The Pakistani banks and some financial institutions finance their clients on the basis of buy back on mark-up agreements. According to this method, the client of the bank purports to sell a particular commodity to the bank, and simultaneously buys it back on a high price on deferred payment basis. A certain rate of mark-up (percent per annum) is applied to the second sale. Does this arrangement fall within the ambit of Ribā?
The answer to this question lies in the statement of the question itself: ‘The Pakistani “banks” and some “financial institutions” “finance” their clients on the basis of….’ And ‘the “bank” “purports” to sell….’.
As is obvious from the words in quotation marks, and as is the case in reality, there is no sale. There is only credit. For there is no trader. There is a bank, which ‘finances’ (extends credit to) its clients, not sells anything as such. It only ‘purports’ to sell. And the bank and the client both know this. The client does not go to the bank to buy goods. He goes there to obtain credit. The real purport of the whole deal is clear to all involved, which is extension credit.1
Those who sincerely believe that devices as Mark-up solve the problem need to analyse the mechanism seriously, and those who use them as subterfuges should know that fancy names as Mark-up and Arabic terms as Murābahah (‘Sale on profit’), which were termed as Islamic Fudge even by the Economist,2 can deceive no one for long, least of all God.
As Muslims, we should guard ourselves fully against the trap that the Jews laid down for themselves when they broke the sabbath by violating its spirit with their subterfuges.3
A bank is not into the business of buying and selling goods as such. It is by no means a typical trader, who buys goods, bears the costs and risks of marketing those goods, and typically cannot bind the customers to buy those goods. The bank on the other hand is bound to have this ‘buy-back’ agreement, not to mention other safeguards as collateral security simply because, not being a trader, it cannot afford the costs and risks that make a trader’s business true entrepreneurship. What the trader does is doubtlessly entrepreneurship. What the bank does is without doubt lending. The difference is manifest.
Since the object of analysis in this question is an arrangement of credit, that is the arrangement of a loan for a specific period of time, the gain on that loan at a predetermined rate (which is still expressed in many cases as ‘so many paisas per thousand per day’ – the way interest rate on working capital loans used to be expressed) is by definition Ribā.
It is important to remember that the Islamic jurists and scholars who laid down various rules for Murābahah did not have in mind the Murābahah which is now used as a term for a mechanism of credit extention.4 They had ‘sale’ in mind.5 The purpose of these rules (laid down not by Sharī‘ah but by scholars) was to ensure that no element of exploitation (Darar ‘aw Gharar: damage or deception) or Ribā should creep into a transaction of sale. This cautiousness is important as extension of Ribā based credit in the guise of ‘credit sale’ has always been easy and popular. Whenever ‘credit sales’ is used as a device to extend a loan, the difference in the prices of ‘spot sale’ and ‘credit sale’ becomes indistinguishable from Ribā. In fact, the word Ribā has been defined as Al-‘īnah as well as Al-Fadl in ‘Aqrabu’l mawārid’, one of the most authentic and well-known dictionaries of Arabic. Bay‘u’l-‘īnah (transaction of ‘īnah) has been explained in this dictionary as follows:
A man asks another for a loan, but the lender is not interested in extending the loan as he cannot charge any extra amount on that loan. So he says: ‘I shall sell you this cloth for, say, twelve dirhams [on credit]’ while its actual price is ten dirhams. Thus, he gains two dirhrams for that period of time.
It can be clearly seen that, in effect, there is hardly any difference between this form of Ribā and the one a bank gets in the name of mark-up.
It is therefore ironic that the precautionary measures suggested by Islamic jurists and scholars to ensure that a sale contract remain free of exploitative elements as damage, fraud and Ribā are, intentionally or unintentionally, laid down by many scholars of late as conditions for justifying the extension of Ribā based credit.6
An Islamic state reserves the right to prohibit – and indeed gradually and ultimately it should prohibit – all such arrangements as can be used as subterfuges in the above mentioned ways so that it is ensured that Ribā does not enter the economy through the back door, just as the Prophet (sws), for the same purpose, gave certain directives regarding barter on credit (see Appendix 2).7
1. And, for the bank, gain at a predetermined rate on that credit.
2. The Economist (Oct. 26, 1985), 77.
3. Even in matters pertaining to Ribā, their attitude has hardly been different.
4. For example, the buyer must be made aware of the price beforehand, and the transaction must be a trade transaction, etc. (see Fuad Al-Omar & Mohammad Abdel Haq, Islamic Banking – Theory, Practice and Challenges (Karachi: Oxford University Press, 1996), p.16.
5. Murābahah (Lit. ‘Sale on profit’)
6. For example see Fuad Al-Omar & Mohammad Abdel Haq, op. cit., p. 16
7. Other devices as Bay‘u’l-mu’ajjal, lease purchase agreement, etc. may also be analysed an the same bases, viz.
a) is the arrangement actually an extension of credit in the guise of some other permissible arrangement?
b) is there a gain demanded by the lender at a predetermined rate on this loan extended for a specific period of time?