Granting Facilities in Islamic Banking (Book)

Author: Mehdi Mohammadi

Granting Facilities in Islamic Banking
Book Information
Author	Fatemeh Moghimi'an
Style	Reporting-Analytical, Argumentative Jurisprudence
Language	Persian
Publication Information
Publisher	Khorsandi

• Abstract

Granting Facilities in Islamic Banking (in Persian: 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 as identical to credit sales (Bay' Nasi'ah). According to the author, the maximum service fee rate in loan facilities 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.

Introduction and Structure of the Book

The book "Granting Facilities in Islamic Banking" is the result of research by Fatemeh Moghimi'an, published in Persian by Khorsandi Publications in 2020 (1399 SH). Moghimi'an holds a master's degree in Islamic jurisprudence and law.

This book is organized into three chapters. The first chapter examines participatory contracts in the granted facilities under the Usury-Free Banking Operations Law (p. 19). In the second chapter, the exchange contracts existing in the Usury-Free Banking Operations Law regarding the granting of facilities are examined (p. 59), and the third chapter is dedicated to the loan contract ('Aqd al-Qardh) through which banks grant facilities to applicants (p. 119).

Participatory Contracts

In examining participatory contracts (Uqud Musharakati), the author emphasizes that in these types of contracts, the bank provides the necessary capital to launch an economic activity and shares the resulting profit with the customer. The main characteristic of these contracts is the prohibition of determining a definitive profit before the end of the activity, and only determining the profit ratio between the parties is permissible.

The Mudharabah Contract

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).

Critique of Banking Mudharabah Transactions

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).

Partnership Contracts

Based on this research, "partnership" (Shirkah) in jurisprudence means the joint (Musha') ownership of several people in a property. In the Usury-Free Banking Operations Law as well, "civil partnership" refers to the combination of cash or non-cash partnership shares of natural or legal persons to gain profit based on a contract. In this type of partnership, the bank can enter into a transaction with one or more partners, and the partnership share must be joint; meaning none of the partners owns a specific part of the property, rather all of them are partners in the whole of it (pp. 40–44).

Critique of Banking Participatory Transactions

Some believe that the partnership contract (Aqd al-Musharakah) should be removed from the system of granting facilities. In their view, this type of contract requires precise religious and economic supervision, which is not realized in practice. Either the bank, seemingly and without real supervision, seeks a specific profit, which is incompatible with the nature of partnership; or it must employ expert appraisers for each project, which is beyond the capacity of commercial banks. Also, risks such as a lack of profitability or the provision of unrealistic reports by the customer might cause a loss to the bank (pp. 47–48).

In contrast, another group emphasizes the high importance of participatory contracts and even considers them a suitable alternative to other contracts. Pointing to the flexibility and high capacity of civil partnership, this group believes this contract can have positive performance in banks regarding return and profitability. From their perspective, inserting the "minimum expected profit" in civil partnership can act as an alternative to the "interest rate" in usurious banking and give high maneuvering power to banks (p. 49).

Exchange Contracts

Exchange contracts (Uqud Mubadala'i) are a category of contracts in which a fixed profit rate can be determined, meaning that in exchange contracts, the bank, in return for paying a financial grant, can deduct a fixed and definitive percentage of its profit regularly from the customer's account.

Lease-to-Own Contract

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).

Critique of Banking Lease-to-Own Transactions: According to the researcher, there is little inclination among applicants to receive facilities in the form of a lease-to-own contract. The main reason for this reluctance is the imbalance in the bargaining power of the parties; because the bank, as a capitalist institution, tries to gain the most profit with the least risk, while the other party, namely the customer, due to financial inability, is forced to accept the bank's conditions. This situation has caused unfair conditions to be imposed in the contracts (p. 74):

• The determination of the lessee's violation is placed upon the bank, and the lessee has no right to object.
• The responsibility for any loss, without transgression or negligence (Ta'addi wa Tafrit), is upon the lessee, and the bank determines the amount of the loss.
• The right of cancellation (Haqq al-Faskh) is stripped from the lessee and reserved unilaterally for the bank.
• In case of not paying even one installment, the contract is cancelled and the leased object is taken back.
• All costs of insurance, registration, and the attorney fee (Haqq al-Wikalah) for cancellation are also imposed on the lessee (pp. 75-77).

