Sunday, July 24, 2005

Making loan (qard) is not the way to make profits



Surah al-Baqarah 275 says that, "Allah has allowed al-bay and prohibits riba". The question now is to whom this verse pointed at?The answer lies in the verse preceding the above according to which the disbelievers (i.e. musyrikun) says, " that al-bay is the same as riba".

Apparently, the Quran is putting one point very straight to the musyrikun. If you have money and intends to earn from the money, do it by way of trading (al-bay') and not by making loans and charging riba on them.

The rich merchants of Mekkah (i.e the musyrikun) who relentlessly stood against the teaching of Prophet Muhammad (saw) usually make money from loans (qard) in two ways:
1) making loans to the poor sorely for their consumption needs
2) making loans to traders as capital

Making loans with riba to the poor often exploits them. Defauting borrowers eventually becomes slaves to the lending party. For this reason, the Quran prohibits riba as it is unfair. Riba opens the doors to exploitation.

The rich people of Mekah also provide riba loans to the merchants and traders. Artisans may borrow to purchase raw materials. The traders involved in caravans trading resorted to riba loans, while others opted to trade by way of mudarabah. The former must return the capital and riba upon arrival in Mekah. If they fail to do so, the implication has been disastrous.

The caravan trade is highly dangerous and risky. It involves long-journey travels through severe heat of the day and cold in the nights. Highway robberies and desert storms are the norms. Equally important, caravan traders are also exposed to market volatilities. There is no guarantees that goods can be sold at profits.

For example, a caravan merchant buys X for 5 dinar in Mekkah and sells it for 10 dinar in Syria. While in Syria he purchases Y for 10 dinar and sells it in Mekkah for 20 dinar. In this way his total profit is 20 dinar - 5 dinar = 15 dinar while the ROI = 15/5 x 100 = 300%. But this is true only when he reached Mekkah alive and well as the journey took him more than 1000 miles across the desert. He will see the creditor and pays back the 5 dinar loans plus the riba.

However when he failed to sell X due to unforseable reasons, say losing market or destruction of goods during the caravan travels, he end up defaulting the loan. For this reason, when traders seek to use riba loans to finance their travelling expenses (say, from Mekah to Damascus) as well as purchases in Mekah, failure to earn profits always means a failure to pay up the loans and riba attached to the loans. That failure as mentioned earlier always leads to disaster. The rich lenders will confiscate properties belonging to the traders or turn them in slaves when nothing is found enough to replace the loans.

The same does not apply in the mudarabah system. The mudarabah is the financing aspects of the whole business of caravan trading. The main line of transactions remains to be buying and selling of goods and commodities where payments are settled on the spot. It does not make sense, to see the Prophet Muhammad (saw) having purchased an item worth 4 dinar in Mekkah offers the same for 10 dinar cash or 14 dinar on credit in Damascus. Certainly, the sale is settled on the spot in Damascus at 10 dinar!

The mudarabah system is an egalitarian one. If the business does not go well, the capital provider shall bear the loss. The agent-entreprenuer (i.e. mudarib) is spared from all liabilities except those incurred by way of negligence.

The caravan trading actually illustrates the nature of risk that people always face in that business. It is by no means to bring us back to the old ways. The risks are severe as in any modern business today. Some examples are price and operational risks.

To sum up. to earn money one must stay away from lending. Lending money to consumers and producers often invites injurious relationship. Of course, when lenders dutifully pay up their debts, riba is beneficial but the reverse has always mean injury and hardship to the borrowing party.

15 Comments:

Blogger Noor Anum Sarah bt Johar Ariffin said...

