It is the intention that matters

According to dictionary, the word Islam, from the tri literal root s-l-m, is derived from the Arabic verb Aslama, which means "to accept, surrender or submit. “ A Muslim (Arabic: مسلم ) an adherent of the religion of Islam. The feminine form of 'Muslim' is Muslimah (Arabic: مسلمة ). Literally, the word means "one who submits to God".

“If anyone is looking for a religion other than Islam, then let it be known that it will not be accepted from him; and in the Hereafter he will be among the losers.” (Sura Al’i-Imran Aya No. 85)." Dīn (دين, also anglicized as Deen) is an Arabic word usually translated as "religion" but also as "way of life", especially referring to Islam, known as ad-dīn "the deen", or dīn al-haqq "the true deen" (e.g. ayat 48:27, 9:33 = 61:9). It is, however, not exclusive to Islam, as Arab Christians also use it to refer to their religion and religion in general. The word “Deen” appears in as many as 79 Qur'anic verses and it is often translated as religion for convenience since there is no equivalent single satisfactory English word. In the Qur'an, Islam is always referred to as Dīn. It is the sum total of a Muslim's faith and the code and conduct necessary to submit to Allah's laws.

Hence, it can be said that Islamic Finance is conducting financial and business matters according to the commandments of Allah(SWT) expressed or implied.

Aya 65 of Sura Al-Baqara "And well ye knew those amongst you who transgressed in the matter of the Sabbath; We said to them: "Be ye apes despised and rejected."

This Ayah means, O Jews! Remember that Allah sent His torment on the village that disobeyed Him and broke their pledge and their covenant to observe the sanctity of the Sabbath. They began using deceit full means to avoid honoring the Sabbath by placing nets, ropes and artificial pools of water for the purpose of fishing before the Sabbath. When the fish came in abundance on Saturday as usual , they were caught in the ropes and nets for the rest of Saturday. During the night , the Jews collected the fish after the Sabbath ended. When they did that , Allah changed them from humans into monkeys, the animals having the form closest to humans. Their evil deeds and deceit appeared lawful on the surface, but they were in reality wicked. This is why their punishment was compatible with their crime.(Tafsir Ibn-e-Kathir)

Dr. Mahmoud El-Gamal said best "When developing an Islamic financial model, the temptation is very strong to try to mimic what bankers already know. Indeed, that has been the history of Islamic banking and finance: start with the conventional practice that you forbid but want to mimic (e.g. an interest-bearing loan), break it down into its pieces (e.g. money now from A to B, more money later from B to A), and then reconstruct the pieces with some degrees of separation (e.g. goods sold for money now from C to A, goods sold on credit for more money later from A to B, and goods sold for money now from B to C -- this is tawarruq if the bank conducts all three transactions, or commodity murabaha if the bank only does the first two pieces and leaves it up to B to make the spot sale to C or another party D). This is the silly model marketed variously as commodity murabaha or tawarruq."

Dr. Muhammad Nejatullah Siddiqi said "We consider Murabaha to be superior to debt financing on a number of grounds. We also consider that its inclusion in the toolbox of Islamic financial instruments makes that box really capable of handling all financial situations. We claim that it serves to keep the financial market in sync with the market for real goods and services, thus making it less vulnerable to gambling like speculation. Demonstrating these and possibly other virtues require Murabaha to be practiced in real earnest, i.e. as a means of financing the acquisition of means of production and needed goods by people who are expected to be able to pay for them, but after sometime. It would be a caricature of Islamic finance if, instead, Murabaha is used as a trick to do what conventional finance is doing, i.e. lending on the basis of interest. It is only the practitioner who can ensure that Murabaha does not degenerate to that level."

Dr. Mahmood Ahmed is of the view that "Finance", whether Islamic or conventional,is dependend on financial intermediation which has three essential features-1.Principal amount,2.Rate and 3.Time. All these three must be pre- determined. Hence an intermediary accepts signature of the client in a set of charge documents as per law of the land then makes him agent to buy goods which is not an essence for it but is done as an eye wash for lebeling it "Islamic" which is a religius cheating in the name of Islam."

Brother Mahmood Shafqat is of the opinion that "in my view, we need to distinguish between recommended or liked and disliked practices."

