1. INTRODUCTION
Islamic Banking or non-interest banking as it may be called could be
simply understood to be a banking process where interests are not charged.
Earnings on money lent can only be realized from a definite value creating
process. Thus, non-interest banking legalises only profits. All other forms of
interests charging are prohibited.
2. DISCUSSION/ COMPARISM
To discus this topic reasonably in
this brief paper, it may be wise; to make an assessment by way of comparison
and so compare non-interest banking as against the conventional form of banking
that is predominant today. Thus, comparing profit and loss sharing against
interest charging.
1 - Savings and Investments
These are the 2 most important
determinants of economic growth and development in any economy. Contrary to the
general apprehension, which purports that prohibition of interests may reduce
the level of savings and may thus retard economic growth and development. A
rise in interest rates, reduces the income of the borrower. It consequently
reduces his propensity to save/invest. This happens because of the cost
(interest) of funds he borrows.
2 - Unemployment and Inflation
When interests rates are high, cost
of capital are high and eventually cost of production are also high. This
causes a fall in the volume of enterprise thereby leading to the closure of production
units, retrenchment of workers to cut down costs or because their services are
no longer required, and producers may decide to increase prices of their goods
and services to balance their 'cost/income' trend. Thus, inflation is
triggered.
3 - Profitability and Productivity
Profit sharing promises leverage
benefits to firms free of risk and a return higher than the rate of interest to
the financier. Fluctuations in the rate of profit on equity under profit and
loss sharing finance are likely to be smaller than the rate of profit on equity
under interest finance, and profit and loss operations may have a small
destabilising potential for the economy as a whole compared to financing on
interest. For the financiers and the firms that borrow funds from them, the
profit and loss sharing system is the best and most suitable.
3. RISK SPREAD
With the prohibition of interests; preference
shares, debentures, commercial papers, treasury bills, bankers' acceptance will
no longer exist (at least in their interest earning forms). This does not in
any way narrow the investment opportunities/portfolios available to banks. This
is because other assets representing profit sharing arrangements will also
exist automatically. Thus, the names of preference shares, commercial papers
etc may not change, but their interest characteristics will be abolished.
In an Islamic financial system, the
availability of assets with a variety of risk characteristics is a distinct
possibility and there is no reason to assume that there is a limit to the
diversity of assets in such a system.
4. CONCLUSION
In light of the above
justifications, it is quite obvious that non-interest banking is here to stay.
I am of the least doubt that from the inferences, which can be drawn from the comparisons
above, non-interest banking, will succeed. This is because 'profit sharing' is
superior as compared to other tools of macro-economic policy (that is,
'interest charging'). Profit sharing has a quality, which most other macro-economic
tools usually lack. This quality is stability.
