Islamic banking and recession

I very well am aware that its too late to touch this issue as for now recession seems to have subsided from the present scenario.It was recession due to which several financial institutions had become insolvent,with  the US economy as the most affected one.Now, recession can be defined as a  negative growth or a decrease of more than 10% in the GDP of a country for more than one consecutive quarter of a year.In economics,it refers to a general slow down in the economic activities of a country over a sustained period of time or a business cycle contraction.While analysing recession in terms of its causes,it can be consumer debt,low consumer confidence,inflation, over-valuation of assets,large scale  unemployment and the most crucial of all that is high interest rates,that can lead to an economic recession.

The cause of  recession was the advancement of loans by the banks to people who are not very strong financially.These loans were later converted into bonds and sold to the investors in open market.Later,when the interest rates hiked,repayment of loans became difficult for the people and the loans were defaulted.Hence,the investors lost their money and ultimately the banks crashed and its aftermath is Recession.In this situation,the Federal reserve could not reduce interest rates and the condition perpetually deteriorated.Therefore,interest was the major reason of this recession.So,I say that why not cut off this interest and implement the Islamic Banking System to facilitate recovery.

The literal meaning of interest or Al-RIBA as it is used in the Arabic language means excess or increase.In,other words “Riba` is a loan with the condition that the borrower will return to the lender more than and better than the quantity borrowed.”Hence,all this is considered ‘Haram’ i.e. forbidden in Islam.While elimination of “Riba” or interest in all its forms is an important feature of the Islamic financial system, Islamic banking is much more.In essence, it aims to eliminate exploitation and to establish a just society by the application of the Shari’ah or Islamic law to the operations of banks and other financial institutions.Islamic finance may be viewed as a form of ethical investing, or ethical lending, except that no loans are possible unless they are interest-free.Albeit,the western media frequently suggest that Islamic banking in its present form is a recent phenomenon, in fact, the basic practices and principles date back to the early part of the seventh century.

Muslim theoreticians and bankers have between them devised ingenious ways of coping with the interest problem. One is Murabaha. The Qur’an says you cannot borrow $100m from the bank for a year, at 5% interest, to buy the new machinery your factory needs? Fine. You get the bank to buy the machinery for you — cost, $100m — and then you buy the stuff from the bank, paying it $105m a year from now. The difference is that the extra $5m is not interest on loan, which the Qur’an (perhaps) forbids, but your thanks to the bank for the risk it takes of losing money while it is the owner of the machinery: this is honest trading, okay with the Qur’an.The main forms of Lending in IBS are: a) Loans with a service charge where the bank lends money without interest but they cover their expenses by levying a service charge. This charge may be subject to a maximum set by the authorities. b) No-cost loans where each bank is expected to set aside a part of their funds to grant no-cost loans to needy persons such as small farmers, entrepreneurs, producers, etc. and to needy consumers. c) Overdrafts also are to be provided, subject to a certain maximum, free of charge.

While consistency and sustainability are the foundation to the Islamic banking system, the proof is in the fact that the market meltdown did not take the system down with it. A sustainable growth was witnessed in the system and subject to which, 27 Muslim and 15 non-Muslim nations invited the Islamic banks in hopes of getting sustainability in their financial sector.Islamic Banking system withstood so much of the turmoil that infected other banking systems due to the following factors.The pragmatic interest policy in the Islamic financial system was one of the major factors attracting the affluent investors of Arab, which gave the system a strong base.The internal wealth became the platform to the Islamic Finance, and gathered enough interest and support to sustain the current condition found in the world economies today.The system is transparent, which helps risk-taking and profit-sharing among all, which in turn guides the market in a better direction.

So,Islam definitely has the solution to the problems of the West.


7 thoughts on “Islamic banking and recession

  1. salamalaikum salman bhai………….wishing u a vry happy birthday……nd may u achieve ur goals succesfully…….nd wer r u jeddah or london

  2. I have to disagree with you. American banks failed because of greed and dishonesty, and not just because of interest rates. In Islamic banking there is no interest, but at the end of the day you have to pay more to the bank than the initial amount. It’s the same thing just not called “interest”.

    You would need to research and show us why Islamic banking would work even if it’s not regulated and how it roots out the problems of greed and corrupt bankers.

    Your analysis is incomplete.

    • Mr. Ninad
      You have disagreed to agree, but you are agreeing that American banks failed because of greed and dishonesty but not interest whereas interest comprises of both the greed and dishonesty, the greed of having more without taking risk and involving in any operation, the dishonesty of asking for something which does not belong to you. Interest is an unearned income and is the most distressing factor for any economic activity as it injects inflation. It is because of this feature that Lord Keynes the father of macroeconomics called it the most de stablising factor for the growth of any economy. I do agree that Islamic banking is not able to serve the systems fully because initially it is in its nascent stage and secondly no country is ready to implement it. If we really want to see the result we have to Islamise the entire system including the central bank of the country,partial Islamisation will never be able to yield any result. Islam claims to offer a complete package either accept it or leave it, any ism whether capitalism or socialism will never be able to bring any desirable change if applied partially.
      You want to see how islamic banks will work without regulation,again it is an absurd demand nothing can work without rules and regulations hence Islamic banks will need regulatory bodies to keep it in checks and balances. I will advise you to read more literature on Islamic banking and finance by visiting several sites if God wills you will find satisfactory analysis

      • Interest is nowhere near to greed. That way even earning income would be considered greed. Interest is charged by savers who sacrifice immediate consumption for earning a bit more for future consumption.

        I can’t argue about finance and greed with you, as it seems you are following a strict definition of greed from Islam. When religion is involved, there can be no logical argument.

        • Absolutely,individuals tend to be sensitive when it comes to religion.But this idea of getting more than what you have given without offering any services just fails to impress my perception.You cant relate earning to greed at all.When you earn,you offer services in exchange.Therefore,you have a right over your income.But what hard work do you do for getting a fixed percentage on the principal amount?

  3. Dr.Israrul Haque & Mr.Ninad

    First of all,thanks a ton for having given your thoughts.I tend to agree with what Dr.Israr has spoken about and he has also answered most of your questions.He has touched a very vital point that partial implementation is never going to help.We need to understand first that Islamic Banking is a different kind of banking altogether.These banks buy certain things for their customers than lending money and then bank and borrowers share risk and benefits. During the recession period,the Islamic banks’ assets grew an average of twice as fast as conventional banks’ assets in major Muslim markets.Albeit Islamic banks were not as profitable as traditional institutions,still they were able to extend credit at a faster rate.

    I would suggest you to visit the site below should you require some more elaboration

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