Sahih Al-Bukhari 1:1 Narrated Umar bin Al-Khattab (RAA)

I heard Allah's Apostle saying, "The reward of deeds depends upon the intentions and every person will get the reward according to what he has intended. So whoever emigrated for worldly benefits or for a woman to marry, his emigration was for what he emigrated for."

The result that emerges from the above discussion, it is the intention that matters.

Proposed Solution to Global Financial Crisis

Ellen Hodgson Brown in his book "Web of Debt - The Shocking Truth About Our Money System and How We Can Break Free" says that in a system in which money comes into existence only by borrowing at interest, the system as a whole is always short of funds, and somebody has to default.

He cites from a case law "In his court memorandum, Justice Mahoney stated:

Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the entire $14,000.00 in money and credit upon its own books by bookkeeping entry. That this was the consideration used to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence when they created it."

Startling revelation about the current banking system comes from Bernard Lietaer who helped design the single currency system (the Euro):

"[G]reed and competition are not a result of immutable human temperament . . . . [G]reed and fear of scarcity are in fact being continuously created and amplified as a direct result of the kind of money we are using. . . . [W]e can produce more than enough food to feed everybody, and there is definitely enough work for everybody in the world, but there is clearly not enough money to pay for it all. The scarcity is in our national currencies. In fact, the job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive."

In the 1990s, a young team at Wall Street investment bank JP Morgan pioneered a new way of making money – credit derivatives. Within a decade, the market for these exotic securities had exploded to more than $12,000bn – and some people later blamed them for fuelling the global financial fiasco. In the first of two extracts from her book, Fool’s Gold, the FT’s Gillian Tett reveals how the innovation genie was first let out of the bottle – and eventually devoured the system, to the horror of its creators.

Christina Romer says that "Also important was an accidental switch to contractionary monetary policy. In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street. In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion. When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession."

Ben Funnell proposed " What can be done? First, although it is not ideal, we should not be too hasty about abandoning the capitalist model. It is less bad than any other system yet invented. But we should redouble our efforts to increase productivity through innovation and creating new markets; simply squeezing lower-income workers is a bad option, which helped get us into this mess in the first place. This requires investment in education and research. Second, we have to learn to live within our means. This means spending less than we earn, perhaps doing without the BMWs, flat-screen television sets and leather sofas. Third, we should be careful in distributing the higher tax burden that we will inevitably have to bear over the coming decade. Very high marginal tax rates did not work in the 1970s and will not work now. That said, income disparity at current levels is a political time-bomb that needs to be dealt with. Finally, we should all come to terms with the fact that these are structural issues needing structural solutions; they need to be enforced over a longer time period than any one government’s term. So we need a new political consensus, one aimed at reducing overall debt levels while reducing inequality by encouraging education, entrepreneurship and investment in innovation."

Nassim Nicholas Taleb offers "No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal."

"Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab."

George Soros say that since markets are bubble-prone, regulators must accept responsibility for preventing bubbles from growing too big.

Quran offers "Allah has laid His curse on usury and blessed charity to prosper. Allah does not love any ungrateful sinner. " 2:276 "O You who believe! Fear Allah and waive what is still due to you from usury if you are indeed believers;" 2:278 "or war shall be declared against you by Allah and His Rasool. If you repent, you may retain your principal, causing no loss to
debtor and suffering no loss. " 2:279 "If the debtor is in a difficulty, grant him time till it is easy for him to repay; but if you waive the sum by way of charity it will be better for you, if you understand it. " 2:280

New Life for Open Source Movement

Open source movement was worried over the acquisition of "MySQL" by "ORACLE". There was all kind of speculation about the future of most successful open source database. Recent two events have breathed a new life into the movement. One is the inquiry of the US Department Of Justice regarding how the Oracle / Sun deal could affect Open Source software, in particular MySQL and Java and the other is announcement of Google to launch an open source Google Chrome OS.

