Granting Facilities in Islamic Banking (Book): Difference between revisions

'''Granting Facilities in Islamic Banking''' (اعطای تسهیلات در بانکداری اسلامی) is a Persian book in the field of [[economic jurisprudence]] (Fiqh al-Iqtisadi). According to Fatemeh Moghimi'an, the author of the book, the main characteristic of participatory contracts (Uqud Musharakati) is the prohibition of determining a definitive profit before the completion of the economic activity. In a sleeping partnership contract ('Aqd al-Mudharabah), the loss resulting from trade will be borne by both parties, and unfortunately, bank operators are aware of the fictitious nature of the Mudharabah but pay no attention to its validity and religious compliance (Shar'i).  

In the author's belief, in a partnership contract ('Aqd al-Shirkah), the partnership share (Sahm al-Shirkah) must be joint (Musha'). In exchange contracts (Uqud Mubadala'i), the profit rate can be determined as definitive and fixed. She states that in lease-to-own (Ijarah bi-Shart al-Tamlik), banks have placed the determination of the lessee's violations upon the banks themselves, which does not seem logical and fair. She calls reward contracts (Ju'alah) the "Mother of Contracts" (Umm al-'Uqud) and states that the legal relations in a Ju'alah contract are very complex; she also considers installment sales (Farush-e Aqsati) as identical to credit sales (Bay' Nasi'ah). According to the author, the maximum service fee rate in loan facilities (Tashilat-e Qardh) is 4 percent, but some banks charge a fee of up to 26 percent. Taking late payment penalties (Jarimah Ta'khir Ta'diyah), which is a discretionary punishment (Ta'zir) for capable debtors, is considered among other flaws of loan facilities.

In the discussion of sleeping partnership (Mudharabah), the author considers it a revocable contract (Aqd Ja'iz) in which the capital is from one side and the labor from the other, and the potential profit is divided between them. Mudharabah in banking operations is implemented in such a way that the bank is the investor and the customer is the agent (Amil); the agent receives the capital, buys goods, and after selling, pays the agreed-upon profit to the bank (pp. 23–27). Among the characteristics of Mudharabah is its commutative (Mu'awwad) nature; meaning the agent provides a service, and in case of realizing a profit, the owner also has a share. However, this profit is not definitive, and in the absence of profit, the agent does not receive a substitute ('Iwadh). Also, the condition of determining a specific profit or absolving the owner from liability for loss is incompatible with the essence of the Mudharabah contract (pp. 24–26).

The flaws related to banking transactions in the field of granting facilities based on Mudharabah have several parts, and an attempt is made to address the most important of these flaws.  

* The fictitious nature of the transactions: In the author's view, the first flaw in banking Mudharabahs is the fictitious (Suri) nature of many of these contracts; meaning their signing is not done based on the real intention (Qasd) of the parties. In most cases, the recipients of the facilities act merely to supply temporary financial needs and not to execute a real Mudharabah. Bank operators are also sometimes aware of this intention but overlook it. This is while the religious validity of the contract depends on the true intention of the parties (p. 31). If the borrower, without the intention of Mudharabah, acts merely to receive funds and repay them with an added amount, this act is considered usury (Riba); because the legitimacy of Mudharabah depends on its actual realization and not just the apparent signing of the contract (p. 31).

* Determining definitive profit: The author considers one of the important flaws in the execution of banking Mudharabahs to be the determination of a definitive profit. According to the directive, the bank must insert the minimum and maximum expected profit into the contract according to the resolution of the Money and Credit Council, whereas the real estimation of profit must be done based on multiple factors such as the customer's experience, the type and price of goods, the duration of the sale, and the amount of capital. However, in practice, banks at the time of settlement only suffice with the minimum determined profit (p. 34). Also, although the predicted profit varies within a range, determining a specific percentage as the bank's minimum share in the contract can cause the Mudharabah to distance itself from its real and religious form (pp. 33-35).

* Imposing loss on the customer: Banks, contrary to the principle of sharing in profit and loss in the Mudharabah contract, take a commitment from the agent to compensate for all the loss and receive heavy collaterals to guarantee it. This unilateral condition is incompatible with the participatory nature of Mudharabah. Although it is not problematic in the case of the agent's real consent, borrowers usually have no choice but to accept this condition (p. 36).