"Allah has allowed al-bay and prohibits riba". It means clearly that every Muslim in this world can earn profits from their money by way of trading(al-Bay) and not by making loans that charge interest(riba). Al-Quran has condemned interest(riba) and enjoining profit creation via trading(al-Bay).
Islam prohibits riba because it is unfair or unjustice way for someone to get money. It also brings exploitation, riskiness, and difficulty to the people especially for the poor or needy people to get money because they have to pay more than the amount of money that they borrowed.
One of the best solution for this problem is by using Mudarabah system. Mudharabah (islamic profit sharing) is an agreement made between a capital provider and another party (entrepreneur), to enable the entrepreneur to carry out business projects, based on a profit sharing basis, of a pre-agreed ratio. In the case of losses, the losses are borne by the provider of the funds.
So, as a conclusion, man should avoid from lending system. It may cause many disadvantages and hardship to the borrower to pay back their debts.

NOOR ANUM SARAH BT JOHAR ARIFFIN
G0513862

9:11 AM  
Blogger Bilal Mohd Parid (G0428469) said...

With regard to this topic it is obvious that profit comes from a business and not loan. It is a law of nature that a benefit comes only with an effort and not for free. The effort it self must be a real one and no prohibited element included. This is what Islam had promoted.

Loan is defined as a good deed done by a Muslim towards his brother or her sister who are in difficulties. By giving a loan it is hoped that their burden and liability can be settled or reduced. The lender gives up their money without any intention to get reward or compensation from the borrower. Their focus is to get the reward only from Allah. This is the basic idea of loan in Islam. Therefore the element of exploitation from the difficulties faced by others is prohibited in Islam. This is accordance to ‘La Dharar Wa La Dhirar’ principle.

The usage of Mudharabah contract in the trade was implemented among the merchant long time ago before the present of Islam. When Islam came it recognize the contract and it is used widely in the trade transaction. It is understood from the recognition that Islam wants to promote justice among the parties involved. It is a combination of resource and effort contract. Both parties share the risk of business failure. The capital owner will lose the capital and the entrepreneur will gain nothing from his effort and time consumed. It is a contract that allows the accumulation of capital for an investment purposes. It involves strict and wise management, and any element of negligence will be the responsibility of the entrepreneur. Therefore Mudharabah contract involves real effort, real capital and real time of transaction.

In conclusion, any benefit (determined by the capital owner) earned from loan is haram. Any increment from the capital in loan is considered as riba. Therefore as a mean of investment Islam has recognize equity contract that fulfill the idea of justice, wealth sharing and entrepreneurship among the community.

Bilal Mohd Parid
G0428469

8 August 2005

8:46 PM  
Blogger Adeila Radzlein Ahmad said...

Interest rate on loans is set to capture increase in the price level. This is because to the bank it is how they prevent themselves from unexpected losses due to decline in the real value of loans made to the borrowers. But most of the time it will burden and give injustices to the borrowers.
In Islam, interest bearing loans are replaced by credit sale instruments such as al-bai bithaman ajil, al-Mudharabah, bay’ al-inah and al-naqad. But there is one which is given on a non-commercial basis (a facility only accessible to the banks’ staff and workers) which is known as qardhu hasan.
‘Abd Allah b. Umar said: “Loan is of three kinds:1) A loan given to earn Divine goodwill, 2)loan given to obtain a friend’s goodwill and pleasure, and 3)loans of valid goods for forbidden goods. And he said that the last one is riba. Meaning that like Brother Bilal Mohd Parid write in his comment, that, “Loan is defined as a good deed done by a muslim towards his brother or sister who are in difficulties. By giving a loan it is hoped that their burden and liability can be settled or reduced.
From Sister Anum comment, we learn that “Al-Quran has condemned interest(riba) and enjoining profit creation via trading(al-Bay)”. Al-bay’ implies that the existence of “iwad” or equal counter value in the transaction where “iwad” is the basic trait or condition sine quo non of a lawful sale.
Meaning that, to me, man cannot expect to make profit without assuming loss and risk.

Adeila Radzlein Ahmad
G0424754

6:20 PM  
Blogger kamruzzaman said...

This comment has been removed by a blog administrator.

5:38 AM  
Blogger kamruzzaman said...

