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."