The Nature of the Lease-to-Own Contract

As quoted by Moghimi'an, one of the most important challenges and criticisms raised regarding the execution of the lease-to-own contract in the banking system is the disagreement over the nature of this contract. Some believe that in the event of a dispute or problem during the execution of the contract, there are no specific rulings and solutions to resolve it. From the perspective of this group, only two clear effects can be identified in this contract: one is the "initial transfer of ownership of the benefit" (Tamlik Ibtida'i Manfa'at) and the other is the "final transfer of ownership of the entity" (Tamlik Naha'i 'Ayn), and its other legal effects are ambiguous and unclear (p. 82). Regarding the nature of this contract, three viewpoints have also been raised. Some consider it merely a lease contract (Aqd al-Ijarah) in which the parties have stipulated that the transfer of ownership of the entity will take place in the future. Another group believes this contract is, in truth, a kind of sale (Bay'), and the lease is merely a cover for paying the transaction price in installments. The third viewpoint considers this contract a kind of independent and specific contract that is not a combination of lease and sale. Nevertheless, Moghimi'an considers the correct view to be that very first assumption and believes the main nature of this contract is a lease (p. 84).

Reward Contract (Ju'alah)

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).

Installment Sale Contract

In the author's belief, installment sale is a new phrase for an old transaction, because it is a type of credit sale (Bay' Nasi'ah) where the sold object (Mabi') is sold now and all or a portion of the price (Thaman) is paid later in known installments and over a specified period. It is clear that the price of a credit-sold object is higher than a sold object that is sold in cash; this contract is considered one of the most widely used facilities in the banking facility granting system (pp. 102-106).

Critique of Installment Sale Transactions in the Banking System: From the perspective of this research, the rate of installment sale (credit) could, due to two characteristics—the profit being known and its being definitive—be introduced as the best alternative to the interest rate. However, determining the installment sale rate in practice based on the interest rate has seriously challenged this optimism (p. 109). According to the executive directive for housing installment sales, banks are obligated to receive an amount as a down payment in cash before the contract, whereas before the contract, an advance receipt will have no relation to a transaction that will be carried out later (p. 110).

Forward Sale (Bay' Salaf)

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).

Loan Contract (Aqd al-Qardh)

According to the author's statements, stipulating a benefit (Naf') in a loan (Qardh) is considered usury (Riba), and the condition of excess, whether mentioned in the contract or stated implicitly within it, is usury and forbidden (Haram), and it makes no difference whether the excess is an entity ('Ayn), a benefit (Manfa'at), or an attribute (Sifah); in any case, it is usury and forbidden. The distinguishing point in this contract is that the capital in a loan is always circulating and, through this contract, is placed in the hands of someone who needs it (pp. 124 and 120).

Critique of Loan Transactions in the Banking System: A considerable volume of the author's material is dedicated to critiquing the performance of banks in granting interest-free loan (Qardh al-Hasanah) facilities. The author believes that in many cases, the service fees received by banks exceed the real cost of the services; while according to the Usury-Free Banking Operations Law, costs must be calculated precisely and separately. Also, despite the determination of a customary fee rate between 2 to 4 percent by the Money and Credit Council, some banks receive up to 26 percent; an issue that some jurists consider an instance of usury (pp. 132 and 133).

The author also criticizes the lack of transparency in announcing the amount of the service fee and writes that in many cases, banks do not announce the exact amount of the fee before concluding the contract. This matter, since there is a possibility of the applicant withdrawing if informed of a high fee, conflicts with the principle of the parties' consent and leads to a contract involving risk/uncertainty (Aqd-e Gharari) (p. 133). Receiving a late payment penalty is also lacking a religious foundation in the author's view; because this penalty is considered a kind of discretionary punishment (Ta'zir), the determination of which is solely at the discretion of the religious ruler (Hakim al-Shar'), and its funds must be allocated to the public treasury (Bayt al-Mal), not deposited into the banks' accounts (p. 133).

Subsequently, the author points to other flaws such as the incomplete allocation of interest-free loan resources, the condition of opening an account and blocking a part of the deposit, deceptive advertisements with prizes, and strictness in granting loans to needy strata, and considers them contrary to the spirit of usury-free banking (pp. 131–136).