It is true that riba is prohibited in islam because of the problem it cause to the borrower.
Furthermore it is true that business and the process of trading (al bay) must involve some risks.
Western economists have argued however that times have changed and gone are the days of enslaving the borrowers should they default on their repayments.
For conventional banks the concept of credit ratings were created to determine the ability of individuals to make repayments.the bank in providing loans are also taking risks because if the borrower does not make their repayments then they make a loss.so there is also an element of risk for modern banks which is a primary element of al bay.assuming that the bank must take a legel recourse to recover its money then the only thing the bank can do is sue the individual,perhaps sell his property and then declare the individual bankrupt if the amount owed is unrecoverable.
which leads me to analyze modern islamic banking. for example bait bitaman ajil, a system that allows muslims to purchase homes.The bank purchases the home for the buyer and then requires the buyer to rebuy it from the bank at a marked up price. should the buyer default?the bank sells his house to recover the cost and then sues the buyer for the remainder of the amount that he owes the bank if the bank sells the house at a loss.
For example the bank buys the house for the buyer from the developer at RM 150,000 and then resell it to the buyer at a mark up of RM200,000.
The buyer and the bank enters into a contract and the buyer begins payment.if the buyer is unable to pay his installment the bank resell the house for RM120,000.the balance of RM80,000 from the RM200,000 is reclaimed through legel recourse because it is seen as a breach of contract.if the buyer does not pay the court orders that all property of the buyer be seized and sold and if the money is still insufficient then buyer is decleared bankrupt.
Although there are subtle differences in the two systems the buyer still suffers.
So are what modern islamic banks doing,riba too since both methods causes difficulty for the borrower/buyer of the house? or is modern conventional banking free of riba since it no longer enslaves the borrower?

Md.Kamruzzaman
G0418759

6:43 AM  
Blogger ronald rulindo said...

"Making loan (qard) is not the way to make profit"

I strongly agree with this statement because the purpose of loan or Qard in Islam is only to help the others who need money to fulfill their daily needs or to run their business.

It is true that the borrower will gets an advantage from the loan but it can't be a reason for lender to charge the borrower an interest beacause Islam prohibited riba and most moslem scholars agree thah interest is same with riba.

Nowadays, the Islamic bank change the concept of loan with interest by trading scheme (BBA and Murabahah). In my opinion, Islamic bank can offer this product because moslem community still needs the financing scheme from the bank to fulfill they basic need like house and even a car even though we have to evaluate the nature of the concept again. However, profit and loss sharing or PLS (mudharabah and Musharakah) should be the main products of the Islamic Bank bacause its can reduce the poverty in moslem community.

One way to reduce the poverty is teach the poor community how to reach their financial independent and one step for this things is teach them to open their own business. How the poor can open a business if they do not have a capital? So, Islamic Banking should help them by give them the mudharabah contract at beginning and musharakah contract when their business has been growth.

We can imagine if this sistem run well, there are no poverty anymore in moslem commmunity and the bank also can get profit from PLS scheme in order to replace the profit from loan. So, it is the high time for the Islamic Bank to change the concept of loan in the name of trading by use Mudharabah and Musharakah (PLS scheme) and of course, to save the bank from cheating by the customer which can lead the Islamic bank going to bankruptcy, The Islamic bankk should develop a good internal control in their financing departement.

10:01 PM  
Blogger eghutapea said...

Erwin Gunawan Hutapea-G.0422765

Pros and cons on murabahah will be long lasting unless Islamic banks (IB) are able to invert their assets portfolio to become PLS (profit and loss sharing) dominant rather than debt dominant. For sure it is easy to say but quite difficult to do.

In this discussion, I prefer to use term “murabahah” rather than “BBA” since the first was more internationally accepted. Another reason, the original term for this kind of trading is murabahah since the seller has to declare the CoGS (cost of good sales) in order to fulfill the transparency principle as Islamic teaching required. So, no matter the methods of payment are chosen by both parties (cash in spot, installment, or lump sum at the end of period) thus the transaction is still the same murabahah.