Limited Liability Concept in Islam

Dr. Mahmoud El-Gamal writes that

"One of the traditional verses to start a sermon is [59:18]:
يَا أَيُّهَا الَّذِينَ آمَنُوا اتَّقُوا اللَّهَ وَلْتَنْظُرْ نَفْسٌ مَا قَدَّمَتْ لِغَدٍ وَاتَّقُوا اللَّهَ إِنَّ اللَّهَ خَبِيرٌ بِمَا تَعْمَلُونَ
The traditional translation is: "O ye who believe! Fear Allah, and let every soul look to what (provision) he has sent forth for the morrow. Yea, fear Allah: for Allah is well-acquainted with (all) that ye do." I would not limit the collective order اتَّقُوا, which is repeated twice in the plural, I would not limit it to "fear", because the notion of taqwa encompasses God-consciousness, God-wariness, and other concepts besides fear.

Our focus for today is on the following: the verse does not say "let every soul" or "let each soul" (و لتنظر كل نفس) but rather "let a soul" (و لتنظر نفس), focusing on the community of the faithful (addressed: يَا أَيُّهَا الَّذِينَ آمَنُوا) as a single organism. In other words, although we are accountable individually, we are also accountable for the future (مَا قَدَّمَتْ لِغَدٍ) that the community as a single organism forges for itself."

So, we are jointly and severally liable for the deeds of the community. If so, then the concept of limited liability company in Islamic Finance becomes doubtful as every shareholder is jointly and severally liable for all the deeds including all liabilities of the company. Think for a moment, had this been the case, would large number of shareholders having minority shareholding let happen misdeeds in corporate finance e.g. the case of "Enron".

The concept of "limited liability" is worth revisiting in the context of recent global financial crisis and more so in the context of Islamic Finance.

A Valley Beyond Naran called Jal Khand

Before this visit all I knew about Naran, it was lake Saif-ul-Muluk, the pinnacle point of travel. This time Allah (SWT) was very merciful and beneficent to all of us. While passing through Abbotabad, we just went to see and have a cup of tea with one of my friend - Muhammad Irshad - at Meezan Bank and we met Lodhi Sb., one of his clients and friends. He set us to a new direction - Jal Khand Valley. For more pictures, please visit Jal Khand Album.

Fast World

The world is changing fast. Not only the pace of change is fast but the nature of change is also fast. We have fast food, instant coffee, real time chats, ready made friendships and virtual reality. The story does not end here, we have instant publishing tools - Blogs, say few words as these come to mind - twitter and instantly create online community, thanks to "facebook". Fast means ready-made, instant. All this has changed our view of the world that was.

Debt Based Business Transactions

While thinking about this Aya 280 of Al-Baqara. I am not able to determine whether the first part of the Aya "If the debtor is in a difficulty grant him time till it is easy for him to repay" is mandatory up on Muslims. If so then it is not for everyone to do business on 'Murabahah", one must have enough capital, if one has to wait for sometime that some of his debtors are able to pay, he is not out of business. This Aya is part of Ruku 38 that starts from Aya 274 and ends at Aya 281. While reading of these Ayat, I understood these Ayat as follows:

1. Give charity. Those who give charity, they shall be in no fear and grief whatsoever - decrease in their wealth is one of these.
2. Trade is permitted but usury is forbidden. Usury is something different from trade.
3. Usury will not increase anything including wealth but deeds of charity will increase all things including wealth. Allah(SWT) does not love ungrateful and wicked. People shall be ungrateful and wicked also - ungrateful to Allah(SWT) on His blessings on them and wicked as to use some mischievous ways to defeat the forbidding of usury.
4. Those who have firm belief in everything that is said above and do good deeds and establish Salah and pay Zakah, their reward is with Allah(SWT) and they shall be in no fear and grief whatsoever - That reward, they may not perceive it.
5. Those who claim to be Muslims should be conscious of Allah(SWT) and should give up their demand of usury if they claim to be Muslims.
6. If you (those who claim to be Muslims) don't do this, then there is a notice of war from Allah(SWT) and His Messenger (PBUH) and if you agree to give up your demand of usury then you are entitled to your original amount.
7. If the debtor is unable to pay the original amount that is promised above then give him time to such an extent that he is able to pay the amount but it is much better to give up entire amount as charity. Don't write off this amount in your books as bad debt but as giving a charity. This act is best of the things in debt based transactions but one may not perceive it.
8. Remain conscious of the day of judgment when all human beings shall be accounted for their deeds and each shall have his account statement of good deeds and sinful deeds that shall be prepared with enough proof that no one shall be able to deny it.