* Imposing insurance costs on the recipients of facilities: While according to the executive directive of Mudharabah, the insurance cost is upon the bank, the lack of initial investigation into the readiness of the conditions for concluding the contract, and the inexactness of the real duration required in the Mudharabah contract, are among other flaws directed at the usury-free banking system (pp. 32-38).

Based on the author's viewpoint, one of the most important contracts used by banks for granting facilities is the lease-to-own contract (Aqd Ijarah bi-Shart al-Tamlik or Leasing). In this contract, it is stipulated that the lessee becomes the owner of the leased object at the end of the lease period and upon adherence to the provisions of the contract. Although the main goal of this contract is the development of service, agricultural, industrial, and mining activities, banks often apply it in the housing sector. The determination of the rent (Mal al-Ijarah) is also based on the cost price, the bank's expected profit, and the duration of the lease, and the duration of the lease must not exceed the useful life of the leased object (pp. 68-72).

Based on the author's findings, reward (Ju'alah) is one of the deep-rooted institutions in Islamic jurisprudence and civil law, by virtue of which the rewarder (Ja'il or employer) commits to paying a specific amount (Ju'l) in exchange for the performance of a specific act. Banks in the usury-free banking system can, in the form of a Ju'alah, provide the necessary economic facilities as the agent (Amil) or, when necessary ('Ind al-Iqtida'), as the rewarder (pp. 85 and 90). Ju'alah, due to its applicability in all economic sectors, can be a complement or alternative to Mudharabah, which is exclusively applied in the field of trade. The breadth of subjects that can be encompassed and the ease of the conditions of this contract have caused some to refer to it as the "Mother of Contracts" (Umm al-'Uqud); because any act that is considered valuable from the perspective of rational people ('Uqala) can be the subject of a Ju'alah contract (p. 85).

'''Critique of Banking Ju'alah Transactions:''' Relying on the author's discussions, the granting of facilities in the form of Ju'alah by banks faces numerous flaws and shortcomings, some of the most important of which are mentioned in this section. First, the legal relations existing in the Ju'alah contract are very complex and intertwined, such that even for individuals familiar with legal concepts, a correct understanding of these relations is not easily possible; while the general public, who often constitute the applicants for these facilities, lack the necessary awareness to precisely understand these relations. Since the realization of the intention (Qasd) and will (Iradah) of the parties is a condition for the validity of any contract, and this matter depends on being aware of the provisions and subject of the contract, it is clear that in such a complex structure, the realization of the creative intention (Qasd Insha'i) is difficult and, consequently, the possibility of the contract being void (Batil) also exists (p. 95).

Another flaw is that based on jurisprudential and legal rules, the determination of the reward amount is upon the rewarder (employer); but in the current banking system, the bank appears in the position of the agent while at the same time determining the reward amount itself, which is incompatible with the legal structure of Ju'alah (p. 99). Also, the method of banks gaining profit through the difference between two Ju'alah contracts—one in the position of the agent in the primary contract and the other in the position of the rewarder in the secondary contract—is based on the difference in the reward price between these two contracts. This method of gaining profit, from a jurisprudential and ethical perspective, is not considered a proper method for securing banking interests (p. 96).

The researcher introduces forward sale (Bay' Salaf or Salam) as the opposite of credit sale (Nasi'ah), and in this regard says, a forward sale is buying a fungible entity (Kulli) with a term, in exchange for a cash price, contrary to credit sale, and the subject of the forward sale transaction consists of the cash advance purchase of products from production units in the industrial, mining, or agricultural sectors (pp. 112 and 114).  

'''The Problem with Salaf Transactions in the Banking System:''' Despite the positive effects that the Salaf contract has on the economy and in aiding producers, in practice, banks do not greatly welcome concluding this contract for various reasons. Among these reasons are: paying the entire price of the sold object before receiving the sold object might not be economically viable, the market for the goods might not be in the bank's favor in the future, there is a possibility that the goods are perishable, and banks must pay costs such as warehousing and insurance (p. 117).