Murabahah as an IB product has been given massive critics to the way it was practiced. No one argued about the validity and originality of murabahah as a part of trading transaction, since trading was permitted in the Holy Qur’an (QS. 2:275). Should we list those critics, they might be categorized as follows: i) fulfillment of each step of murabahah transaction (i.e. is it true that the IB really own the murabahah object) in the eyes of shariah principle, ii) the way IB determined the mark-up; and iii) how they deal with default customer (i.e. does IB require default customer to pay extra money if the time to settle installment was due?).

I share the same opinion with others that many things have to be corrected in how IB applied murabahah to be complied with the shariah principles. But, to be fair, in this opportunity let me look at this problem from different angle. What kind of problems are actually they face in running what so called IB?

In order to transfer deposits-received into financing, IB stands in front of two parties with totally different preference. Depositors want the fund to be managed safely (in some countries government gives such a kind of Guarantee Scheme to retain market confidence). Even though for mudharabah-investment account, with its original nature is risk sharing, depositor are not ready and don’t want to see that their money is reduced (an easy way to verify this fact is through asking ourselves, do we ready to lost our saving that put under the mudharabah-IA). This is not surprise because what depositors put into the IB is rather saving than investment.
Another fact, in putting their money, IB-depositor acts as rational agent with two criteria: lowest risk (if attainable zero risk through Govt. Guarantee) and highest return. So, depositor required that IB have to compete with its conventional counterpart in rate of return, no matter its earning capacity.

Differently, in financing side, customers prefer to use PLS based product (if they are able) rather than debt based, but with notes: it is so under the risky project and estimated profit given to the IB is lower than interest rate (potentially create adverse selection and moral hazard problem). If the project is secure (meaning that risk is manageable) and return is higher than interest, then this preference is inverted.
Another fact is not that easy to find trusty customer since the PLS is based on trust, but this is not try to so pessimistic.
With that circumstances, it is unfair for us to force IB to put most of their assets portfolio under the PLS contract, or in banking terminology, it is unfair to force IB to take risk exceed their risk taking capacity. Even though we realize that PLS is the ideal form of financing to Islamic economic point of view. There are some preconditions to be prepared in order to achieve that, namely: how to change those divergent preferences to be inline with the nature of IB in current conventional atmosphere, how to educate ummah to have better understanding about IB.

As long as that circumstance is the same we will see that murabahah is the major form of IB assets side.

In my understanding, what we have discussed about unsatisfying implementation of murabahah is generally coming from deviation in practices compare to the concept of murabahah according to the shariah. I want to share my view from law enforcement perspective. For this time being, as long as I know, regulation about what murbahah should be is fallen under the domain of “fatwa of Ulama”. Consequently, this makes any violation of those fatwa is unable to punish (this happen for sure in Indonesian case, other country have to conform). This loop hole makes, it is quite hard to force IB to comply with those fatwa, because instrument available only moral suasion. Even though we know that any violation to shariah principle potentially increases what so called reputation risk for IB. So, any measures to adopt those fatwa into any regulation form under jurisdiction of positive law or civil law will enable banking authority to enforce any violation to the shariah principles.

Wallaahu ‘alam bissawab

9:42 PM  
Blogger abduh said...

Muhammad Abduh G0415065

Qard means loan, Hasan means good or benevolent. So, Qard al-Hasan means a loan that without increment that set by the lender. It doesn’t mean that in returning the loan, forbidden to give the increment but the increment based on debtor willingness.
Making loan should be planned to help other people. That’s why in Islam we are ordered to give loan in Qard al-Hasan contract. Or if we want to earn profit, we can use mudharabah contract, we give capital and the lender as someone who run the business. But we also take the risk. If the business get lose, so our capital will reduce, if the business makes profit we will get share from its profit.
Many people assumed that if he give loan, so he lose his opportunity to spend his money at this time. That’s why people assumed that if he gives loan, he must get surplus from his loan not only getting back the initial amount that he borrowed but also adding with the interest. The person who did the trading not have guarantee that he will always make profit, because in trading there are risk that he could not avoid.
So, making money by giving loan with riba is unfair because giving loan to trader with expecting the loan must be back whether he lose or gain profit also adding with interest is irrational because all trade have risks.
Al Qur’an state that Allah allow al-Ba’I and prohibit riba. Someone who want to earn money is thorough al Ba’I, not from making loan. By trading, we get halal income, and the increment from the trade is halal in Islam. But if we giving loan with expecting the fixed increment, in Islam it is haram even the loan giving to the trader. Because trader has a risk. With the risk, he can lose or makes profit.

