There are several opinions on whether Islamic banking is truly Halal or not? There is a lot of difference in opinion on the financial instruments as summarised and detailed between the muftis as well when it comes to Islamic finance but you can always find a safe way in sha ALLAH.
For those who declare Islamic Banking Halal
Those in favor of this opinion rate Islamic Banking typically a different model of banking compared to Conventional Banking. The main point is that Islamic Banking and Conventional banking are two different things, one should not confuse the interest earnings by the bank with the profits they earn through their trade activities. Hence, to them it is Halal.
Islamic banking is purely halal banking and certified by mufityan deen so no questions about their authenticity and halaal
Islamic banking vs conventional banking: It is more about the Process
There is no need to define conventional banking. The concept of paper money was an innovation in the society and now that it prevails qualified muftis etc have studied this for years to differentiate the fundamental concepts as described in Islamic law against conventional laws of finance that are predominantly haram. Just because the end result is similar has got nothing to do with the methodology. You can make money in gambling and you can make money by trade. One is haram. One is halal.
How’s buying a car at interest/lease/Ijara from an Islamic bank different from buying it from other commercial banks, when you pay the extra amount at both banks? There is a huge difference between the two. The truth lies in the process. Just like you don’t eat chicken abroad but when you see a halal certificate you eat it. It has to do with the process. In terms of process, there is a huge difference. Also, how Nikkah papers are not just ceremonial and a contract that disavows Zina and makes sex halal. What is the difference between a wife and a girlfriend? Just a “contract “ (Nikkah nama) makes the girl halal for you. In Islamic banking, usually, a process has been defined as Islamic Banking whereas in any conventional bank it is not.
It’s sad to see people having such a negative opinion about Islamic Banking just because they are unable to see a physical difference in the transaction. Remember that a steak made of Halal cow meat and a Haram dead cow meat looks the same once cooked. But it’s the crux/intention/context/process behind the steak that makes it Halal or Haram.
The Two Basic Sides of Banking Transactions
About the Process – there is a fine line. For instance, a conventional bank provides financing to its clients by giving them interest-based loans whereas an Islamic bank provides financing to its client based on profit-based financing such as Murabaha, Ijarah, Salam, Istisna etc.
Let us discover:
Car on Installments Case Study
When you buy a car using equity-based ‘Murabaha Financing’ the bank buys that car for you, adds its profit*, and sells you the car in installments. *The profit earned here is not interest because it was not earned by lending money rather it was earned by selling you an asset. Ijarah is also a trade-based activity, the bank buys the asset and leases it to the client, and at the end of the lease period, the ownership is transferred. Correct me if I’m wrong, but in diminished “musharakah” the bank and client jointly own the asset and the client then buys the share of the Bank. These are the main three types of Islamic banking.
What is Islamic banking in Pakistan
Basically, factor in the importance of Islamic banking encourages a Profit and Loss sharing model in which both parties (Customer and Bank) take benefit and bear the loss together. Conventional gives you money to buy a car and charge interest on money whereas Islamic bank gives you a car and charges rent on the car. For example: If you have a car value of 20K and you want to sell it for 25k to someone saying you can pay anytime but you have to pay 25k and you signed a contract then 5k is your profit it is not Mortgage. But if you say you have to pay 25k on extra you have to pay me some percent or some amount on top of it, that’s not allowed. In the contract which you are signing with the bank if it defines any term like Mortgage or late fee on missing payment then it’s not allowed in Islam. If they are saying you have to pay a fixed amount without any time restrictions and an extra amount what you have defined on a contract then it’s allowed.
Profit and loss are equally shared in Islamic banking
Islamic finance transactions are based on the concept of sharing risk and reward between the investor and the user of funds. For example, in conventional banking, the premium paid by the Customer is lost in case of an accident, and the car is completely destroyed whereas, in Islamic banking, both banks and Customers share the loss and a certain amount is refunded back to the Customer after settlement. This is just one difference, there are many other differences.
What makes it halaal or haram is the “Contract”, wordings are important,
Concepts and instruments are Islamic. The issue is about their application. Usually, Islamic banks are applying them for their own profit.
Being a finance professional had come across a scenario in a listed company where the bank was sharing a profit under the Musharika agreement but when the company registered a loss bank asked to change the formula.
It’s not about names and terms they are using. It’s all about the concepts and practices they implement.
Islamic Banking is Haram
Firstly the term. Calling anything Islamic means it comes from Islam. And Islam was completed by the prophet Muhammad ﷺ.
Now there will be people who say that’s because it is within the bounds of Islam that’s why it’s called Islamic. Which doesn’t make sense, because if we take anything that was never approved by Islam and add Islamic elements to it, it shall not work. Like doing a robbery after performing ablution would still be haram.
