to exceed 2 trillion dollars in assets as of 2019, and this amount is expected to increase further.  As a result, Islamic banks and finance have become one of the fastest-growing industries. Islamic financial institutions have been set-up in all parts of the world and are widely accepted by Muslims and non-Muslims (Iqbal & Molyneux, 2005).  

Islamic banks or Sharia-compliant banking refer to a banking system that operates according to the principles of the Shariah (Islamic law). Essentially, an Islamic bank operates based on two fundamental principles: (1) profit and loss sharing and (2) the prohibition of collecting and paying interest by lenders and investors.

Several studies have shown that Islamic banks are different from traditional banks, not only in how they operate but also in the values and principles that guide their functions generally. Shariah values are expressed not only in the number of their practices but also in the breadth of their role in realizing the shariah standards in all their operations. Indeed, Islam recognizes and promotes business activities. Engaging in business is considered ibadah in Islam, and this shows the importance given to business ventures in Islam such as startups, sole proprietorship, partnership, and companies  It shows the essence of engaging in business ventures. However, this is true when business activities are conducted in ways that conform to the doctrines of Shariah.

IB transactions on the outside seem to be similar to that of their conventional counterparts. And this has led to a common fallacy that IB operations are identical to Conventional banking. These similarities give people the impression that Islamic finance is a smokescreen and nothing but interest-based banking. Additionally, there is a huge misconception among the masses that profit and interest are the same, but this is far from the truth. Reasons being that Islamic finance is different in spirit, form, and substance. To understand the differences, first, it is essential to know what riba is from the Shariah, and how it is earned or given out by a conventional bank? Also, what is the definition of profit, and how is it extended to customers?

Scholars defined Riba as “a predetermined excess or surplus over and above the loan received by the creditor conditionally concerning a specified period.” By this definition, riba/interestmust contain three elements:1. Excess or surplus over and above the loan capital 2. determination of this surplus concerning time. 3. thestipulation of this surplus in the loan agreement.

Prohibition of Riba in the Quran.

1. “And whatever riba you give so that it may increase in the wealth of the people, it does not increase with Allah.“ [Surah Ar-Rum 30:39]

2. “O you who have to believe! Do not consume interest,doubled and multiplied; but fear Allah; that you may (really) prosper.” [Surah Al-e-Imran 3- 130]

Difference Between Interest and Profit.

Profit is defined as the amount of money added to the cost of a product or service. This excess amount is called the profit margin. Profit is earned after all expenses have been paid and all overheads have been settled. (Abdullah, 2010) in one of his assertions contended that the excess amount in the form of profit is a reward to traders for time, wealth, and effort spent. In contrast, interest is generally not added to the cost of the product but on a loan amount without any effort. Thus, Interest and mark-up (profit) considerably differ in the way both are earned. Earning profits involve engaging in business and investment in real economic activity, in that effect, the economy too can be affected. When one is involved in a business venture, investment, or trade, he/she takes a substantial amount of risk to satisfy the demands of the people. This is in line with Islamic principles of “Alghunun Bilghurum” (earning profit is legitimized only by risk-sharing and engaging in economic activity) and “Alkhiraj Biddamaan” (gain accompanies liability for loss). However, lending money for excess in return does not involve real economic activities. In a nutshell, Profit is earned by investing labor, effort, and resources, whereas interest is earned without the participation of creditors in the process of production and distribution.

Table 1: Difference between Profit and Riba, El-Gawady, Z. M. (2004).

No.ProfitInterest (Riba)
1By definition, profit is the difference between the value of production and the cost of production.By definition, Riba is the extra amount paid by the borrower to the lender on top of the principal as a condition for the loan.
2When money is used in trading (for example), thethe uncertain result is profit.When money is “charged” on a loan, the result is Riba.
3Profit is post-determined, and hence thethe amount is not known until the activity is done.Riba is prefixed, and hence there is nouncertainty on the part of either the givers or the takers of loan
4Profit can be positive, zero, or even negative (i.e., Loss)Riba cannot be negative. It can at least be very low or zero.
5From an Islamic Shariah perspective, profit is permissible.From the Shariah point of view, interest is impermissible.

Modus operandi of conventional loans

Hypothetically, Sheikh wants a personal loan of D50,000 to start a business, and he approaches a bank and requests financing. The first thing the bank does is underwriting. Underwriting or appraisal is the process of evaluating whether the said customer can pay back the loan and ascertaining the customer’s risk of default. Banks use different procedures in appraising. Some banks use the 5Cs, which are Character, Capacity, Capital, Conditions, and Collateral. The said customer will be avail loan once he meets these conditions. But how is this calculated?

In our case, the Principal amount is 50,000, interest rate 9%, and payment period 12 months.

I = prt= 50,000*0.09*1 = D4500. At the end of 12 months, Sheikh will have to pay D54,500. These bring us to the definition of riba. As mentioned earlier that any excess or surplus over and above the loan capital constitutes riba. It is the case because extra money (D4500) is being added to the principal amount (D50,000) without any real economic activities happening – meaning no good was sold. In the event where Sheikh defaults or his startup fails, the conventional bank does not care. The principal amount plus interest is still payable. The bank would not consider why the business fails or what economic or natural factors led to the failure. This practice is tantamount to exploitation and enriching oneself without any activity. This kind of financing is against the Islamic principle of Alghunun Bilghurum – earning profit is legitimized only by risk-sharing and engaging in economic activity. In essence, interest is when money is being used as a commodity to gain a benefit or earn an extra amount in return. However, when it comes to IFIs, there is profit and loss sharing. Contracts such as mudaraba and musharaka are profit and loss sharing ventures where real economic activities take place. For instance, Mudaraba is a form of a business contract in which one party provides capital, and the other party offers personal skills/techniques. The percentage share in profit is determined through mutual agreement and must be in ratio but not in a lump sum. The financier is known as rabbul-mal and the entrepreneur as mudarib. In the event of loss, the financier bears all the loses, and the entrepreneur loses his time and effort. Nevertheless, in the event of negligence, the entrepreneur will be liable. Therefore, one may attribute the misrepresentation of Islamic banking to ignorance of Islamic finance principles and their applications in modern-day banking or as a way of triggering some degree of distrust among the public.  