8:13 PM  
Blogger nadiahaisyah said...

Nowadays, loan is somewhat important in fulfilling people’s need. It is quite hard to acquire some today’s basic needs like cars and houses without taking loan especially the middle income group people. If I’m not mistaken (correct me if I’m wrong), government imposes tax on car that is bought by cash. So, although one is possible and willing to pay in cash, with such rule, he may think twice of paying cash. It makes borrowing as a culture of life, in which, nobody can escape from using it.

As the idea of developing Islamic bank is to become an alternative for interest-bearing banks or the conventional one, in my opinion, it should in any way not to promote loan as a way of life. However, is it possible to do so? Since we posses the control, it is not impossible if we alter a little bit on the banking acts to suite the Islamic teaching and Shariah and let Islamic banking being govern by its own rules without any existence of conventional banking act. Meaning, BAFIA and IBA should be separated. IBA cannot in any way be put under the jurisdiction of civil court, otherwise it ultimate goals will never be achieved.

My suggestion is seems very aggressive. Thus, many questions may be asked. How is it possible for people in middle class especially Muslim owning properties without making loan? It is not attractive for Islamic bank to offer a Qardhul Hassan loan due to risk it needs to bear, thus what should Islamic bank offers then to fulfill the need? Many suggestions towards this matter have been discussed (ie; leasing or al-ijarah). One of the best examples that I can highlight here is Lariba American Finance House in United States, which provide home financing for its customer through leasing. It websites can be surfed through www.lariba.com.

Basically, the motive upon an establishment of Islamic banking is very good, that is to provide an alternative to Muslim individual to perform their worship to God through other sources of financing instead of riba. Thus, as a Muslim, we need to support the Islamic banking. However, due to the implementation of its products is somewhat similar to the conventional one, do we need to support as well? Our goal of life is to get the God’s blessing not only in this world but also in the hereafter, where our last and certain journey. Selecting to use riba means deteriorating our faith towards Allah and of course will be penalized in the hereafter. But, if we do not support the Islamic banking, it means that purposely we run to the riba which is prohibited in Islam. I think, Muslim in Malaysia, especially me, really live in dilemma.

Thus, Government through BNM should play an important role to realize the need of all Muslims in Malaysia and bring them out from what so called a dilemma. Furthermore, Malaysia has always becomes a reference to other Islamic countries. Making things right (improve the Islamic banking operation) means all Muslim around the world can get the benefits too.

10:35 PM  
Blogger iryani said...

From this article, it can be concluded that money or profit from loan making is not one of the alternative command by Islam. By doing so, practically can leads toward injustice as well as exploitation to the poor people. No doubt this unlawful practice is still going until today by irresponsible people who seeking for fast and easy money. The lenders are willing to give money to the borrower with a condition that he or she must pay back the lump sum of money together with an interest. Failing to do so would doubled the amount of money which eventually will be heavy burden to the borrower to pay back. Such immoral activity should not happen in our Muslim’s society as it seen to give more trouble and oppress the poor. While in the business or trading situation, there is always involved with risk. To bear the risk in businesses are willing to face and accept all circumstances that might occur during the period activities. No one can avoid from not bearing risks. Risks not only happened in the business (fail to sell the stocks which leads to high inventory or economic effect such as inflation) but also can be from others incident such as nature disasters, death and so on. When those happened, the lender of the loan or capital to the business is the person who is affected. That is why in Islam recognized mudarabah as an equally trading. The system needs the payment on the goods made on the spot. This would secure the profit to the traders which by means will making the buying and selling go smoothly. Thus, when buying and selling are successfully made then the traders can gain profit which is lawfully to the Islam.

