Islamic banking: use of loan as tool of financing

Salaam Alaikum,

A hadeeth-e-qudsi declares reward for qard is eighteen times. Implying that Islam wants widespread use of interest-free loan which is highly commendable irrespective of whether the loan is for consumption or investment. Muhammad saws himself bought edibles on credit and took loans for state purposes. Several Sahabah Karaam r.a and Imam Abu Haneefah r.a invested borrowed money in business. Hence it is highly condemnable and sinful to denounce interest-free lending and exclude it from Islamic banking operations. In ‘Introduction to Islamic Finance’ M.Taqi Usmani writes “The case of Islamic banking cannot be advanced unless a strong system of inter-bank transactions based on Islamic principles is developed. The lack of such a system forces Islamic banks to turn to conventional banks for their short-term needs of liquidity which the conventional banks do not provide without either an open or camouflaged interest”!
Profit sharing and interest-bearing loans both were used as financing devices in pre-Islamic era. Islam prohibited interest, permitted profit sharing and highly commended interest-free loan. Thus interest-free loan has its origin in Islam and as such it is the true Islamic alternative of interest and not profit sharing or any other financing device.
Loan is indispensable need of mankind. As Islam caters for all needs of mankind, true Islamic banking aiming at finishing interest and replacing interest-based banking must provide interest-free loan facility on a large scale as conventional banks provide interest-bearing loans. Otherwise interest can never be finished just as illiteracy cannot be finished without providing schooling to every child. Late Professor Shaikh Mahmud Ahmad was applauded in the historic unanimous judgment of 23rd Dec 1999 passed by Supreme Court of Pakistan Shariat Appellate Bench in the famous Riba case as “Our country’s most outstanding economic researcher and leading thinker who devoted considerable part of his life to the study of the theory of interest”. Hr invented a novel interest-free lending device TMCL-Time Multiple Counter Loan that can perform all banking functions as are performed by interest. TMCL transaction comprises two simultaneously exchanged interest-free loans between two parties such that multiple of the amount and period of one loan (loan value) equals the multiple of the amount and period of the other loan. It facilitates interest-free loans of large sums against counter loans of much smaller sums advanced for proportionately longer periods. For example a trader can get interest-free loans of Rs. 10 million for one year by advancing counter-loan of Rs. 1 million to the bank for ten years. Thus TMCL fulfils the client’s need of funds and enables the bank to cover its expenses and earn profit for its share holders and depositors by long term investment of counter loan amounts. TMCL based transaction is just and equitable as in this transaction, unlike interest-based transaction, none of the two parties is a definite gainer or loser and each one of them may gain or lose by investing the loan amount borrowed from the other party. As in TMCL transaction both parties do good to each other it conforms with Quraanic precept hal jaza ul ihsan illa al-ihsan and the noble teaching of our Holy Prophet saws that a favour done should be reciprocated. Hence TMCL-based banking system is bound to bring prosperity to the people.
TMCL-based interest-free banking model was unanimously held to be potentially useful by a 17-member panel of senior economists and bankers appointed by Council of Islamic Ideology to produce interest-free economic system. In its report of 15 June 1980 CII recommended use of TMCL principle by banks for giving interest-free loans to account holders for personal and non-productive purposes. Most unfortunately CII, inspite of not finding any fault or defect in TMCL and without giving any reason avoided to recommend TMCL as permanent alternative of interest. Had CII not committed this blunder Pakistan and subsequently other Muslim countries would have got rid of interest long ago.
The writer presented TMCL model before the Supreme Court Shariat Appellate Bench and argued in its favour as Islamic substitute of conventional banking. It was well received by all the five judges including two Islamic scholars M.Taqi Usmani and Dr. Mahmood Ahmad Ghari. TMCL model was the only interest-free banking model presented in the Court and described in the unanimous judgment of 23rd Dec 1999 without any adverse comment.
Complying with the order in the Supreme Court Shariat Appellate Bench judgment the government of Pakistan appointed a high powered Commission for Transformation of the Financial System (CTFS) to devise and implement interest-free banking system in the country by 30th June 2001. UBL field a review petition against the judgment and applied for extension in the date for implementation the Supreme Court order on the plea that it would take 5 years to prepare an interest-free banking plan. Supreme Court granted extension of one year CTFS including an Islamic Scholar Mufti Rafi Usmani failed to devise an interest-free banking plan and refused to implement TMCL model on the flimsy ground that CII had not approved TMCL as permanent alternative of interest. Islamic economists having big name in Pakistan and elsewhere also failed to produce an interest-free banking model themselves and due to inexplicable and totally unjustified bias against TMCL avoided to support TMCL model. Resultantly Supreme Court order to implement interest-free banking in the country was set aside on 24th June 2002 and the Riba case is now pending for re-adjudication by Federal Shariat Court for more than seven years. Only God knows when Islamic economists and bankers will realize that present Islamic banking is no solution to the problem of eliminating interest for which a viable interest-free banking model like TMCL model is needed.
Details of working and benefits of TMCL-based interest-free banking system are available on website given below. Comments and queries on the subject will be welcome.

Abdul Wadood Khan

Web:
http://www.realislamicbanking.com
http://www.geocities.com/aokhan2/index.htm