All of the above leads to one conclusion that there is an element of usury in debt based transactions and these types of transactions are not to be taken as a routine matter as in business no one has enough capital to give time to debtor till they are able to pay the original amount - meaning cost or cash basis price and nor can everyone write them off as charity even if it is the best and it is the best because Allah(SWT) has said so.

A New Model for Islamic Finance is needed

Dr. Muhammad Nejatullah Siddiqi writes in his article "Current Financial Crisis and Islamic Economics" that "Islamic economics stands for abolition of riba and maysir in financial dealings as well as on a regard for the interest of others in one’s pursuit of material gains." How can banking be gambling? Again to answer this question, I refer to the same article and quote "I argue that risk shifting is gambling." "Debt financing of productive enterprise amounts to preferring risk shifting to risk sharing. This is immoral as well as counterproductive. The environment in which productive enterprise takes place does not guarantee creation of additional wealth. It is only a probability. The lender’s demand for a guaranteed positive return to the sum lent is unfair." The bank is always concerned with its pre-determined return without taking any risk of the venture being not profitable or not so profitable as to be able to pay the return. The banks demands the fixed return. So according to the argument, banking is synonymous to gambling as the bank shifts risk to the borrower and immune itself.

The current practices of Islamic Banks are more in line with their couterparts as rightly pointed out by Muhammad Umer Chapra that "The use of equity and PLS is still very small while that of debt-creating modes is preponderant. Moreover, even in the case of debt-creating modes, all the conditions laid down by the Shari’ah are not being faithfully observed by the use of legal stratagems (hiyal)." This view has also been shared by Dr. Muhammad Nejatuulah Siddiqi That "I am not happy with Islamic banks doing business.I envisage them as financial intermediaries,al-mudarib yudarib." Dr. Mahmood Ahmed also voiced that "Finance, whether Islamic or conventional,is dependent on financial intermediation which has three essential features-1.Principal amount,2.Rate and 3.Time. All these three must be pre- determined. Hence an intermediary accepts signature of the client in a set of charge documents as per law of the land then makes him agent to buy goods which is not an essence for it but is done as an eye wash for labeling it "Islamic" which is a religious cheating in the name of Islamic finance. Signing in a baking charge document makes a client owe to the bank and the bank creates bank money out of nothing for financing which is unjust and is the cause of current world recession. Financial intermediation cannot be Islamic indeed."

So, one thing is very clear that in Islamic Finance, there is no room for lending. Brother Acram Latiph also subscribed to this "I fully subscribe to the opinion that in Islam all form of financing is based on equity." Brother Muhammad Obaidullah also agreed that "As I understand, the issue of using client as agent is now frowned upon by many fuqaha. One rational way to challenge this is to highlight the conflict of interest between the two roles that the client is required to perform. Yes, I agree with you that "having different Murabahah companies having related expertise to carry out specific Murabahah contracts - minus appointment of client as its agent" would be a better solution from Shariah compliance point of view." Dr. Ausaf Ahmed also of the opinion of participatory role of Islamic Financial institution as "To my mind, the essence of Islamic finance is its participatory relationship between the provider of finance and seeker of finance."

I propose a model in line with the Venture Capital Firms as facilitators between investors and entrepreneur or venture capitalists on sharing of risks with entrepreneur like Dr. Muhammad Nejatullah Siddiqi said in the article "The Islamic approach to risk is realistic but cautious. It does not allow deals involving excessive uncertainty (gharar kathir). It encourages sharing arrangements for facing risks. The additional wealth created with the use of existing wealth through risky ventures should be shared between fund users and fund owners while both bear the risks involved and the resulting losses. Differences in the participants’ perception of risks involved will be decisive in determining the terms of bargain between those sharing risk. Even though the motive of each party is making profits, it is very different from taking chances in gambling."Muhammad Umar Chapra in his blog also of the opinion that "the financier should also share in the risk so as not to shift the entire burden of losses to the entrepreneur."