G0333098

6:37 PM  
Blogger Orawan said...

It is clear concept the statement above, but in financing today, people are not allowed to loan some amount of money without interchange certain thing. It means to lend amount of money for investment, they have pay back more than they have lend. Because they think the amount of money that they give to customer as a capital that it can make a profit and also they have counted the length of time that customer to lend
as profits. Thus, making loan is the investment of capital (the money is the capital and the efforts of customer is a profits). It seem to be the concept of Mudarabah, but can not apply in it, because the system of Mudarabah establish in line of equal chance to get profits; if one’s investment successful both of them will get the profit equally, on the other hand, if the investment loss both of them also nothing to share. The notion of Mudarbah is to help people who are absent of financial but they have ability to make business. While for people who are rich will fulfill the absent of financial by giving money as a capital. Therefore, any activity in Islam would be concern on the value and would be in the line of helping each other. And the notion of system Mudarabah is the one example that can show the symphasity each other in order to commentary the social justice.

G0515464

6:51 AM  
Blogger muhammad said...

Assalamualaikum

Lending always give adverse impact on the borrower.However, engaging Mudharaba principle, the capital providers will suffers losses.From here, we can say that both party cannot escape from risk by lending and borrowing. One party has to suffer loss and vice versa.

Islamic pillars always prohibit us from engage in riba.Clearly, riba does more harm than good.

Our whole current economic system is tailored by the jewish or Abu Lahab, which is riba based.Good example would be if a company will be given tax exemption on interest instead of divedend given to its shareholders.This attracted more company to engage more in loan as their source of capital instead of equity financing, which is promoted by our Prophet.

As an implication, Muslim wealth will be gradually eroded by 'riba' resulting to more social problems.

Ad hoc mechanisms to curb this problems is crucially need before it is too late.

Regards

Muhammad (G0217291)

1:08 AM  
Blogger masahina said...

Making riba as unlawful while al-bay remains lawful and the way of business allowed in Islam should not be seen as a ruling targetted at al-mushrikun/al kuffar alone but all those who resort to riba in making their earning and livlihood out of it.

Making loan with interest is not the islamic way of dealing in any kind of business as contrary to mudharaba way of making profits as it does not represent unfair elements and injustice.

Multiplication of profits through unlawful way of earnings such as riba is seen causing harship, injustice and distruction in any society and is one of the basic elements of economicinjustice. Therefore in Islam,fairness justice, and reasonableness are the basis in any commercial transaction.

9:06 AM  
Blogger Md.khademul Islam said...

The main objective of loan is helping people to fulfill the fundamental needs or making profit from business. But we should make profit from right way because riba is prohibited in Islam. When a customer takes loan from conventional bank he makes liability which he must have to pay before maturity period. Some kinds of loan come with double or redouble. Besides, loan can increase the spending power of customer and consumer consumes unconsciously. He cannot use his knowledge accurately. As a result he cannot pay the loan before maturity. Therefore bank usually got his assets .What is about lender? Lender always thinks he will get fixed income (interest) he cannot use his knowledge and effort to make profit. As a result, he will become lazy but he will get more money from interest. In this way loan actually cannot help poor people rather it divides the society in class – poor& rich. That rich man will be a richer day by day the poor man will be poorer in day by day. Meaning that equal distribution of resource is not possible in conventional system. What is happening in Islamic banking system? As far I know Islamic bank provides loan to rich people. For example, one customer has knowledge and he is a learned man but he is poor. In this case Islamic bank will not make any contract with him because of security. Now I want to pose a question how will be possible equal distribution of asset by the Islamic banking? If I am not go in wrong way around, I think that Islamic banking system still baby. We should take care it as soon as possible so that Islamic banking product can achieve faith and believe from Muslim Ummah which can play a significant role Islamic banking. But I am happy because Islimic banking system provides us some product (BBA, Mudarabah, Murabaha) which are better than conventional system.

Md.Khademul Islam,G0429917

10:38 PM  
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