Use of Benchmarking Islamic Commerce Transactions to Interest Rates

Guest Post by Muhammad Rizwan-ul Haque
Chairman, Dawood Family Takaful / Director of a Trust and S.E.V.P. at an Investment Bank

The theory of Islamic banking & finance was introduced about four to five decades ago and as per this theory; the transactions can be benched-marked to prevailing ‘interest rate’ in the country. The argument in its support is that ‘interest rate’ is a mere number and Islamic finance transactions are only being pegged to this rate to access the future price. Thus the transaction in itself is Shariah complaint, because necessary documents have been executed; which signifies that it is a trading deal and not an interest bearing transaction. Further, this process is being endorsed by Shariah scholars.

Financing Vehicle

Same school of thought is of the opinion that Islamic finance is a vehicle or a Shariah complaint procedure to carry-out a trading deal and it purifies the transaction from element of Riba primarily with the execution of a few documents.

Message of Allah SWT and Prophet S.A.W

However, we were given a message 1,500 years ago that Riba is forbidden and there is no reference in Quran that a trading transaction can be benched-marked to ‘interest’. Nor, there is any evidence in Sunnah, where the then prevailing interest rate(s) were being used to benchmark trading transactions.

Ijitihad, Fatwa or a Heela

In view of the above, we may say that Islamic financial system, which is being practiced today is more of a heela with a view to find an alternate way of doing banking etc. However, with trial & error, we have learned that there is no apparent difference between the two types of system.

Riba and Trading

The meaning of Riba is; increase, growth, swell etc and we all know that it is only; ‘interest’, which keeps on; increasing or growing. While, trading is different from Riba (or interest), as commodity prices fluctuate. So much so that a trader may suffer a loss on his principal sum, but whilst benchmarking a deal to ‘interest rate’; the principal gets secured and one earns over and above the principal amount.

Surah-e-Baqra Verse No.275

It is in view of the above that Allah SWT has vehemently forbidden Riba (or interest) and has permitted trading to maintain equilibrium in societies.

A New Lease of Life to ‘Interest’

In view of the above, it is visible that through Islamic finance transactions and benchmarking, we are giving new lease of life to ‘interest’ bearing transactions and despite being a forbidden element, ‘interest’ has been accepted in our daily lives, as a Shariah complaint factor

Why Benchmarking Is Vital For Banks?

Benchmarking to interest rate is essence of any sort of banking system, including Islamic financial institutions. If future price of a commodity is not available through the courtesy of ‘interest rates’, then bank will have to take the risk on actual commodity prices in which they are deal in. Since, they will be exposed to business risk, therefore they will not freely indulge in commodity transactions. It means that with the removal of benchmarking to ‘interest’, there may not be any incentive to set-up an Islamic bank.

Interest Rate

Brothers & sisters, today we are setting-up Islamic financial institutions only because we know that we will be able to sell (or place depositors’ money) all sorts of commodities at a profit on a future date, because of acceptability or permission to deal in ‘interest’.

Commodity Trading

If Islamic banks intend to execute a pure Shariah complaint transaction, then they should benchmark with actual price of a commodity in which a deal is being executed. Otherwise, we are playing a game to deceive ourselves and keeping a blind eye towards Riba. The option to undertake a trading transaction in actual commodities will carry following risks for banks; i.e. (i) whether, it will be able to ‘sell’ the commodity (ii) whether, it will be able to sell at a ‘profit’; as demand & supply factor will also come into play. This is the reason that Allah SWT has clearly differentiated Riba from trading.

Surah-e-Baqra – 279

We must give heed to commandment of Allah SWT and should not involve ‘interest’ or Riba in any Islamic finance transactions (i.e. not even for benchmarking purposes), because we may be inviting a notice of declaration of war from HIMSELF and Prophet Muhammad S.A.W.

What is Carved in Stone?

Neither Fatwa nor Ijtihad is carved in stone; the only thing which is carved in stone is Quran & Sunnah. Therefore, after witnessing the limitation of manmade theories on benchmarking etc, we have to rethink in the light of Quran & Sunnah and also in light of what is happening in various (global) economies. To understand the menace of; debt, interest and banking; including Islamic banking. We need to think beyond this ordinary system and not only superficially circumvent the issue of Riba by ‘executing a few additional documents’. In fact, we need to understand that why, Allah SWT has forbidden Riba and how economic woes including; unemployment, poverty, inflation etc can be eradicated from the system and how social evils like; theft, kidnapping, murder and terrorism can be controlled to restructure societies based on basic lesson of Islam i.e. ‘equality & justice’.

In the end, I would humbly refer to a verse in Surah-e-Ale-Imran, where Allah SWT says; ‘O Listener! This is the truth from your Lord; be not therefore of doubters. (3-60).

May Allah SWT guide us all to see, what HE is trying to show to us (Ameen).