Modus operandi of Islamic bank loans.

If Sheikh goes to an Islamic bank for financing, there will be a similar procedure to a conventional loan. He will first go through appraisal before he is giving the financing benefit. How does it work? No Islamic bank will extend financing by just giving you money without an underlying asset involved. The financier will purchase a commodity from the market worth D50,000, thereby taking the risk of ownership, and subsequently, sell that commodity to the customer at cost plus profit (MURABAHA). What this means is one gets profit through engaging in trade or investment. But not extra money charged on top of a loan, which is precisely the conventional approach. In the case of commodity Murabaha (Tawarruq), the customer may appoint the bank or another party as an agent to sell that commodity on his behalf. After selling the commodity, only then the amount will be transferred to the customer’s account. The practical example is as follows.

Bank buys a commodity worth D50,000 and sells it at a mark-up (that is cost plus profit) to customer D54000, payable in 12 months, the bank makes D4000 for selling the commodity. The Islamic contracts that can be used for this transaction could either be Murabaha (cost + profit) and tawarruq (commodity Murabaha).

This Brings to Mind the Question of How Islamic Are Islamic Financial Institutions in The Gambia

Primarily, most of the employees at our Islamic finance institutions (IFIs) are conventional graduates, only a few are versed in IB and its fundamental principles. In such a scenario, the questions that come to mind may include: How would such employees explain to their customers what the various IBcontracts are? how does it diverge from the traditional banking system? what are the various products offered? what product is most suitable for the need of a specific customer? It is important to highlight that Islamic banks have different products, and these products are structured to meet the needs of different customers. For example, home financing, car financing, personal financing, and short-term financing. However, these products should be aligned with the ideal and most suitable contract. For example, for short-term financing or debt financing, the most suitable contract would be Murabaha. Salam contract for agriculturalpurposes/financing, Istisna for manufacturing and constructionpurposes such as buildings, roads, schools, Musharaka or/andMudaraba for partnership ventures and SMEs. Every bank has a product development department, how does one develop products and structure them to meet the needs of the public if one does not know the contracts. All these need to be understood and examined.

Secondly, we need to understand how Islamic banks advance their financing, what contract is used, and the products offered. The most prominent product used by our Islamic banks in extending finances is MURABAHA be it short-term or long-term debt. Murabaha is cost plus profit, that is selling something at a mark-up. This is acceptable in Islam because it is a form of Trade. Allah (SWT) has said in Sura Al Baqarah, V. 275:

“……this is because they say: “Trade is like interest” while God has permitted trade and forbidden interest……….” (275).

To extend financing, an Islamic bank should take part in al bay (trade) that is buying and selling of goods. It is permissible for Islamic banks to buy goods and sell them at a markup price to make a profit. One should also understand that Islamic banks are not charitable organizations and are entitled to make a profit, but how the profit is made is what matters.

Is this how Islamic Financial Institutions extend financing in the Gambia?

This might be the case on paper, but in practice, testimonies and material shreds of evidence say otherwise. The information gathered from stakeholders’ states that Islamic banks in the Gambia advance their financing similar to conventional loans. In most instances, their primary focus is on the appraisal and the availability of loan guarantor(s) to minimize risk and not necessarily applying the Islamic finance contracts’ principles to the letter. This could indicate that they are not practicing as per shariah and are defying the principles on which Islamic banks are founded (justice, equity, and fairness). Secondly, Islamic banks are known to be involved in real economic activities, but the practices of Islamic banks in the Gambia dictate otherwise.Another important factor that needs to be looked at is the payment/charges of late payments or default. In IB, you cannot charge an extra amount for default because this is tantamount to riba, and it is unearned money. So, how do our Islamic banks deal with this problem of default? Do they charge late payment, and, in the event, these charges are made, are they accounted for as gain for the bank, or are they channel to charity? if accounted as gain what percentage is taken as compensation and what percentage is channeled to charity? Islamic banks are permitted to charge late payment charges, but junk of the money should bechanneled to charity and in other jurisdictions, 1% (BNM) of it is accounted for as compensation for the bank. Is this the practice of our Islamic banks?

In conclusion. Based on testimonies, it seems IFIs in the Gambiaare violating some aspects of the shariah especially the principle of profit and loss sharing, but why? Well, while some argued that they need to be competitive to stay in business, others claimed that that the IB industry is still in its early stage. Yes! these arguments may sound logical, but! it does not give any Islamic financial institution the right to be involved in a transaction that is against the doctrines of shariah. The shariah boards of these IFIs and the shariah committee of the central bank of the Gambia (if there is any) have a role in ensuring that Islamic financial institutions are not applying un-Islamic practices at all stages of their transactions including the interbank money transfers with conventional banks which are interest-based. They have to closely monitor and scrutinize them and even threaten to strip them of their license if they fail to be a shariah complaint. Among the forbidden elements in Islamic finance is (Jahl), which is translated as taking advantage of people’s ignorance, and certainly, this is what some IFIs are doing in the Gambia. They sometimes tend to label or give products Islamic tags just to manipulate the ignorance, because our people tend to follow whatever has Islamic connotations.

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